VIETNAM'S FRANCHISE LAWS LAID GROUNDWORK FOR INCREASED FRANCHISING ACTIVITY

With Vietnam’s entry into the World Trade Organization in January 2007, many predicted that franchising activity in the country would increase significantly. They were correct. In the first half of 2009, Vietnam’s Ministry of Industry and Trade granted licenses for franchise deals for 15 foreign companies, mostly from the United States, Belgium, and Canada. The Vietnam Business and Franchise Association and the Business Centre from the Republic of Korea have forecasted that the Vietnamese franchise sector will earn US$36 million in revenue in 2010, if it continues to grow at current rates. They also forecasted that by the year 2010 the number of franchised businesses in Vietnam will increase by 50 percent. In 2008, there were only 890 franchised businesses in the country.

Prior to 2005, Vietnamese law did not provide a clear basis for franchising arrangements. However, the passage of the Commercial Law in 2005 and Decree No. 35 and Circular No. 09 in 2006 laid the groundwork for franchising to develop.

Legal framework

Vietnam’s Commercial Law provides the basic legal framework for franchising, while related franchising regulations are contained within certain decrees and the country’s Intellectual Property Law and Technology Transfer Law. Vietnam’s franchise laws apply to franchising activities between Vietnamese parties, to foreign franchisors granting franchise rights within Vietnam, or to Vietnamese franchisors granting franchise rights in a foreign country.

The Commercial Law is broad. It defines franchising as a commercial arrangement where the franchisor grants its franchisee the right to conduct the business of selling goods or supplying services. The franchisee may carry out the business in a format determined by the franchisor and use the franchisor’s trademarks, trade names, logos, slogans, and advertisements. The franchisor has the right to control and assist the franchisee in the conduct of the franchised business. Quite notably, the Commercial Law’s definition of a franchise does not mention any fee requirement. Adopted in 2006, Decree 35 has expanded the definition of franchising to include master franchising, sub-franchising, and area development arrangements. While the Commercial Law does not explicitly provide exceptions to what is considered a franchise, different relationships such as trademark licensing, wholesale and distribution agreements, and partnership relationships are not likely encompassed within the definition. These relationships are governed by other Vietnamese laws.

Governing authorities

The Ministry of Industry and Trade (“MOIT”) and local offices of the Department of Industry and Trade (“DOIT”) regulate franchise activities. Depending on the circumstance, the MOIT or the DOIT has discretion to determine whether a particular distribution or licensing arrangement qualifies as a “franchise.”

Relationship between the parties

The legal relationship between the franchisor and the franchisee is established by the franchise agreement. The Commercial Law establishes that the agreement must be made in writing or another form with “equivalent legal validity.” Under Decree 35, a franchise agreement must be made in the Vietnamese language. This does not apply to a franchise agreement under which a Vietnamese franchisor grants a franchise to a franchisee in a foreign country. In addition, the business system must have been operating for at least one year before it may be offered as a franchise. Goods and services offered by the franchisor may not be contained on a list of goods and services prohibited by the country. Franchisors must register “franchising activities” prior to the offer and sale of franchise agreements; however, the franchise agreement itself need not be registered. Franchisees, on the other hand, need only have a business registration appropriate for the subject of the franchise.

Registration

Franchisors must register their franchising activity and pay a registration fee with the MOIT or the DOIT before franchising their businesses. The registration materials must include a standard registration form, a form copy of the franchisor’s disclosure document, a certified copy of the franchisor’s business registration, and copies of any certificates reflecting the franchisor’s intellectual property rights. A Vietnamese translation of these documents (certified by a notary public) is required for registration filing with the MOIT or DOIT if any of the documents are written in a foreign language. There is no requirement to file or register executed franchise agreements with either agency.

Franchisors are required to report to the MOIT or DOIT any changes in the franchised business within thirty (30) working days from the date on which the change occurs. Reportable events include changes in any information described and registered in the disclosure document and information related to the franchisor, including (a) its name, (b) address of the head office, (c) telephone and fax number, (d) scope of business, (e) type of business to be franchised, and (f) intellectual property rights used in the business.

Franchisors must also report annually by January 15 to either the MOIT or DOIT about matters contained within the disclosure document, including: (a) information on franchisor’s organizational structure as well as information on members of its board of directors, (b) information on litigation proceedings, (c) initial franchise fee and other financial obligations of a prospective franchisee, (d) initial investment for a franchised business, (e) franchisee’s obligations to purchase or rent specific equipment, (f) obligations of the franchisor, (g) the market of the franchised business, (h) the franchise agreement form, (i) the franchising system, (j) the annual financial statement, and (k) any awards or recognition that the franchisor has received during that year.

Disclosure requirements

Vietnam franchise laws require the franchisor to provide prospective franchisees with a disclosure document and a copy of the franchise agreement at least fifteen (15) working days prior to execution of the agreement, unless the parties otherwise agree on a longer period. The disclosure document has to be prepared in accordance with Circular No. 9, and it must also include the following:

• Information about the franchisor, including name, head office, incorporation date, scope of business, organizational structure, and type of business to be franchised
• Confirmation of whether the franchisor has registered its franchising activities with the appropriate agencies
• Business experience of the franchisor’s management
• Litigation history, including pending lawsuits
• Types and amounts of initial fees and other fees
• Franchisee initial investment estimates
• The franchisor’s intellectual property rights and whether marks are registered
• Major terms and conditions of the franchise agreement, including renewal, termination, and default
• Number of outlets in operation and number of defunct outlets
• Financial statements
• Summary of franchise contract

Franchisors are required to update franchisees about material or significant changes in the franchise system. If a franchisor fails to satisfy its obligations under the Commercial Law, it may be possible for the franchisee to unilaterally terminate the contract.

At present there are approximately 70 franchising systems operating in Vietnam, principally Malaysia’s Parkson, Germany’s Metro Group AG, and the United States’s CBRE, Dilmah, and KFC. Several Vietnamese businesses have joined the trend toward franchising, such as Trung Nguyen Coffee, Pho 24, Kinh Do Bakery, AQ Silk, and Coffee24Seven. As the thirteenth most populous country in the world with a set of recently revised franchise laws, Vietnam is poised for dramatic growth in its franchise sector.

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Nixon Peabody Franchise Law Alert, Feb 23, 2010.
Reprinted with permission.