Franchise is an increasingly common form of business operation and investment across many countries, including Vietnam. It plays an important role in facilitating market expansion and transferring business models efficiently. The following elaboration explains the concept, characteristics, and legal aspects of franchise agreements under Vietnamese law, particularly the 2005 Commercial Law and its guiding regulations.
1. What is a Franchise?
Under the 2005 Vietnamese Commercial Law, franchising is defined as a commercial activity in which the franchisor permits and requires the franchisee to conduct the sale of goods and provision of services under the following conditions:
- The sale of goods and provision of services must be conducted in the manner of business organization prescribed by the franchisor and associated with the franchisor’s trademark, trade name, business secret, business slogan, business symbol, and advertising.
- The franchisor has the right to supervise and assist the franchisee in operating the business.
From this legal definition, several key aspects of franchising should be noted:
Firstly, franchising is a form of commercial activity.
Secondly, the law emphasizes the franchisor’s rights—to permit and require—and the corresponding obligations of the franchisee. In essence, the franchisor grants the franchisee the right to operate a business using its model, techniques, and brand, in return for a fee or a percentage of the revenue over a specified period. The franchisee, while allowed to operate under the franchisor’s system, must comply with various conditions imposed by the franchisor.
2. Characteristics of Franchising
Based on the definition in the 2005 Commercial Law, franchising exhibits the following essential characteristics:
- Franchising concerns the transfer of commercial rights.
Commercial rights refer to the right to conduct business activities in accordance with the franchisor’s operational system, including the right to use trademarks, trade names, business secrets, slogans, symbols, and advertising materials. At the heart of the franchising relationship is the franchisor granting the franchisee the right to use its commercial rights.
- There is a close supportive relationship between the franchisor and the franchisee.
This distinguishes franchising from other types of commercial transactions. The support relationship begins immediately after the franchise relationship is established. The franchisor is required to provide materials and train the franchisee’s staff. Over time, as the system evolves, the franchisor must continue to provide technical assistance and training on newly implemented features.
- The franchisor retains control over the franchisee’s business operations.
The right of the franchisor to supervise the franchisee is widely recognized in international legal practice. The franchisor may conduct regular or ad hoc inspections to ensure compliance with the franchising system. This control is crucial to maintaining the uniformity of the franchising system and the consistency of goods and service quality.
3. Contents of a Franchise Agreement
Vietnamese law provides fundamental provisions that serve as a framework for franchise agreements, while allowing parties to specify details suitable to their circumstances. According to Article 11 of Decree 35/2006/ND-CP, a franchise agreement may include the following six components:
a. Subject Matter of the Franchise
This clause defines the subject of the agreement and is considered its core, influencing all other provisions.
b. Rights and Obligations of the Parties
The specific rights and obligations of both the franchisor and the franchisee are subject to mutual agreement. In the absence of such agreement, Articles 286–289 of the Commercial Law 2005 provide the following default provisions:
- Franchisor’s Rights: These include (i) the right to receive franchise fees; (ii) the right to advertise the franchise system and its network; and (iii) the right to inspect the franchisee’s operations to ensure system uniformity and quality stability.
- Franchisee’s Rights and Obligations: The franchisee, typically in a weaker position due to the franchisor’s ownership of the franchised assets, must fulfill more extensive obligations. These include payment of fees, investment in facilities and human resources, proper application of transferred business know-how, and adherence to system standards—even after termination. The franchisee may not sub-franchise without the franchisor’s consent. Article 290 of the Commercial Law governs such sub-franchising activities.
c. Price, Periodic Franchise Fees, and Payment Methods
These are to be determined by mutual agreement. The law does not fix franchise fees, allowing the parties to base pricing on brand value, territorial market conditions, and other commercial considerations. Parties may also choose payment methods best suited to their context.
d. Term and Renewal of the Agreement
The agreement’s term is set by the parties. It may be terminated early as per Article 16 of Decree 35. Under Article 14, the agreement becomes effective upon execution unless otherwise agreed. Parties may negotiate to renew or terminate the agreement before its expiry.
e. Termination of the Franchise Agreement
Franchise agreements commonly terminate under the following circumstances:
- Expiration without renewal;
- Mutual agreement to terminate prior to expiry;
- Unilateral termination. This provision protects the aggrieved party and minimizes damages. Article 16 of Decree 35 provides that:
- Franchisees may unilaterally terminate the contract if the franchisor fails to: provide operational manuals; deliver training and technical assistance; assist with layout design at the franchisee’s expense; protect IP rights; or treat all franchisees equally.
- Franchisors may terminate if the franchisee: loses its business license; is dissolved or declared bankrupt; seriously violates the law affecting system reputation; or fails to rectify non-fundamental breaches within a reasonable time despite written notice.
f. Dispute Resolution
As a commercial contract, franchise agreements follow the general dispute resolution mechanisms for commercial contracts under Article 317 of the Commercial Law 2005. These include mediation by a mutually agreed entity or individual, arbitration, or litigation. The parties have full discretion to select their preferred dispute resolution method.
In conclusion, franchise agreements serve as a legal foundation for expanding business operations and transferring proprietary commercial systems. The Vietnamese legal framework provides a balanced structure, safeguarding both franchisor and franchisee interests while allowing contractual flexibility. To maximize the benefits of franchising, parties should not only comply with statutory provisions but also ensure clarity and fairness in their contractual arrangements.
📞 CONTACT LEGAL CONSULTANT:
TLA Law is a leading law firm with a team of highly experienced lawyers specializing in criminal, civil, corporate, marriage and family law, and more. We are committed to providing comprehensive legal support and answering all your legal questions. If you have any further questions, please do not hesitate to contact us.
1. Lawyer Vu Thi Phuong Thanh, Manager of TLA Law LLC, Ha Noi Bar Association
Email: vtpthanh@tlalaw.vn
2. Lawyer Tran My Le, Chairman of the Members’ Council, Ha Noi Bar Association
Email: tmle@tlalaw.vn.
Dinh Phuong Thao