Understanding Franchise Agreements in Vietnam

Franchising has gained significant traction in Vietnam and is presenting lucrative prospects for foreign enterprises and investors. However, commencing a franchise, either as a franchisor or franchisee, can be complex. Here’s what foreign businesses need to know to kickstart their franchise in Vietnam.

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Vietnam is regarded as a promising franchise market in Southeast Asia, according to the International Franchise Association (IFA).

Franchises are becoming more visible across a range of sectors, such as education, health and wellness, food and beverage, business services, hospitality, beauty and skincare, fashion, entertainment, child services, and convenience stores. Consequently, the Vietnamese market is presenting numerous opportunities for both franchisors and franchisees.

However, to ensure a successful venture in Vietnam, investors must possess a comprehensive understanding of the regulations governing the establishment and operation of franchises.

See also: Foreign Franchises in Vietnam: Departures, Successes, and the In-Between

Overview of franchising in Vietnam

Vietnam has granted permission to hundreds of foreign businesses to engage in franchising activities within the country, since 2007, according to data provided by the Ministry of Industry and Trade.

World-renowned brands, such as McDonald’s, Baskin Robbins, Pizza Hut, Kentucky Fried Chicken, Burger King, Lotteria, Tous Les Jours, and BBQ Chicken in the food and beverage sector, as well as Swensen’s, Warehouse, Topshop, and Coast London, are all well-known to Vietnamese consumers.

With a consumer base of almost 100 million that is serviced by 8,475 markets, 1,009 supermarkets, and 210 trade centers, Vietnam has the potential to be a high-growth market for franchising.

Additionally, Vietnam’s increasing disposable incomes, a high consumption rate, and market liberalization create the right conditions for foreign enterprises to set up base here and expand their market share through franchising.

What is franchising?

Franchising is defined as a business activity where one business (the franchisor) permits another business (the franchisee) to sell the franchisor’s products and services and use the franchisor’s brand and trademark to build their own business.

These agreements usually come with strict guidelines for the franchisee to ensure that the franchisor’s brand is protected and that products and services are uniform across their franchise network. This means detailed and sometimes complex contracts that should be clearly understood before entering a franchise agreement in Vietnam.

Franchise contracts in Vietnam

The Commercial Law of Vietnam, 2005, is the primary legislation governing franchise agreements in Vietnam. However, while this law covers a broad range of businesses, the specific regulations related to franchising are outlined in Decree 35/2006/NĐ-CP.

Key elements of a franchise agreement in Vietnam

According to Decree 35/2006/NĐ-CP, there are six main components that parties must make clear in a franchise agreement. These include:

• The product or products that are being franchised;
• The franchisor’s rights and obligations;
• The franchisee’s rights and obligations;
• The price, periodic franchise fee, and payment method;
• The contract’s validity; and
• The contract renewal and termination clauses, as well as dispute resolution mechanisms.

Among these components, the products and commercial rights are the most significant and should be emphasized.

The commercial rights are the franchise contract’s focal point. All terms and conditions of the contract are centered on the exercise and limitations of these rights. Clearly defining these rights in the contract helps the parties involved delineate their scope clearly and avoid potential conflicts.

Contract validity of franchise agreements in Vietnam

The franchise agreement becomes effective from the time of signing unless otherwise agreed upon by the parties. If the contract includes a clause related to the transfer of intellectual property rights, that particular section will be subject to the provisions of the Law on intellectual Property.

In accordance with the commercial law, there are no minimum or maximum limits specified for the duration of a franchise contract. The validity period of the contract is negotiated and agreed upon by both parties based on the demands and features of the industry and business sector.

Format

Due to the intricate nature of franchise relationships, disputes can sometimes arise. Therefore, Commercial Law 2005 stipulates that a franchise contract must be made in writing or in a form with equivalent legal validity.

With current technology, various forms of communication, such as fax and email, are commonly used by parties to save time and facilitate convenience. The law also recognizes these forms as being equivalent to written documents and enforceable by law.

Language

Decree 35/2006/ND-CP mandates that the franchise contract must be drafted in Vietnamese. In the case of franchising from Vietnam to another country, the parties can choose the language of the contract.

Nonetheless, failure to prepare a franchise contract in Vietnamese (unless agreed otherwise) may lead to an administrative fine ranging from VND 6,000,000 to VND 10,000,000 under Decree 98/2020/ND-CP.

Franchise contract disputes in Vietnam

Common forms of commercial dispute resolution are usually used to settle franchise contract disputes in Vietnam. Under Vietnamese law, common forms of dispute resolution include:

• Negotiation;
• Mediation; and
• Commercial arbitration.

Rights and obligations of franchise participants under Vietnamese Law

Both the franchisor and the franchisee have a number of rights and obligations under Vietnamese law.

Rights of franchisors

• To receive franchise payments;
• To organize advertising for the commercial franchise system and the commercial franchise network;
• To conduct periodical inspections of the activities of franchisees; and
• Any other rights agreed upon by both parties.

Obligations of franchisors

• To supply documents guiding the commercial franchise arrangement;
• To provide initial training and regular technical assistance;
• To design and arrange store layouts at the expense of franchisees;
• To guarantee the intellectual property rights over objects outlined in the franchise agreement;
• To treat all franchisees equally; and
• Any other obligations agreed upon by both parties.

Rights of franchisees

• To request franchisors provide full technical assistance;
• To request franchisors to treat all franchisees equally; and
• Any other rights agreed upon by both parties.

Obligations of franchisees

• To pay franchise fees;
• To invest in facilities and human resources;
• To submit to the control, supervision, and instruction of franchisors;
• To comply with all requirements set by franchisors;
• To keep franchised business know-how secret;
• To stop using intellectual property and the franchisor’s systems upon the expiration or termination of the franchise agreements;
• Not to sub-franchise without permissions; and
• Any other obligations agreed upon by both parties.

Termination of franchise contracts

In order to safeguard the rights and interests of both the franchisor and the franchisee, there are measures in place to ensure that the commercial franchise contract is terminated appropriately in the event of a breach of contract. These regulations are designed to cover all possible cases and ensure that the legitimate rights and interests of both parties are protected when entering into a franchise contract.

According to Decree No. 35/2006/ND-CP, the franchisee may terminate the contract unilaterally if the franchisor fails to meet its obligations specified in the Commercial Law. The franchisor may unilaterally terminate the contract in a number of cases, including situations where the franchisee no longer holds the required business license, has gone bankrupt or dissolved the business, has committed serious violations of Vietnamese law, or has not remedied immaterial breaches within a reasonable time limit.

Furthermore, the bond between the franchisor and the franchisee continues even after the contract has ended. As per Commercial Law, the franchisee is required to maintain confidentiality regarding any franchised business secrets after the termination of the franchise contract.

Key takeaways

Vietnam’s growing economy has made it an appealing location for foreign investors seeking to expand their business through franchising. For foreign companies planning to pursue this path, it is crucial to have a sound understanding of franchise agreements.

Although there have been modifications to the regulations over time, they have provided a robust legal framework for franchising in Vietnam.

Nonetheless, it is imperative for both franchisors and franchisees to conduct a thorough review of the pertinent regulations before engaging in a franchise contract. This will ensure the success and long-term viability of their business ventures.

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