Commercial franchising has increasingly become an attractive business model in Vietnam, offering significant expansion opportunities for both domestic and foreign investors. However, to ensure effective implementation, enterprises should thoroughly understand the legal framework, registration procedures, and potential legal risks involved.
In the article below, LawPlus highlights several important issues that enterprises should consider when conducting commercial franchising activities in Vietnam.
1. Concept of International Commercial Franchising
1.1. Commercial Franchising
Article 284 of the 2005 Law on Commerce provides that: “Commercial franchising means a commercial activity whereby the franchisor permits and requires the franchisee to independently conduct the purchase and sale of goods or provision of services under the following conditions:
1. The purchase and sale of goods or provision of services shall be conducted in accordance with the business organization model prescribed by the franchisor and associated with the franchisor’s trademarks, trade names, business know-how, business slogans, business symbols, and advertisements;
2. The franchisor shall have the right to supervise and provide assistance to the franchisee in operating the business.”
Accordingly, Vietnamese law recognizes commercial franchising as an independent commercial activity conducted by traders for profit-making purposes. Furthermore, this definition emphasizes the reciprocal relationship between the parties, particularly the franchisor’s supervisory authority over the franchisee.
1.2. International Commercial Franchising
Vietnamese law currently does not provide a specific definition of international commercial franchising. Based on the definition of commercial franchising above, international commercial franchising may be understood as having a broader scope. Accordingly, based on Article 284 of the 2005 Law on Commerce and the definition of foreign-related civil relations under Article 663 of the 2015 Civil Code, international commercial franchising may include the following elements:
– A commercial franchising activity; and
– A foreign element, whereby at least one party is a foreign individual or legal entity, or the establishment, amendment, performance, or termination of the franchising agreement occurs abroad.
For cases involving foreign-related civil relations under Article 663 of the 2015 Civil Code, the subject matter of the franchising relationship is considered the “commercial rights”.
2. Conditions for Commercial Franchising in Vietnam
2.1. Conditions Applicable to the Franchisor
Pursuant to Article 5 of Decree No. 35/2006/ND-CP, as amended and supplemented by Article 8 of Decree No. 08/2018/ND-CP, a business system intended for franchising must have been operating for at least one year before franchising activities may be conducted.
Accordingly, franchisees should note that this condition applies to the business system itself rather than the trader. The one-year period is calculated from the issuance date of the business location certificate of the store, and the business system must have been actually operated in practice.
2.2. Conditions Applicable to the Franchisee
Article 6 of Decree No. 35/2006/ND-CP previously provided that traders were only permitted to receive commercial rights if they had registered business lines compatible with the franchised business activities.
However, Decree No. 08/2018/ND-CP abolished this requirement, thereby allowing franchisees to freely participate in franchising relationships without being subject to specific statutory conditions.
Although current laws do not impose mandatory conditions on franchisees, franchisors may still contractually establish strict requirements to protect their lawful rights and interests.
3. Form and Contents of Commercial Franchising Agreements
3.1. Form of Commercial Franchising Agreements
Article 285 of the 2005 Law on Commerce stipulates that commercial franchising agreements must be made in writing or in another form having equivalent legal validity.
In franchising activities, franchisors may need to disclose confidential information such as business know-how and trade secrets to franchisees. Such information plays a critical role in the franchising system. Therefore, reducing such information into written form or equivalent legal forms may raise concerns regarding confidentiality risks.
Nevertheless, these contents constitute essential parts of a franchising agreement and must be expressed in writing or other legally equivalent forms. To mitigate such risks, franchisors may incorporate confidentiality clauses and provisions requiring compensation for damages if franchisees disclose trade secrets to third parties (Clause 4, Article 289 of the 2005 Law on Commerce).
3.2. Contents of Commercial Franchising Agreements
Pursuant to Article 11 of Decree No. 35/2006/ND-CP, where the parties choose Vietnamese law as the governing law, a commercial franchising agreement may contain the following principal contents:
- Contents of the commercial rights;
- Rights and obligations of the franchisor;
- Rights and obligations of the franchisee;
- Prices, periodic franchise fees, and payment methods;
- Term of validity of the agreement;
- Renewal, termination, and dispute resolution mechanisms.
For international commercial franchising, the parties are entitled to agree upon the governing law applicable to the agreement pursuant to Articles 664 and 683 of the 2015 Civil Code. In the absence of such agreement, the law of the country having the closest connection with the agreement shall apply.
4. Conclusion
Vietnamese law has established a relatively comprehensive legal framework governing international commercial franchising activities. Foreign enterprises must comply with regulations relating to franchising registration and information disclosure obligations under Vietnamese law.