Franchising | Legal Risks and Prevention of Fees Charged by Franchisors
Published:
2025-03-03
In addition to the "franchise fee", the franchisor will also charge the franchisee a deposit, guarantee fund, advertising fee, training fee, and other expenses. Although the "Regulations on the Administration of Commercial Franchising" and the "Measures for the Administration of Information Disclosure in Commercial Franchising" stipulate the collection of other fees, in practice, due to weak legal awareness and unclear agreements, many disputes arise when franchisors collect other fees. How should franchisors collect other fees and prevent risks? This article elaborates on this in detail.
In addition to the "franchise fee", the franchisor will also charge the franchisee a deposit, guarantee fund, advertising fee, training fee, and other expenses. Although the "Regulations on the Administration of Commercial Franchising" and the "Measures for the Disclosure of Information on Commercial Franchising" stipulate the collection of other fees, in practice, due to weak legal awareness and unclear agreements, many disputes arise when franchisors collect other fees. How should franchisors collect other fees and prevent risks? This article elaborates on this in detail.
1. Fees Collected Before the Contract is Signed
Some franchisors will charge the franchisee site selection fees, design fees, deposits, and other fees before the franchise agreement is signed. At this time, the franchise relationship between the two parties has not yet been established. To prevent franchisors from charging arbitrary fees and to balance the interests of both parties, the law has clearly restricted this, requiring franchisors to provide a written explanation of the purpose and refund conditions of these fees.
If the franchisor violates the above regulations and fails to provide an explanation or provides an incomplete explanation after collecting the fees, and a dispute arises between the two parties, especially when the legal franchise relationship has not been established, the court will order the franchisor to refund the relevant fees.
The People's Court of Dongguang County, Hebei Province (2020) Ji 0923 Minchu No. 489 civil judgment found: The plaintiff and defendant failed to sign a contract due to differences during the contract negotiation process. According to Article 16 of the "Regulations on the Administration of Commercial Franchising", "If the franchisor requires the franchisee to pay fees before signing the franchise agreement, it must provide a written explanation to the franchisee regarding the purpose of these fees and the conditions and methods for refund." In this case, the defendant (franchisor) collected 150,000 yuan from the plaintiff (franchisee) before the contract was signed, without providing a written explanation of the purpose and refund conditions of this fee to the plaintiff. Since the contract was not established, the defendant should refund the plaintiff.
The People's Court of Yingde City, Guangdong Province (2022) Yue 1881 Minchu No. 3190 civil judgment found: The plaintiff (franchisee) paid 10,000 yuan to the defendant (franchisor) as a design fee for subsequent project budgeting. Due to issues with the franchise fee, the plaintiff abandoned the project franchise, and no formal franchise agreement was signed between the two parties. The plaintiff did not start operations and did not utilize the defendant's business resources. The defendant also did not provide evidence that it continuously provided services to the plaintiff, so the collection of fees lacked factual and legal basis, and the defendant should refund the plaintiff 10,000 yuan.
The Intermediate People's Court of Jinan City, Shandong Province (2020) Lu 01 Minchu No. 221 civil judgment found: Both parties acknowledged that the franchise agreement between them was not established. The plaintiff (franchisee) claimed that the defendant (franchisor) should refund the amount paid. The court supported this claim. According to Article 16 of the "Regulations on the Administration of Commercial Franchising", the plaintiff paid 10,000 yuan on October 3, 2019. Although the defendant stated in the receipt that it was a "deposit for the car wash project", it did not provide a written explanation of the purpose and refund conditions for this fee. The defendant's claim that this amount was a deposit was not accepted by the court, and the defendant should refund the plaintiff.
Therefore, to prevent relevant legal risks, when charging the franchisee related fees, the franchisor should provide a written explanation to the franchisee regarding the purpose and refund conditions of these fees in accordance with Article 16 of the "Regulations on the Administration of Commercial Franchising". At the same time, evidence of the franchisee's receipt of the written explanation should be preserved to prevent disputes where the franchisor cannot prove that it has fulfilled its obligations.
It should be noted that if it can be fully proven that the franchisee is aware of the purpose of the fees, and the franchisee does not request a refund within a certain period, and subsequently pays other fees and engages in franchise activities. Although the franchisor did not explain the purpose and refund method of the fees, there is a possibility of recognizing the legality of the fees charged to the franchisee, but the conditions for judicial recognition are relatively strict.
The Intermediate People's Court of Jinan City, Shandong Province (2020) Lu 01 Minzhong No. 5930 civil judgment found: On July 28, 2019, Zhai Peiyong (franchisee) paid a deposit of 10,000 yuan to Qina Company (franchisor), and later both parties signed a contract, with Zhai Peiyong paying the remaining franchise fee of 21,800 yuan. Zhai Peiyong believed that Qina Company did not disclose the purpose and refund method of the deposit and requested to determine that the method of collecting the deposit by the respondent was illegal. The court held that as a person with full capacity for civil conduct, Zhai Peiyong paid the deposit, knowing that it was for the project involved in the franchise, and did not request a refund within seven days, and subsequently paid the franchise fee as agreed and engaged in subsequent business activities. Zhai Peiyong's request to determine that Qina Company's method of collecting the deposit was illegal was not supported.
2. Collection of Promotion and Advertising Fees
During the franchising process, franchisors will use their own resource advantages to promote and advertise the franchise brand and the franchisee's stores to enhance the brand's visibility and social influence, improve market competitiveness, and increase the franchisee's operating income. Therefore, franchisors will naturally charge promotion and advertising fees. To protect the legitimate rights and interests of franchisees and avoid losses due to information asymmetry, the law has made clear provisions requiring franchisors to use these fees for the agreed purposes and disclose the usage in a timely manner.
If the franchisor violates the above provisions and collects promotion and advertising fees without agreeing on the purpose, does not use the fees for the agreed purposes, or fails to disclose the usage in a timely manner, the court will not support the franchisor's request for the franchisee to pay the relevant fees after a dispute arises.
The Intermediate People's Court of Foshan City, Guangdong Province (2018) Yue 06 Minzhong No. 3364 civil judgment found that according to Article 17 of the "Regulations on the Administration of Commercial Franchising", the involved "Store Guidance and Technology Transfer Contract" is a standard contract text. Although the contract specifies the payment amount and time for the advertising fund, it does not clearly stipulate the corresponding amount and purpose. The evidence in the case also failed to reflect the corresponding advertising placement situation. The lawsuit request of Yuke Milk Tea Shop and Deng Yinghe (franchisor) regarding Lei Hongying (franchisee) paying the advertising fund lacked evidence support, and the court dismissed it.
The People's Court of Longchang County, Sichuan Province (2022) Chuan 1083 Minchu No. 5252 civil judgment found: Although the case clearly stipulates that the defendant (franchisee) is to pay a招商费 (recruitment fee) of 1 million yuan, according to Article 17 of the "Regulations on the Administration of Commercial Franchising", this recruitment fee of 1 million yuan is an expense incurred by the plaintiff (franchisor) for attracting the defendant. However, the plaintiff did not disclose the usage of this recruitment fee to the defendant, violating the mandatory provisions of laws and regulations. The defendant has already paid the plaintiff 574,000 yuan in recruitment fees, and the plaintiff did not achieve the agreed recruitment rate of not less than 80%, which constitutes a fundamental breach of contract. Therefore, the plaintiff's request for the defendant to pay the未实际发生的招商支持费用 (unrealized recruitment support fee) of 426,000 yuan is not established, and the court does not support it according to law.
To prevent relevant legal risks, franchisors should clearly stipulate the purpose of promotion and advertising fees according to the provisions of Article 17, Paragraph 1 of the "Regulations on the Administration of Commercial Franchising", strictly use the fees for the agreed purposes, and disclose the usage to the franchisee in a timely manner. They should also preserve relevant evidence to prevent situations where they cannot prove the purpose of the funds and fulfill their disclosure obligations during litigation.
3. Collection of Guarantee Funds
To ensure the performance of the contract, the franchisor will charge the franchisee a certain amount of deposit. Similarly, to protect the legitimate rights and interests of the franchisee, Article 5 of the "Regulations on the Disclosure of Commercial Franchise Information" stipulates that the content of the franchisor's information disclosure should include "the collection of the deposit, conditions for refund, refund time, and refund method."
When the franchise agreement has been fully performed or the conditions for refund are met, the franchisor should promptly refund the deposit to the franchisee, except when the deposit has been offset against franchise fees or other debts.
The People's Court of Shijingshan District, Beijing (2015) Civil Judgment No. 7099 determined: The contract in question stipulates that "Party B must pay a deposit to Party A to obtain exclusive agency rights in the designated area," and it is stated that this amount is conditionally refundable based on the purchase volume. He Daoji (the franchisee) did not meet the refund conditions stipulated in the contract, and Zhicaifang Company (the franchisor) also refused to refund, therefore the court believes that He Daoji's claim for the refund of the agency deposit has no factual or legal basis, and the court does not support this.
The People's Court of Shenyang High-tech Industrial Development Zone, Liaoning Province (2021) Civil Judgment No. 2604 determined: The plaintiff (the franchisee) paid a contract deposit of 5000 yuan to the defendant (the franchisor), and both parties agreed on the refund method and conditions of the deposit in the contract. During the performance of the contract, the plaintiff did not fully fulfill their obligations as stipulated in the contract, and the defendant also failed to provide evidence of having previously provided training and technical guidance services to the plaintiff. In summary, considering the actual performance of the contract and the degree of fault of both parties in the performance, the court decided that the defendant, Shenyang Chris Catering Management Co., Ltd., should refund Bi Enming a deposit of 2000 yuan.
The Guangzhou Intellectual Property Court (2020) Civil Judgment No. 105 determined: Article 8, Clause 6 of the "Cooperation Agreement" stipulates that if Party B does not renew the contract upon expiration and there is no breach of contract by Party B, Party A shall refund Party B's performance deposit without interest within 15 working days. Now that the term of the "Cooperation Agreement" has expired and both parties have not renewed the contract, Li Jinpeng (the franchisee) has not committed any breach of contract as stipulated in Article 9 of the "Cooperation Agreement," and Heshun Company (the franchisor) has not claimed any breach of responsibility from Li Jinpeng, therefore the conditions for the refund of the performance deposit have been met, and Heshun Company should fulfill its obligation to refund as agreed.
To prevent related risks, the franchisor should agree on the conditions for the refund of the deposit in writing; otherwise, unclear agreements may lead to a full or partial refund of the deposit, making it impossible to achieve the purpose of collecting the deposit. Additionally, relevant evidence that does not meet the refund conditions should be preserved to prevent difficulties in providing evidence during litigation, which could result in adverse legal consequences. Furthermore, if the deposit is offset against franchise fees or other debts, a written offset agreement needs to be signed; otherwise, the franchisee can still claim the refund of the deposit.
Key words:
Related News
Zhongcheng Qingtai Jinan Region
Address: Floor 55-57, Jinan China Resources Center, 11111 Jingshi Road, Lixia District, Jinan City, Shandong Province
