Franchise Agreements in Hong Kong: Legal Framework and Key Considerations

Introduction

Franchising is a well-established model for business expansion across Hong Kong and the Asia-Pacific region. Whether you are an international franchisor entering the Hong Kong market, a local brand seeking to expand through franchising, or an entrepreneur considering a franchise investment, understanding the legal framework governing franchise relationships is essential.

Unlike many jurisdictions, Hong Kong does not have a dedicated franchise statute. Franchise relationships are governed by general contract law, together with specific legislation covering intellectual property, competition, data privacy, and employment. This creates significant flexibility for parties to structure their arrangements, but also requires careful drafting to protect both franchisors and franchisees.

What Is a Franchise?

A franchise is a contractual arrangement in which a franchisor grants a franchisee the right to operate a business using the franchisor’s brand, systems, know-how, and support, in exchange for fees and compliance with the franchisor’s standards. Common franchise models include:

• Business format franchising – the most common model, where the franchisee adopts the franchisor’s complete business system (e.g., F&B chains, retail stores);
• Product distribution franchising – the franchisee sells the franchisor’s products under the franchisor’s trademark;
• Master franchise – the master franchisee is granted rights to sub-franchise within a territory, often used for international expansion into Asia.

Legal Framework Governing Franchises in Hong Kong

No Dedicated Franchise Law

Hong Kong has no franchise-specific legislation comparable to the U.S. FTC Franchise Rule or Australia’s Franchising Code of Conduct. There are no mandatory disclosure requirements, no mandatory cooling-off periods, and no government franchise registry. This makes Hong Kong a flexible but “caveat emptor” jurisdiction – parties must rely on contractual protections.

Applicable General Law

Franchise arrangements in Hong Kong are governed by:

• Contract law (common law principles of offer, acceptance, consideration, and good faith implied terms);
• Trade Marks Ordinance (Cap. 559) – governing trademark licensing and registration;
• Copyright Ordinance (Cap. 528) – protecting manuals, software, and branded materials;
• Competition Ordinance (Cap. 619) – prohibiting anti-competitive provisions in franchise agreements (e.g., resale price maintenance, exclusive purchasing requirements);
• Personal Data (Privacy) Ordinance (Cap. 486) – governing the sharing of customer data between franchisor and franchisee;
• Employment Ordinance (Cap. 57) – relevant where franchisee staff interact with the franchisor’s systems.

Key Provisions of a Franchise Agreement

1. Grant of Franchise and Territory

The agreement must clearly define:

• The scope of the franchise grant (right to operate one or multiple locations);
• The territory – whether the franchisee has an exclusive, non-exclusive, or protected territory;
• Any reserved rights of the franchisor (e.g., online sales, institutional customers) within the territory.

2. Fees and Royalties

Typical franchise fee structures include:

• Initial franchise fee – a one-time upfront payment for the right to use the system and brand;
• Royalty fee – an ongoing percentage of gross sales (typically 5%–10%) or a fixed periodic fee;
• Marketing/advertising fund contribution – contribution to a system-wide marketing fund;
• Technology fees – for access to POS, inventory, or reservation systems.

The agreement should specify the calculation methodology, payment frequency, audit rights, and consequences of non-payment.

3. Term and Renewal

Initial terms typically range from 5 to 10 years, with renewal options. The agreement should address:

• Conditions precedent to renewal (good standing, training completion, refurbishment);
• Whether renewal requires payment of a new franchise fee;
• The franchisor’s right to update the franchise system as a condition of renewal.

4. Intellectual Property Licensing

The franchise agreement should contain a comprehensive IP licence covering:

• Trademarks – rights to use specified marks in connection with the franchise business, subject to quality control obligations;
• Know-how and trade secrets – operational manuals, recipes, product specifications, and proprietary methods;
• Software and technology – licence to use the franchisor’s technology platforms;
• Copyright – in marketing materials, training content, and branding elements.

The franchisor should ensure its Hong Kong trademarks are registered with the Trade Marks Registry before granting franchise rights, and the licence should specify that the franchisor retains all IP ownership.

5. Standards, Training, and Operations

Maintaining brand consistency is central to franchising. The agreement should include:

• Obligation to comply with the operations manual (which should be incorporated by reference);
• Mandatory initial training and ongoing training requirements;
• Quality control audit rights for the franchisor;
• Approval requirements for suppliers, products, and marketing materials.

6. Non-Competition and Post-Term Restrictions

Franchise agreements typically include:

• In-term non-compete – prohibiting the franchisee from operating a competing business during the franchise term;
• Post-term non-compete – restricting the franchisee from operating a competing business for a specified period (typically 12–24 months) and within a specified radius after termination.

Under Hong Kong common law, post-term restrictions must be reasonable in scope, duration, and geography to be enforceable. Overly broad restrictions may be struck down by Hong Kong courts.

7. Assignment and Transfer

The agreement should clearly state:

• Whether the franchisee may assign or transfer the franchise (typically subject to franchisor consent and right of first refusal);
• Transfer fee payable to the franchisor;
• Training requirements for an incoming franchisee;
• Conditions for inheritance or succession on death of the franchisee.

8. Termination

Termination provisions are critical. Common grounds for immediate termination include:

• Insolvency of the franchisee;
• Fraud or material misrepresentation;
• Breach of IP obligations or disclosure of confidential information;
• Health and safety violations.

Grounds for termination on notice (with cure period) include repeated breach of operational standards, failure to pay fees, and unauthorised assignment.

The agreement should specify post-termination obligations: returning confidential information, ceasing use of trademarks, and de-identification of the premises.

9. Governing Law and Dispute Resolution

International franchise agreements frequently choose Hong Kong law as the governing law for its neutrality, predictability, and enforceability. Dispute resolution clauses commonly provide for:

• Mediation first – mandatory mediation before arbitration or litigation;
• HKIAC arbitration – binding international arbitration under the Hong Kong International Arbitration Centre Rules, which provides confidential and enforceable awards in over 170 countries under the New York Convention;
• Hong Kong court litigation – where the parties prefer court proceedings.

Competition Law Considerations

The Competition Ordinance (Cap. 619) prohibits agreements that have the object or effect of preventing, restricting, or distorting competition in Hong Kong. Franchise agreements may raise concerns in areas including:

• Resale price maintenance (RPM) – fixing the price at which franchisees sell products is generally prohibited;
• Exclusive purchasing – requiring franchisees to purchase products exclusively from the franchisor or designated suppliers may attract scrutiny if the network has market power;
• Territory restrictions – passive sales restrictions within exclusive territories may be problematic.

Franchisors should review their standard agreements against Competition Commission guidance, particularly the “block exemption”-style analysis relevant to vertical agreements.

Practical Tips for Franchisors

• Register Hong Kong trademarks before granting franchise rights;
• Prepare a comprehensive operations manual that forms part of the franchise agreement;
• Consider pre-contractual disclosure even though not legally required – it builds trust and reduces disputes;
• Include robust audit rights to enforce brand standards;
• Ensure competition law compliance review of all exclusivity and pricing provisions;
• Plan for dispute resolution with a tiered mechanism (mediation → arbitration).

Practical Tips for Franchisees

• Conduct thorough due diligence on the franchisor’s financials, existing franchisee satisfaction, and litigation history;
• Negotiate territory exclusivity and renewal terms before signing;
• Seek independent legal advice – franchise agreements are typically one-sided and heavily favour the franchisor;
• Understand the total investment (initial fee, fit-out, working capital) and realistic revenue projections;
• Review the operations manual before signing to understand what standards you will be bound by.

How Alan Wong LLP Can Assist

Alan Wong LLP advises both franchisors and franchisees on all aspects of franchise arrangements in Hong Kong and the Asia-Pacific region. Our Corporate & Commercial team provides:

• Drafting and reviewing franchise agreements, master franchise agreements, and area development agreements;
• Intellectual property licensing advice and trademark registration strategy;
• Competition law review of franchise agreement provisions;
• Franchise dispute resolution, including mediation and HKIAC arbitration representation;
• Cross-border structuring for international franchisors entering the Hong Kong market.

Contact us to discuss your franchise legal needs.