Wednesday, May 2, 2007

Heavier Penalties for Violations of the New Chinese Franchise Law

Under the new Chinese Franchise regulation, here are the requirements and penalties for breach thereof:

Article 7---2 Units in Operation for 1 Year

A franchisor shall have at least two directly-operated units under operation for more than one year.

Penalties for Breach of Article 7

Article 24 A franchisor, who is unqualified under Section 2 of Article 7, yet conducts franchising operations, shall be subject to an ordered correction from commerce regulatory authorities, confiscation of profits, a monetary fine between 100,000 and 500,000 yuan, and a public reprimand.

Entities or individuals other than registered enterprises, who conducts franchising operations, shall be subject to an order from regulatory authority to cease illegal operations, confiscation of profits, and a monetary fine between 100,000 and 500,000 yuan.

Article 8---Registration

Article 8 The franchisor shall register a franchising operation with commerce regulatory bodies pursuant to the Regulation within 15 days of its first franchise contract.

Penalties for Breaching Article 8

Article 25 A franchisor, failing to register with appropriate commerce regulatory authorities pursuant to Article 8, shall be subject to an order from such regulatory authorities to register the franchise within a specified time and a monetary fine between 10,000 and 50,000 yuan; if the franchisor fails to register within the specified time, it shall be subject to a monetary fine between 50,000 and 100,000 yuan and a public reprimand.

No doubt that the increase in the amount of penalties is intended to discourage violations of the rules as specified in the new law. However, from the view point of a United States consumer (franchisee), the administrative penalties do not seem too high. Yet at the same, the franchisee is entitled to traditional contract damages if a breach occurred.

If a reader knows whether Chinese contract law allows exemplary damages for a breach of contract in connection with a tort like fraud, please let me know. In the mean time, I will do some research on this topic after my final exams in early May, 2007.

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