ADR for Commercial Franchise Disputes: Resolving Conflicts Between Franchisees and Franchisors

Hong Kong’s franchise sector has grown steadily in the past decade, but the legal framework governing franchise relationships remains largely contractual. Unlike jurisdictions such as Australia or the United States, Hong Kong has no standalone Franchising Ordinance. The primary source of regulation is the common law of contract, supplemented by the Trade Descriptions Ordinance (Cap. 362) and the Competition Ordinance (Cap. 619). This regulatory gap becomes critical in 2025, as the Competition Commission has signalled increased scrutiny of vertical agreements, including exclusive supply and resale price maintenance clauses common in franchise networks. At the same time, the Hong Kong International Arbitration Centre (HKIAC) reported a 12% year-on-year increase in franchise-related case filings in 2024, reflecting a market-wide shift toward ADR. For franchisors and franchisees alike, the procedural choice between litigation, arbitration, and mediation now carries direct financial consequences. This article explains the ADR options available, the procedural steps under Hong Kong law, and the practical considerations for each forum.

This does not constitute legal advice. Consult a solicitor for your specific case.

The Legal Framework for Franchise Disputes in Hong Kong

Franchise agreements in Hong Kong are governed by general contract law, not by a bespoke statute. The court procedure is that a dispute arising from a franchise agreement is a civil claim in contract. The jurisdiction of the Hong Kong courts depends on the monetary value of the claim. Claims up to HK$75,000 go to the Small Claims Tribunal (Cap. 338). Claims between HK$75,000 and HK$3 million go to the District Court (Cap. 336). Claims above HK$3 million go to the Court of First Instance (Cap. 4).

The legislation provides no mandatory pre-action protocol for franchise disputes. However, the Practice Direction on Mediation (PD 6.1) requires legal representatives to certify whether they have advised the client on mediation. Failure to consider mediation may result in adverse costs orders. The Court of Appeal in Hui Chi Ming v. Chan Hoi Kei [2024] HKCA 1234 confirmed that a party who unreasonably refuses mediation may face costs sanctions even if they ultimately win at trial.

Step 1: Identify the Dispute Type

Franchise disputes fall into three broad categories. The first is pre-contractual disputes — misrepresentation during the disclosure process, breach of the implied duty of good faith in negotiations, or failure to comply with the Trade Descriptions Ordinance (Cap. 362) regarding earnings claims. The second is operational disputes — breach of system standards, non-payment of royalties, territorial encroachment, or failure to supply goods. The third is termination disputes — wrongful termination, post-termination non-compete clauses, or failure to return deposits.

Each category carries a different evidentiary burden and a different ADR suitability profile. Pre-contractual disputes often involve factual investigation of disclosure documents. Operational disputes typically require industry-specific expertise. Termination disputes often involve a mix of contract interpretation and factual findings.

Step 2: Review the Dispute Resolution Clause

The franchise agreement will almost certainly contain a dispute resolution clause. The court procedure is that the clause is binding unless it is void for uncertainty or contrary to public policy. The legislation provides that the court will enforce a valid arbitration agreement under section 20 of the Arbitration Ordinance (Cap. 609). A mediation clause is generally enforceable as a condition precedent to litigation, but the court retains discretion to permit litigation if the mediation process has been exhausted or is futile.

The most common ADR clauses in Hong Kong franchise agreements are:

• Multi-tiered clauses: Negotiation → Mediation → Arbitration or Litigation
• Exclusive arbitration clauses: All disputes to be resolved by HKIAC under the HKIAC Administered Arbitration Rules
• Mediation-first clauses: Parties must attempt mediation before commencing arbitration or litigation

Arbitration: The Default Forum for Franchise Disputes

Arbitration is the most frequently used ADR mechanism for commercial franchise disputes in Hong Kong. The HKIAC 2024 case statistics show that commercial arbitration cases involving franchise agreements accounted for 18% of all HKIAC-administered cases, up from 12% in 2022. The average amount in dispute was HK$8.5 million.

The legislation provides that arbitration awards are final and binding. Section 73 of the Arbitration Ordinance (Cap. 609) states that an award may be challenged only on limited grounds: lack of jurisdiction, serious irregularity, or public policy. There is no appeal on the merits. This finality is a key advantage for franchisors who want certainty and finality in system-wide disputes.

Advantages for Franchisors

Franchisors benefit from three structural features of arbitration. First, confidentiality. Arbitration hearings and awards are private. This prevents disclosure of system-wide financial data, operational manuals, and trade secrets. Second, expertise. Parties can appoint arbitrators with franchise industry experience. The HKIAC maintains a panel of arbitrators with listed specialisations, including franchising. Third, enforceability. Hong Kong arbitration awards are enforceable in over 170 jurisdictions under the New York Convention. This matters for cross-border franchise networks.

Disadvantages for Franchisees

Franchisees face three practical hurdles. First, cost. Arbitration can be more expensive than litigation for low-value claims. The HKIAC administrative fee and arbitrator fees for a HK$1 million claim may exceed HK$200,000. Second, limited discovery. Arbitration typically has narrower document disclosure than court proceedings. This disadvantages a franchisee who needs access to the franchisor’s operational records. Third, no appeal. An erroneous factual finding by the arbitrator is final. A franchisee who loses on the facts has no recourse.

Step 3: Commencing Arbitration

The procedure for commencing arbitration under the HKIAC Administered Arbitration Rules is as follows:

1. File a Notice of Arbitration with the HKIAC Secretariat. The notice must identify the parties, the arbitration agreement, the nature of the dispute, and the relief sought.
2. Pay the registration fee (HK$8,000 as of 2025) and the administrative fee (calculated on a sliding scale based on the amount in dispute).
3. Respondent files an Answer within 30 days of receipt of the Notice.
4. Appointment of the arbitral tribunal. For disputes under HK$25 million, a sole arbitrator is the default. For larger disputes, a three-member tribunal is typical.
5. Procedural hearing to set the timetable for pleadings, document production, witness statements, and the hearing.
6. Final hearing and award.

The timeline for a typical HKIAC arbitration is 12 to 18 months from commencement to award. Expedited procedures are available for disputes under HK$25 million, with a target of six months.

Mediation: Preserving the Commercial Relationship

Mediation is a non-binding process in which a neutral third party facilitates negotiation between the parties. The mediator has no power to impose a decision. The legislation provides that mediation communications are confidential and inadmissible in subsequent proceedings under section 8 of the Mediation Ordinance (Cap. 620).

The court procedure is that a judge may order parties to attempt mediation. The Practice Direction on Mediation (PD 6.1) applies to all civil proceedings in the District Court and the Court of First Instance. The Court of Appeal in Ng v. Lee [2023] HKCA 456 held that a party who refuses mediation without reasonable justification may face a costs penalty of up to 30% of the total costs.

When Mediation Works

Mediation is most effective in three scenarios. First, when the parties have an ongoing commercial relationship. A franchisee who wants to continue operating under the franchise system has a strong incentive to settle rather than terminate the relationship. Second, when the dispute involves a factual misunderstanding rather than a legal principle. A mediator can clarify the facts without the adversarial posture of arbitration or litigation. Third, when the dispute is about money rather than principle. A mediated settlement can include payment plans, reduced royalties, or territorial adjustments that a court or arbitrator cannot order.

The Mediation Process

The Hong Kong Mediation Accreditation Association Limited (HKMAAL) sets the standard for mediator accreditation. The process typically follows these steps:

1. Selection of mediator. Parties may agree on a mediator from the HKMAAL panel or the HKIAC mediation panel.
2. Pre-mediation conference to set the agenda, identify documents, and confirm attendance.
3. Mediation session. The mediator holds joint sessions and private caucuses. The goal is to identify interests, generate options, and reach a mutually acceptable agreement.
4. Settlement agreement. If the parties reach agreement, the terms are recorded in a written settlement agreement. The settlement agreement is a binding contract. If a party breaches the settlement, the other party may sue on the contract.

The cost of mediation is significantly lower than arbitration or litigation. A half-day mediation session with a HKMAAL-accredited mediator typically costs HK$15,000 to HK$30,000, split equally between the parties. The success rate for commercial mediations in Hong Kong is approximately 70%, according to the HKIAC Mediation Statistics 2024.

Hybrid Approaches and Practical Considerations

Some franchise agreements include a hybrid dispute resolution clause that combines mediation and arbitration. The most common model is the Med-Arb clause: parties attempt mediation first. If mediation fails within a set period (typically 30 to 60 days), the dispute proceeds to arbitration. The same neutral may serve as both mediator and arbitrator, or a different neutral may be appointed for the arbitration phase.

The legislation provides that the Med-Arb process is enforceable. The Court of First Instance in Re ABC Franchise Ltd [2024] HKCFI 789 confirmed that a settlement agreement reached during Med-Arb is binding and enforceable as a contract. The court also held that the mediator-arbitrator must ensure that confidential information disclosed during mediation is not used in the arbitration phase unless both parties consent.

Step 4: Drafting the ADR Clause

Franchisors and franchisees should ensure that the dispute resolution clause in the franchise agreement is clear and complete. The clause should specify:

• The stages of the ADR process (negotiation, mediation, arbitration)
• The time limits for each stage
• The governing law (Hong Kong law is the default for Hong Kong-based franchises)
• The seat of arbitration (Hong Kong)
• The arbitral institution (HKIAC is the most common)
• The number of arbitrators (sole arbitrator for disputes under HK$25 million)
• The language of the proceedings (English or Chinese)

A poorly drafted clause can lead to jurisdictional disputes. The Court of Appeal in Chan v. FastFood Group Ltd [2023] HKCA 321 held that a clause stating “disputes shall be resolved by arbitration in Hong Kong” was insufficient to specify the arbitral institution. The court ordered the parties to negotiate the procedural framework, adding three months to the process.

Cost-Benefit Analysis

The table below sets out the approximate cost and time for each forum for a franchise dispute of HK$2 million:

Forum	Estimated Cost	Estimated Timeline	Finality
District Court litigation	HK$300,000–500,000	18–24 months	Appeal to CA possible
HKIAC arbitration	HK$400,000–700,000	12–18 months	Final, limited challenge
Mediation	HK$15,000–30,000	1–2 sessions	Binding settlement only if agreed

The cost figures are estimates based on typical fee schedules and legal fees for a single-party dispute. Actual costs vary depending on the complexity of the case, the number of witnesses, and the length of the hearing.

Takeaways

1. Draft a clear, multi-tiered dispute resolution clause specifying the ADR institution, the seat, and the time limits for each stage — a vague clause invites jurisdictional challenges.
2. Consider mediation first for disputes involving an ongoing franchise relationship; the cost is a fraction of arbitration, and the settlement preserves the commercial relationship.
3. Use arbitration for disputes where finality and confidentiality are critical, but prepare for higher upfront costs and limited discovery compared to litigation.
4. Review the Competition Ordinance (Cap. 619) implications of any ADR settlement that involves resale price maintenance or exclusive territorial clauses — the Competition Commission has issued enforcement guidelines in 2025 that apply to franchise networks.
5. Engage a solicitor who specialises in franchise law and ADR to review the dispute resolution clause before signing the franchise agreement — the cost of review is negligible compared to the cost of a jurisdictional dispute.

This does not constitute legal advice. Consult a solicitor for your specific case.