Franchising is rapidly spreading over all continents with many famous trademarks of giants such as McDonald’s and Carrefour.

In the early stages, there were two types of franchising; product distribution franchising (ie: franchise on the distribution of goods without sale method) and business format franchising, which today is the dominant mode of franchising. The latter seemed to suite the US socio-economic structure in the late of 1920s, which when combined with the economic power of the US, has marked its impressed growth all over the world. According to the International Franchise Association, there have been about 16,000 franchise systems of around 320,000 corporations in 75 different sectors.

However, franchising in Vietnam is relatively new. This business model appeared in Vietnam in the early of 1990s. Nowadays, according to statistics from the World Franchise Council, Vietnam has approximately only 70 franchise systems and nearly 100 executed franchise agreements.

One of the main reasons for the modest growth of franchising in the past Vietnam was the lack of a legal framework for franchising. Before the effectiveness of the Commercial Law 2005, franchising used to be established and disguised under other relationship forms such as licence, distribution, and technology transfer, therefore be regulated by different and separate legal documents.

To realise selling and buying franchises in Vietnam, traders normally elected to enter into one or several of the above mentioned contracts instead of a franchise agreement. This caused complexity and controversial issues, but this is the only way to make the franchise feasible and enforceable in Vietnam market.

However, now with the advent of Commercial Law 2005 (from Articles 284 to Articles 291) Governmental Decree No. 35/2006/ND-CP, and Circular No. 09/2006/TT-BTM issued by the Ministry of Trade, a legal base of franchising is fundamentally set up. Nevertheless, several stipulations of such documents attract comments and criticism from the business circle, especially in the following issues:

Regime for franchisor to manage franchise system

Regulations do not yet specify how the franchisor can control the franchised units in terms of quality and compliance with franchise guidelines. This is the key point to ensure the success of the whole franchise system. Franchisors should have the right to control their franchised units with the limitation on not intervening in the franchisee’s autonomy in daily business. The laws on franchising in most countries are designed to offer the franchisors’ right to inspect and control their franchise system but still prevent such a franchisor from abusing of their supervision and control role of franchisee’s business activities. Technically, the legal document provides, in detail, the activities that the franchisor is not allowed to do, such as:
(a) set the franchisee’s net profit from the franchised business;
(b) prescribe or strictly control the right of its franchisees to withdraw increases in the net worth of the franchised business;
(c) manage daily operations of the franchised business for an extended period of time;
(d) hire, fire, or otherwise directly control its franchisee’s employees; or
(e) require its franchisee to deposit all revenues into an account controlled by the franchisor, or from which the franchisor must consent to withdrawals.

Conditions of franchisor and franchisee

According to the regulations, the franchisee and franchisor are not required to be institutional entrepreneurs. A franchisor must run a franchised business for one year, at least. With this provision, even individuals or households can be franchisors or franchisees to franchise agreements. There seems to be too much room for players in comparison to the stipulations of other countries (experience requirements in a franchise must be at least three years in China). It also should be noted that franchising activities of an individual would be very difficult to control by authorities.

Franchise agreement

Regulations on franchising lack rules relating to amendment, supplement, renewal, termination, and consequences of termination of a franchise agreement. The terms of the renewed agreement in many countries such as the US offered to the franchisee may not be less favorable to the franchisee than either (a) the terms of the franchisor’s then-current form of franchise agreement, or (b) renewal terms offered by the franchisor to other comparable renewing franchisees. However, regulations in Vietnam do not provide the same conditions. This make the franchisors have room to move in the course of negotiation for renewal of the agreement and they may only offer a less favorable conditions to ask for the increase of franchising fee.

Termination

According to Decree No. 35/2006/ND-CP, a franchisee can terminate the agreement if a franchisor violates obligations as provided in Articles 287 of the Commercial Law 2005. Accordingly, a franchisor is obligated to treat all franchisees equally in the same system and provide support to the franchisee. If a franchisor breaches this kind of obligation, regardless of the seriousness thereof, a franchisee is entitled to terminate the agreement.
This regulation is unclear, without evidence and seems to be unfair to the franchisor. Clear criteria for such kind of violation must be built up and provided in legal document.

IP contents

Decree 35/2006/ND-CP stipulates that “licensing industrial property rights in an agreement is governed by regulations on industrial property right”.

This is likely to cause difficulties for the parties when many provisions of IP law cannot be used to regulate franchise relationship such as provisions forbidding a licensor to restrict unreasonably the right of the licensee, including the right to improve the industrial property objects other than trademarks. However, if the franchisee improves or renovates the business format without the permission of the franchisor, this shall not be the franchise.
Franchising is a complicated and newly completed business method, subject to the governing of many different legislation branches. Traders are advised to cautiously consider the pros and cons before making decision on buying or selling a franchise. Consultation with legal and financial experts over negotiating and implementing a franchise agreement is also a practical approach for a business person wishing to go for the franchise method.

Source: VIR