Franchise | Disputes and Determination of Refund of Franchise Fees After Contract Termination
Published:
2025-02-20
The franchise fee is also referred to in the relevant contract as "brand usage fee," "agency fee," "operational guidance fee," etc. It is the most important franchise cost paid by the franchisee to the franchisor. After the commercial franchise contract is terminated for various reasons, both parties often dispute the return of the franchise fee. This article elaborates on how the courts have recognized this dispute in judicial practice and the basis on which the courts determine the amount of the franchise fee to be returned.
The franchise fee, also known as "brand usage fee," "agency fee," or "operational guidance fee" in relevant contracts, is the most important franchise cost paid by the franchisee to the franchisor. After the commercial franchise contract is terminated for various reasons, disputes often arise between the parties regarding the refund of the franchise fee. This article elaborates on how the courts have determined this dispute in judicial practice and the basis for the court's ruling on the refund amount of the franchise fee.
1. Determine the amount of the franchise fee refund based on the degree of fault and liability for breach of contract that led to the termination of the contract.
If the termination of the contract is caused by either the franchisor or the franchisee, the court will make a ruling unfavorable to the party at fault when determining the refund amount of the franchise fee. In cases where both parties are at fault, the court will comprehensively consider the degree of fault and the severity of the breach of contract to determine the refund amount of the franchise fee.
The People's Court of Anji County, Zhejiang Province (2023) Zhe 0523 Min Chu 4225 Civil Judgment found that Liu XX (the franchisee) paid a franchise fee of 120,000 yuan to Zhejiang XX Company (the franchisor) as per the contract. After the signing of the "Liu XX Franchise Agreement," Zhejiang XX Company failed to provide the corresponding user platform, and its breach of contract has led to the failure to achieve the contract's purpose. The parties can request the termination of the contract and seek compensation for losses. Therefore, the court supported Liu XX's request to terminate the "Liu XX Franchise Agreement" and refund the franchise fee of 120,000 yuan.
The People's Court of Shanhaiguan District, Qinhuangdao City, Hebei Province (2024) Ji 0303 Min Chu 295 Civil Judgment found that the plaintiff (the franchisee) paid an operational guidance service fee of 38,300 yuan as per the contract. Based on the evidence in this case and the statements of both parties, the defendant Qinhuangdao XX Company (the franchisor) failed to provide operational guidance and management training services as stipulated in the contract, which constituted a significant defect. The court decided that the defendant Qinhuangdao XX Company should refund 70% of the operational guidance service fee it received to the plaintiff Huang XX.
The People's Court of Jinshan District, Shanghai (2024) Hu 0116 Min Chu 13798 Civil Judgment found that the plaintiff (the franchisee) paid a franchise fee of 40,000 yuan to the defendant (the franchisor) as agreed. The plaintiff, using the defendant's brand to open a franchise store, was obligated to not sell products of other brands in the franchise store. However, the plaintiff unlawfully sold products of other brands on the delivery platform account of the franchise store, constituting a breach of contract. Considering the degree of fault of the breaching party and the actual performance of the contract, the court decided to order the defendant to refund 5,500 yuan of the franchise fee.
The Higher People's Court of Yunnan Province (2024) Yun Min Shen 4452 Civil Ruling found that in this case, the applicant for retrial (the franchisee) did not determine the business location or prepare for opening according to the nature of the franchise contract and the provisions of the contract involved. The applicant violated the commitment by not selecting a business address to conduct business activities and did not actively perform the contract within the contract period, leading to the expiration of the contract on December 31, 2018. Therefore, due to the applicant's breach of commitment, the second-instance judgment did not support its request for a refund of the franchise fee, which is consistent with the actual situation of this case and relevant laws, and is not improper.
The Shanghai Intellectual Property Court (2022) Hu 73 Min Zhong 588 Civil Judgment determined that Zeng Huabo (the franchisee) paid 150,000 yuan as a招商代理 fee to Moqi Company (the franchisor). Moqi Company did not complete the franchise qualification filing and failed to provide evidence that it met the "two stores in one year" requirement at the time of signing, nor did it provide evidence that it had fulfilled the ninth service stipulated in the contract, indicating fault on its part. Zeng Huabo unlawfully closed the store and did not promptly notify Moqi Company that he would no longer continue to perform the contract, which also constituted fault. Considering the degree of fault of both parties, the court decided that Moqi Company should refund 80,000 yuan to Zeng Huabo.
2. Determine the amount of the franchise fee refund based on the actual performance of the contract.
The actual performance of the contract includes: the franchisee's payment of the franchise fee; the franchisee's use of franchise resources; the franchisor's provision of services to the franchisee in site selection, store design, employee training, opening, market research, etc. If the franchisor has actually fulfilled the corresponding obligations and the franchisee has used the franchise resources, after the termination of the contract, when the court determines the refund amount of the franchise fee, it will rule to deduct the corresponding amount as the payment for the franchisee's use of franchise resources and acceptance of services provided by the franchisor.
The People's Court of Panyu District, Guangzhou City, Guangdong Province (2024) Yue 0113 Min Chu 2095 Civil Judgment found that the plaintiff (the franchisee) had paid a franchise fee of 54,800 yuan, and the defendant (the franchisor) had provided services such as assistance in site selection, store design, employee training, and supply of materials. The plaintiff opened and operated the store with the defendant's assistance. Based on the performance of the contract and the degree of fault for the termination of the contract, combined with the principle of fairness, the court decided that the defendant should refund 38,000 yuan to the plaintiff.
The Beijing Intellectual Property Court (2022) Jing 73 Min Zhong 393 Civil Judgment found that after the signing of the contract involved, Yao Yao and Yao Zilan (the franchisees) did not actually open and operate the store, nor did they utilize the business resources of Zhongjiao Quanna Company (the franchisor). However, considering that Zhongjiao Quanna Company did indeed do some work in assisting with site selection, providing a list of opening materials, conducting training, providing teaching materials, and offering online courses, the court comprehensively considered the establishment and performance of the contract, the degree of fault of both parties, and decided that Zhongjiao Quanna Company should refund 300,000 yuan out of the brand usage fee of 388,000 yuan to Yao Yao and Yao Zilan.
The People's Court of Zengcheng District, Guangzhou City, Guangdong Province (2023) Yue 0118 Min Chu 318 Civil Judgment found that during the performance of the contract, Wukong Company (the franchisee) was able to utilize the brand resources of a certain company (the franchisor) to conduct business activities and actually used the brand logo of that company. That company also provided operational management services. Considering the performance of the contract, the court decided that out of the basic fee (franchise fee) of 99,000 yuan, the certain company should refund 50,000 yuan.
3. Determine the amount of the franchise fee refund based on the actual operating period of the franchisee.
After the termination of the contract, the operating period of the franchisee's franchise store is an important basis for the court to determine the amount of the refund of the franchise fee. Without considering other factors, the court generally determines the refund amount based on the proportion of the time not in operation.
The People's Court of Qianhai Cooperation Zone, Shenzhen (2024) Yue 0391 Min Chu 1130 Civil Judgment found that this court used the time when Di XX Housekeeping Company (the franchisor) signed the "Monthly Nurse Service Agreement" (i.e., May 3, 2023) as the deadline for the company to provide services to the plaintiff (the franchisee). Since Di XX Housekeeping Company failed to provide services, it should refund the franchise fee to the plaintiff Xie XX for the period from May 4, 2023, to February 22, 2024, based on a three-year fee standard of 228,000 yuan, the franchise fee for the above period should be 61,424.66 yuan.
The People's Court of Jianghan District, Wuhan City, Hubei Province (2024) E 0103 Civil Judgment No. 304 states: Regarding the franchise fee of 19,800 yuan, since both parties agreed on a term of three years, and the store of a certain company in Xinjiang (the franchisee) only operated for 1.5 months, the company in Wuhan (the franchisor) should refund the remaining franchise fee for the operating period. After calculation, the defendant, the company in Wuhan, should refund the plaintiff, the company in Xinjiang, a franchise fee of 18,975 yuan.
The People's Court of Weiyang District, Xi'an City, Shaanxi Province (2024) Shan 0112 Civil Judgment No. 336 states: The defendant (the franchisor), as the training and guidance party, failed to fulfill the corresponding obligations stipulated in the contract, which led to the plaintiff (the franchisee) being unable to carry out franchise operations normally and not starting business as scheduled. The plaintiff's request to terminate the contract and refund the franchise fee is supported, and the court ruled that the defendant should refund the plaintiff the total franchise fee paid of 49,999.7 yuan.
4. Handle the franchise fee according to the contract agreement, but agreements such as "no refunds" are invalid.
Some contracts specify the amount and method of refunding the franchise fee, and when the agreements do not violate mandatory legal regulations, the court will prioritize applying the contract's provisions. However, if the contract contains similar provisions such as "no refunds," they will be deemed invalid.
The Intermediate People's Court of Hangzhou City, Zhejiang Province (2024) Zhe 01 Civil Judgment No. 3299 states: Company A (the franchisor) agreed in the "Supplementary Agreement" signed with Chen (the franchisee) that Company A would provide information on 20 available store locations within 60 working days. If the agreed number is not provided, resulting in no suitable store being selected, Company A must unconditionally and interest-free refund Chen's franchise fee. Company A failed to prove that it provided information on 20 available store locations within 60 working days, and according to the above agreement, Company A should unconditionally and interest-free refund Chen the franchise fee of 59,800 yuan already paid.
The People's Court of Wuhou District, Chengdu City, Sichuan Province (2023) Chuan 0107 Civil Judgment No. 24180 states: Although both parties agreed in the contract that all fees paid by Yuan (the franchisee) would not be refunded, according to Article 497, Item 2 of the Civil Code of the People's Republic of China, the above provision constitutes a format clause that excludes Yuan's main rights and should be deemed invalid. The amount paid by Yuan to a certain company in Chengdu (the franchisor) should be refunded.
The Intermediate People's Court of Weihai City, Shandong Province (2024) Lu 10 Civil Judgment No. 589 states: The contract stipulates "no refunds of the franchise fee for any reason leading to the termination of the contract." This clause does not distinguish the legal consequences of termination due to the franchisor's breach, which exempts the franchisor from liability, increases the franchisee's responsibility, and excludes the franchisee's main right to request a refund of the franchise fee. This provision clearly violates the principle of fairness, and the format clause is invalid.
It should be noted that when multiple factors affecting the court's determination of the refund amount for the franchise fee occur simultaneously, the court will comprehensively determine the refund amount based on multiple factors. For example, if the franchisee's franchise store has not opened for business, if only considering the operating period, the franchise fee should be fully refunded. However, if the franchisor has fulfilled obligations such as site selection and design, the court will also consider the performance of the contract and appropriately deduct the franchise fee as payment for consideration.
The Intermediate People's Court of Wuhan City (2024) E 01 Civil Judgment No. 320 states: Considering the performance of both parties in the contract involved, the defendant (the franchisor) provided site selection services to the plaintiff (the franchisee), which constitutes normal performance with labor costs incurred. The plaintiff did not actually open a store for business, and the court decided to deduct 10,000 yuan from the franchise fee and management fee, determining that the defendant should refund the plaintiff a total of 68,000 yuan for the franchise fee and management fee.
The People's Court of Qingpu District, Shanghai (2024) Hu 0118 Civil Judgment No. 1052 states: Given that the plaintiff (the franchisee) has not yet used the business resources of the defendant (the franchisor), the fees collected from the plaintiff should be refunded. The defendant has provided the plaintiff with some site evaluation, store decoration design, and opening construction services, and should deduct the corresponding service consideration from the refunded amount. The court ruled that the defendant should refund 70,000 yuan from the 100,000 yuan guidance service fee to the plaintiff.
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