September 26, 2024 Copyright ©️ 2024 by goldkeen International Patent & Trademark Joint Office
 

 

 

Can a franchise headquarters terminate a regional agent’s contract on the grounds of sourcing materials independently?
How can franchise HQs use contracts to restrict franchisees from unauthorized procurement?

To accelerate expansion, beverage franchises often appoint regional agents to develop franchise stores in specific cities or counties. This case involves Ching Yuan, a brand known for its taro-based drinks.

In 2020 (Year 109), Ching Yuan headquarters granted Ms. Lin the exclusive regional agency rights for Tainan City and Taichung City. The contract required her to open three stores (including at least one directly operated store) in the first year, and five more each year thereafter. Failure to meet these terms would allow the HQ to terminate the contract. A deposit was also stipulated, to be refunded if both parties had no disputes.

The contract also clearly bound material procurement to the HQ, with three major clauses:

1. “To maintain brand consistency, regional agents must procure all materials used in stores and franchisees under their territory exclusively through headquarters. The cost is borne by the agent. Franchise supervisors appointed by HQ have the right to inspect operations, material usage and storage, product preparation, and equipment maintenance at any time.”
2. “If the agent violates any clause in Article 3, HQ will issue a notice demanding immediate correction and collect a symbolic penalty of NT$10,000. The agent must correct the violation within the specified time. If the same violation occurs three or more times, the entire security deposit will be converted to a breach penalty, and HQ has the right to terminate the agreement.”
3. “If the agent purchases any materials not provided or approved by HQ, HQ may withhold the full security deposit and has the right to terminate the agreement.”

According to court documents, Ms. Lin was found to have sourced materials from third parties, which became grounds for termination. Ching Yuan then ended her regional agency rights for Tainan and Taichung.

This case clearly shows that franchise headquarters must draft contracts carefully, preferably with legal counsel, to ensure control over material supply (a key profit mechanism) and to clearly define termination clauses that protect HQ’s interests.

※ Case No. 633, Year 110 (Taiwan District Court)

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