Compensation for breach of contract by a franchisor

On 1 August 2005, Zhejiang Xiaer Apparel Company executed a franchising contract with Wu Zhichao. Under the contract, Xiaer appointed Wu to sell Xiaer products in Henan Province, and Wu warranted that he would place orders with Xiaer worth at least RMB3 million (US$439,000) each year. The term of the contract was two years, from August 2005 to the end of July 2007. Furthermore, Xiaer’s franchising handbook stated that the franchisee would enjoy a number of advantages, including exclusive operation within the franchise territory and the sharing of certain benefits. The handbook promised that the franchisee would enjoy a return of at least 65%.

Pursuant to the contract, Wu paid Xiaer a total of RMB160,000, and Xiaer shipped goods to Wu Zhichao worth RMB128,135.

Starting on 14 July 2005, Wu spent approximately RMB1 million on leasing and fitting out premises, participating in exhibitions, soliciting business, publicity, advertising and other items.Xiaer provided Wu with such components as Xiaer apparel labels and signs, and authorized him to affix the labels to, and sell, Xiaer apparel. However, as Xiaer suffered from a shortage of goods, it failed on several occasions to supply goods ordered by Wu on time.

Harry He is a partner of AllBright Law Offices. His main practice areas are foreign direct investment, M&A and labour disputes.