Illustration (source: Internet)

Franchising is becoming increasingly popular and developing across various fields, including education, healthcare, food and beverage, business services, tourism and hospitality, beauty, fashion, entertainment, child services, convenience stores, and more. Among these, Vietnam is evaluated by the International Franchise Association (IFA) as one of the most promising and potential franchise markets in the Southeast Asia region.

However, to ensure franchising in Vietnam, investors need to have comprehensive understanding of the regulations governing the establishment and operation of franchising.

For more information on this issue, please refer to below information.

Franchising

The Commercial Law of 2005 defines franchising as a commercial activity, whereby the franchisor permits and requires the franchisee to independently conduct the purchase and sale of goods, provision of services, under certain conditions:

1. Purchasing and selling of goods, provision of services are conducted in accordance with the business organization methods prescribed by the franchisor and are associated with the franchisor's trademarks, trade names, business know-how, business slogans, business symbols, advertising.
2. The Franchisor has the right to control and assist the franchisee in managing the business operations.

Illustration (source: Internet)

Conditions of franchise operation

Although Vietnam continues to create conditions and opportunities for traders to engage in franchising activities, not every trader with a business operation system is allowed to franchise.

According to Article 5 of Decree No. 35/2006/ND-CP detailing the Commercial Law regarding franchising activities, as amended and supplemented by Article 8 of Decree No. 08/2018/ND-CP, traders are allowed to grant franchise rights when they meet the following conditions: "Traders are allowed to grant franchise rights when the business system intended for franchising has been in operation for at least 01 year."

Form of franchise contract

The franchise contract must be made in writing or in another form with equivalent legal validity.

Illustration (source: Internet)

Accordingly, when negotiating and preparing a franchise contract, traders need to ensure that there are at least 06 main contents when entering into the contract, including:

1. Content of franchised commercial right;
2. Rights and obligations of the franchisor;
3. Rights and obligations of the franchisee;
4. Price, periodical franchise fee and mode of payment;
5. Valid term of the contract;
6. Renewal and termination of the contract, and settlement of disputes. 

Termination of the contract before its expiration - The binding between the franchisor and the franchisee

Clause 2 of Article 13 and Article 16 of Decree No. 35/2006/ND-CP stipulate the conditions under which the franchisor and the franchisee are unilaterally allowed to terminate the contract before its expiration. Accordingly, the parties are only permitted to terminate the contract for justifiable reasons such as:

• The franchisee has the right to unilaterally terminate the franchise contract if the franchisor breaches the obligations stipulated in Article 287 of the Commercial Law.
• The Franchisor has the right to unilaterally terminate the franchise contract in the following cases:
  • The franchisee no longer has a business license or a document of equivalent value that the franchisee must have in order to conduct business under the franchise method..
  • The franchisee is dissolved or bankrupted according to the provisions of Vietnamese law.
  • The franchisee violates the law in a serious manner that could cause significant damage to the reputation of the franchising system.
  • The franchisee fails to remedy non-material breaches in the franchise contract within a reasonable period, despite having received written notice from the franchisor requesting remedy of the breach.

In addition, traders need to note that even after the contract has been terminated or concluded, the franchisee still must maintain confidentiality regarding the franchised business know-how.

Regulations regarding the registration of franchising activities

Before conducting franchising activities, the franchisor must register with the competent state authority. Through this registration process, the state authority will assess and determine whether the enterprise meets the conditions to carry out franchising activities or not.

Regulations regarding the handling of legal violations in commercial franchising activities

To ensure a healthy environment for the development of franchising activities, Vietnamese law has established clear regulations regarding violations of administrative laws in this field, applicable to both the franchisor and the franchisee. Accordingly, the following behaviors will be considered and processed according to regulations:

• Operating franchising without meeting the prescribed conditions.
• Franchising goods or services that are prohibited from trading.
• Violating the obligation to provide information in franchising activities as required by law.
• Using dishonest information in franchise introductions.
• Violating regulations on registering franchising activities.
• Violating regulations on notifications during franchising activities.
• Failure to pay taxes as required by law without reaching the level of criminal liability.
• Failure to comply with the requirements of the competent state authority during inspections and audits.

Therefore, when engaging in franchising activities, traders need to equip themselves with and understand the legal regulations to ensure minimizing risks during the operation process.

Hereby is the legal advice provided by YBS Law Firm. If you have any further questions or need assistance with other legal procedures, please contact us online or via hotline at 0911 53 88 35, or via email at info@ybsvn.com for more detailed information.

Best Regards,

YBS Law Firm

Minh Thu