Regulations on franchising

Regulations on franchising

However, the excessive freedom of association will have potential risks, so the law needs to regulate this type of business. The following are specific provisions of the law on franchising.

1. What is a Franchise?

The Commercial Law 2005 has defined commercial franchising as a commercial activity, whereby the franchisor permits and requires the franchisee to conduct the purchase and sale of goods and provision of services on its own the following case:

• The purchase and sale of goods and provision of services shall be carried out in the manner of business organization prescribed by the franchisor and associated with the trademark, trade name, business secret, business slogan, business logo, advertisement of the franchisor.

• The franchisor has the right to control and assist the franchisee in running the business.

In this definition, it also generalizes some rights and obligations of the parties in the franchise.

2. Franchise contract

a. Form of the franchise contract

• A commercial franchising contract must be made in writing or in another form with equivalent legal validity (Article 285, Commercial Law 2005).

• A commercial franchising contract must be made in Vietnamese. In the case of franchising from Vietnam to abroad, the language of the franchise contract shall be agreed upon by the parties (Article 12, Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising activities).

b. Entities of the franchise contract

• In a franchise relationship, there are two parties, the franchisor and the franchisee. Franchise contracts are agreements between these two entities on the content of franchising activities.

Since franchising is a specific commercial activity, most countries stipulate that the entity of the franchising relationship must be a trader, exist legally, have business authority and have the right to conduct commercial activities in accordance with the law suitable for the franchisee.

• For Vietnam, the commercial law has also recognized objects that can become a franchise relationship, including: franchisor, franchisee, secondary franchisor, primary franchisee grantor and secondary franchisee (Clause 1, 2, 3, 4, 5, Article 3, Decree No. 35/2006/ND-CP).

A commercial franchising contract can be implemented in many forms. In its most basic form, franchisors and franchisees exist. However, in a more complicated form, the primary franchisees are allowed to cede the franchise to the final franchisees and become the final franchisees.

c. Subjects of the franchise contract

• Goods and services permitted for commercial franchising are goods and services that are not on the list of goods and services banned from business.

• In case goods and services are on the List of goods and services restricted from business or the List of goods and services subject to conditional business, the enterprise may only do business after being granted a Certificate by the sector management agency, business license, papers of equivalent value or meeting all business conditions (Article 7, Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising).

d. Types of franchise contracts:

• Commercial rights development contract (Article 3(8), Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising).

• Secondary franchising contract (Article 10(10), Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising).

e. Contents of the franchise contract:

The subject of franchise contracts is commercial rights. This is the benefit that the parties in the franchise relationship are aiming for. Commercial rights include one, some or all of the following rights:

• i. Right granted to the franchisee by the franchisor that also requests the franchisee to undertake by itself the business of supplying goods or providing services within a system set up by the franchisor and associated with the franchisor's trademark, trade name, business slogan, business and advertising logo.

• ii. Common commercial right granted by the franchisor to the primary franchisee.

• iii. Right sub-granted by the secondary franchisor to the secondary franchisee under the common franchising contract.

• iv. Commercial right granted by the franchisor to the franchisee under the commercial right development contract. 

(According to Article 3(6), Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising).

f. The valid term and extension of franchise contracts

• The valid term of franchise contracts shall be agreed upon by the parties and stated in the contract. According to Article 13 of Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising contract stipulates:

  • The commercial franchising contract takes effect from the time of signing, unless otherwise agreed by the parties.

  • If the commercial franchise contract contains a section on the transfer of the right to use an intellectual property object, that part shall take effect according to the provisions of the law on intellectual property.

• The extension of the franchise contract.

When the term of the contract ends and if the franchisee has previously fully performed its obligations under the contract. Without acts – breach of contract as well as fully complying with the instructions of the franchisor, it will normally agree to renew the contract with the franchisee.

However, in some cases, for special reasons, for a certain period of time, rights will not be granted to any other party in the territory (Article 13(1), Decree No. 35/2006/NĐ-CP dated March 31, 2006 on the franchise contract). Regarding the termination of the franchise contract:

• The franchisee has the right to unilaterally terminate the commercial franchising contract in case the franchisor violates the obligations specified in Article 287 of the Commercial Law.

• The franchisor has the right to unilaterally terminate the franchise contract in the following cases:

  • “a) The franchisee no longer holds the business license or papers of equivalent value, which the franchisee is required by law to hold for conducting business activities by mode of franchising.

  • b) The franchisee is dissolved or goes bankrupt according to the provisions of Vietnamese law.

  • c) The franchisee commits serious law violations, which may greatly harm the reputation of the franchising system.

  • d) The franchisee fails to remedy its immaterial breaches in the franchising contract within a reasonable time limit, though it has received a written notice from the franchisor requesting the remedying of such breaches.”

(According to Article 16, Decree No. 35/2006/ND-CP dated March 31, 2006 on commercial franchising).

g. The transfer of franchise contracts

• Commercial Law 2005 stipulates that the franchisee has the right to assign the rights to a third party if it is accepted by the franchisor. Consent of the franchisor is a necessary condition for the franchisee to transfer the business to any third party.

• Before deciding to franchise to the franchisee, the franchisor has carefully checked the conditions of the franchisee for the franchisee with certain commitments.

3. Register for commercial franchising

• Before conducting commercial franchising activities, Vietnamese traders or foreign traders intending to franchise must register commercial franchising activities with the Ministry of Trade.

• Implementation time: 05 working days from the date of receipt of valid dossier.

• Dossier for registration of commercial franchising:

  • An application for registration of commercial franchising, made according to form MD-1 in Appendix II issued together with Circular 09/2006/TT-BTM.

  • An introduction to commercial franchising according to the form in Appendix III issued together with Circular 09/2006/TT-BTM.

  • Notarized copy of business registration certificate or investment certificate in case of commercial franchising from Vietnam to abroad; a copy of the business registration certificate or an equivalent document of the foreign trader certified by the competent authority where the foreign trader is established in the case of commercial franchising from abroad to Vietnam.

  • A notarized copy of the industrial property protection title in Vietnam or abroad in case there is a transfer of the right to use the industrial property objects that have been granted the protection title.

  • Papers evidencing the consent of the original franchisor to permit re-franchising in case the trader registering for franchising is a secondary franchisor.

4. Legal basis

• Commercial Law 2005.

• Decree 35/2006/ND-CP on commercial franchising activities.

• Circular 09/2006/TT - BTM guiding the registration of commercial franchising activities.