HM&P's Managing Partner Nguyen Van Phuc and Legal Associate Nguyen Nhat Duong share HM&P's insight in The Saigon Times (No. 40-2023) on 5 October 2023. Below is the English version translated by HM&P of this article:
Franchising, a well-established business practice worldwide, continues to be preferred by large enterprises, especially in the distribution and service industries. This business model has proven its suitability for many companies in the modern era. However, franchising is recognized as a complex commercial activity that envolves various risks and potential conflicts between the franchisor and the franchisee.
In order to make the franchise operation, the parties involved come to an agreement known as the franchise agreement. This agreement establishes a cooperative relationship between the brand owner, also known as the franchisor, and the recipient party, also known as the franchisee. Its purpose is to ensure consistency in the development and management of the network of stores/businesses while protecting the interests of both parties. In this article, the author will provide companies with a clearer understanding of franchising from the perspective of legal risk control through the terms stipulated in the franchise agreement.
1. Vietnamese enterprises still face several risks when engaging in franchising
While franchising is experiencing significant growth in Vietnam and many businesses have achieved success through its implementation, it is important to recognize the contingent risks associated with it if not properly managed. These risks can arise from a lack of consistency in business processes between the franchisee and the franchise system, inadequate inspection and supervision by the franchisor, and even more serious concerns such as information security. In the case of Pho 24, for example, the company initially had high hopes of becoming a successful overseas Vietnamese franchise brand. However, due to various difficulties and challenges, Pho 24 had to transfer all its capital to another company. This was done to ensure the continuity of its business operations under the management of the new company.
At present, many Vietnamese businesses have yet to fully grasp the importance of franchise agreements. This is evidenced by the casual and inadequate manner in which franchise agreements are generally drafted, missing crucial provisions. The resulting deficiency gradually pushes the parties into a state of loss of control, ultimately leading to the failure of their franchising endeavors.
2. Key aspects of franchise agreements for the franchisors
2.1. Terms for maintaining consistency and uniformity of the franchise system
The ultimate goal of franchising is to create a system or network of stores and businesses with a consistent brand identity. To achieve this, it is essential that all outlets within the franchise system operate in a cohesive and consistent manner. Franchising, commonly referred to as brand licensing, goes beyond simply granting the franchisee the right to use the franchisor's image and trademark in its business operations. The franchisee also gains access to additional franchisor assets, such as know-how, trade secrets and corporate culture. Therefore, the franchisor's first priority is to ensure that the franchisees who receive the rights properly apply the instructions provided. To achieve this, the franchisor must establish a rigorous monitoring and inspection process for the franchisee's business operations. In particular, the franchisor must develop and standardize its own procedures for franchising activities, including partner selection criteria, business location criteria, input raw material requirements, interior design, output quality and service style. To draft the franchise agreement, it is necessary to reach consensus and include all these elements. The franchisor must then establish guidelines to ensure that the franchisee meets these requirements. This includes agreeing on specific procedures for monitoring and supervising the franchisee's activities, as well as including provisions for termination rights, penalties for violations and indemnification for unauthorized actions. These measures are put in place to protect the overall operation of the franchise system in the event that a store or outlet deviates from the agreed upon activities.
2.2. Terms of confidentiality
As mentioned above, in addition to the tangible aspects such as brand, interior design, products and services, franchising involves intangible assets that the franchisor must disclose to the franchisee. These assets can consist of know-how, trade secrets and other important information that plays a central role in the franchise system. These elements not only differentiate a brand from its competitors, but also contribute significantly to its overall success. As a result, the exposure of confidential information can cause significant financial damage and jeopardize the franchisor's very existence.
Because of the existential impact of information, it is critical for the franchisor to be aware of the timeframe for ensuring information security obligations in franchise agreements. Generally, this period begins upon receipt of the information and continues even after the franchise agreement is terminated or expires. This measure protects the franchisor's confidential information and prevents unauthorized disclosure.
To ensure optimal and effective enforcement of the confidentiality provision, it is critical that the franchisor specifically identify the confidential information covered by the franchise agreement. In addition, the franchisor should establish a procedure for dealing with situations in which confidential information is disclosed. In the context of franchising, there may be more than one franchisee. It can be a time-consuming and expensive process for the franchisor to investigate the disclosure of confidential information. Therefore, in addition to imposing penalties on franchisees, the franchisor should consider requiring the offending franchisee to pay the costs associated with investigating the breach.
3. Key aspects of franchise agreements for the franchisees
Sources: https://thesaigontimes.vn/
3.1. Terms of the protected territory or protected radius
Although the franchisor may not have direct control over the entry of other companies in the same industry, it may still exercise control over this aspect for other franchisees. When entering into a franchise agreement, it is important for the franchisee to carefully consider this term and ask the franchisor to grant him a protected territory. Specifically, this provision is designed to ensure that the franchisee is the only entity granted commercial rights within a specific geographic area for the duration of the agreement. No other party will be permitted to open stores/locations in that geographic area. In addition, this provision allows the Franchisee to have sufficient scope and space to operate the business, thereby avoiding competition among multiple franchisees of the same brand.
3.2. Terms of the franchise agreement
Under applicable Vietnamese laws, the duration of an agreement is determined by mutual agreement between the parties involved, including franchise agreements. However, in the context of franchising activities, the franchisee often makes substantial investments in infrastructure, technology, personnel training costs and other expenses required to meet the standards of the franchise system. As a result, it is important for the franchisee to carefully evaluate and negotiate an appropriate term for the franchise agreement to ensure a return on its initial investment. In addition, there are specific obligations that the franchisor must fulfill as part of its role in franchising. These obligations include providing guidance to the franchisee, providing initial training and regular technical assistance, securing intellectual property rights to the assets identified in the franchise agreement, and treating all franchisees equally within the franchise system. These obligations are essential to the franchisee's successful operation. Therefore, if the franchisor breaches any of these obligations, the franchisee has the right to unilaterally terminate the franchise agreement.
It can be observed that when entering into a franchise agreement, each party needs to consider various terms and conditions that are directly related to its rights and interests. These terms can be drafted by the parties into various relevant clauses, such as restrictions on input products or services, restrictions on what the franchisee may sell or deliver, restrictions on the duration and exchange of information, conditions regarding the entry of other franchisees, or representations and warranties provided by the franchisor. The process of reaching a specific and detailed agreement allows both parties to better control their respective risks. This facilitates transparency in franchising activities and aims at long-term benefits for all parties involved.
Read the article at: Đừng xem nhẹ hợp đồng nhượng quyền thương mại!
