To Maintain a Stable and Fair Trading Order
——Li and Liu v. W Company in Shenzhen over Franchise Contract Disputes
[Case Summary]
In September 2017, the plaintiff Li and the defendant Shenzhen W Company signed a "Rental Service Contract", stipulating that the hotel operated by the plaintiff Liu (Li's wife) became one of the affiliated hotels of W Company's brand management platform, whereas W Company provided standard management consultation, marketing promotion and customer source delivery for the plaintiff's hotel in accordance with the brand’s established standards. On the day of signing the contract, Li paid the franchise fee of 126,000 yuan to W Company by means of transfer as agreed in the contract, and then Li renovated the hotel operated by Liu according to the standards agreed in the contract. On November 13, 2017, employees of Company W informed Li that due to the suspension of the management platform's project, follow-up matters should to be resolved with the project manager who signed contracted at that time. Due to the suspension of the project, the purpose of the contract could not be achieved. Li and W Company negotiated to cancel the contract, and it was difficult for the two parties to reach an agreement due to the compensation for the decoration costs, therefore they sued to the court.
[Ruling Results]
The court held that the contract signed by the two parties was a franchise contract, which was expressed by the true intention of both parties, and the content did not violate the mandatory provisions of laws and administrative regulations, therefore legal and effective, and was legally binding on both parties. Li paid the relevant franchise fee according to the contract, and carried out decoration and renovation, and fulfilled the relevant obligations of the contract. However, due to the suspension of the W company’s brand management platform project, the purpose of the contract signed by the two parties could not be achieved, and the behavior of W company constituted fundamental breach of contract, therefore Li's request for the termination of the contract was supported by the court. Due to Company W’s breach of contract, Li suffered a loss in hotel the decoration, furniture upgrade, equipment, and termination of the decoration. Based on the evidence provided by Li for the related expenses, the reasonable part of the above loss claimed by Li was supported by the court.
[Significance]
Franchise business has made great progress in China for its advantages including rapid expansion, low cost, low risk, and high efficiency, covering many industries such as hotel franchise, convenience store, regional agency, clothing sales, catering services, car rental, jewelry sales and sales. It has a profound impact on the social economy, especially the retail industry.This case is a typical franchise contract dispute. By correctly determining the validity of the contract, the court provided reasonable division of responsibilities between the parties while supporting the counter party of the contract requiring the breaching party to compensate for the reasonable losses caused by the breach, which can effectively regulate and guide the parties to strictly fulfill the contractual obligations, thereby creating a stable and fair operation environment for the FTA.
