Key Clauses in a Franchise Agreement

As global integration continues to reshape international business, franchising has become an increasingly prevalent model in Vietnam, particularly in industries such as food and beverages, retail, education and a wide range of services. To ensure legal certainty and minimize commercial risks, both franchisors and franchisees – whether domestic or foreign – must pay careful attention to drafting a well-structured and enforceable Franchise Agreement. This article highlights the key contractual provisions that should be considered when entering into such arrangements.

1.What is a Franchise Agreement?

A Franchise Agreement is a legal contract between a franchisor and a franchisee, whereby the franchisor grants the franchisee the right to operate a business using its brand, business model, trade secrets or operational system for a specified period, typically in exchange for an upfront fee and/or ongoing royalties. Both parties may be individuals or entities from Vietnam or abroad.

This arrangement allows the franchisee to leverage a proven business model and brand reputation, while enabling the franchisor to expand its footprint without directly managing each unit.

2.Key Clauses in a Franchise Agreement

• Scope of the franchise

One of the most critical provisions in any franchise agreement is the definition of the franchise scope. This extends beyond simply identifying a brand or product; it includes the full package being transferred such as proprietary formulas, operating procedures, quality control systems, marketing strategies and operational manuals. A vague or incomplete description can lead to disputes over the extent of the franchisee’s rights. It is therefore essential to clearly define the nature, scope and limitations of the franchise, including territorial exclusivity, permitted uses, duration and restrictions on marketing or sublicensing.

• Franchise fees

Franchise fees typically consist of: (i) an initial fee paid by the franchisee to access the franchisor’s intellectual property and business systems; and (ii) ongoing periodic fees (monthly, quarterly or annually) for continued use of the brand and operational support. Some agreements may also include advertising fund contributions or training fees. To avoid future disputes, the agreement should specify the structure of these fees – including how they are calculated, when they are due and the consequences of late or missed payments. In cross-border franchise agreements, particular attention must be paid to the currency of payment, in compliance with Vietnamese foreign exchange regulations.

• Rights and obligations of the parties

The success of a franchise relationship depends on a balanced distribution of rights and responsibilities. The franchisor is generally responsible for granting the rights to use its trademark and business model, providing training, operational support and ongoing supervision to ensure consistency across the franchise network. The franchisee, in turn, must comply strictly with operational procedures, protect the brand’s reputation, refrain from competitive activity and maintain strict confidentiality regarding trade secrets. The agreement should clearly outline remedies and penalties for breach of obligations.

• Term and renewal

The term of the agreement must be clearly defined – whether fixed or indefinite – and should include provisions on renewal, termination and post-term obligations. A lack of clarity here can result in disputes if either party wishes to exit or continue the relationship unilaterally. In addition, it is prudent to include a renewal priority clause for the franchisee, contingent upon satisfactory performance, to promote long-term stability and investment confidence.

• Intellectual property protection

Given that franchise arrangements revolve around brand value, robust intellectual property provisions are crucial. The agreement must explicitly state the scope and conditions for using the franchisor’s trademarks, logos, slogans, marketing materials and proprietary systems. The franchisee should be prohibited from using these assets outside the agreement’s terms, sublicensing them to third parties or continuing their use after contract termination. These provisions help preserve the integrity and value of the franchisor’s intellectual property and reduce the risk of infringement or dilution.

• Termination

Termination provisions should anticipate a range of scenarios that could end the franchise relationship. These include fundamental breaches (such as non-payment or non-compliance), insolvency, regulatory changes or mutual agreement. The contract should also address the consequences of termination, including return of assets, settlement of outstanding payments, treatment of inventory and cessation of trademark use. In cross-border agreements, post-termination provisions may need to comply with both local and international legal requirements.

• Dispute resolution

The dispute resolution clause is a vital safeguard for both parties. While commercial relationships should ideally be preserved through negotiation or mediation, the agreement must also designate a method for formal resolution typically arbitration or litigation. If arbitration is chosen, the contract should specify the arbitral institution, seat of arbitration and language of proceedings. If court proceedings are preferred, the jurisdiction and governing law must be clearly stated, especially for cross-border transactions. Doing so can prevent costly and time-consuming jurisdictional disputes. Additionally, parties should consider the use of bilingual agreements or certified translations to avoid misinterpretation during the dispute resolution process.

In summary, a franchise agreement is not merely a commercial contract – it is a legal framework that governs the relationship between franchisor and franchisee, both in terms of rights and responsibilities. Each party should exercise due diligence when negotiating, drafting and signing the agreement to minimize risk and ensure long-term success. We hope TNTP’s article on “Key Clauses in a Franchise Agreement” offers valuable guidance for foreign and domestic stakeholders considering franchise operations in Vietnam.

Sincerely,