Notes for Franchisees after the post-Covid 19 season

Commercial Franchise can be considered as an optimal choice for individuals, small and medium-sized organisations, especially after the heavy impact of the Covid-19 pandemic on the economy. In addition to the benefits that can be leveraged such as reputation, source of customers, finished products, available processes, etc., organisations and individuals should pay attention to various crucial legal issues for the franchising relationship to proceed it smoothly.

Commercial Franchise in accordance with the provisions of Vietnamese law

 Commercial Law 2005 stipulates that Franchise is a commercial activity whereby the Franchisor permits and requires the Franchisee to conduct the purchase and sale of goods and provision of services on its own when it has satisfied the conditions prescribed by law[1].

It can be understood that the relationship between the two parties in Commercial Franchise is a bilateral relationship – both parties enjoy the same benefits as well as fulfill their respective obligations. The Franchisor could expand their business, reach, increase business recognition by advertising the system and network of the Commercial Franchise, and is responsible for training, technical assistance, and service provision for the Franchisee. On the other hand, the Franchisee can reduce the burden of branding as well as establish an independent operating process and fulfill the payment obligation under the franchise contract to the Franchisor as well as ensure the investment in facilities, maintain business confidentiality and intellectual property rights.

The Commercial Franchise contract is the legal basis for the Commercial Franchise relationship. The object of the Commercial Franchise contract is the commercial right to the products and services that the enterprise trades, not the products and services themselves. The rights and obligations of the parties as well as the cost of the Commercial Franchise and other related conditions shall be agreed upon by the two parties but must ensure that the provisions of the law on Franchise are satisfied[2].

Notes for Franchisees in the post-Covid 19 season

 Choosing the right sector or industry, as well as considering the usage of technology in the business

The impact of the Covid-19 pandemic has severely affected the economy. However, during the time of the pandemic, several industries and businesses were still active and going strong, such as trading in food, medical instruments, disinfection products, etc. Therefore, if an enterprise would like to start a Commercial Franchise relationship, it should prioritize considering prominent business lines as mentioned above to guide operations.

Besides, Covid 19 also shows us the importance of using technology in the process of doing business. Being restricted from doing activities and only allowed to go out in the case of absolute necessity while the virus spreads, made our daily life dependent on delivery services and online applications. Therefore, digitizing the working processes and diversifying revenue channels are both necessary preparations for businesses to avoid operations being put on hold in the future, as well as to promote commercial trade, expand their customer base, and increase profits. However, in the Commercial Franchise relationship, the Franchisee is bounded by the Franchisor on how the business organisation[3]. Therefore, the Franchisee must pay attention to thoroughly research the operation process as well as the technological applicability to the operation. Last but not least, the Franchisee must compromise with the Franchisor on specific agreements between the parties right from the beginning as well as clearly indicate it in the contract.

Learn more about the Franchisor’s information and legal status.

Currently, there are quite a few cases where the parties in the Commercial Franchise relationship “take the money and run away” when they are unable to fulfill their assigned obligations, one of the main reasons being the loss of business due to the impact of the Covid-19 pandemic. Among them is the case of investors losing money when pouring money into S.Tix Coffee[4]. The Commercial Franchise business market naturally faces more or less similar legal risks for the same reason. In order to avoid such risks and damage to its interests, the Franchisee needs to find out and confirm if the Franchisor has met all the conditions prescribed by law[5], including: has operated for 01 year, has registered Commercial Franchise activities with the competent authority, and the goods and services are subject to commercial rights.

Furthermore, the Franchisor is responsible for providing a copy of its sample Commercial Franchise contract as well as an introduction document to the intended Franchisee at least 15 working days before signing the Commercial Franchise contract[6]. The Franchisee should be aware and request the Franchisee to perform this obligation as soon as possible so that it has enough time to confirm the information provided.

Notes on “force majeure events” in the Commercial Franchise contract

Franchisees often rely on the Covid-19 outbreak as a force majeure event to ease their own burden when they are unable or unwilling to perform their contractual obligations. Current legal regulations only state the factors that an event is considered to be force majeure if all of the following conditions are satisfied: (i) is an objective event; (ii) unforeseeable; and (iii) cannot be remedied despite taking all necessary measure[7]s. As we have seen, the rapid spread of the Covid-19 pandemic is an “objective” and “unforeseen” event. Although the two factors of a force majeure event are satisfied, whether the Covid-19 pandemic is considered a force majeure event or not depends on the agreement between the parties in the contract and the factor of not being able to remedy despite taking all necessary measures. During this time, the Franchisee needs to prove that its obligations cannot be fulfilled because of the Covid-19 pandemic in order to be exempt from liability.

In the Commercial Franchising relationship, in which case would the Franchisee be entitled to invoke the Covid-19 pandemic as a force majeure event when it fails to properly perform the contractual obligations?

Case 1: the parties have agreed that the pandemic is one of the force majeure events in the contract

As analysed above, the Covid-19 pandemic is not automatically considered as a force majeure event if the Parties did not agree to so in the contract. the Franchisee must prove that their obligations cannot be performed because the outbreak occurred by providing specific documents or loss profit figures. If the two Parties have agreed to this in the contract, the risk and burden of the Franchisee will be greatly reduced. At this time, the two parties can agree to “extend the performance of contractual obligation period or refuse to perform the contract”[8]. In the event of a dispute, the agreement on force majeure events between the Parties will be the basis for the competent State authorities to compare in order to release the Franchisee from liability.

Case 2: the Parties do not have an agreement that the pandemic is one of the force majeure events in the contract

The Covid-19 pandemic is not automatically considered a force majeure event if there is no such agreement in the Commercial Franchise contract between the Parties and that event does not satisfy all three conditions for a force majeure event. In this case, the Parties must perform their obligations in accordance with what was signed in the contract and when there are any amendments and supplements, the Parties must agree to establish a written agreement and attach its original contract.

Thus, in order to be exempt from liability for the performance of contractual obligations in the event of a force majeure event, the party directly affected by the pandemic is still obliged to prove its case of exemption from liability[9]. Likewise, it also depends on the specific circumstances to assess whether the Covid-19 pandemic is a force majeure event affecting the performance of the contract or not. Specifically, in the judgment on the dispute on unilateral termination of the labour contract No. 01/2021/LD-ST[10], the Covid-19 pandemic was not considered by the Court as a force majeure event because the employer could not prove that they had used all remedial measures but still had to reduce production and reduce working places.

When entering in the Commercial Franchise contract, the Franchisee should pay close attention to the force majeure event, it is necessary to have certain anticipations for objective factors similar to the Covid-19 pandemic to minimize disputes. Moreover, when negotiating and drafting contracts, the Franchisee also needs to understand the legal provisions on liability exemption to protect its legitimate rights and interests.

In summary, businesses that wish to return to the economy in the post-Covid-19 time need to be especially cautious and have a multi-dimensional perspective to minimize risks. Adding to that is the striving effort to build a strong and flexible business that can improvise during unexpected circumstances.

[1] Article 284 Commercial Law 2005

[2] Article 11 of Decree 15/VBHN-BCT

[3] Article 284.1 of Commercial Law 2005

[4] https://congan.com.vn/song-theo-phap-luat/hotboy-stix-coffee-biet-tam-cung-hang-tram-ty-dong-huy-dong-von-trai-phep_124845.html

[5] Article 5 of Decree/VBHN-BCT

[6] Article 8.1 of Decree 15/ VBHN-BCT

[7] Article 156.1 of Civil Code 2015

[8] Artcile 296 of Commercial Law 2005

[9] Article 295 of Commercial Law 2005

[10] https://thuvienphapluat.vn/banan/ban-an/ban-an-ve-tranh-chap-don-phuong-cham-dut-hop-dong-so-012021ldst-182323