03 prerequisite legal questions to consider before receiving a foreign franchise into Vietnam

03 prerequisite legal questions to consider before receiving a foreign franchise into Vietnam

1. Do the business model and products satisfy the conditions to be traded in Vietnam?

Essentially, a franchise transaction will consist of 02 primary licensing agreements: licensing of the business model and licensing of intellectual property rights attached to the franchise system.

The law of each country is different. The fact that a business model can operate smoothly in a country, especially a developed country, does not mean that there will be a legal corridor large enough for it to operate in Vietnam. There may also be cases where such business models can be applied in Vietnam, however, with too heavy a legal and procedural burden, (e.g. requiring the obtention of too many licenses, requiring the preparation of too many reports, or the burden on tax and employment, etc.). So, the risk of economic failure for these business models is substantially larger.

2. Are the intellectual property objects protected or can be protected in Vietnam?

A franchise agreement will share similar elements with an intellectual property licensing agreement (trademarks, copyright, business secrets, industrial designs, etc.). Besides, looking from the commercial factor, a franchisee is often involved in a franchise system because they want to utilize the goodwill of the system within a specific field. The advantages acquired from the intellectual property will only be most effectively used if they are protected in accordance with the laws of the country where the franchisee intends to conduct business.

Therefore, if the intellectual property objects attached to the franchise system are not yet or not qualified for protection according to Vietnamese laws, the system’s brand advantages will be difficult to achieve economically. Legally, in this case, the franchisee can also face risks of violating intellectual property rights of other parties in Vietnam. If considered to be a perpetrator of intellectual property rights violation, the franchisee will have to suffer risks of administrative fines and compensation for financial or reputational damages.

3. Is it a master franchise agreement?

The obligations of a territory-exclusive franchisee (master franchisee) will be vastly different from those of a regular franchisee. Accordingly, apart from the obligations of an ordinary franchisee, a master franchisee will also be bound by some peculiar obligations. For example, the master franchisee is obligated to train secondary franchisees and organize marketing campaigns for the system, as well as provide products and approve designs, etc.

In addition, one severely burdensome obligation of the master franchisee is meeting the target on the number of units to be opened or the franchise revenue within the territory during a specific period. Failure to satisfy these conditions is deemed a violation of the franchise agreement.

Therefore, if the intentions or financial resources of the franchisee cannot ensure compliance with the above obligations, the franchisee shall clearly notify the franchisor or pay close attention during the negotiation and review of the franchise agreement.

Disclaimer: This article is for general information only and is not a substitute for legal advice. Apolat Legal is a Vietnamese law firm with experience and capacity to advise on matters related to Contract Drafting and Reviewing. Please click here to learn more about our services and contact our lawyers in Vietnam for advice via email info@apolatlegal.com.