International Franchises Over Regulated

VietnamNetBridge reports that in the process of economic integration, the granting of franchise by international companies to local operators in Vietnam is a key issue.

The news agency observes that franchise agreements are a significant pathway for technology transfers and for licensing of trade names, industrial processes, proprietary software, and other valuable intellectual property to Vietnamese users. Such licensing agreements are of potentially great commercial significance for the country in the process of globalisation and development.

To wit, the Government has issued Decree No 35/2006/ND-CP regulating franchises in Vietnam. It details the Commercial Law adopted by the National Assembly in 2005. The new decree provides for key concepts in franchising, requirements of franchise agreements and State administration of franchises.

The decree is an important step, contributing to the improvement of the legal framework on franchise relied upon by businesses in actualising franchise agreements in Vietnam.

However, the decree also has shortcomings and inappropriate provisions which may somewhat hinder the expected boom in franchises, including restrictions on franchise and requirements for franchise agreements.
Article 3 of the decree defines “general commercial rights” such as the right of a franchisor or franchisee to grant a sub-franchise to a third party.

However, the decree restricts sub-franchisees to grant such rights to any other. This provision creates tensions and may lead to an understanding that the sub-franchisee is prohibited from further granting franchises to partners.

“General commercial rights” should be commercial rights in the true sense of the word, dependent only on the discretion of the contracting parties and without any further restrictions.
If the owner of a franchise grants rights to franchisees or sub-franchisees to grant further franchises, there should be no restrictions set by law.

The decree also sets a time limit on cases in which a Vietnamese party receives a franchise from abroad. A local franchisee shall lose the right to sub-franchise to another unless it has already exercised its franchise for at least a year. This restriction could have adverse effects on the expansion of franchises in Vietnam.

As to franchise agreements, the decree requires all franchise agreements to be made in the Vietnamese language unless the franchise is transferred from Vietnam to a franchisee abroad.
In practice, this requirement is highly unfavourable to foreign franchisors because many use extensive franchise agreements that have already been drafted and standardised for use in a variety of international markets.

The common language for such multinational transactions is English, and the English version of the contract is the one likely to be relied upon by the parties, so requiring a Vietnamese translation of such an agreement is cumbersome.

The law should make no restrictions which would be considered as obstacles to foreign franchise holders who are considering Vietnam as a potential market.

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