Franchising is one of the most popular business forms chosen by many businesses, applied to expand the scale of operations, influence the franchisor and the ability to develop rapidly based on the franchisor’s trademark, brand to the franchisee. Recently, at the TV talk show “Business and Law” of VTV television station, Lawyer Pham Duy Khuong – Managing Director of ASL LAW Firm participated in presenting his in-depth perspective on franchising contract disputes in the field of restaurant services.
The program “Business and Law” with the theme: Franchise contracts in the field of restaurants of VTV was honored to have the participation of 2 guests including:
– Lawyer Pham Duy Khuong – Director of ASL LAW Firm.
– Assoc. Prof. Dr. Ngo Quoc Chien – Faculty of Law, Foreign Trade University.
At the program, DCT Mai Trang presented a situation with the content: On January 9, 2019, Company N signed a coffee franchise contract with a business located in Hanoi of Ms. H. In which, Company N is the franchisor and Ms. H is the franchisee.
Accordingly, company N will allow its partner, Ms. H, to indirectly use its brand image for 3 years. During the franchise period, company N maintains its control over the brand and commits to provide effective assistance to Ms. H’s business. The transfer fee is 500 million VND, in which Company N supported Ms. H 350 million VND.
Ms. H is obliged to pay 10% when signing the contract, the second installment is 45% when the company N sponsors the assembly of the images and the third installment is the remaining 45% when the company N has installed the tables and chairs.
Ms. H has paid the 10% amount on schedule and company N has also sent technical staff to provide vocational training for Ms. H’s facility. However, when she had access to the raw materials provided by party N, Ms. H refused to use burnt coffee beans that lost their taste and used another type of coffee.
When a dispute arose, company N asked Ms. H to perform the obligation to return the installed equipment. If she cannot pay, Ms. H must pay 500 million VND to company N, not subtracting the 50 million VND that she paid earlier.
On the contrary, Ms. H argued that she did not receive the furniture as agreed, the technical staff was not qualified and the coffee beans were not qualified, roasted, bitter, and had no coffee taste, so she did not accept this resolution. She complained to the company but was not approved, corrected and thereby, disagreed with the petition of company N.
The case closed with the appellate judgment of the People’s Court of City A not accepting the lawsuit request for the return of equipment of company N against Ms.
Controversy about the restaurant franchise contract
DCT Mai Trang: “Considering that Ms. H does not use the coffee provided by company N, is this a mandatory obligation for the franchisee in a franchise contract?”
Lawyer Khuong: “The compulsory use of the franchisor’s products will depend on the contract between the two parties. Normally, in the current franchise models in Vietnam and in the world, forcing the franchisee to use the materials they provide is an absolute competitive advantage that cannot be exchanged, negotiated in which the franchisor will always keep tightly.
Although there is no detailed information on the contractual obligations, it would be particularly unusual in this dispute for company N to not have a mandatory provision on the use of such materials.”
DCT Mai Trang: “Thereby, assuming Ms. H sells other coffee products, would that act seriously violate her contractual obligations?”
Lawyer Khuong: “In practice, for many reasons such as interests, circumstances, and strategic thinking of the franchisee themselves, they might perform the act of changing mandatory materials in the franchise contract. For such cases, when discovered, the franchisor will definitely handle contract violations.”
DCT Mai Trang: “Considering the content of Ms. H’s complaint that the coffee provided by Company N is burnt, bitter, and has no taste of coffee, leading to her changing the original coffee, so what is the responsibility of Company N?”
Assoc. Prof. Dr. Chien: “In my opinion, the fact that Ms. H thinks that coffee is burnt, bitter, and has no taste of coffee may be just Ms. H’s own point of view, which may not necessarily reflect the objective truth. Therefore, if only according to Ms. H’s argument, it is not enough to attribute the responsibility to company N.
In addition, about the quality assurance factor in the Franchise contract, I also agree with lawyer Khuong’s opinion that not only in Vietnam but also on a worldwide scale, all franchisors want to control the quality of the products to ensure uniformity in the system. That is why the quality clause is one of the most important terms in any franchise contract that no parties will take it lightly or give up easily.”
DCT Mai Trang: “So, through the story of the dispute between Company N and Ms. H, can we draw any experiences, notes and lessons when participating in the signing of franchise contracts, Mr. Khuong?”
Lawyer Khuong: “Before signing a franchise contract, firstly, the franchisee needs to determine the history of the franchisor related to the reputation in their mode of operation and secondly, the intellectual property rights of the franchisor in the franchise model, whether they fully own the related intellectual property assets. The third is detailed information about products and materials required in the operation such as coffee ingredients and optional ingredients, which can be changed so that the franchisee can be proactive, avoid the case where the franchise contract is just the name but also needs to include the accompanying details.”
In the next hypothetical situation about the trademark dispute “Pho T” related to franchising activities without proof of trademark ownership, Lawyer Pham Duy Khuong said that there is a colossal difference between the importance of intellectual property rights in franchise contracts in Vietnam’s law and international law:
“The condition of the franchising model from abroad to Vietnam or within the territory of Vietnam only requires a minimum of 1 year of operation, while the trademark registration process in Vietnam takes at least 2 to 3 years in practice to be granted a protection certificate. Thereby, leading to many cases where businesses are eligible to perform franchising but do not have rights to intellectual property such as trademarks.
In addition, the law on franchising in Vietnam stipulates that it is not necessary to have proof of ownership of a trademark when drafting a contract, such documents can be filed later or if not, there is no problems, optional. This is in stark contrast to the regulations on franchising in many developed countries around the world, when franchising must go hand in hand with intellectual property.”
Lawyer Khuong added: “Thereby, when there is an element of intellectual property involved in a franchise contract in Vietnam, it carries many risks. The franchisor must commit to the franchisee on handling future problems and this is also the basic cause of many franchise contract disputes like this Pho T case, although that the nature of the case is somewhat peculiar in that neither party has any rights to the trademark.”
See the detailed interview with Lawyer Pham Duy Khuong in the program “Business and Law” with the topic: Franchise contract in the field of restaurant of VTV here.
ASL LAW has successfully advised many businesses in Vietnam and abroad in franchising activities. Contact law firm ASL LAW for guidance on Franchising in Vietnam.