Update day: August 24 , 2023

Key terms in the Franchise Agreement (Part 2)

Following the series of articles about the Franchise agreement, in this article, we will share the remaining key terms in the Franchise agreement that the parties should keep in mind.

Accordingly, the terms of manual, business secret, franchise fees – method of payment, rights, and obligations of the parties, report, unilateral termination of agreement, penalty, etc. need to be established in the franchise agreement.

Table of contents:

1. Term of franchise fees

The issues of price, franchise fees, and method of payment are the ones that take a lot of time for the parties to negotiate in the franchise transaction. With this term, the parties need to clarify the following contents: initial franchise fees, and monthly franchise fees (if any), as usual in some cases, the parties agree on an additional franchise fee that is paid monthly based on net profit received.

In addition to the franchise fees, incurred fees such as training fees and other relevant fees are specifically recorded in this term. Although these fees may not have been incurred at the time of establishing the agreement, to implement the agreement smoothly, the parties should anticipate the incurred fees and record the method of implementation in the agreement, instead of recording “the parties will agree at the time of incurring”.

2. Term of the Franchisor’s Rights and obligations

This term will fully record the rights of the franchisor, typically as:

The right to require the franchisee to comply with the regulations about display, operation management, and quality of the product with the criteria set by the franchisor. The right to periodically and irregularly inspect the activities of the franchisee to ensure the franchisee is complying with the criteria agreed by the parties, the right to request reports, the right to suspend or unilaterally terminate the agreement when the franchisee violates, and the other relevant rights.

Regarding obligations, depending on the model and franchised object, the parties record the franchisor’s obligations in the agreement. Accordingly, some of the franchisor’s obligations are: providing materials or materials’ information, suppliers, recipes, products’ standards, training, guidance documentation, information confidentiality, obligation to ensure the franchisee’s normal operation, to avoid unfair competition practices, conflicts of interest, etc.

3. Term of the Franchisee’s Rights and obligations

If you are a franchisee, you need to pay special attention to the franchisor’s legitimate ownership of the franchised object, which must be recorded in legal documents according to the regulations of the law. In order to operate smoothly, maintain competition, the franchisee has the right to require the franchisor to maintain fair competitiveness between the franchisees in the same system. Besides, the scope of use, the franchisee’s rights to trademarks, images, slogans, etc are considered as important contents that the franchisee needs to keep in mind to maintain the franchisee’s normal operation during the agreement term.

Regarding obligations, as usual, the franchise agreement has some basic obligations such as: information confidentiality, commitment not to change any relevant contents of the franchised object, financial commitment and necessary licenses so that the franchisee operates legally, obligations to report, obligations to comply with the advertising regulations to ensure fair competition between the franchisees in the same system, obligations to be punished and compensated when there is a breach of agreement, responsibility when terminating the franchise agreement, etc. The franchisee’s obligations will be determined in detail for each franchised object, for example:

If the franchised object is a beverage shop, the franchisee’s obligations need to be more detailed at these points: materials, recipes, compliance with guidance in provided documentation, obligations of a certificate of food hygiene and safety, obligations of preservation, etc.

In addition to the above terms, to maintain the parties’ compliance with the committed contents of the franchise agreement, the parties need to pay more attention to the terms of penalties for breach of agreement, compensation, unilateral termination of agreement, dispute settlement, applicable law, force majeure events, agreement interpretation, etc.

In the process of consulting for the franchise activities from abroad to Vietnam, we always recommend the parties fully record the agreement. Although we understand that the establishment of a franchise agreement full of contents sometimes prolongs the negotiating time of the parties, the agreement is a legally valid document to guide action, and the behavior of each party during the implementation of the agreement, so fully recording will ensure the parties’ interests.

Time of writing: 01/07/2023

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer at info@cdlaf.vn

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