Draft Franchising Decree in Vietnam
Deacons Special Counsel Prof. Andrew Terry, with input from Deacons partner Stephen Giles and members of Deacons Vietnam offices, has been involved in the drafting of new laws to regulate franchising in Vietnam. Prof Terry was involved in the drafting of the Franchising decree, and has been requested to provide further assistance in connection with the drafting of the required Regulations. This article is reprinted with kind permission of Deacons. © Deacons September 2005
The franchising industry in Vietnam has been gradually developing over the past few years with the products and services of a number of well-known local and foreign brand names achieving higher market profile. However, this development has taken place in the absence of any regulations directly governing franchising activities. The current franchising industry in Vietnam has relied on regulations on related issues, such as those to do with licensing of intellectual property rights and technology transfer coupled with general contractual obligations.
Under the current regulations, franchising is considered as a form of technology transfer. In June this year, the National Assembly of Vietnam passed the new Commercial Law (which will come into effect on 1 January 2006), which includes eight articles dealing with franchising activities (Articles 284 – 291). However, these provisions are not comprehensive and cannot adequately govern franchising activities. As a result, a decree on franchising ("Draft Decree") is currently being drafted to implement the franchising provisions of the Commercial Law.
The Draft Decree will provide a regulatory framework for franchising matters in Vietnam, and gives franchising credibility as a business method in Vietnam. However the legislation is broad in scope and uncertain in application in several areas. As with many Asian countries it will be necessary to work with regulators to understand local implementation practices.
The Draft Decree will apply to Vietnamese and foreign individuals and organizations carrying out the following activities:
- franchising from abroad or from Vietnamese export processing zones or tax free areas into Vietnam;
- franchising in Vietnam including franchising from Vietnam to Vietnamese export processing zones or tax free areas; and
- franchising from Vietnam to abroad.
Under the Draft Decree, a franchisor must satisfy the following conditions:
- being legally established;
- operating for 2 years or more; and
- being the owner of the franchised objects or having the rights to sub-franchise such objects.
A franchisee must satisfy the following conditions:
- being legally established; and
- having a permitted scope of activities to allow it to be involved in a particular franchising business.
Under the Draft Decree, only goods and services that are not subject to any transactional prohibitions in Vietnam may be franchised. Further, for franchise of goods and services that are subject to certain conditions, franchising can only be carried out if these conditions are satisfied. Franchisors will therefore need to check the transactional restrictions and conditions applying to the goods and services they sell.
Franchising has apparently been drafted to cover all forms of franchising, and includes:
- the franchisor licensing the franchisee to carry out business in respect of goods and services pursuant to an established system of the franchisor and to use trademarks, trade names, slogans, symbols and advertisements of the franchisor; and/or
- the franchisee being permitted to license to third parties; and/or
- the franchisor licensing the franchisee under a "development agreement". A "development agreement" is defined as an agreement whereby the franchisor allows the franchisee to exercise "many trading rights". There is no definition or explanation of "many trading rights" in the Draft Decree.
Under the Draft Decree, the franchisor is required to disclose information in respect of its franchising system to the proposed franchisee at least 15 days prior to the execution of the franchising agreement. During the term of the franchising agreement, the franchisor is required to disclose all significant amendments to the franchising system to the franchisee within 60 days from the date of amendments.
In case of sub-franchising, other than the above information, the franchisee must disclose to the sub-franchisee the following information:
- information in respect of the franchisor;
- information in respect of the content of the franchising agreement;
- information in respect of the relations between the franchisor and the franchisee; and
- the method of settlement of the sub-franchising agreement if the master franchising agreement is terminated.
On the other hand, the franchisee is required to disclose to the franchisor information which is reasonably required by the franchisor so that it may make an informed decision as to whether it will enter into a franchising agreement with the franchisee.
All franchising activities must be carried out on the basis of written agreements.
A franchising agreement must have the following minimum provisions:
- names and addresses of the franchisor and the franchisee and their a. representatives;
- name and form of objects to be franchised;
- definitions of terms used in the agreement;
- contents and scope of franchise. If the objects to be franchised include intellectual property rights protected in Vietnam, the agreement must contain separate provisions dealing with the license of the objects of intellectual property. Such provisions are required to be registered with the National Office of Intellectual Property of Vietnam (presumably in a separate agreement);
- rights and responsibilities of the parties with respect to implementation of the franchising activities;
- time, schedule, duration, and location and method of franchising;
- price and method of payment;
- term of the agreement; and
- governing law (in cases of franchising from abroad to Vietnam).
In addition to the above minimum provisions, the parties may agree to include other provisions in the agreement provided that such provisions are not contrary to Vietnamese law. The minimum term of a franchising agreement is 5 years. However, parties to the contract may negotiate to terminate the agreement before the expiry date. There is no maximum term.
The franchising agreement must be made in Vietnamese. If a party to the agreement is a foreign individual or organization, the agreement may, in addition, be made in a commonly used foreign language as agreed by the parties. In such a case, the Vietnamese version and the foreign language version of the agreement will have equal validity.
A franchising agreement comes into effect on the date of registration with the authority. If the franchising agreement includes provisions on licensing of objects of intellectual property rights, such will be governed by the applicable regulations on intellectual property.
Registration of Franchising Agreements
Under the Draft Decree, the following franchising agreements must be registered:
- franchising from abroad to Vietnam;
- franchising from Vietnam to abroad; and
- domestic franchising with a value of VND 500 million or more.
With respect to domestic franchising with a value of less than VND 500 million, the parties may elect to register with the authority.
As a result, there will be some franchising agreements which are not required to be registered. However, under Article 15.1 of the Draft Decree, the agreement will only be valid on the date of registration with the authority. In other words, all franchising agreements must be registered in order to be enforceable.
Under the Draft Decree, the Ministry of Trade is the authority for registration of:
- agreements for franchising from abroad to Vietnam with a payment value of more than VND 1 billion; and
- agreements of franchising from Vietnam to abroad.
The provincial Department of Trade in the location of the franchisee is the authority for registration of:
- agreements of franchising from abroad to Vietnam with a total payment value of VND 1 billion or less; and
- agreements of domestic franchising with a value of VND 500 million or more.
There is an overlap between the Draft Decree and Decree 11/2005/ND-CP dated 2 February 2005, as Decree 11 requires a technology transfer contract (which currently includes a franchising agreement) to be registered with the Ministry of Science and Technology or the provincial Department of Science and Technology. However, under the Draft Decree, a franchising agreement is required to be registered with the Ministry of Trade or the relevant provincial Department of Trade. According to Art. 80(4) of Law on The Promulgation of Legal Documents, the Draft Decree should, on its effective date, repeal the relevant provisions of Decree 11.
An application file for registration comprises of the following documents:
- application for registration of the agreement (in the standard form);
- original signed agreement;
- documents in respect of disclosure of information; and
- information on the following:
- legal status of the parties; and
- proof of identity of the representatives of the parties.
- statements that:
- the franchisor has carried out market surveys;
- the franchisor has established procedures to implement franchising activities;
- the franchisor has adequate capacity to assist franchisees; and
- the franchisor has good financial status.
The application for registration is to be submitted to the relevant authority within 60 days from the date the parties sign the agreement. If there is no written request for amendment of or addition to the application from the authority within 15 working days from the date of receipt of a complete application, it must register the agreement.
If there is a written request for amendment or addition to the application, the parties to the franchising agreement must comply with such request within 45 days from the date of receipt of such request. In case of non-compliance, the application will lapse. If no further written request for amendment or addition is made within 10 working days from the date of receipt of the requested documents or information, the agreement will be registered.
The confirmation of registration of the franchising agreement is the document evidencing the validity of the agreement. In the case of a foreign franchisor, it is also the basis for remittance of payments in foreign currency overseas.
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