Legal remedies for termination of franchise agreements

In a dispute over a TOT (teams of tomorrow) franchise agreement, where a foreign-funded enterprise, which set up a project company and a specific operating entity (collectively called the investor) invested in a domestic sewage-treatment plant, the local government defaulted in the payment of sewage-treatment fees and refused to allow the facility to be shut down for maintenance, causing the plant and equipment to go into a long-term overloaded operation. In the matter, the government’s competent authority for environmental administration issued the administrative penalty decision, the decision on the order to correct illegal acts, and the decision on consecutive daily penalties, totalling RMB32 million (US$4.6 million), for excessive water pollutants, excessive air pollutants and other circumstances. Thereafter, the government notified the investor to end the franchise agreement and regain control of the sewage-treatment plant. As a result, the investor forcibly took over the plant before handing it over to other enterprises to operate.

Strong practical significance of subdivision and selection of dispute resolution methods. Article 12 of the Administrative Procedure Law of China (2017 revision) provides that the said law shall apply and the administrative counterparty may initiate an administrative procedure when an administrative agency fails to perform according to the law or as agreed upon, or illegally modifies or rescinds, a government franchise agreement. There is no express provision in law or judicial interpretation on whether the parties involved may initiate a commercial arbitration or civil procedure for any breaching liabilities, damages, determination of project price or other dispute having no direct relation to government administrative approval, administrative licensing and administrative functions under a franchise agreement, as civil legal relations.

The opinions in certain decisions of the Supreme People’s Court in relevant cases and the opinions of the high people’s courts of certain provinces and municipalities are inclined to believe that “the disputes involving administrative planning, licensing, penalty, management and supervision, and other administrative functions are administrative legal relations; the disputes where contracts represent specifically the rights, obligations and breaching liabilities between the parties are civil legal relations”. As such, in a case where the government terminates a franchise agreement, remedy for the investor may be achieved through administrative law or civil law generally based on the claims of the investor. In certain cases, the selection of proper legal remedies can help an investor recover huge property losses.