Franchising in Hong Kong: overview

A Q&A guide to franchising in Hong Kong.

The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.

Contents

Market

1. What have been the main developments in the franchising market over the past 12 months?

Many international brands target Hong Kong as their regional franchising hub. According to the latest study by the Hong Kong Trade Development Council (HKTDC), international brands are identifying Hong Kong as the prime location to set up their franchise network in order to tap into the huge mainland China market. The HKTDC organised the Hong Kong International Franchising Show alongside the World SME Expo in December last year. Overseas brands that attended included:

  • The Fitness Space.

  • FiltaFry Plus.

  • Minster Cleaning Services.

  • Figaro's Italian Pizza Inc.

 
2. What are the most commonly used methods of local and international franchising?

Local franchising

Local franchisors are treated the same as international franchisors, with no commonly used, or infrequently used, methods of franchising. There is no legally binding local franchising law or any commercial issues which have any impact on the preference for any particular method for local franchising.

International franchising

International franchisors are treated the same as local franchisors. The methods used in franchising are based on the type of businesses the franchisor is conducting. As there are no local franchising laws or commercial issues affecting the method of franchising, there is no preference for any particular method for international franchising.

 
3. Are there any specific reasons for an overseas franchisor to use a separate entity for entering into a franchise agreement with a franchisee in your jurisdiction?

In Hong Kong, there are no specific tax benefits, restrictions on foreign investments, exchange controls or foreign equity participation. Therefore, there is no specific reason for an overseas franchisor to use a separate entity, except for those general good reasons (for example, assets protection, avoidance of litigation for a parent company, and wishing to use a separate legal entity as opposed to its principal business).

 

Regulation of franchising

4. What is the legal definition of franchising and/or a franchise?

There is no specific franchising legislation in Hong Kong and no legal definition of a franchise contained in statute. However, franchisors and franchisees in Hong Kong can voluntarily join the Hong Kong Franchise Association (HKFA) (www.franchise.org.hk), which was established in 1992 as a committee within the Hong Kong General Chamber of Commerce. It helps to monitor and promote the development of franchising activities in Hong Kong by providing a non-binding code of ethics.

The HKFA defines franchising as a method of marketing goods and services, and the basic features of a typical franchising agreement will include:

  • The franchisor allowing the franchisee to use its name or brand.

  • The franchisor exercising continuing control over the franchisee.

  • The franchisor providing assistance to the franchisee.

  • The franchisee making periodical payments to the franchisor.

 
5. What are the laws regulating franchising?

There is no specific franchising legislation that governs the offer and sale of franchises in Hong Kong. Neither are there exchange controls, foreign equity participation or local management participation regulations in place at the moment. Franchises in Hong Kong are not required to be registered with the Government of the Hong Kong Special Administrative Region or any trade associations. As a result, the offer and sale of franchises is subject to common law (with special regard to contract law principles), where the principle of caveat emptor (buyer beware) applies.

There are no specific laws for franchising enacted in Hong Kong that affect the ongoing relationship between franchisor and franchisee. However, the relationship between the franchisor and franchisee will be subject to the principles of contracts under the common law system of Hong Kong, including the principles covering:

  • Unconscionable contract terms.

  • Other contract term-related ordinances, including the Control of Exemption Clauses Ordinance (Cap 71) and the Misrepresentation Ordinance (Cap 284).

Further, the amended Personal Data (Privacy) Ordinance (Cap 486) regulates the collection and processing of personal data (such as customers' Hong Kong ID card numbers) in Hong Kong. The franchisee must pay particular attention when dealing with personal data provided by customers. Moreover, although there is no restriction on the offshore transfer of personal data at present, such restrictions are expected to come into force in the near future.

 
6. What is the regulatory authority responsible for enforcing franchising laws and requirements in your jurisdiction?

Since there is no specific legislation governing franchising alone, there is no particular government or regulatory authority responsible for enforcing franchising laws and requirements in Hong Kong.

However, franchisors and franchisees in Hong Kong can voluntarily join the Hong Kong Franchise Association, which helps to monitor and promote the development of franchising activities in Hong Kong by providing a non-binding code of ethics for parties' reference.

 
7. Must the franchisor be registered with a professional or regulatory body before setting up a franchise system?

There are no registration requirements relating to the franchise system in Hong Kong. However, a franchisor can consider applying on the website of the Hong Kong Franchise Association (HKFA) (www.franchise.org.hk) to become a member of the HKFA, so that the franchisor will be listed as a franchise operator in Hong Kong. This registration is only on a voluntary basis.

Despite the fact that every person carrying on a business in Hong Kong must apply for business registration under the Business Registration Ordinance (Cap 310), a franchisor does not need to apply for business registration if it is not carrying on business in Hong Kong but merely entering into a franchise agreement in Hong Kong.

 
8. Is there a code of ethics or other means of promoting ethical franchising in your jurisdiction?

The Hong Kong Franchise Association lists provisions concerning its code of ethics on its website (www.franchise.org.hk). The provisions include:

  • Ten general provisions.

  • Eight provisions regulating franchisors' behaviours.

  • Five provisions regulating franchisees' behaviours.

  • 11 provisions regulating franchise consultants' behaviours.

 
9. Do franchisees benefit from any laws designed to protect consumers or small businesses?

Under section 2 of the Trade Descriptions Ordinance (Cap 362), a "consumer" is defined as an individual who, in relation to a commercial practice, is acting (or purporting to act) primarily for purposes that are unrelated to the person's trade or business. Since franchisees are acting for purposes that are related to their trades and businesses, it is unlikely that franchisees will be regarded as consumers. As a result, franchisees will not benefit from any law designed to protect consumers. In Hong Kong, there is no law relating to the protection of small businesses and so franchisees do not benefit from this type of law.

 
10. Are there any other requirements which must be met before a business can sell a franchise?

There is no specific legislation on franchising enacted in Hong Kong, and no statutory requirement must be met before a business can sell a franchise. The principles of contract law will apply to the offer and sale of a franchise. If a franchisor and a franchisee have entered into a franchise agreement for the sale and offer of a franchise, then this agreement will set out the parties' respective obligations.

Certain legal requirements will apply in relation to:

  • Protecting the franchisor's intellectual property rights in Hong Kong.

  • Setting up a corporate entity to operate the franchise in Hong Kong.

Regulatory licences may also be required for certain kinds of business in Hong Kong (for example, restaurants). It is advisable for the franchisor to seek legal advice to ensure that the operation of the franchise business will meet all the relevant legal requirements in Hong Kong. Overseas franchisors are treated in the same manner as Hong Kong local franchisors, and there are no specific government consents or official authorisations required for an overseas franchisor to operate a franchise in Hong Kong.

 

Franchise agreement

Pre-contract disclosure requirements

11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?

There is no specific legislation that provides for pre-contractual disclosure in Hong Kong. However, franchisors that are members of the Hong Kong Franchise Association (HKFA) must adhere to the code of ethics published by the HKFA (although the code of ethics is not legally binding).

The code of ethics stipulates that franchisors must provide full and accurate written disclosure of all information that is material to the franchise relationship to prospective franchisees within a reasonable time prior to concluding the franchise agreement. Prospective franchisees are also expected to provide full and frank disclosure of all information considered material in order to facilitate the franchisor in choosing an appropriate franchisee.

Where the disclosure process includes any information provided by an overseas franchisor or IP owner, under the code of ethics the overseas franchisor or IP owner will be expected to participate in the local disclosure process.

 
12. Must the franchisor disclose fairly and in good faith all facts material to the prospective franchisee's decision to enter into the arrangement, or must the prospective franchisee rely on its own due diligence?

There is no general legal obligation on the parties to a franchise agreement to deal with each other in good faith.

The Hong Kong courts do not recognise an implied duty on contracting parties in commercial agreements, such as franchise agreements, to perform their obligations in good faith. This differs from the position in other common law jurisdictions (for example, Canada, the United States and Australia).

Even if there is a "good faith disclosure clause" in the franchise agreement, it is still uncertain whether the Hong Kong courts would favour its interpretation as the doctrine of good faith would create uncertainties as to the intentions and obligations of contracting parties.

However, there are various ways of drafting which can achieve similar objectives to attain the meaning of good faith, including a clause that, for example, "the franchisor will use its best endeavours to take every step to disclose information which is material to the business".

In addition, the doctrine of honesty in fact, or a clear conscience, is recognised by the Hong Kong courts and therefore contracting parties have a duty not to engage in fraudulent conducts. The courts will only be prepared to interfere when there is a severe economic imbalance between the parties.

Where a franchisor is a member of the Hong Kong Franchise Association (HKFA), the HKFA's code of ethics sets out provisions that require franchisors and franchisees to act in good faith and goodwill both during the pre-contract and post-contract stages, which include:

  • Provision 9 of the code of ethics, which requires the pre-contractual negotiation to be conducted in a fair manner.

  • Provision 18 of the code of ethics, which requires a franchisor to allow a franchisee reasonable time to remedy defaults for breach.

However, the code of ethics is not legally binding.

 

Formalities

13. What are the formal contractual requirements to create a valid and binding franchise agreement?

The validity of an agreement will depend on its compliance with the laws of Hong Kong.

Largely following the English contract law position, the basic requirements for making a valid contract in Hong Kong are:

  • Intention to create legally binding relations.

  • Offer.

  • Acceptance.

  • Consideration.

  • Legal capacity to make contracts.

Upon satisfaction of all the above listed requirements, a valid agreement is concluded.

There is no legislation regulating the use of any particular language to form a valid and binding franchise agreement, although the official languages of Hong Kong are English and Chinese. In practice, where a franchise agreement is made in a language other than English or Chinese, translations may be required to enforce that agreement. Where translations are required, the franchisor must ensure in the franchise agreement that the copyright in those translations belongs to the franchisor.

 

Parties' rights and obligations

14. Is there a general obligation to behave fairly, reasonably or in good faith to the other party during the term of the franchise agreement?

Obligations of the franchisee

As there is no specific legislation governing franchising in Hong Kong, and local law does not impose any obligations on the franchisee or the franchisor, the only obligations that can be imposed must be contained in the franchise agreement. The general rule of contract law on reasonableness applies in a franchise agreement.

Obligations of the franchisor

See above, Obligations of the franchisee.

Whether an overseas franchisor, or its officers and directors, can be directly liable for the failures of the local sub-franchisor in Hong Kong will depend on the circumstances. For example, if there is an indemnity clause in the agreement between the franchisor and sub-franchisor, the franchisor will be held liable for the specific indemnity. In some cases of tort (for example, product liability), the court may find the franchisor liable as they also have some kind of duty of care. Therefore the liability of the franchisor to the sub-franchisor is subject to the common law principles.

 
15. Does local law require that particular provisions must be expressly included in a franchise agreement?

There is no requirement in local law that any particular provisions must be included in a franchise agreement.

 
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are they effective to protect the franchisor?

In general, the Hong Kong courts are willing to give effect to the free will of the contracting parties. As such, an entire agreement clause and specific exclusions will serve their specific purposes if carefully drafted with the intention of excluding such specific matters. However, the courts may still override such clauses in light of the facts of the case.

Despite the effectiveness of the entire agreement clause and exclusion clauses, the overseas master franchisor cannot escape liability even if it is not a party to the sub-franchise agreement as it is a common practice for the sub-franchise agreement to expressly refer to and incorporate the master franchise agreement. As a result, the master franchise agreement is a part of the sub-franchise agreement and the entire agreement clause will not operate to exclude the master franchise agreement. Even if, for whatever reason, the master franchise agreement is not expressly incorporated, the courts may, in light of the facts, give rise to a legally binding obligation on the master franchisor, notwithstanding an entire agreement clause.

In such a case, the master franchisor may be liable for the wrongdoings of the sub-franchisee.

 
17. Can the franchisor impose product tying or other purchasing restrictions and non-compete obligations on the franchisee during the term of the agreement?

Restrictions on purchasing and product tying

There is no legal restriction on the provisions that can be contained in a franchising agreement. Provided that the contractual terms reflect the intention of both the franchisor and the franchisee, they are enforceable under the contractual rules of common law. However, in limited cases an undertaking with a substantial degree of market power can harm competition through tying or bundling. This may give rise to foreclosure in the latter markets, leading potentially to higher prices for consumers. In such situations, this can raise concerns under the Second Conduct Rule of the Competition Ordinance (Cap 619).

Non-compete obligations and transfer restrictions

There are no legal restrictions preventing the franchisor from imposing non-compete obligations and transfer restrictions on the franchisee. However, a post-agreement non-compete restriction is limited only to a reasonable period (for example, less than three years).

 

Fees and payments

18. What fees are usually payable by the franchisee? Are there any restrictions on the parties' freedom to set the fees and payments, or any other payment requirements?

There is no law or regulation in Hong Kong that governs the nature, amount or payment of fees. This depends solely on the contractual terms expressly agreed upon by the franchisor and franchisee.

Most franchise agreements contain a provision for the amount of interest that can be charged by the franchisor on any late payments, as agreed between the parties. However, under section 24 of the Money Lenders Ordinance (Cap 163), an agreement for the payment of interest is unenforceable if the effective rate of interest exceeds 60% per annum.

 

Term of agreement and renewal

19. Are parties free to agree on the term of the franchise agreement? What is the typical term of a franchise agreement in your jurisdiction?

There are no specific laws regulating the term for a franchise agreement, and the parties can freely agree on the contract terms subject to common law (contract law principles).

The typical term for a franchise agreement is around three to five years, depending on the type of franchise and the relationship of the parties. The length of the term varies. There is usually a renewal option for the same duration as the original term agreed.

 
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on renewal?

Commercial practice

A franchising agreement will usually contain express provisions on any option to renew or extend the franchise agreement, which set out the circumstances and conditions in which the option can be exercised. It is general practice to include a fee on renewal and the fee is usually subject to the socio-economic environment at the time of renewal.

Local law

A franchisee does not have any automatic right to a renewal or extension of the franchise agreement under local law, unless such an option to renew or extend is expressly included in the franchise agreement. Contractual remedies or no remedy may be available if the franchisor refuses to honour the option to renew. This depends entirely on the drafting of the agreement which is subject to common law (contract law principles).

 

Termination

21. Are there any limitations on the right of a franchisor to terminate the agreement?

A franchise agreement will usually contain specific provisions governing those circumstances in which the right of either party to terminate the franchise agreement will arise.

In the absence of such express provisions, the right to terminate the franchise agreement will arise in the following events:

  • Repudiation. A franchisee is entitled to terminate the agreement in the event of a repudiatory breach by the franchisor, and vice versa. A repudiatory breach is a fundamental breach of contract that permits the non-breaching party to terminate the contract and to claim damages.

  • Misrepresentation. A misrepresentation is a false statement of fact that induced an innocent party into contractual relations. A franchisee has the right to rescind a franchise agreement entered into as a result of the franchisor's fraudulent, negligent or innocent misrepresentation. It is also possible to claim damages for misrepresentation under the Misrepresentation Ordinance (Cap 284).

  • Frustration. Both parties have a common law remedy to terminate the franchising agreement if the occurrence of an unforeseen event has rendered performance of the contractual obligations impossible.

 
22. Are post-term restrictive covenants enforceable?

It is usual practice to incorporate confidentiality covenants into a franchise agreement to protect the franchisor's trade secrets and know-how. It is necessary to ensure that confidentiality covenants continue to bind the parties after termination of the franchise agreement. If the franchisee or the franchisor breaches the terms of the confidentiality covenant, the non-breaching party can treat this as a repudiatory breach of contract and commence an enforcement action.

As well as confidentiality covenants, there are other restrictive covenants, such as non-competition, non-solicitation or non-dealing covenants. These covenants are generally exercisable. However, they are subject to the reasonableness test under common law. In assessing whether a clause is enforceable, the court will consider both:

  • Whether the clause is reasonable in time and geography.

  • Whether the clause has gone beyond what is necessary to protect a legitimate business interest.

Usually, the court is more willing to give effect to these covenants as it is unwilling to interfere with free will in the business world.

 
23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's customers?

There is no legal restriction prohibiting the franchisor, or a replacement franchisee, from continuing to sell to the former franchisee's customers. There is no express provision entitling the franchisee to any compensation payment, although the parties are free to incorporate such terms into the franchise agreement.

 

Choice of law and jurisdiction

24. Will local courts recognise a choice of foreign law in a franchise agreement for a business operating in your jurisdiction?

The parties have the freedom to choose the applicable law in Hong Kong. The local courts will recognise a choice of foreign law in a franchise agreement provided that the franchisor and the franchisee specify the foreign law which will be applicable in the franchise agreement.

 
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a business operating in your jurisdiction?

The parties generally have freedom to choose both the jurisdiction and the applicable law in the franchise agreement.

 

Operations Manual

26. How does the franchisor ensure that the franchisee complies with the business standards, systems and requirements?

Where the franchisor is a member of the Hong Kong Franchise Association (HKFA), the franchisee will expected to adhere to the HKFA's code of ethics, which stipulates that the franchisee must undertake and complete all necessary training to ensure that the franchise business is managed in a manner commensurate with the balance of the franchise system.

If the franchisor is not a member of the HKFA, clauses related to compliance with the business standards, systems and requirements should be carefully drafted in the franchise agreement to ensure the franchisee's compliance.

There are some local regulations and rules on the business standards, systems and requirements in certain businesses, such as in the operation of restaurants. The government of the Hong Kong Special Administrative Region may impose penalties for non-compliance, and in the worst cases, the business can be ordered to suspend.

 
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?

There are no specific legal restrictions on the franchisor's ability to unilaterally change the Operations Manual, which will depend entirely on the drafting of the franchise agreement.

However, where the franchisor is a member of the Hong Kong Franchise Association (HKFA), he will be expected to adhere to the HKFA's code of ethics, which stipulates that the franchisor must provide full and accurate written disclosure of all information considered material to the franchise relationship (including, but not limited to, the franchisor's current operations, the investment required, potential profits and performance records) to each prospective franchisee within a reasonable time prior to the execution of any binding document (including any change to the Operations Manual).

 

Liability issues

28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent selling practices?

The remedies available will depend on whether it is a representation or a term or condition in the agreement.

If such practices are included in the terms of the agreement, the franchisee can seek any remedies either under the terms of the agreement or under the general contract law principles (for example, damages, injunction or specific performance).

If the franchisor has made a fraudulent representation that induced the franchisee to rely on that misrepresentation and enter into a franchising agreement, the franchisee can rescind the contract and sue the franchisor for damages on the ground of misrepresentation. If the misrepresentation has caused the franchisee to suffer losses, the franchisee is further entitled to damages arising from the fraudulent act under section 3 of the Misrepresentation Ordinance (Cap 284).

 
29. How can third-party claims against the franchisee be brought successfully against the franchisor?

Indemnity

The franchisor and franchisee are free to negotiate any indemnification clauses and incorporate those clauses into the franchise agreement. There are no legal limitations on the parties' ability to agree terms concerning indemnification.

Precautions

The franchisor can incorporate a clause into the franchise agreement to clearly state that the franchisee is independent from the franchisor, so that any third-party claims against the franchisee cannot also be brought against the franchisor.

 

Intellectual property

30. What provisions are usually made in relation to intellectual property rights (IPRs), including know-how?

Hong Kong has its own domestic intellectual property laws, but it also adheres to various international intellectual property conventions, including:

  • UN Universal Copyright Convention 1952.

  • WIPO Paris Convention for the Protection of Industrial Property 1883 (Paris Convention).

  • WIPO Berne Convention for the Protection of Literary and Artistic Works 1971 (Berne Convention).

  • UN Universal Copyright Convention 1952.

  • Convention for the Protection of Producers of Phonograms Against Unauthorised Duplication of Their Phonograms 1971.

  • Patent Cooperation Treaty 1970 (PCT).

  • Convention Establishing the World Intellectual Property Organisation 1967.

  • WIPO Copyright Treaty 1996.

  • WIPO Performances and Phonograms Treaty (WPPT) 1996.

Hong Kong, China is a member of the World Trade Organization (WTO) in its own right, and our intellectual property protection system meets the standards set out in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights 1994.

Intellectual property laws in Hong Kong apply equally to residents of Hong Kong and foreign entities. The Trade Marks Ordinance (Cap 559) protects trade marks, certification marks, collective marks and well-known trade marks. It also specifies the procedures for trade mark registration and trade mark revocation. The Trade Descriptions Ordinance prohibits the use of misleading information and false trade descriptions (including the forging of a registered trade mark). The common law rule of passing off applies in Hong Kong, which can be used to enforce unregistered trade mark rights. The Patents Ordinance with the Patent Amendment Ordinance introduced on 10 June 2016 protects patents registered in Hong Kong. Under the current registration patent system in Hong Kong, an applicant can obtain patent protection by securing a patent granted at one of the designated patent offices, such as:

  • The State Intellectual Property Office in China.

  • The UK Patent Office.

  • The European Patent Office designating the UK.

Intellectual property laws are enforced by the Intellectual Property Investigation Bureau, which is part of the Customs and Excise Department.

There is no definitive answer on what rights are typically granted to a franchisee in the franchise agreement relating to the use of IPRs and know-how, and what rights are typically expressly reserved. This depends entirely on the bargaining power of the contracting parties. The franchisor may consider the size of the territory and the performance of the licensee to decide whether to grant an exclusive right to use the licensed marks in the area.

 
31. What are the registration requirements for licensing IPRs?

Although it is common for the parties not to enter into a separate trade mark licence, it may be preferable for them to do so. The franchisor can ensure that the franchisee cannot claim that the use of the licensed mark by him gives him any unauthorised rights to the licensed mark. The franchisee can also protect himself by ensuring that the franchisor does not sell the licensed marks free of the licence agreement.

Although there is no statutory requirement that trade mark licences must be registered, it is important to ensure the effective protection of a licensed mark against a third party acquiring interests with the licensed mark under sections 35 – 37 of the Trade Marks Ordinance.

 

Real estate

32. Are consents from landlords difficult to obtain when transferring leases or granting subleases from a franchisor to a franchisee?

The difficulty in obtaining consent from a landlord varies from landlord to landlord. Generally, a tenancy document usually contains a clause that prohibits the tenant from subletting the property to another party. Any subletting by the tenant will constitute a breach of that a clause, enabling the landlord to institute a legal action for compensation.

If the tenancy document does not contain a clause that prohibits subletting, then the mere act of subletting, even without the landlord's consent, may not be illegal. As a tenancy has the effect of passing the landlord's interests in the property to the tenant, the tenant can deal with the property in whatever manner he chooses (except for any illegal activities or actions which would violate the tenancy agreement) within the period of the tenancy, including subletting the property to another party.

Based on the same reasoning, the breach of a prohibition clause on subletting will make the tenant liable to the landlord for damages, but may not render the sub-tenancy illegal.

In conclusion, the franchisor is free to negotiate the transfer of leases or the granting of subleases with the landlord, and then incorporate any related terms into the leasing agreement.

 
33. How can a franchisor prevent the franchisee from occupying the premises after the franchise agreement has ended?

If the franchisor leases or subleases the premises to the franchisee, the parties will sign a separate leasing agreement which will be protected under contract law. After the leasing agreement has come to an end, if the tenant (franchisee) still occupies the premises, the landlord (franchisor) can exercise his right of forfeiture and can file a claim at the Lands Tribunal, the District Court or the Court of First Instance of the High Court.

The landlord (franchisor), if successful in obtaining a judgment against the tenant (franchisee), will be able to apply to the tribunal/appropriate court for a writ of possession. Upon the issue of the writ of possession, the court bailiff will recover possession of the property on the landlord's behalf.

 
34. How can the franchisor effectively acquire the franchisee's premises at the end of the franchise relationship?

This can be achieved by negotiation between the parties to the franchise agreement.

If the franchisor is the landlord, this can be easily done by letting the premises to the franchisee under the franchise agreement. When the franchise relationship ends, the lease of the premises also automatically ends and the landlord (franchisor) can eject the tenant (franchisee) as outlined in Question 33.

If the franchisor is not the landlord, it is advisable for the franchisor to enter into the tenancy agreement with the landlord directly and secure a right from the landlord to sublease the premises to the franchisee. When the franchise relationship ends, the franchisor can acquire the franchisee's premises under the sublease agreement. This can avoid the problems that can be created when the term of the tenancy agreement is longer than the duration of the franchise agreement.

 
35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent expressed as a percentage of the franchisee's sales?

There are no particular rules governing these issues, and the franchisor and franchisee are free to negotiate and agree on provisions concerning related costs and rent, and incorporate these terms into the franchise agreement.

 

Competition law

36. What is the effect of competition law rules on franchising agreements? Are there any available exemptions?

Competition law

The Competition Ordinance (Cap 619) came into full force, and the Competition Commission commenced full operation, in Hong Kong from 14 December 2015.

The Competition Ordinance (Cap 619) covers all sectors of the economy of Hong Kong as it regulates the conduct of market players, and its provisions concerning price fixing, market allocation and so on can have an impact on a franchise business.

The Competition Ordinance (Cap 619) adopts a "three conduct rules" approach, namely:

  • The first conduct rule prohibits any form of agreements, concerted practices and decisions of a trade association which have the object or effect of preventing, restricting and/or distorting competition in Hong Kong.

  • The second conduct rule prohibits the abuse to a substantial degree of market power by conduct which has the object or effect of preventing, restricting and/or distorting competition in Hong Kong.

  • The third conduct rule (the merger rule) prohibits any direct or indirect mergers, acquisitions and joint ventures between telecommunications carrier licence holders that have the effect of substantially lessening competition in Hong Kong.

Exemptions

If the Commission is satisfied that a particular category of agreement is an excluded agreement, it can issue a block exemption order in respect of that category of agreement. An agreement that falls within a category of agreement specified in a block exemption order is exempt from the application of the first conduct rule.

The Chief Executive in Council can, by an order published in the Gazette, exempt a specified agreement (or a specified class of agreement) from the application of the first conduct rule, or specified conduct (or a specified class of conduct) from the application of the second conduct rule, if he is satisfied that either:

  • There are exceptional and compelling reasons of public policy for the exemption.

  • There is a conflict between this Ordinance and an international obligation that directly or indirectly relates to Hong Kong.

Online/e-commerce restrictions

There are no restrictions in this regard and the franchisor can prevent the franchisee from:

  • Having its own website presence.

  • Promoting its business on the internet.

  • Engaging in e-commerce.

The parties are free to agree terms and incorporate those terms into the franchise agreement.

 

Employment issues

37. Can a franchisee be regarded as an employee of the franchisor?

A franchisee will generally not be considered as an employee of the franchisor. The risk of this happening (if any) can be mitigated by including a well-drafted relationship clause in the franchise agreement to clarify the relationship between the two parties.

 

Dispute resolution

38. How are franchising disputes typically dealt with? What provisions for handling disputes are usually included in domestic franchise agreements?

Hong Kong is a popular venue for arbitration. The Arbitration Ordinance (Cap 609) provides a legal framework for arbitrations based largely on the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Arbitration Law). Under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region and the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), arbitral awards made in Hong Kong are enforceable in mainland China and in over 140 jurisdictions worldwide. Facilities and support services in relation to arbitration are provided by the Hong Kong International Arbitration Centre.

Arbitration is considered a practical and quick method for dispute resolution. Court proceedings can be time consuming and more expensive. In cases where all parties are legally represented, the solicitors will file in court a mediation certificate at the same time that the timetabling questionnaire is filled under Order 25, rule 1 of the Rules of High Court/Rules of District Court, indicating whether each party is willing to attempt mediation or not. Where one or more parties are not legally represented, on the application of a party or on its own motion, the court can, at a suitable stage, give directions that the parties should attempt mediation.

Arbitration is a voluntary process, and it can start before any litigation begins or at any stage during the process of litigation. The procedures apply to all civil proceedings in the Court of First Instance and the District Court which have been begun by writ.

 
39. How are foreign judgments or foreign arbitral awards enforced locally?

Foreign judgments in civil and commercial matters can be enforced in the Hong Kong Special Administrative Region under the statutory registration scheme or at common law.

There is a statutory registration scheme for foreign judgments under the Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) to facilitate the reciprocal recognition and enforcement of judgments on the basis of reciprocity. With respect to foreign judgments that may not be registered under this Ordinance, they can be enforced at common law.

It should be noted that a foreign judgment does not have to originate from a common law jurisdiction in order to benefit from the common law rules. Neither is reciprocity a requirement under the common law. Hence, a judgment originating from a jurisdiction which does not recognise a Hong Kong judgment can still be recognised and enforced by the Hong Kong courts provided that all the relevant requirements at common law are met.

If a Chinese patent holder who also registered in Hong Kong secures an injunction in a Hong Kong court, and the patent holder goes back to the Chinese court to apply for foreign recognition of that judgment, even if the Chinese court admits the foreign judgment, the Chinese court cannot grant the patent holder the injunction and can only grant a monetary award.

 

Exchange control and withholding

40. Are any exchange control or currency regulations applicable to payments to an overseas franchisor?

There is no foreign exchange control in Hong Kong and the Hong Kong dollar is freely convertible into other currencies.

 
41. Is there a withholding obligation on payments made to an overseas franchisor?

There is no withholding obligation on payments made to an overseas franchisor in Hong Kong.

 

Reform

42. Are there any proposals to reform the laws affecting franchising?

At present there are no proposals to introduce new legislation or regulations, or to revise existing legislation or regulations, in relation to franchising in Hong Kong.

 

Online resources

Hong Kong Franchise Association

W www.franchise.org.hk/codeofethics.asp

Description. The website of the Hong Kong Franchise Association (this is an up-to-date but unofficial website).

Bilingual Laws Information System

W www.legislation.gov.hk/index.htm

Description. The official and up-to-date website of the Bilingual Laws Information System. The Business Registration Ordinance (Cap 310) can be found at: www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA94825755E0033E532/E2F97C5B03413D68482575EE005BB70D/$FILE/CAP_310_e_b5.pdf. The Foreign Judgments (Reciprocal Enforcement) Ordinance (Cap 319) can be found at: www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA94825755E0033E532/B884F29F7501419A482575EE006021E6/$FILE/CAP_319_e_b5.pdf.



Contributor profile

Ella Cheong, Senior Partner

Ella Cheong Law Office

T +852 2810 7400
F +852 3199 7399
E ellacheong@ellacheonglaw.com
W www.ellacheonglaw.com

Professional qualifications. Admitted as Solicitor, Hong Kong, Singapore, UK and Australia; Justice of Peace; Notary Public (Hong Kong and Singapore).

Areas of practice. Intellectual property; commercial and corporate; litigation and dispute resolution; notarial.

Languages. Mandarin, Cantonese, English

Professional associations/memberships.

  • Hong Kong Law Society (Chair of Intellectual Property Committee/Roll of Honour).
  • Asian Patent Attorneys Association (Founding President (HKG)/Enduring Award).
  • Asian Anti-Counterfeit Association (Life Founder Member).
  • Association Internationale pour la Protection de la Propriété Intellectuelle (Member of Honour).
  • Fédération Internationale des Conseils en Propriété Industrielle (Member of Honour).

{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248405079744", "objName" : "Franchising in Hong Kong", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/1-632-1645?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "22e97be00:15b190ba19c:1f44", "analyticsSessionCookie" : "22e97be00:15b190ba19c:1f45", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }