The State Council of P.R. China released the Administrative Regulation on Commercial Franchise (hereinafter the “Regulation”) with its No. 485 order on February 6, 2007, which will take effect on May 1st, 2007.
Aiming to solve the problems in the Chinese franchise field with introducing the practice in foreign countries, the Regulation has established five rules as follows:
1. The Regulation has stipulated the initial requirements on the “Franchisor” in China including that only the enterprise is permitted to operate franchise in China. A mature business operation mode with the ability to provide the operational instruction, technical support as well as training on a continuous base is required. According to the Regulation, the Franchisor shall have its two directly-operated stores existing for over one year in China.
2. The Regulation has stipulated the obligation of the Franchisor on the disclosure of necessary business information.
3. The Regulation has stipulated the recordation of procedure of the Franchisor for its executed franchise agreements.
4. The Regulation provides a basic structure of a formal franchise agreement.
5. The Regulation provides a good assignment of rights and obligations for the franchisor and franchisee.
Compared with the Administrative Rules on Commercial Franchise released by the Ministry of Commerce on December 30, 2004, the Regulation belongs to the administrative regulation at the State level and enjoys a higher position and shall be more applicable in general binding all. For instance, when the Chinese courts handle the franchise disputes, they shall hear the case pursuant to the Regulation while the Administrative Rules are only the reference.
