800.343.3213
China Franchise Law
1. What forms of business entities exist that would be
relevant to the typical
franchisor?
Foreign enterprises have two options when establishing a
franchise
in China.
FIEs
The first option is to establish a:
Foreign-invested enterprise (FIE)
that would then act as a sub-franchisor.
There are three typical FIE structures that could act as
a subsidiary
to the foreign enterprise:
Wholly foreign-owned enterprises (WFOEs),
Equity joint ventures (EJVs) or
Cooperative joint ventures (CJVs).
A wholly foreign-owned enterprise is independently owned
by a
foreign enterprise without the aid of a Chinese partner.
Though this
business structure is preferable because the investor
can keep 100
per cent of the profits, the law strictly regulates the
establishment
and operation of a WFOE and, in some industries, is
entirely prohibited.
Although current franchise regulations are silent as to
whether
a WFOE may create a franchise within China, it is likely
that the law
would permit a WFOE to take the position of a
sub-franchisor. This
sub-franchisor would then be in the position of granting
licenses to
any local corporate franchisee by entering into a
sub-franchise agreement.
However, due to the strict, often misunderstood,
guidelines
on the formation of businesses, it is not advisable to
have a WFOE
establish a franchise in China.
Joint ventures are the most functional way of creating
the necessary
local know-how when establishing a business entity in
China,
especially for franchises. An EJV is a limited liability
partnership
between a foreign company and a Chinese legal person.
Profit distribution
and shareholding is directly proportional to each
partner’s
investment. CJVs are becoming more accepted in China but
are still
prohibited in many industries. This business structure
allows the foreign
entity and Chinese legal person to have more flexibility
in structuring
the shareholding and profit-sharing. Similar to the WFOE,
both of these joint ventures would be considered as a
subsidiary to
the parent franchise abroad. As such, each would have
the same legal
rights and liability as the franchisor.
Direct contractual relationships
The second option for a foreign investor is to avoid
creating a business
entity in China and create a direct contractual
relationship with
a local franchisee. In doing so, the foreign business
can establish a
local network while maintaining its domicile abroad.
Exercising this
option allows the foreign investor to avoid the legal
barriers that are
faced when establishing a FIE.
For domestic franchisors, the regulations are seen as
another type
of contract. These franchisors engage in a direct
contractual relationship
with their franchisee.
2. What laws and agencies govern the formation of
business entities?
The Company Law of the People’s Republic of China (PRC)
provides
the general legal framework for all limited liability
companies,
domestic and foreign. All foreign entities must also
comply with the
Catalogue for the Guidance of Foreign Enterprises (FIE
catalogue),
which is updated regularly and categorizes foreign
businesses and
industries into ‘encouraged’, restricted’ and
‘prohibited’. Generally,
any business or industry not listed in the catalogue is
permitted.
Other relevant laws that govern the formation of
business entities
include, inter alia the Labor Contract Law (2007), the
Enterprise
Income Tax Law (2007), the Contract Law (1999), the
Labor Law
(1994) and the Land Management (1998). The Partnership
Enterprise
Law (2007) applies to Chinese legal persons wanting to
establish
a business partnership in China with no foreign
entities.
On a national level, the State Council is the chief
administrative
authority for the formation of business entities. Acting
in the
interest of the State Council is the Ministry of
Commerce, the State
Administration for Industry and Commerce (SAIC), and the
National
Development and Reform Commission. Investors go directly
to these
administrations only if the business meets certain
national thresholds
or if the business is interprovincial. In most
circumstances, the local level
administration evaluates and approves the business
proposal.
These administrations vary according to autonomous
region, province
or municipality.
3. Provide an overview of the requirements for forming
and maintaining a
business entity.
During the initial stage, the foreign entity and their
Chinese partner,
if applicable, must supply to either the local agency or
the Ministry
of Commerce (MOFCOM):
• a general application letter introducing the investor
and planned
business project in China;
• articles of association (including all of the details
of management
and capitalization of the company);
• a feasibility study report including planned business
activities and
financial background information;
• a letter of creditworthiness;
• a valuation report of state-owned assets (if
applicable);
• a list of merchandise to be imported or exported;
• a list of FIE directors;
• a copy of land-use rights document or lease, or both;
• a power of attorney for representative handling the
application;
and
• a copy of any trademark licenses, patents, tech
transfer, service
contracts, etc.
After obtaining a certificate of approval from the local
agency or
MOFCOM, the investor files an application with the SAIC
in order
28 How to obtain a business license.
If a business falls within the ‘restricted’
category as per the FIE catalogue, then preliminary
approval must
be granted by the National Development and Reform
Commission
(NDRC) before submitting the application to the Ministry
of
Commerce. Additional administrative approval might be
required
depending on the location and type of business.
In order to maintain a it position as a business entity,
the business
must annually update any new information to the
necessary officials,
pay taxes quarterly, and ensure that all practices
comply with the
laws of the PRC.
4. What restrictions apply to foreign business entities
and foreign
investment?
The FIE catalogue contains a comprehensive list of all
the restricted
and prohibited industries that may not be established by
a foreign
business entity. In addition to the restrictions
outlined in the FIE catalogue
is the generic provision that a business may not go
against the
health, morals or development of the People’s Republic
of China.
5. Briefly describe the aspects of the tax system
relevant to franchisors.
How are foreign businesses and individuals taxed?
All business entities are subject to the new Enterprise
Income Tax
Law of the PRC (2007). This law created a unified 25 per
cent tax
rate for both domestic and foreign entities. Prior to
the new tax law,
preferential treatment was given to all foreign entities
by the granting
of tax exemptions and reductions. Currently, the
Notification
of the State Council on Carrying out the Transitional
Preferential
Policies Concerning Enterprise Income Tax contains a
comprehensive
outline of specific industries and locations that
qualify for a tax
exemption or reduction. Typically, a franchise will not
qualify for a
tax reduction or exemption; however, the franchise may
deduct payments
already paid abroad to offset taxes in China, but this
amount
may not exceed the tax payable.
Since a franchise engages in the sale and importation of
goods
in China, the franchisor or sub-franchisor must pay a
value added
tax (VAT) of 17 per cent at the time of importation. In
addition, a
franchise must pay a business tax that ranges from three
to five per
cent depending on the revenues generated. If a business
withholds
profits, the business tax can be between 10 and 20 per
cent, depending
on the business’s domicile.
Businesses are required to audit every month and taxes,
except
for VAT, are paid quarterly. Reconciliation is done at
the end of the
year, usually at the end of December.
6. Are there any relevant labor and employment
considerations for
typical franchisors? What is the risk that a franchisee
or employees of a
franchisee could be deemed employees of the franchisor?
What can be
done to reduce this risk?
There is a general provision that states that a
franchisor’s obligations
to a franchisee are to provide, business guidance,
technical support
and business training. However, there are no specific
provisions that
address labor or employment considerations. As such, any
labor
or employment consideration is addressed by the Labor
Law of
the PRC.
This law states that an employee (aged 16 and over) may
not
work more than eight hours a day and 44 hours a week.
Should the
employee exceed one hour of overtime per day or three
hours due
to a special reason, he or she is entitled to 150 per
cent pay. If the
employee is not granted a guaranteed day of rest within
a week, the
employee is entitled to 200 per cent of his or her pay.
Finally, if an
employee works on a national holiday, he or she may be
paid 300 per
cent pay. Wages are generally determined by economic
factors such
as the daily cost of living in the area.
In addition, the employer must promote good health,
safety and
the welfare of its employees. This includes contributing
to a number
of social insurance and welfare funds that assist
employees with
healthcare, housing and pensions.
Since a contractual relationship does not exist between
the franchisor
and the employees of the sub-franchisor, there is only a
low
risk that these employees will be deemed employees of
the franchisor.
In order to prevent such confusion, the franchisor may
require that
the sub-franchisor add a provision in each employment
contract that
severs the franchisor from employment liability.
7. How are trademarks and know-how protected?
The regulations stipulate that the protection of
trademarks and
know-how shall be handled in accordance with all
applicable law
and administrative regulations.
According to the trademark law, the first person to
register the
mark receives trademark protection. Unregistered marks
may also
be protected if the mark has been declared as a
‘well-known mark’
by a court or administrative authority. The application
process takes
12 to 18 months and protects service marks, collective
marks and
certification marks.
The Anti-Unfair Competition Law ensures that the
business
know-how of the franchisor is sufficiently protected.
This law provides
protection for any information that is not known to the
public,
provides economic benefits to the owner, is of practical
application,
and has been subject to steps by the owner to maintain
its secrecy.
Any misuse of the franchisor’s business know-how is
subject to criminal
prosecution.
8. What are the relevant aspects of the real estate
market and real estate
law?
Because most land is state-owned, enterprises and
individuals may
only possess the right to use land, not the right to own
it. Franchises
may obtain this right for up to 40 years. Upon
expiration of the
grant term, the land and the title to all the structures
and attachments
reverts to the state without compensation. Investors
wanting to avoid
reversion must, before the term of use expires and under
new contractual
terms, apply for an extension to the local branch office
or
Ministry of Land and Natural Resources (MLNR).
Land-users cannot resell property; instead, the land-use
right may
be transferred through assignment or lease. An
assignment occurs
when the land-user transfers all rights to use the land
to an assignee
through a written contract. A lease occurs when the land
user transfers
his right to use the land for a period of time to a
lessee. The lessee
pays rent to the lessor throughout its possession of the
right to use,
but the lessor remains responsible for continued
performance of the
original land grant contract.
In addition, current law restricts foreign development
of land,
especially the development of land for leisure
activities. In fact, due
to exploitation concerns, the government forbids
foreigners from
acquiring land from the state. As such, if a foreign
entity wants to
develop land, it must first establish a network with a
domestic partner
who has the legal right to acquire land from the state
and then
develop the land accordingly. Some stipulate that this
rigid requirement
will be altered as China continues to attract a
significant
amount of foreign investors.
Laws and agencies that regulate the offer and sale of
franchises
9. What is the legal definition of a franchise?
A franchise refers to a business operation by which a
franchisor, an
entity that possesses a registered trademark, enterprise
mark, patent,
know-how, or any other business resource, confers by way
of
contract the resources to another business operator
(franchisee). The
franchisee pays franchising fees to the franchisor and
conducts business
operations under the uniform business model as stated by
the
contract. No entity or individual other than an
enterprise may conduct
the franchise business as a franchisor (that is, no
natural person
may engage in franchising).
10. Which laws and government agencies regulate the
offer and sale of
franchises?
The relevant agencies that regulate the offer and sale
of franchises, in
descending authority, include the State Council, MOFCOM
and the
Ministry of Commerce of specific provinces, autonomous
regions or
municipalities under the Central Government. Other
agencies might
apply depending on the industry.
The controlling law for franchising in China is the
Regulations on
Administering Commercial Franchise (2007). Ancillary to
this law are
the Administrative Measures for Archiving Commercial
Franchises
and the Administrative Measures for the Information
Disclosure of
Commercial Franchise (2007).
11. Describe the relevant requirements of these laws and
agencies.
The law requires that both the franchisor and franchisee
are legal
entities. Prior to the acceptance of the contractual
terms, the franchisor
must disclose all relevant information to the franchisee
as outlined
in the Administrative Measures for the Information
Disclosure
of Commercial Franchise. Within 15 days of the
conclusion of the
contract, the franchisor must submit a signed copy of
the agreed
upon terms and all of the relevant parties’ contact
information to
the local Ministry of Commerce as per the Administrative
Measures
for Archiving Commercial Franchises. Upon submitting the
required
documents, the Ministry of Commerce will review the
application
and issue an approval of the franchise within 10 days.
Approval from
the Ministry of Commerce must be granted before the
franchisee may
engage in daily business transactions.
12. What are the exemptions and exclusions from any
franchise laws and
regulations?
The current franchise law does not contain any
exemptions or
exclusions. Even though the franchise regulations do not
contain
any exemptions or exclusions, certain business
stipulations by the
government might apply. These stipulations vary
depending on the
industry and location. Other than the industry-based
stipulations,
no franchise may burden the public welfare or be against
the government’s
beliefs.
13. In the case of a sub-franchising structure, who must
make pre-sale
disclosures to sub-franchisees? If the sub-franchisor
must provide
disclosure, what must be disclosed concerning the
franchisor and the
contractual or other relationship between the franchisor
and the sub-
franchisor?
In the case of sub-franchising, the sub-franchisor
assumes the same
legal responsibilities as a franchisor. As such, the
sub-franchisor must
disclose all presale information that a franchisor would
be required
to disclose. In addition, the sub-franchisor must
disclose the contractual
relationship between franchisor and the sub-franchisor
to the
sub-franchisee.
14. What is the compliance procedure for making
pre-contractual disclosure
in your country? How often must the disclosures be
updated?
A franchisor must disclose all of the information
outlined in the franchising
regulations at least 20 days prior to the conclusion of
the
franchise contract.
All changes in information must be submitted by the
franchisor
to the franchisee in a timely manner. Failure to submit
changes in a
timely manner warrants rescission by the franchisee and
criminal
fines may be instituted by the Ministry of Commerce. The
franchisor
must also submit changes to the Ministry of Commerce in
the first
quarter of every year.
15. What information must the disclosure document
contain?
At a minimum, a franchisor must provide:
• the name, domicile, legal representative, registered
capital, business
scope of the franchiser, and basic information in
respect of
the franchised operations;
• the basic information in respect of the registered
trademark,
enterprise mark, patent, know-how and business model of
the
franchiser;
• type, amount of franchising fees and payment method;
• prices and requirements for providing the franchisee
with products,
services and equipments;
• specific contents of business training and other
services to be
continuously provided to the franchisee, as well as the
methods
and implementation plans;
• concrete measures for guiding and supervising the
business activities
of the franchisee;
• the investment budget for the franchise outlet;
• the business evaluation of franchisees currently
existing within
the territory of China;
• digests of the financial statements and audit reports
for the past
two years;
• the condition of all franchise-related lawsuits and
arbitration for
the past five years;
• any record of major illegal business operations; and
• any other information as prescribed by the commerce
department
under the State Council.
Additional requirements are outlined in the
Administrative Measures
for the Information Disclosure of Commercial Franchise.
16. How do the relevant government agencies enforce the
disclosure
requirements?
Failure to disclose information in accordance with the
law results in
legal action by the Ministry of Commerce. If the error
is minute, the
department may order the franchisor to make corrections
or impose
a fine of between 10,000 and 50,000 renminbi
(approximately
US$1,460 to US$7,300).
In more serious circumstances, a fine of between 50,000
and 100,000 renminbi
(approximately US$7,300 toUSS$14,600) will be imposed
and an announcement
will delivered. Additionally, if a franchisor willfully
fails to disclose or fraudulently
misrepresents information, it will be subject to
criminal liabilities.
If a crime has not been committed but an entity acted in
bad faith, the entity will be punished by the public
security organ in
accordance with the Law of the PRC on Public Security
Administrative
Punishments.
17. What actions can franchisees take to obtain relief
for violations
of disclosure requirements? What are the legal remedies
for such
violations? How are damages calculated? If the
franchisee can cancel
or rescind the franchise contract, is the franchisee
also entitled to
reimbursement or damages?
According to the general franchise regulations, the
franchisee may
unilaterally rescind the contract if a franchisor
violates the minimum
disclosure requirements. If the franchisor required a
down-payment,
the franchisee may also be entitled to a reimbursement
of funds.
Compensation will be granted only if the franchisee has
strong
evidential support that there was a breach of contract.
In such a
case, contract law sets precedent as to the compensation
of damages.
Generally, any monetary loss that is reasonable or
foreseeable, or
both, will be compensated.
18. In the case of sub-franchising, how is liability for
disclosure violations
shared between franchisor and sub-franchisor? Are
individual officers,
directors and employees of the franchisor or the
sub-franchisor exposed
to liability? If so, what liability?
A sub-franchisor assumes all the rights and
responsibilities of the
franchisor. As such, all regulations that apply to the
franchisor apply
equally to the sub-franchisor, including legal
liabilities. Furthermore,
it appears that since a franchise may only be
established by a legal
person, only a business entity may be legally liable,
not a natural person
(individual officers, directors and employees). However,
the court
ultimately decides in the preliminary hearing whether or
not to enjoin
a party. Hence, depending on the claim, an individual
officer, director,
or employee, or all, may be added as a party to the suit
along with the
business entity. In such a case, each party is equally
liable.
19. In addition to any laws or government agencies that
specifically regulate
offering and selling franchises, what are the general
principles of law
that affect the offer and sale of franchises? What other
regulations or
government agencies or industry codes of conduct may
affect the offer
and sale of franchises?
The law is vague as to the specific principles and codes
of conduct that
must be followed when engaging in the offering and
selling of franchises.
In general, contract law, company law and the general
principles
of civil law set the legal precedents on engaging in
transactions
such as offering and selling a business entity. The
State Council, the
Ministry of Commerce and the SAIC, along with any local
administrations,
regulate these transactions. The application of other
regulations,
the involvement of other government agencies, or the
institution of
certain codes of conduct vary depending upon the
industry.
20. What other actions may franchisees take if a
franchisor engages in
fraudulent or deceptive practices in connection with the
offer and sale of
franchises? How does this protection differ from the
protection provided
under the franchise sales disclosure laws?
China’s franchise regulations do not explicitly state
the legal remedies
available to a franchisee when a franchisor engages in
fraudulent or
deceptive practices in connection with the offer and
sale of franchises.
However, the franchisee will be entitled to
consequential damages if it
can provide evidential support for a breach of contract
or a violation
of the principles of fairness and reasonableness.
Legal restrictions on the terms of franchise contracts
and the
relationship between parties involved in a franchise
relationship
21. Are there specific laws regulating the ongoing
relationship between
franchisor and franchisee after the franchise contract
comes into effect?
There are no specific laws regulating the ongoing
relationship
between franchisor and franchisee. The only applicable
law would
be the Contract Law of the PRC, which states that the
franchisor
and franchisee must deal at arm’s-length and obey the
principles of
fairness and reasonableness.
22. Do other laws affect the franchise relationship?
Other laws might apply depending on the industry. New
stipulations
might be adopted in the near future as the
implementation of the law
matures and the market begins to evolve. For the most
up-to-date
information on laws that affect the franchise
relationship, visit the
MOFCOM website.
23. Do other government or trade association policies
affect the franchise
relationship?
As previously stated, the franchise regulations of the
PRC are in their
initial stages of implementation. As such, the law is
very vague as
to whether other government or trade association
policies affect the
franchise relationship. In practice, other government or
trade association
policies might apply depending on the industry.
24. In what circumstances may a franchisor terminate a
franchise
relationship? What are the specific legal restrictions
on a franchisor’s
ability to terminate a franchise relationship?
The franchisor has an obligation to keep the contractual
relationship
with the franchisee for three years. After three years,
the franchisor
may terminate the contract without any legal
restrictions. The contractual
relationship may terminate before the end of the
three-year
span only if there is strong evidential support that
there is a breach
of contract or a violation of good faith.
25. In what circumstances may a franchisee terminate a
franchise
relationship?
A franchisee may unilaterally terminate the contract if
the franchisor
fails to disclose information. Other circumstances are
not outlined in
the franchise law, but, according to the Contract Law of
the PRC, a
franchisee may terminate the franchise relationship if
there is a justified
breach of contract.
26. May a franchisor refuse to renew the franchise
agreement with a
franchisee? If yes, in what circumstances may a
franchisor refuse to
renew?
After the requisite three-year period, a franchisor may
refuse to renew
the franchise agreement with a franchisee. The law is
silent as to
what circumstances permit renewal; nevertheless,
according to the
Contract Law of the PRC, the franchisor must still be
fair and reasonable
when deciding to terminate the franchise relationship
(that
is, act in good faith).
27. May a franchisor restrict a franchisee’s ability to
transfer its franchise or
restrict transfers of ownership interests in a
franchisee entity?
Yes. The franchisee must seek permission from the
franchisor before
there can be a transfer of ownership. The franchising
regulations do
not restrict the franchisor from preventing a transfer
of ownership
from occurring; however, according to the Contract and
Company
Laws of the PRC, the franchisor must act reasonable when
denying
a transfer of ownership.
28. Are there laws or regulations affecting the nature,
amount or payment of
fees?
The current franchise regulations are silent as to the
nature, amount
or payment of fees. As such, the parties are free to
negotiate the payment
of fees. The Contract and Company Laws of the PRC
prevent
any corrupt transactions that violate the practices of
good faith and
the goodwill of the country. Criminal prosecution could
result if the
parties are found to have engaged in corrupt practices,
especially for
unjust enrichment.
29. Are there restrictions on the amount of interest
that can be charged on
overdue payments?
The current franchise regulations do not contain any
restrictions on
the amount of interest that can be charged on overdue
payments.
Other relevant laws are also silent as to the amount of
interest that
may be charged for overdue payments. In practice, the
general rule is
that the franchisor may charge interest as long as the
interest charged
is reasonable and not punitive.
30. Are there laws or regulations restricting a
franchisee’s ability to make
payments to a foreign franchisor in the franchisor’s
domestic currency?
If a foreign franchisor establishes a FIE in China, the
business
entity is required to file the foreign exchange account
with the State
Administration of Foreign Exchange (SAFE). The
government does
not guarantee that the renminbi generated by the
franchisee will
be converted into foreign currency. Comparatively, if
the franchisor
maintained its domicile abroad while engaging in a
contractual relationship
with a franchisee, then it may possess an offshore
account
where minimal legal restrictions apply. In such a case,
the money
generated may be freely transferred to the franchisor’s
domestic currency
as long as neither party engages in an illicit activity.
31. Are confidentiality covenants in franchise
agreements enforceable?
Yes. The general regulations contain a specific
provision that makes
confidentiality covenants binding.
32. Is there a general legal obligation on parties to
deal with each other in
good faith? If so, how does it affect franchise
relationships?
Yes. Article 4 of the Commercial Franchise Regulation
specifically
states that, ‘the principles of free will, fairness,
honesty, and good
faith shall be followed. In addition, the Company and
Contract law
of the PRC both state that parties must deal in good
faith’.
Acting in good faith implies that both parties must act
at arm’s length
from each other. As such, unconscionability, fraud,
misrepresentation,
deceit and other practices of bad faith warrant
rescission
by the promise and the payment of damages from the
promisor.
33. Must disclosure documents and franchise agreements
be in the language
of your country?
The franchise regulations do not stipulate whether the
disclosure
documents and franchise agreements given to the
franchisee must
be in Chinese; however, all information submitted to the
local agencies
and MOFCOM or the SAIC must be in Chinese. Furthermore,
the Chinese government requires that all claims and
documents be
translated in Chinese prior to submitting a claim to
court or the arbitration
committee.
34. What restrictions are there on provisions in
franchise contracts?
The regulations do not provide specific provisions that
restrict
the terms of a franchise contract; nevertheless, there
are several
laws that provide certain restrictions on doing business
in China.
Recently, the State Council released a general
declaration emphasizing
that businesses may not limit the transfer of high-tech
knowhow,
engage in willful deceit (especially in regards to the
validity
of patent rights) or create contractual burdens. Most
importantly,
China has recently adopted an anti-monopoly law which
will add
certain restrictions as to establishing franchises in
China. Generally
speaking, the government restricts any practice that
would
be against the national interest including, inter alia,
illicit trade,
exploitation of others and willful misrepresentation.
Specific restrictions
depend on the location and type of industry the
franchise is
engaged in.
It is important to note that the new regulations seem to
impact
foreign franchisors more than domestic franchisors.
Domestically,
these regulations are merely a different type of
contractual relationship.
For the foreign entity, not only must it comply with all
the
applicable regulations according to its industry, but it
must also obey
the current stipulations. Overall, the current
regulations have added
another layer of restrictions for the foreign
franchisor. In addition,
foreigners often run into cultural barriers, especially
when establishing
a franchise. In order to limit these systemic barriers,
it is strongly
As the franchise regulations mature, more clarification
will be given
on how to establish and maintain a franchise in China.
In fact, the
State Council is continuously producing declarations or
supplemental
regulations that provide more guidance on the
implementation of the
initial law. As such, it is essential that each
interested investor keeps up
to date with information on the law.
Current and future franchisors should pay attention to
the effects
of the newly enacted anti-monopoly law. Many foreign
investors fear
that this law will be used as a tool to further restrict
foreign industry. Of
course, due to the recent enactment of the law, these
concerns remain
unfounded in practice. Nevertheless, this new law
provides hope for
foreign investors that the Chinese are becoming more
liberal with their
regulations on establishing a business in China
Another trend that investors must keep an eye on is the
constant
revision of intellectual property (IP) rights,
especially if the franchise
necessitates patent protection. The State Council is
constantly refining
the law in order to ensure adequate protection, but has
yet to acquire a
strong enforcement mechanism that prevents numerous IP
infringements.
Recently, there have been several proposals, symposiums
and declarations
from the government addressing issues regarding the lack
of protection.
Finally, investors, both foreign and domestic, should
acquire legal
counsel to help navigate the evolving laws of the PRC.
32. It is advisable that each foreigner engages in
ongoing consultation with
a Chinese partner.
33. Describe the aspects of competition law in your
country that are relevant
to the typical franchisor. How are they enforced?
In order to best protect the evolving needs of the
current market
economy, China has adopted its first anti-monopoly law,
effective
as of 1 August 2008. This law provides guidelines
towards limiting
the monopolization of the market by both foreign and
domestic
enterprises. The law itself is intentionally vague so as
to allow industry
specific regulations to take precedent. Overall, the law
prohibits
certain types of agreements unless they fall within an
exemption,
prohibits behaviors classified as abuse of dominant
market position,
provides a framework for determining when dominance
exists,
establishes a broad merger review scheme and, most
importantly,
prohibits abuse of government administrative powers
restraining
competition.
34. Very briefly describe the court system. What types
of dispute resolution
procedures are available relevant to franchising?
The highest court is the Supreme People’s Court, which
supervises
all subordinate local and special people’s courts. The
Local People’s
Court includes, in ascending order, the Grass-roots
People’s Court,
the Intermediate People’s Court and the Higher People’s
Court. Generally,
the Grass-roots People’s Courts are located at the
municipal
district and autonomous county level.
The Intermediate People’s are established in capitals or
prefectures at the provincial
level. The Higher People’s Courts, located in all
provinces, autonomous
regions, and municipalities, are directly under the
control of
the Central Government. China practices a system of
courts characterized
by ‘two instances of trial’ where the judgments and
orders of
the appeal shall be seen as final decision of the case.
It is important to
note that most cases are rarely litigated and are rather
settled through
administrative agencies or party negotiations.
Preferable for franchising
claims is arbitration, which is considered another
practical and
quick approach for dispute resolution.
Article by:
China
Tian Fengchang
Longan Law Firm
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