Franchising | Disputes and Determination Regarding Compensation for Losses After Termination of a Commercial Franchise Agreement
Published:
2026-01-04
During the performance of a commercial franchise contract, the franchisee incurs expenses such as store rental fees, renovation costs, and procurement costs for supplies. After the contract is terminated, the parties typically dispute how these related expenses should be handled. Franchisees often rely on the provisions of Article 566 of the Civil Code to claim compensation from the franchisor for their incurred expense losses. Due to the special nature of commercial franchising and the lack of clear statutory provisions regarding the scope of losses that franchisees can claim, there remains some controversy in judicial practice over the determination of compensation for franchisees’ losses.
During the performance of a commercial franchise contract, the franchisee incurs expenses such as store rental fees, renovation costs, and procurement costs for supplies. After the contract is terminated, the parties typically dispute how these related expenses should be handled. Franchisees often rely on the provisions of Article 566 of the Civil Code to claim compensation from the franchisor for their incurred expense losses. Due to the special nature of commercial franchising and the lack of clear statutory provisions regarding the scope of losses that franchisees can claim, there remains some controversy in judicial practice over the determination of compensation for franchisees' losses.
I. Determination of Loss Compensation in Cases Where the Franchisor Bears All or Primary Fault for Contract Termination
If the commercial franchise contract is terminated due to the franchisor’s total or primary fault, given that the lease payments, renovation costs, and other expenses claimed by the franchisee are all funds necessarily invested to achieve the business objectives, courts will generally support the franchisee’s claims for damages. However, the court will exercise discretion in determining the amount of compensation and is unlikely to fully uphold the franchisee’s claims. In particular, if the franchisee also bears some fault for the occurrence of the losses, the franchisee should bear part of the responsibility itself.
The civil judgment No. 4554 of the Beijing Intellectual Property Court (2021) Jing 73 Min Zhong No. 4554 held that, as established by the facts ascertained, Blue Morning Company’s authorization to Oriental United Company (the franchisee) exceeded the term of its rights, thereby rendering it impossible for Oriental United Company to achieve the purpose of their contract. Both the renovation costs and the rent were funds necessarily invested to achieve the business objective; therefore, Blue Morning Company should provide reasonable compensation. Based on factors such as the relevance, necessity, and reasonableness of the expenses, as well as the degree of fault attributable to each party, the court determined Oriental United Company’s loss of renovation costs at RMB 100,000 (compared with the claimed amount of RMB 500,000) and its loss of rent at RMB 100,000 (compared with the claimed amount of RMB 2.6 million).
The civil judgment No. 4879 of the Guangzhou Intellectual Property Court (2021) Yue 73 Min Zhong No. 4879 held that Yuncheng Company had concealed material facts, and Yuan and Guo (the franchisees) were entitled to terminate the contract. With regard to the rent loss claimed by Yuan and Guo, given that they had actually paid the rent, the court ordered Yuncheng Company to compensate them for rent loss in the amount of 10,000 yuan (as opposed to their claim of 50,000 yuan),酌情 determining the compensation amount. As for the loss of shop renovation costs claimed by Yuan and Guo, considering that they had indeed paid the renovation expenses, the court determined their renovation cost loss at 20,000 yuan (as opposed to their claim of 42,000 yuan), also酌情 making this determination.
The civil judgment No. 3686 of the Guangzhou Intellectual Property Court (2022) Yue 73 Min Zhong No. 3686 held that the trademark licensed by Miao Fang Company for use by Zeng (the franchisee) had not been successfully registered, and thus upheld Zeng’s claim to terminate the contract in question. It was necessary for Zeng to carry out certain renovations on the store he intended to operate. Taking into account the evidence available, which demonstrated the duration of operation of the store in question and the fact that Zeng himself had also been at fault for the losses incurred due to the contract’s inability to continue being performed, the court酌情 determined Zeng’s loss of renovation costs to be RMB 20,000 (compared to the claimed amount of RMB 68,250).
II. Determination of Loss Compensation in Cases Where the Franchisee Is Fully or Primarily at Fault for Contract Termination, or Exercises Its Unilateral Right to Terminate Within the “Cooling-off Period”
If the commercial franchise contract is terminated due to the franchisor’s total or primary fault, the court will generally not uphold the franchisor’s claims for losses such as rental fees and renovation costs; instead, the franchisor shall bear these losses on its own. Similarly, if the termination of the franchise contract is triggered by the franchisor exercising its unilateral right to terminate during the cooling-off period, the franchisor’s claims for damages will also not be supported.
The Civil Judgment No. (2021) Yue 0307 Min Chu 32093 issued by the People's Court of Longgang District, Shenzhen City, Guangdong Province, held that the plaintiff’s (the franchisee’s) franchising activity constitutes a commercial business operation, and the leasing of premises and the renovation of stores fall under this category. Cost-related expenditure Whether the operating revenue can reach the expected level exceeding the costs constitutes a commercial business risk, which should be borne by the plaintiff itself. Moreover, the plaintiff has already made actual use of certain commercial resources provided by the defendant’s company; furthermore, the primary reason for terminating the contract also lies with the plaintiff. Therefore, the plaintiff should bear independently the expenses incurred, such as the store rental deposit and renovation costs.
The Civil Judgment No. 6941 of the People's Court of Zhangqiu District, Jinan City, Shandong Province (2021) Lu 0114 Min Chu 6941 held that the franchisee, Kang, was entitled, within a reasonable period (the cooling-off period), to unilaterally terminate the contract in question in accordance with the prescribed procedures. The termination of the contract was triggered by Kang’s exercise of his unilateral right of termination. The evidence submitted by Kang was insufficient to prove that Juding Company had committed any breach of contract during the performance of the contract. Therefore, Kang’s claim for Juding Company to pay liquidated damages, rent, storefront advertising fees, renovation costs and labor charges for renovation, equipment expenses, transportation expenses, and accommodation expenses was not supported.
The Civil Judgment No. (2021) Yue 0111 Min Chu 33586 issued by the People's Court of Baiyun District, Guangzhou City, Guangdong Province, held that: The plaintiff (the franchisee) explicitly stated its unwillingness to continue performing the contract in question, and the parties have lost the foundation of mutual trust necessary for cooperation. Therefore, this court confirms that the contract in question is hereby terminated; however, the responsibility for the termination of the contract does not lie with Tongchuang Company. With regard to the plaintiff’s claim that Tongchuang Company should compensate for losses such as shop renovation costs and rent payments, these expenses occurred during the plaintiff’s period of operation and constitute the plaintiff’s operating costs. Moreover, since the fault for the termination of the contract in this case does not lie with the defendant, the plaintiff’s request that Tongchuang Company bear the aforementioned expenses lacks both factual and legal basis, and thus is not supported by this court.
III. Special Judicial Scenarios for Determining Compensation for Losses
In practice, some court rulings have held that renovation costs, rent, and other expenses incurred by the franchisee are considered normal operating expenses. Even if the franchisor’s fault led to the termination of the contract, the franchisee’s aforementioned losses will not be compensated.
The Civil Judgment No. (2021) Jing 0106 Min Chu 38391 issued by the People's Court of Fengtai District, Beijing Municipality, held that the breaching behavior of Xian Wa Fang Company had a substantial impact on the realization of the contract’s purpose, constituting a fundamental breach of contract, and Li Mou (the franchisee) was entitled to terminate the contract. Regarding Li Mou’s claim for compensation from Xian Wa Fang Company for losses such as store lease fees and renovation costs, this court holds that leasing a store, undertaking renovations, and purchasing restaurant equipment and facilities are all normal operating expenses and costs incurred in the course of business. Therefore, Li Mou’s claim in this regard lacks sufficient factual basis and is not supported.
The Civil Judgment No. (2018) Jing 0106 Min Chu 5248 issued by the People's Court of Fengtai District, Beijing Municipality, found that Chenxi Sunshine Company provided substandard clothing, which was sufficient to render it impossible for Zhou (the franchisee) to achieve the purpose of entering into the contract in question. Therefore, this court supports Zhou’s claim to rescind the “Lidisha Brand Franchise Contract.” The renovation costs, flooring expenses, and prop transportation fees claimed by Zhou constitute necessary expenditures incurred in operating the store. However, Zhou’s request that Chenxi Sunshine Company reimburse these expenses lacks both factual and legal basis, and thus is not supported by this court.
The Civil Judgment No. 393 of the Beijing Intellectual Property Court (2020) Jing 73 Min Zhong No. 393 held that a commercial franchising contract is not intended to enable the franchisee to make a profit. Any commercial business activity inherently involves risks. The expenditures on rent and renovation costs are operating expenses that Xu should bear in conducting his business. During the period when Xu (the franchisee) was operating, these expenditures do not constitute Xu’s losses. (Considering that the contract was terminated due to the franchisor’s fault, the court determined, at its discretion, that the rent for the premises after the store’s closure could be regarded as Xu’s loss; however, no support was given to other claimed losses.)
IV. Treatment and Determination of Procurement Costs for Raw Materials and Supplies Paid by the Franchisee
During the term of the franchise agreement, the franchisee typically purchases from the franchisor the raw materials and supplies necessary for operating the business and pays the corresponding procurement fees. After the contract is terminated, if the franchisee requests a refund of these procurement fees, the court will generally handle the matter as follows: If the raw materials and supplies have already been delivered, the franchisor is not required to refund the fees. However, if there was a delay in delivery or quality issues with the delivered items, the franchisor will be liable to provide certain compensation.
The Civil Judgment No. (2024) Gan 0191 Min Chu 3060 issued by the People's Court of the Nanchang High-Tech Industrial Development Zone, Jiangxi Province, holds that: With regard to Lu Moubin’s (the franchisee) claim for reimbursement of expenses incurred in purchasing equipment and supplies, since [Company Name] Catering Company has already delivered the corresponding facilities, equipment, and raw materials, which have been put into use by Lu Moubin, the sales contract has been fully performed. Therefore, Lu Moubin’s request that [Company Name] Catering Company refund the expenses he had paid for procuring equipment and supplies during his business operations lacks sufficient legal basis and is hereby dismissed.
The Civil Judgment No. 9600 of 2020 issued by the People's Court of the Chengdu High-Tech Industrial Development Zone, Sichuan Province (Case No. Chu 0191 Min Chu 9600) held that the materials were purchased by Zhang (the franchisee) from Houjie Company for the purpose of operating his store. Houjie Company delivered the materials to Zhang in accordance with the contract, and thus has fully performed its obligation with respect to this part of the transaction; therefore, a refund cannot be automatically granted. Zhang argued that he had already received the aforementioned materials and had used up all the seasonings during the preparation for opening his business. However, the court finds that Zhang’s evidence in support of this claim is insufficient, and thus does not uphold his argument.
The Civil Judgment No. (2021) Yue 0112 Min Chu 26192 issued by the People's Court of Huangpu District, Guangzhou City, Guangdong Province, held as follows: With regard to the equipment fee of RMB 22,909 and the material costs of RMB 64,920 claimed by Hui Mou (the franchisee) for reimbursement, the court confirmed that Sanxun Guangzhou Company had indeed delivered the aforementioned equipment and materials. However, there were instances of delay or inconsistency in Sanxun Guangzhou Company’s delivery performance, and therefore Sanxun Guangzhou Company should provide corresponding compensation for this portion.
As can be seen, except in cases involving special judicial rulings, when the franchisor is at fault for terminating the contract, courts in practice generally grant discretionary support for losses incurred by the franchisee—such as rent and renovation costs—arising from the franchisee’s engagement in franchise operations. The franchisee should pay close attention to preserving relevant evidence, including contracts, invoices, and payment vouchers, to facilitate asserting their rights.
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