Drafting Franchise Agreements

Franchising is one of the extremely popular business forms today, suitable and convenient to replicate for open-chain business models, especially in the food and drink industry, restaurants, coffee, education, … However, due to the specific characteristics of the Vietnamese market, franchise activities in Vietnam in recent years still have many shortcomings, leading to inadequate promotion in the inherent potential of this type of business.

In order to contribute to raising awareness of the business model that is not new but not yet clearly understood and widely applied in practice, we would like to share some experiences in supporting clients (especially foreign ones) in establishing a franchise business in the Vietnamese market.

Tóm tắt nội dung

I. What is a franchise agreement?

If you research on Google, there are many definitions of franchising activities, franchising agreements. However, legally, a commercial franchise agreement is an agreement under which the franchisor allows and requires the franchisee to purchase and sell goods or provide services on its own provided that the sale of goods and services are conducted in the manner of the business organization specified by the franchisor and affixed with trademarks, trade names, business know-how, business slogans, business logos advertising and advertising of the franchisor, and the franchisor has the right to control and assist the franchisee in running the business.

II. Legal basis for signing a franchise agreement in Vietnam

Franchising is a commercial activity that has been recognized and regulated very specifically by the laws of Vietnam. The parties participating in the franchise must sign a written agreement and must comply with relevant laws to be enforceable in Vietnam.

Until 2020, the main legal documents governing commercial franchising in Vietnam in general and franchise agreements, in particular, include the followings:

–  Civil Code 2015;

–  Commercial Law 2005;

–  Decree No. 35/2006/ND-CP detailing the Commercial Law regarding commercial franchising;

–  Decree No. 120/2011/ND-CP amending and supplementing administrative procedures in a number of decrees of the Government detailing the Commercial Law;

–  Decree 08/2018/ND-CP amending a number of Decrees related to business investment conditions under the state management scope of the Ministry of Industry and Trade;

–  Circular No. 09/2006/TT-BTM guiding the registration of commercial franchising;

–  And other relevant laws and regulations.

III. Which goods and services are the subject of a franchise in Vietnam?

Goods and services subject to the franchise include:

–  Goods and services are not subject to the List of goods and services banned from business.

–  In case goods or services are subject to the List of goods and services restricted from trading or the List of goods and services subject to conditional business, the enterprise may do business only after it is granted the business licenses or equivalent documents or is qualified for such a business.

It can be said that most goods and services legally traded can be the subject of a commercial franchise in Vietnam.

Iv. Who is allowed to enter into a franchise agreement in Vietnam?

Domestic and foreign companies wishing to do franchising in Vietnam (the franchisor) need to meet the following conditions:

–  The business system intended for the franchise has been in operation for at least one year. In case the Vietnamese company is the primary franchisee from the foreign franchisor, the Vietnamese company must have operated the franchise for at least 1 year in Vietnam before re-granting commercial rights.

–  If the franchisor is a foreign company, that company must register the franchise operation with the Ministry of Industry and Trade before entering into a commercial franchise agreement with a Vietnamese partner. If the franchisor is a domestic company, that party must register for franchising at the Service of Industry and Trade where the company’s headquarter is located.

–  The goods and services that are the subject of the commercial franchise do not violate Vietnamese law.

The franchisee must have business lines suitable for the subject of the commercial franchise.

v. The main contents of a franchise agreement

A franchise agreement usually has the following key terms and conditions:

–  Contents of commercial rights for franchise.

–  Rights and obligations of franchisors.               

–  Rights and obligations of franchisees.

–  Price, periodical franchise fee, and payment method.

–  Effective term of the agreement.

–  Contract extension, termination, and dispute resolution.

In addition to the above contents, the parties can completely agree on other terms suitable for their transactions. However, to ensure the legitimacy and the protection of their rights and interests, and to avoid any future disputes, the parties should consult with experts in this field before signing the franchise agreement.

Refer to contract drafting and reviewing services of LTS LAW.

vi. Form and language of a franchise agreement

The franchise agreement must be made in writing and in Vietnamese. In case of franchising from Vietnam to abroad, the language of the commercial franchise agreement shall be agreed upon by the parties.

In fact, for franchising transactions of foreign companies entering Vietnam, agreements should be drafted in both Vietnamese and in foreign languages ​​to facilitate transactions between parties and in accordance with the laws of Vietnam.

Contact LTS LAW for advice on drafting a bilingual franchise agreement.

vii. Effective date and term of a franchise agreement

The franchise agreement will take effect from the time it is entered into, unless the parties agree otherwise. Contents of licensing of intellectual property objects (for example: trademarks, trade names, inventions, industrial designs, geographical indications, trade secrets, …), internal will take effect according to the provisions of the law on intellectual property.

The term of a commercial franchise agreement is agreed upon by the parties. A commercial franchise agreement may be terminated ahead of the agreed time in some special cases as provided for by laws.

If you have any questions or need further advice about franchising in general and franchise agreement in particular, please contact LTS LAW by calling (+84) 938 666 010 or sending an email to contact@lts.com.vn.