Supposed to be initiated since the 19th century by Singer Corporation, the franchise has increasingly developed all around the world with numerous brands. In Vietnam, franchise, especially in food and beverage (F&B) sector, is considered as one of the most lucrative but also greatly competitive market. In fact, only a few names, both international and local brands, attain and sustain their high position in the market over time. However, the franchise in Vietnam will possibly remain its leading trend in business with more brands in different sectors in the near future.
As any commercial deal, a franchisee needs a written agreement between the franchisor and the franchisee. Indeed, a fair and reasonable contract plays a key role in the success of the deal. Yet, in a franchise deal, the gap in the market position of each party is very large, which is hard for both parties to reach a fair and reasonable agreement in the first round of negotiation. Normally, franchisors are global prestigious brands and, of course, they want to run the deal by their own rules, which sometimes cause unfairness. From the view of franchisees, they want to reduce costs and, in the long run, they also want to restrain the influence of the franchisor over their operation, which helps them to easily adapt the business to suit the Vietnamese market.
So, what should be noticed in a franchise agreement?
Governing laws
Undoubtedly, this factor is an advantage for a domestic franchise deal because it is effortless for both local franchisors and franchisees to understand and work these things out. But for an overseas company, it may take time to research and consider before deciding to franchise its business.
Normally, a foreign franchisor prefers choosing its nation’s laws to govern a franchise agreement, except administrative procedures and legal issues which are compulsorily governed by the Vietnamese laws. The reason is that it helps the franchisor to ease the effort to control the performance of the franchisees under the franchise agreement. As a matter of fact, the franchisees, especially the giants of the domestic market, also want such rights, which also allows them to benefit from local laws and policies under which they are provided.
Due to the above fact, in a franchise deal of which a foreign company is a party, governing law provision is really essential because it may greatly limit or extend the performance capacity of the parties under the franchise agreement and, as a result, may bring advantages or disadvantages to them. Thus, such provision should be noticed and discussed in the first place to create a favorable but also fair basis for both franchisor and franchisee in negotiating other terms and conditions.
Legal conditions to franchise under Vietnamese law
To franchise in Vietnam, the foreign franchisors must fulfill the legal conditions of such business under Vietnamese laws.
Firstly, according to the Decree No. 08/2018/ND-CP amended the Decree No. 35/2006/ND-CP, a franchisor shall only be entitled to the franchise if its business has already been operating for at least 1 year. Then, the franchise agreement shall be registered at the Ministry of Industry and Commerce, saving for franchising within Vietnamese territory or from Vietnam to overseas countries. It is necessary to be noted that the registration of the franchise agreement as mentioned shall be conducted by the franchisor.
Intellectual property rights
The rights to use industrial property owned by a franchisor are transferred to franchisees through franchise agreements. According to the amendment of intellectual property law in 2019, such a transfer agreement is not required to be registered at the Intellectual Property Office of Vietnam as prescribed in the law of 2005.
Additionally, it is noteworthy that the franchisees have the right to improve any industrial property object transferred under the franchise agreements, except trademarks, and the franchisor shall not forbid the franchisees doing such right. Accordingly, the IP law prohibits the franchisor from compelling the franchisees transferring free of charge to the franchisor improvements of the industrial property object made by the franchisees or the right of industrial property registration or industrial property rights to such improvements.[1]
Technology transfer
Technology transfer is a material subject matter of a franchise agreement and, along with intellectual property issues, strictly provided and managed by the franchisor. This is because these factors directly relate to the value and reputation of the franchisor’s brand. Hence, hardly ever can provision regarding these factors be negotiated and accepted to be changed by the franchisor.
Under the technology transfer law of Vietnam, technology includes a solution, process or know-how with or without accompanying instruments and facilities to convert resources into products.[2] Accordingly, in a franchise dealer of which the technology is brought from overseas into Vietnam for operating the business, the provisions in connection with technology transfer shall be registered at the Ministry of Science and Technology to be valid for the implementation in Vietnam.
Terms of business operation and development
In most cases, a franchisor wants his business system is operated in a consistent manner regardless of the geographical area. Therefore, provisions in regard to system operation and management are difficult to be changed and the franchisee is strictly required to seek approvals of the franchisor for almost all of their performance. This, from the franchisor’s perspective, is reasonable because it may ensure consistent quality in service and products, which results in the high reputation of his brand.
However, in the long run, it is believed that too rigorous in management may restrain the development of the business. The reason is that each area has its specific characteristics about customer’s behaviors, tastes, market shares… and, clearly as it may seem, the franchisee has a better sense of such factors than the franchisor. Thus, the franchisee should negotiate to reduce the control of the franchisor over the operation to some extent after a particular period, which may allow the franchisee to proactively adapt the business to suit the market as the case may be.
The above points are noteworthy to review and consider before signing any franchise agreement. The franchisor and the franchisee should carefully discuss these matters to ensure the possibility of the agreement.
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If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.
This article is for general information only and is not a substitute for legal advice.
[1] Point a), Clause 2, Article 144 Intellectual Property Law 2005
[2] Clause 2, Article 2 Technology Transfer Law 2017
