Protecting franchisees interests in franchise agreement under vietnamese law in comparison with french, UK and EC law

m

Joint Swedish-Vietnamese
Master’s Programme

MASTER’S THESIS

NGUYEN THI TINH

PROTECTION 0F THE FRANCHISEE’S INTERESTS
IN FRANCHISE AGREEMENTS UNDER VIETNAMESE LAW IN
COMPARISON WITH FRENCH, UK AND EC LAW
THƯ VIỆN
■"HẰNỘI

SUPERVISORS:

Dr. Nguy en Viet Ty
Ass. Prof. Katarina Olsson

HANOI- 2009

m


Statutory Declaration
I hereby declare that this thesis has been written by myself. The thesis has neither
been presented to an institution for evaluation, nor has it been published previously
in its entirety or in part.

Acknowledgements
This thesis has been completed with the help o f my supervisors Professor Katarina
Olsson and Doctor Nguyen Viet Ty. I would like to express my special thank to all
for their supervision and help.


Table of Contents

Table of Contents................................................................................................................
Abbreviations.......................................................................................................................
1.

Introduction.......................................................................................................... 1

1.1

Background o f the thesis...................................................................................... 1

1.2

Purpose and Research questions..........................................................................2

1.3

Delimitation..........................................................................................................2

1.4

Methodology of the T hesis.................................................................................. 2

1.5

Research Sources...................................................................................................3

1.6

M ainC ontent.........................................................................................................3

2.

The Basic Concepts of Contract and Franchise Contract................................. 4

2.1

2.2

3.
3.1

3.2

3.3

Contract...................................................................................................................4
2.1.1

The Concept o f a C ontract.......................................................................................... 4

2.1.2

General Principles on the Formation and Períịrmance of a Contract............... 5

Franchising and Franchise Contract.....................................................................8
2.2.1

V ietn am ........................................................................................................................ 9

2.2.2

France............................................................................................................ 12

2.2.3

United Kingdom.............................................................................................13

2.2.4

EU................................................................................................... ...............15

Protecting the Franchisee in Vietnam, France,the UK and and the EU........19
Pre- contractual disclosure o f iníịrmation........................................................ 19
3.1.1

V ietn am ...................................................................................................................... 20

3.1.2

F ra n ce ........................................................................................................................... 23

3.1.3

United Kingdom............................................................................................ 26

3.1.4

EU.................................................................................................................. 29

T echnical Assistance......................................................................................

32

3.2.1

V ietn am ................................................................................................................ ..33

3.2.2

France............................................................................................................ 33

3.2.3

United K ingdom ......................................................................................................... 34

3.2.4

E U .................................................................................................................................. 35

Source of supplied goods/material to the franchisee....................................... 36
3.3.1

V ietn am ........................................................................................................................37


3.3.2

F rance.......................................................................................................................... 38

3.3.3

United K ingdom .......................................................... ..............................................39

3.3.4

E U .................................................................................................................................40

3.4

Price maintenance............................................................................................43
3.4.1

V ieínam .......................................................................................................................43

3.4.2

F rance.......................................................................................................................... 44

3.4.3

United K ingdom ........................................................................................................ 45

3.4.4

European U nion......................................................................................................... 46

4.

Recommendation íịrVietnam on the Protection of the Franchisee’s Interests
........................................................................................................................... 49

4.1

Recommendation for regulation on Pre-contractual Disclosure of Document
........................................7..................................................................................50

4.2

Recommendation for regulation on Technical Assistance........................... 51

4.3

Recommendation for regulation on Source of Supplied Goods/Materials.. 52

4.4

Recommendation for regulation on Resale Price Maintenance................... 53

5.

Conclusion..........................................................................................................54

Table of Statutes and other Legal Instruments............................................................. 55
Table of Cases.................................................................................................................58
Bibliơgraphy...................................................................................................................... 59
Internet sources................................................................................................................. 59


Abbreviations

Abbreviations

Art.

Article

Id.

Ibidem

IPRs

Intellectual Property Right

ECJ

The European Court of Justice

EU

European Union

EC

European Community

PICC

The UNIDROIT Principles of International Commercial Contracts 2004

RPM

Resale Price Maintenance

VRBE

Vertical Restraints Block Exemption

UK

United Kingdom


1.

Introduction

1.1

Background of the thesis

In the recent period after Vietnam became a member of the World Trade Organization, commercial activities in general - and Ễranchising activities in particular - have
becorne hũt” subjccts of discussion in GUI country. Tỉiere are ã lot of auvaiìtâgcs with
íranchising when this is compared with establishing an enterprise under a new trade
name; for example, íranchising limits the risks for the person who enters the market
for the first time, as he or she does business under an already successM trade name
in the market. This is the reason why so many businessmen have engaged themselves
in íranchising activities. Some of the raore well-known examples of ữanchises in
Vietnam are: McDonald’s, Loterria, Seven Eleven, Kentucky, Trung Nguyen Coffee,
Kinh Do Bakery, Pho 24, Pho Vuong, AQ Silk, Qualitea, Dilmah, Foci, etc.
Traditionally, the franchisor and the íranchisee are independent from each other
both in legal status and in matters of íinance. Franchisees are individuals who want
to start their own business under a íranchising concept. Thus, in general, they must
sign a standardized agrcement íịrmulated by the Ểranchisor. The agreement is usually draíted by the ữanchisor with basis clauses that are more advantageous for the
ữanchisor, leaving the ữanchisee few options for protecting their own interests.
Moreover, to protect the reputation and uniíorm character of the ữanchise system,
the law normally permits the íranchisor to control the franchisee’s business conduct.
These are the main reasons why the ữanchisees are disadvantaged in their negotiation with the íranchisor, their performan.ce o f the franchise contract and in the ability
to respond to the franchisor’s abusive action. In such situations, the íranchisee may
tum to contract law’s recognition of a “duty of good faith and fáir dealing” for protection.
In Vietnam, regulations on the rights and obligations of the parties in íranchise
contracts, as well as other regulations related to protecting the franchisee, are not
considered adequate. A gap in the law may permit the íranchisor to take actions that
would inốinge the franchisee’s right.
The practice of ữanchising and the law on íranchising were bom and developed
very early, and rapidly, in some countries in Europe. By examining and comparing
the law o f Vietnam to the law of some European countries regarding franchising,
Vietaam will beneíit from the legislative exDeriences o f these other countries.
1

Against the background sketched above, I have decided to examine the topic: Protection of the Franchisee’s Interests in Franchise Agreements under Vietnamese Law
in comparison with French, UK and EC Law.

1.2

Purpose and Research questỉons

The thesis aims to compare the Vietnamese, French, United Kingdom (ƯK) and
European Community (EC) law on the protection of the franchisee’s interests. From
the results o f this comparison, I shall draw some conclusions that can be considered
by the Vietnamese legislator when working on the franchising legislation of Vietnam.
In short, the overall research questions of this thesis are:
— How is the íranchisee protected under Vietnam, French, UK, and EC law?
-

How can the Vietnamese law be improved on this issue?

1.3

Delimitation

The thesis will only investigate to the protection of ữie franchisee’s interests in the
perspectives of four different aspects of the íranchising contract, namely: (1) precontractual disclosure of iníịrmation; (2) technical assistance; (3) supplied source of
goods/material to the franchisee; and (4) price maintenance.
The reason why I have chosen these four aspects to investigate are as follows.
Firstly, disclosing iníịrmạtion and providing technical assistance to the íranchisee
mainly depend on the good faith of the íranchisor. Secondly, appointing the supplied
source of goods/material and determining the price are two issues that can easily be
abused by the íranchisor due to the disadvantaged position of the íranchisee in many
cases.

The thesis will deal with the Vietnamese, French, UK, and EC law..I have chosen
to compare the law of these countries because: (1) they belong to legal systems that
are very much diíĩerent from that of Vietaam, and (2) ửiey have had a long tradition
of and much experience in íranchise law.

1.4

Methodology of the Thesis

To achieve the purpose of the ữiesis, the following methođs will be applied:
-

to đescribe the cuưent law on the rights and the protection of đie franchisee’s interests in Vietnam, France, UK and EU;

— to compare the similarities and differences between the Vietnamese and the UK,
French and EU regulations on the protection of the franchisee’s interests.

2


-

to analy ze the content o f these regulations and to prơDOse some improvements on
the Vietnamese laws on the protection of the franchisee’s interests;

1.5
-

Research Sources
Franchise, competitiion and contract regulations in Vietnani, France, United

Kingdom and the European Community;

-

Cases;

-

Legal theories, articles, opinions, commentaries etc.

í.6

Main Content

Part 1: Introduction
Part 2: The Basic Concepts of Contract and Franchise Contract
Part 3: Regulations on the Protection o f the Franchisee’s interests in different
jurisdictions.
Part 4: Recommendation with a View to Improving the Vietnamese Law
Part 5: Conclusion

3


2.

The Basic Concepts of Contract and Franchise
Contract

2.1

Contract

2.1.1

The Concept of a Contract

In general, the contract can be considered as the basis for the establishment of social
relationships, particularly economic relationships. From the legal viewpoint, a
contract is used as a means to eníorce and ensure the parties’ agreements. It has also
been described as the consensus of two or more parties with the aim to harmonize
their interests and to achieve certain intentions. In the context of a market economy,
the development o f the economic relationships will lead to the diversiíĩcation of the
types of contracts. Among them, the franchise contract has been considered as an
ímportant type o f contract that contributes to the success of the business system in
general and of the íranchise system in particular.
With regard to the concept of contract, it can be observed that a contract has been
deíĩned similarly in several countries. For example, Art. 1101 of the French Civil
Code states that “ A contract is an agreement by which one or several persons bind
themselves, towards one or several others, to transfer, to do ornot to do something”.1
Similarly, in Vietnam, the concept of contract is deíĩned under the Civil Code 2005
in which a “civil contract”2 is deíỉned as an agreement between the parties to
establish, change or terminate civil rights and/or obligations.3
From the above deíĩnitions, it appears that three aspects can be discemed in a contract:
Firstly, a contract must be an agreement between two or more parties.
Secondly, the subject o f a contract may be the property, or it may stipulate a requirement tỡ do or not to do something.

1 v Jr/html/codes_traduits/code_civil_textA.htm#CHAPTER%20I
%20%20PRE (last visited April 18, 2009).
2 In Vietnam, a “civil contract” is considered as a “conừact” in general because of the scope of

Art. 1 of the Civil Code 2005, which states that “ [t]he Civil Code provides the legal status, legal standards for the conduct of individuals, legal persons, other subjects; tìhe rights and obligations of subjecís regarding personal identities and property in cívil, marriage and familv,
business, trade, labor relations (hereinaíter referred collectively to as civil relations)”
3 Art. 388, Vietnamese Civil Code 2005.

4


Thirdly, the conteni of a contract must contain rights and obligations of the parties, agreed by all contract parties.

2.1.2

General Principles on the Formation and Performan.ce of a
Contract

When studying this issue, the writer has leamed that there are two basic principles
goveming the process of íormation and períịrmance of the contract, namely:
-

the principle o f freedom of contract; and

-

the principle o f good faith and fair dealing.

2.1.2.1

P

rinciple

of

freedo m

of

contract

This principle states that the parties freely and by themselves can choose his or her
partner to conclude the contract with and freely enter into the contract and íreely
determine on whatever terms they wish. It is stated not only in the law of many
countries but also in intemational organizations as a basic principle of contract law.
It can be clariíied as follow:
The Principles of European Contract Law 1998 adopted by the Commission on
European Contract law4 (“Principles 1998” for short) rules about íreedom of contract
provide that: “Parties are free to enter into a contract and to determine its contents,
subject to the requirements o f good faith and fair dealing. and the mandatory rules
established by these Principles”.5 Furthermore, according to Art.4.108 (ex art. 6.108)
of the Principles, “[a] party may avoid a contract when it has been led to conclude it
by the other party’s imminent and serious threat of an act: (a) which is wrongful in
itselí, or (b) which it is wrongfìil to use as a means to obtain the conclusion of the
contract, unless in the circumstances the first party had a reasonable altemative”.
These circumstances lead a party to unwillingly conclude the contract. Thus, the
party who entered into the contract in this situation has the right to avoid or to continue to períorm this contract.
In France, this principle is also mentioned in theCivil Code through the requirement of “[t]he consent of the party who binds h im se lfT h is is an essential require-

4 Pursuant to Art. 1:101 Application o f ứie Principles: (1) These principles are intended to be
applied as general rules of contract law in European Communities; (2) These Principles will
apply when the parties have agreed to incorporate ứiera into their contract or that their
contract is to be govemed by them; (3) These Principles may be applied when the parties: (a)

have agreed thai their contract is to be govemed by "general principles of law", the "lex
mercatoria" or ứie like; or (b) have not chosen any system or rules of law to govem their
conừact. (4) These Principles mav provide a solution to the issue raised where the system or
mỉes of law applicable do not do so.
5 Article 1.102 (1) ofThe Piinciples of European ContractLaw 1998.

5


ment for the validitv of an agreement.6 If there is no consent, where the consent was
given only by error, or where it was extoríed by duress or abused by deception, it
may be a ground for armulment of an agreement.7 However, an agreement concluded
through error, duress or deception is not void by operation of law; it only gives rise
to an action for annulment or rescission.8
The Vietnamese Civil Code 2005, with respect to the principles for entering into
civil contracts, contains a provision which states that “[t]he entry into a civil contract
must adhere to the following principles: Freedom to enter into the contract, provided
that it is not contrary to law and social ethics”9 and

“ {t]he persons participating in

the civil transaction10 act completely voluntarily”.11 Moreover, “[w]hen a party participates in a civil transaction due to being deceived or intimidated, it shall have the
right to request the Court to declare such civil transaction invalid”.12
In addition, the Vietnamese Commercial Law 2005 also provides that: “(1) Parties
shall have the right to freely reach agreements which are not inconsistent with law,
fine customs and social ethics in order to fĩx their rights and obligations in commercial activities. The State shall respect and protect these rights; (2) Parties shall act
completely voluntarily in commercial activities, and neither party shall be permitted
to take action which imposes its will on, coerces, threatens or hinders the other
party”.13
As seen from the provisions above, the principle o f íreedom o f contract can be

said to comprise the following points: firstly, all parties have the rights to decide by
themselves whether to enter or not to enter into the contract as well as to deterraine
the content and the subject o f ửie contract; secondly, all circumstances that jeopardize the íreedom o f contract principle - such as threat, enjoinment, íraudulent or mistaken due to other party’s act - may render the contract invalid.
However, the basic assumption o f Ixeedom o f coníract is not so readily applicable
in the case where One party enjoys a more advantageous position than the other (the

6Art. 1108, French Civil Code.
7 Article 1.102 (1) o f The Principles of European Contract Law 1998.
s Art. 1117, French Civil Code.
9 Article 389.1, Vietnamese Civil Code 2005.
10 “A civil transaction is a contract or unilateral legal act which gives rise to, changes or terminates civil rights aiid/or obligations” (Art. 121, Vietnamese Civil Code)
11 Art. 122. l(c) of Vietnamese Civil Code 2005
12 Art. 132 o f Vietnamese Civil Code 2005
13 Article 11, Vietnamese Commercial Law 2005.

6


weaker) party. In such circumstances, this principle should be limited to the uníair
contract terms. In addition, to ensure a fair competitive environment, the freedom of
contract principle is also restricted by the law on anti-trust, unfair competition, etc.
2.1.2.2

P

rinciple

of

G

ood

F

aith

and

F

air

D

ealing

This is an important and mandatory principle in contract relationships. There is no
legal dìnition of good faith and fair dealing in Vietnamese, French, UK and EC
law. However, one author defines good faith and fair dealing as an “absence of
intention to harm a legally protected pecuniary interest”.14 Anoứier describes it as an
“action according to reasonable standards set be customary practices and by known
individuaỉ expectations"'.15
The Principles of European Contract Law 1998 by the Commission on European
Contract Law contain some provisions on good faith and fair dealing: e.g. that
“[e]ach party must act in accordance with good faith and fair dealing. The parties
may not exclude or limit this đuty” 16 and that “[e]ach party owes to the other a duty
to co-operate in order to give full effect to the contract” 17.
In the ƯNIDROIT Principles of International Commercial Contracts 2004
(PICC),18 “good faith and fair dealing” is a íundamental concept underlying the Principles. Art. 1.7 provides that “[e]ach party must act in accordance with good faith

and fair dealing in intemational trade”. This means that good faith and fair dealing
may be considered to be One of the íunđamental ideas underlying the Principles. The
statement in general terms that each party must act in accordance with good íaith and
fair dealing, even in the absence of special provisions in the Principles, applies tíius

14 Burton, Steven J., “Breach of contract and the common law duty to períorm ÚI good faith“, 94
Harvard Law Review (1980) 369, at 372-73 and 372.nl7.

15 Holmes, Eric M., “A contextual Study of Commercial good faith: Good faith in disclosure in
contract Formation“, 39 University o f Pittsburgh Law Review (1978) 381, at 452-.
16 Article 1.201 (ex art. 1.106), The Principles of European Contract Law 1998.
17 Article 1.202 (ex art. 1.107), The Principles of European Contract Law 1998.
18 The PICC do not have the status of an intemational convention. They have been prepared by
the International Institute for the Uniíication o f Private Law (UNDDROIT) with purpose of
setting forth general rules for intemational commercial contracts. They shall be applied when
the parties have agreed that their contract be govemed by them or they may be applied when
the parties have agreed that their contract be govemed by general principỉes o f law, the lex
mercatoria or the like or when the parties have not chosen any law to govem their contract.
They may be used to interpret or suppleraent iữtemational uniform law instruments or domestic law. Besides, they may serve as a xnođel for national and intemational legislators (See:
Preamble o f PIC C ).

7


to the parties’ behaviour throughout the life of the contract, including the negotiating
process. This is a mandatory rule; íhe parties may not exclude or limit this duty. To
make this principle clearer, secíion 2 of Comments to Art.1.7, PICC explains that
“abuse of rights” is a typical example of behaviour contrary to the principle of good
faith and fair dealing.
In French law, Art.l 134, para. 3, of the Civil Code states that “They [i.e. agreements] must be períbrmed in good faith”.

Similar to the laws of other countries and intemational organizations, the Vietnamese law provides that “good faith and fair dealing” is a mandatory principle in
modem business environment. Art. 389.2 of the Vietnamese Civil Code 2005 states
that the principles of “voluntariness, equality, goodwill, cooperation, honesty and
good faith” and “the contract must be performed honestly and in the spirit of cooperaíion and in a manner that best beneíits the parties and ensures mutual trust”.19
Generalizing from these regulations, the following observation can be made with
regard to the principle of good faiữi and fair dealing:
(1) Formation o f contract: the parties must act in good faith in negotiation and disclose fully all necessary pre-contractual document to the other party of the contract. In Ếranchise relationship, it is mentioned cleaxly in the franchisor’s duty of
providing the necessary iníịrmation about the ửanchisor and the franchise system to the íranchisee before concluding the contract.
(2) With regard to the períịrmance of contract, there are at least two main applications o f the good faith principle:
i.

The duty of loyalty: In a franchise relationship, the íranchisee must keep
the iníịrmation on transíerred know-how secret, even after the expiry 01'
termination of the franchise contract.

ii.

The duty of cooperation, such as the duty to help and to create the best
conditions for the partner in períịrmance of the contract, mitigating damages that may occur to the partner in períbrmance of the contract etc. Besides, one party is not permitted to abuse his/her rights to create imbalance
between the parties in the contract. There is a duty to períbrm the contract
in good faith and according to the fair dealing principle.

2.2

Franchising and Franchise Contract

The íranchise contract is considered as a special type of contract. However, like other
types of contract, the ữanchise contract is an agreement on rights and obligations of

19 Arí. 412.2, Vietnamese Civil Code.

8


all parties. It must be íulíĩlled under the principle of contract as meníioned in section
2.1. The notion of a “ữanchise contrací” is deíined in various ways in many
countries and intemational organizations. To clariíy this, it is necessary to understand
what “franchise” is.

2.2.1

Vietnam

Franchisỉng is a new concept in business and legal practice in Vietnam. It was
presented in Vietnam for the íirst time at ữie end of 1990s when an investment was
made in the supply of water fílter equipment.20 However, at that time, the
Vietnamese market was not familiar with íranchise activities. Furthermore, the
enterprises that would like to apply the íranchise model had met some difficulties in
establishing their position in the market for the following reasons: Firstly, at that
time intellectual property rights (IPRs)21 were govemed by various codes, decrees
and circulars, as well as by intemal regulations issued by the National Offi.ce of
Intellectual Property of Vietnam22. The eníorcement of these regulations have met a
lot of diffìculties, especially in protecting the subject of IPRs because social
awareness about IPRs was still limited and the businessmen often tend to iníringe the
intellectual property rights o f others. This is a major obstacle for the íranchise
activity, because trade name, trade mark, logo, know-how and other IPRs protected
by IP regulations are the subjects of ữanchise agreement. Thus, the trader may not be
prepared to pay a large sums o f money (íranchise fee) to use a trade name as well as
other subjects of IPRs which may be not very well protected under the law. At this
time, there was a lot of inữingement of IPRs in all kinds of situations in general, and

in íranchise in particular. Secondly, it was only írom 1990 that private enterprises
have been permitted in Vietnam.23 Thus, in the short time, it was not easy for the
enterprises to establish a strong trade-name that can íranchise successíully, thereíore
this initial ữanchising system rapidly had fallen into failure.
The success of franchising activities in Vietnam has been marked by the success
o f the Trang Nguyen Cafe Company. Running this mode of business, from 1996 to

20 Source: Ministry of Trade, Document in Seminar of franchising is fandeđ by the Australian
and the Vietnamese Government, December 2004.
21 In íranchise relationship, IPRs is main element of commercial right which is granted to the
franchisee by the franchisor.
22 The Law on ỉntellectual Property was approved by the Vietnamese Parliament in 29 November, 2005. LawNo.50/2005/QHl 1, legislature XI, Session 8, came into force in 1 July 2006.
23 The íĩrst time Vietnam promulgated Company law was in 1990 and Private enterprise in 1991
(Now, all kinds of enterprises are ruled in the Enterprise Law 2005)

9


the preseni, Trung Nguyen Cafe has established a íranchise System with more than
500 outlets throughout Vietnam and some outlets in íòreign countries, such as Thailand, Cambodia, Singapore, Japan and the us.
From the legal aspect, íranchising activities have been recognized in Vieínam for
the íĩrst time in 1999. The initial regulations on this kind of business were set forth in
Circular No. 1254/1999/TT-BKHCN, Art 4.1.l(a) paragraph 5 as “contracts for
granting business fran chi se” (called “franchise” in English). However, the meaning
of the word “franchise” mentioned in this Circular is quite similar to technology
transfer. This kind of contract is au agreement between parties on granting licences
to use trademarks accompanied with producing and doing business on know-how
transfeưed ữom abroad into Vietnam with a total payment value over 30,000

ưs$

pev transaction.24 This Circular did not consider “ữanchise” as a type of business and
did not provide explicitly for a specific concept of “franchise”.
The applicable regulation comprised then of Decree No. 11/2005/NĐ-CP25 and the
Circular No. 30/2005/TT-BKHCN26 on technology transfer. Under these rules, franchising activities were regarded as a form of technology transíer only. After the entry
into force of the Vietnamese Commercial Law (2005) on 1.1.2006, íranchise has
been regulated in Art. 284 to Art. 291 in Chapter VI of the Law. This is the íirst time
ữanchise is considered as an independent commercial activity in Vietnam: “Commercial franchise means a commercial activity whereby íranchisors permit and require íranchisees to undertake by themselves to purchase or sell goods or provide
services on the following conditions:
(1)

The purchase or sale of goods or proVision of services shall be conducted in
accordance with methods of business organization prescribed by íranchisors
and associated with the franchisors' trađemarks, trade names, business knowshovv, business slogans, business logos and advertisements;

(2)

Franchisors shall be entitled to supervise and assist Ễranchisees in conducting
their business activities” 7

24 Section 4.1.1 (a), paragraph 5 of Circular No. 1254/1999/TT-BKHCN promulgated by the
Ministry of Science and Technology to provide the guidance for the Decree 45/1998/ND-CP
on technology transíer
25 Decree No. 11/2005/ND-CP Detailing about transferring technology (amended), adopted by
Government, dated 2 February 2005
26 Circular No. 30/2005/TT-BKHCN Guidins períorming on technology transíer regarded franchise as a form technology transfer activity
27 Article 284, Vietnamese Commercial Law 2005.

10

According to this deíĩnition, franchise is defmed as one kind of commercial activity.
It means that ữanchise must be conducted by “business entities”28 (“merchants” or
“traders”) with the following characteristics:
Firstly, the parties in íranchise relationship must be traders who will be called the
“íranchisor” and the “franchisee”. The trader who is the íranchisor shall be permitted
to ửanchise his or her business system to a íranchisee if that system has been operated for at least one year . In case a Vieínamese trader is the primary íranchisee of a
íịreign íranchisor, he or she must have conducted the business by mode of commercial ửanchising for at least one year in Vietnam before sub-franchising; and such a
írader T!V1s 1 '•“gictov ri-io ('íimmprí'iol fran<"*Viioir>o witĩi

fh f*

rnmnplpnt mitíiority ^

ỉ hÍ-'

trader who is the ửanchisee shall be permitted to receive commercial rights when
having ứie regisừation of business lines subject to commercial rights.30
Seconly, the subjects in the íranchise relationship are commercial rights relating to
the trademark, trade name, business know-how, business mission statements, business logo, subịects of IPRs. The franchisee is entitled to use the franchisor’s IPRs in
the purchasing and selling of goods or providing services.
Thirdly, the franchisor has the right to control and offer assistance to the franchisee in the conduct of business. This is necessary to ensure that the ữanchisee conduct
business pursuant to the method of business organization speciíĩed by the íranchisor.
In recognizing franchise as an independent commercial activity, the Vietnamese
Coramercial Law has created some good conditions for the development o f íranchising activities. As a result o f this, consumers in Vietnam may take full advantage of
this development in choosing diversiĩied Products from Vietnam and other countries.
With regard to the concept of franchise contract, there is no speaẻal and precise
defmition in Vietnamese law on its content. Article 285, Commercial law 2005, with
the heading “íranchise contract” only mentions the form of íranchise contract: “[a]
franchise contract must be made in writing or in another form with equivalent legal

validity”.31 Although there is no speciíìc diĩiition of the íranchise contract, Decree
No. 35/2006/ND-CP recognizes the special form of franchise contract as a
“[c]ommercial right development contract”, namely a commercial ửanchise cx)ntract

28 According to Art, 6.1, Vietnamese Commercial Law 2005, “[b]usiness entities shall comprise
economic organizations which have been lawfixlly established and individuals who conduct
commercial activities independently and frequently and who have business registration”.
29 Art. 5 of Decree 35/2006/ND-CP.
30 Art. 6 of Decree 35/2006/ND-CP.
31 Article 285 o f Vietnamese Commercial Law 2005.

11


whereby the íranchisor grants the íranchisee the right to seí up more than one establishment to do business by mode of conimercial franchising in a speciíled geographical area;32 and “[s]econdary commercial franchise contract"33 as a commercial franchise contract signed between the secondary íranchisor34 and the secondary franchisee35 regarding common commercial rights.
Moreover, accordingto the hierarchy of the law on contract, the Civil Code is considered as the “mother law” of all contracts, including íranchise conừact. It is stated
in Art. 1 of the Civil Code 2005 that “[t]he Civil Code provides the legal status, legal
stanđards for the conduct o f individuals, legal persons, other subjects; the rights and
obligations of subịects regarding personal identities and property in civil, marriage
and family, business, trade, labor relations (hereinaíter reíerred collectively to as
civil relations)”. In addition, Art. 4, Commercial Law 2005, states, with regard to the
applicability of the Commercial Law and other relevant laws, that commercial activities must comply with the Commercial Law and other relevant laws. In the case of
specialized commercial activities as prescribed in another law, the provisions of such
other law shall apply. The provisions of the Civil Code shall apply to a commercial
activity which is not govemed by provisions of Commercial Law or other specialized
laws. So, íranchise contract could be considered as a kind of civil contract. We can
use Art. 388 of the Civil Code on the concept of civil contract as mentioned in section 2.1.1, and Art. 284 of the Commercial Law on the concept o f “franchise” as
mentioned above to clariíy the concept of íranchise contract as an agreement between
the franchisor and the ữanchisee to establish, change or terminate their rights and obligations in ữanchise activity as regulated in Art.284 of the Vietnamese Commercial
Law.

2.2.2

France

In France, ứie first time íranchising appeared was in 1950s and started rapidly
developing in 1960s through ửanchise activity of several companies with some kind
of production such as baby wear, wedding fashion and matemity clothing. However

32 Art. 3.8 of Decree 35/2006/ND-CP.
33 Art. 3.10 of Decree 35/2006/ND-CP.
34 Art. 3.3 o f Decree 35/2006/ND-CP: “Secondary íranchisor means a trader that is entitled to
sub-franchise commercial rights it has received from the primary franchisor to the secondary
ữanchisee”.
35 Art. 3.5 of Decree 35/2006/ND-CP: “Secondary franchisee“ means a trader that receives commercial rights from the secondarv ữanchisor.

12


the íranchise concept was not stipulated in any specifíc regulation. Franchise
agreement is considered as a typical of commercial contract.
Although there was no regulation on the íranchising, this concept was still mentioned in the decision of the Court of Appeal of Paris in a decision dated 28 April
1978.36 In that case, franchising was defmed as “a method of cooperation between
two or more commercial enterprises, One acting as íranchisor and the others acting as
franchisee or íranchisees.
The íranchisor, being the owner of a famous brand name, acronym, or trademark,
íogeíher with the certain know-how, would grant to the íranchisee certain exclusive
rights to use its original or speciíic Products or services, in exchange for a royalty.
The íìanchisor would also grant to the ữanchisee the benìt of a number of speđfic
commercial techniques to enable the íranchisee to improve the management of its

business. The advantage of this type of aưangement for the íranchisee is that it enables the ữanchisee to develop a market for its goods and, at the same time, to develop the activities of any related enterprises.”
From the deíinitions above, we can see that the concept of franchising in France is
similar to the corresponding concept in Vietnam law.

2.2.3

United Kingdom

The Restrictive Trade Practices (Non-notifiable Agreements) (Sale and Purchase,
Share Subscription and Franchise Agreements) Order 1997 No. 2945 mentioned
“íranchise” in the following manner:37
“ ‘Franchise’ means a package of industrial or intellectual property rights relating to
trademarks, trade names, shop signs, utility models, designs, copyrights, know-how
or patents, to be exploited for the sale of goods or the provision of services in which
(a)

Íranchisees other than master ữanchisees, generate their revenue from the sale
of the goods or services or goods and services which are the subject of the
ữanchise, or

(b)

master íranchisees generate their revenue predominantly from the continuing
provision of services to sub-franchisees as well as from the sale of subfranchises”38

36 Dennis, Campbell, International Franchising Law, Volume 1, Mathew Bender & Company,
2005, s 1 {2}, p. FRA-10 refer to Bull. Transport 1978 277. See also the decision of 20 September 1974 (Mage Distribution)
37 This Order entered into force on 9th January 1998.
38 Section 2, Order 1997 No.2945.

13


This deíinition did not deal with rights and obligations of both contractual paríies
like the concept of “franchise” in Vietnamese law. However, it is considered as a
package of industrial or intellectual property rights to be exploited by the íranchisee.
We have leamed that this deíinition specially underlined the role and interests of the
franchisee in exploiting the subject o f íranchise. It does not mention the role of the
franchisor as Vietnamese Commercial Law does. The term “exploit” covers both the
“selling the goods or services directly” and “providing services to sub-franchisee as
well as from the sale o f sub-franchises”.
This Order also deíĩnes “franchise agreement” as an agreement whereby a person
(“the ữanchisor”) grants to another, the íranchisee, for consideration, the rights to
exploit a íranchise for the purposes of selling the speciíĩed types of goods or services
or goods and services in company with the obligations relating to:
(a) the use o f a common trademark or Service mark, trading name and - (i) trading
premises which are fítted out and equipped to a certain Standard and specification
providing an appearance uniíorm with those of other ửanchisees of the íranchisor
(including the range of stock available for sale or services available to be provided);
or (ii) a vehicle ữom which the ửanchisee conducts his business and which is fítted
out and equipped to a Standard and speciíĩcation common to the íranchisee and other

ữanchisees of the franchisor providing a uniíịrm appearance (including the range of
stock available for sale or services available to be provided);
(b) the communication by the íranchisor or master ữanchisor to the franchisee of
know-how; and,
(c) the continuing provision by the íranchisor or master franchisor to the franchisee of commercial or technical assistance during the tenn of the agreement39
From the above analysis, there are three important characteristics of franchise
contract, ứiey are: Firstly, it is an agreement between the franchisor and the íranchisee in which the íranchisor grants the right to exploit a íranchise (a package o f industrial or intellectual property rights) to the ữanchisee; secondly, the ữanchisee’s ríght
is to exploit a íranchise for the purposes o f selling the speciíĩed types o f goods or

services or goods and services together with obligations to ensure the uniíịrm appearance o f íranchise system while exploiting it; and thirdly, the franchisor’s obligation is to communicate his know-how to ữanchisee and provide the commercial or
technical assistance to the íranchisee during the term of the agreement.
It seems íhat the concept o f íranchise contract in United Kingdom is similar to the
concept o f “íranchise” in Vietnamese Commercial Law.

39 Section 2 of The Restrictive Trade Practices (Non-notifiable Agreements) (Sale and Purchase,
Share Subscription and Franchise Agreements) Order 1997 No. 2945.

14


2.2.4

EU

The European Commission íĩrst enacted a block exemption regulation for franchise
agreements (“Commission Regulation No. 4087/88 on the application of Art.85(3) of
the Treaty to categories of íranchise agreement” - “Franchise Block Exemption” for
short) in 1988. The Franchise Block Exemption was passed in response to the European Court of Justice’s 1986 judgment in the Pronuptia case,40 which decided that
many of the clauses typically found Ũ1 íranchise agreements restrict cx)mpetition, in
violation of European Community competition law (Article 81(1) (ex. Art. 85(3)) of
the EC Treaty). The Franchise Block Exemption provided a roadmap for íranchising
in the European Union and oữered guidance on required, permissible. and prohibited
ữanchise agreement provisions. Since the Franchise Block Exemption was a regulation under the EC Treaty, it applied to the entire European Economic Area, in addition to the member nations of the European Union.
On June 1, 2000, a new Vertical Restraints Block Exemption (“VRBE”)41 No.
2790/99 came into effect. The VRBE replaces the Franchise Block Exemption, as
well as several other block exemptions that applied to agreements incorporating restraints such as exclusive purchasing and exclusive distribution arrangements. Franchise agreements in existence prior to June 1, 2000 were allowed to rely upon the
Franchise Block Exemption during a transition period that expired on December 31,
2001, but all íranchise agreements executed after June 1, 2000 must comply with the
VRBE. While the Franchise Block Exemption took a very mechanical approach to

the application of EU competition law, the VRBE takes an economic approach, not
unlike the “rule o f reason” that is applied to analyze most vertical restraints under

United States antitrust law. In general, ữanchisors with a market share below 30%
are able to take advantage of the VRBE, although certain “hardcore” restrictions
(such as resale price maintenance) are prohibited regardless of market share.
As mentioned above, the concept of fr an chi se contract is first deíĩned by the
European Court of Justice as:
“A contractually govemed form of commercial cooperation between independent undertakings, whereby one party, ứie franchiser, gives one or
more other parties, the franchisee(s), the right to use his trade name or
mark and any other distinguishing íeatures in the sale of products or of
services. The sale takes place on the basis of an exclusive marketing concept (system or íbrmula), developed by the íranchiser; in retum the Ếran40 Case 161/84, Pronuptia
41 Vertical Restraints Block Exemption is abbreviated from The Commission Regulation (EC) No
2790/1999 of 22 December 1999 on tìie application of Article 81(3) of the Treaty to categories o f vertical agreements and concerted practices

15


chiser receives royalties. The use of these rignts by the íranchisee is supervised by the franchiser to ensure uniform presentation to the public
and uniíbrm quality of the goods or services”.42
Then, Section 2.5, Paragraph 199 of the Guidelines on Vertical Restraints (2000/C
291/01) of COMMISSION stated that:
“Franchise agreements contain licences of intellectual property rights relating in particular to trade marks or signs and know-how for the use and
distribution of goods or services. In addition to the licence o f IPRs, the
franchisor usually provides the ữanchisee during the life of the agreement with commercial or technical assistance. The licence and the assistance are integral components of the business method being íranchised.
The franchisor is in general paid a franchise fee by the íranchisee for the
use o f the particular business method”.43
According to this regulation, the íranchise contract has some íeatures similar to the
corresponding concept in UK and Vietnamese laws as discussed above. In addition,
the Guidelines underline the licence and the assistance as integral components o f the

business method being ửanchised. Besides, the franchisor’s right on getting a Ểranchise fee or the franchisee’s obligation to pay a íranchise fee is also considered as
necessary íeatures of this business method. The rule on íranchise fee pointed out that
the fínal purpose of both sides concluding a contract is to get prìt from exploiting
the IPRs, particularly relating to trademarks or signs and know-how for using and
distributing goods or services.

Summary:
The concept o f / 'ranchise:
In the economic perspective, franchising is a marketing technique whereby the
developer o f a product or Service (the ữanchisor) seeks to expand the market for his

or her Products or services through using the labour and íinance of others by granting
them (franchisees) an exclusive right (franchise) to market his Products or services in
a speciíied area and length of từne, under the franchisor’s trademark or trade name
and marketing plan. It differs from a mere exclusive licence to sell the Products or

services. In that case, it contemplates continuing a close, cooperative relationship
between the franchisor and the ữanchisee. And a system o f operation is designed to

42 Case 161/84, Pronuptia
43 Section 2.5, Paragraph 199 of Guidelines on Vertical Restraints (2000/C 291/01) of Commission.

16


identiíy the Products or services with the íranchisor and the íranchisee as a part of

that system rather than as an independent retailer. In this way, the franchisor acquires
the management talent and finance to expand his/her business through the efforts of
the person just vested interest in it. And the íranchisee acquires through his/her

investment the status o f an entrepreneur while placing himself/herself and his/her
investment at less risk through reliance on the manageraent assistance, technical
knowledge help of the íranchisor.
In the legal perspective: Ếranchise is a package o f IPRs relating to trademarks,
trade names, shop signs, utility models, designs, copyrights, know-how or patents
v/hich is cwxied by the íranehisor, to be exploited by the íranchisee for selling the
goods or providing the services in order to get proíít.
The concept o f franchlse contract:
The concept o f “franchise” in the Vietnamese Commercial Law is similar to the
coưesponding concept in UK and EC law. It has two main characteristics as follow:
Firstly, franchise contract is established between two separate parties - the franchisor, and the franchisee.
The íranchisor is usually a trader who has established a good trade-name or trade
mark in the market. To ensure the success o f ửanchise activities, the law generally
requires that the íranchisor must have conducted business by mode o f commercial
franchising for a certain time before granting commercial rights (for example, Vietnam requires that the time is at least One year).44 The requireraent o f time generally
depends on the economic conditions and legal policies of each country.
The franchisee is a party permitted to use commercial right of the franchisor to
run its business, and in retum has to pay a íranchise fee to the Ễranchisor. The condition for the franchisee to receive ữanchise is quite easily met, the franchisee normally must be a trader (for example, Vietnam requires that the íranchisee must be a
trader, and he/she shall be permitted to receive commercial rights when having the
registration of business lines subject to commercial rights).45
Secondly, the franchise contract must contain at least three key elements as follow:
1. Transfer elements o f industrial, intellectual property rights from ữanchisor to
ửanchisee with the intention o f getting proíit;
2. Assistance o f the franchisor to the ửanchisee in process o f caưying on íranchise;
3. Financial obligations of the franchisee (pay ửanchise fee) to tìie franchisor.
Ị

44 Art. 5 of Decree 35/ND-CP.

T w ự V l ễ^N ^

\k MỎI

45 Art. 6 of Decree 35/2006/ND-CP.

17


As the analysis above shows, it seems that íranchise is a speciíic commercial activity. However, it has sorae points of similarity to some otner comxnercial activities
such as commercial agency, license, technical transíer. But we can distinguish ữanchise activity írom said commercial activities based on following elements:
Fìrstly, in coraparison with agency, ửanehising distinguishes itself trough the
separate obligations of the contract parties arising from the profit or risk o f the business. In commercial agency, the principal usually delivers goods to the buyer through
the agent, he does not transfer the goods’ ownership to the agent. For this reason,
when the goods are risked, the party who đirectly bears this risk is the principal - the
goods’ owner. On the other hand, the ữanchisee and the ữanchisor are independent
from each other in legal status, consequentially, they are independent in finance also
when operating their respective business. If the franchisee or the íranchisor suffers
loss or risk, it is not directly related to the other unless the risk has arisen from a
breach of the ữanchise contract. The agent, by contrast, is only the link between the
seller (the principal) and the buyer, he sells goods to the buyer on behalf o f the principal. In íranchising, each party is independent in doing business, the íranchisee does
not sell goods or provide services on and for behalí of the franchisor.
Secondly, franchising differs in many important p o in ts írom licence and technology transfer. In a licence, the owner of ứie licence transfers the right to use traderaark, industrial design, know-how, patent for another in order to get fees. After concluding the licence contract, the receiver is entitled to use transferred licenced objects
in the running of the business. According to the terms o f the licence, the receiver can
use trademark on his/her goods or industrial design to produce his/her Products.
In technology transíer, the transferee can use the technology o f the transferor to
produce the goods. However, whether the trademark for those goods is the same as
the trademark of the transferor’s goods or not depends on the scope o f licence beíween the two parties. Aữer acquiring the technology, the transferee can decide to
keep the initial technology or develop it.
Thus, licence and technology transíer are similar to franchising. However, in licence and technology transfer, the objects of intellectual property are mentioned
separately and not compulsory linked to them. Otherwise, íranchising requires a

close connection between the objects o f intellectuaỉ property. This connection is
compulsory, but the level o f connection depends on the negotiation between the parties in the contract. Once more, in ữanchising, the similarity between the franchisee’s
products and franchisor’s one is necessary as well. The similarity will be considered

18