Unique disputes related to franchise agreements and practical experiences to limit risks

Franchising is a rapidly growing business model in Vietnam, particularly in the sectors of food & beverage, retail, education and healthcare. However, alongside this growth, the number of disputes arising from the implementation of Franchise Agreements is also increasing quickly. Many disputes stem from the parties’ lack of legal understanding, poorly drafted contracts or breaches of obligations by one of the parties. We invite you to explore the unique disputes related to Franchise Agreements and practical experiences to limit risks when entering into such agreements in the article below by TNTP.

1. Unique disputes related to Franchise Agreements

1.1. Disputes arising from the franchisor providing incorrect information

Under Article 8, Clause 1 of Decree 35/2006/ND-CP the franchisor is obligated to provide a franchise introduction document to the franchisee at least 15 (fifteen) working days before signing the agreement The contents of the franchise introduction must fully comply with the provisions in Appendix III attached to Circular No. 09/2006/TT-BTM dated May 25, 2006 issued by the Ministry of Commerce.

However, many franchisors fail to meet this obligation or intentionally provide incorrect information about financial reports, the number of successful outlets, financial obligations, etc. to attract franchisees. In practice, disputes often arise when franchisees invest with expectations based on inaccurate information but end up suffering losses. They then file lawsuits or take other legal actions claiming that they were misled, resulting in disputes over compensation for damages.

1.2. Disputes related to intellectual property rights

According to the law, the franchisor must be the legal owner of industrial property rights especially concerning trademarks – a key element that creates the commercial value of the business model. If the franchisor has not registered the protection before transferring the rights, they risk losing ownership due to the “first-to-file” principle where the law only recognizes rights for the party who registers first. On the other hand, if the trademark has not been protected and is similar or identical to an existing trademark, the franchise agreement may be considered an infringement of third-party intellectual property rights and must be terminated.

Franchise agreements always involve the transfer of rights to use trademarks, trade names and proprietary business information. However, in practice, many franchisors have not completed the intellectual property registration process in Vietnam but still proceed with franchising which leading to disputes related to intellectual property rights regarding trademarks, trade names, business secrets, business slogans, logos, etc..

1.3. Disputes over franchise fees and financial obligations

Franchise Agreements typically mention several types of fees, such as the initial franchise fee, periodic maintenance fees, training fees, marketing fees, etc. However, in practice, many agreements do not clearly specify how these fees are calculated or lack mechanisms to monitor the use of collected fees.

Disputes related to fees in Franchise Agreements often arise when franchisees believe that the fees they have paid are not proportional to the value they received or when franchisors continuously demand payment of additional fees without justification. Lack of transparency in the agreement regarding fee calculation mechanisms, scope of use or the absence of financial control mechanisms increases the risk of disagreement. As a result, disputes over financial obligations arise, which negatively impact the relationship between the parties and the franchising operations in general.

1.4. Disputes over continued use of business models and trademarks after Franchise Agreement termination

Under Article 289, Clause 5 of the 2005 Commercial Law, when a franchise agreement ends the franchisee must immediately cease using the franchisor’s trademarks, slogans, trade names, trade symbols and other intellectual property rights (if any). However, in practice, many franchisees continue to use the business model or brand names that cause confusion with the original brand, leading to lawsuits from franchisors for intellectual property infringement and unfair competition.

2. Practical experiences to limit risks when entering into Franchise Agreements

2.1. Thoroughly verify the legal capacity of the franchisor

This is a crucial step to prevent risks from the outset and ensure that the franchisor has the right to transfer the franchise and that it is legally permitted. In addition to verifying the general legal capacity of the franchisor, the franchisee should request documentation such as the Franchise Operation Registration Acceptance Notice, intellectual property ownership documents, financial reports and a list of units operating within the system. If the franchisor does not have the Franchise Operation Registration Acceptance Notice as required under Clause 1, Article 20 of Decree 35/2006/ND-CP this is an indication that the franchisor may not be fully legally compliant.

2.2. Ensure compliance with legal procedures

Additionally, depending on the scope of operations both the franchisor and franchisee may need to fulfill registration or reporting obligations with competent authorities. Specifically, foreign businesses wishing to franchise in Vietnam must register with the Ministry of Industry and Trade before implementation as stated in Article 18 of Decree 35/2006/ND-CP. For domestic or outbound franchising, the parties must report periodically to the Department of Industry and Trade under Clause 2, Article 3 of Decree 120/2011/ND-CP. Practical experience shows that many businesses especially franchisors, often overlook the registration process or fail to properly guide franchisees on periodic reporting procedures, resulting in the risk that the franchisor is not eligible to conduct franchising activities or that the franchisee may face administrative penalties for non-compliance.

2.3. Draft a thorough and complete contract with key provisions

Franchise Agreements are based on the principles of freedom, voluntariness and equality but they must still comply with legal regulations and not contradict social ethics. Due to their unique nature, these contracts are governed by commercial law, competition law and intellectual property law which requires careful attention when drafting the content. Provisions such as limiting the scope of operations, specifying suppliers and setting prices, if not properly considered, can be viewed as anti-competitive agreements under Article 12 of the 2018 Competition Law. Additionally, risks arise when the contract lacks preventive clauses such as breach remedies, force majeure events, confidentiality or criteria for evaluating system quality.

You can refer to TNTP’s article titled “Key Clauses in Franchise Agreements” for more detailed information.

2.4. Choose an appropriate dispute resolution method

In practice, disputes related to franchise agreements, when taken to court, are often prolonged and particularly have a significant impact on the franchisor’s business secrets. Therefore, the parties should prioritize negotiation, mediation or arbitration to resolve disputes quickly while maintaining confidentiality. Legal counsel with experience is essential to ensure that the dispute resolution process proceeds smoothly and quickly, limiting the negative impact on each party’s business operations.

Franchising in Vietnam is becoming increasingly common but also carries potential risks of disputes if parties do not prepare properly from a legal perspective. To mitigate risks, businesses should seek legal assistance from the negotiation stage, contract drafting and throughout the contract’s implementation process.

Best regards,