Protecting Franchisee S Right

Protecting franchisee’s right

Acknowledgements

My grateful thanks are, first of all, to my supervisors, Ass. Professor Katarina Olson, Faculty of Law, Lund University, Sweden and Dr. Nguyen Viet Ty, Faculty of Economic Law, Hanoi University of Law who having great advices and supports for my thesis.

I appreciate Dr. Vu Dang Hai Yen, who kindly offered me meaningful opportunities to ask and discuss some issues on the theme, responded to enquires, and gave me comments, suggestions and necessary information to improve my work;

I also express my thanks to the librarians working in Faculty of law, Lund University and Hanoi University of Law.

Without their kind helps and important suggestions, I could not have finished this thesis.

Lastly, my thanks are to my family who patiently supported me all the time.

Table of Contents

Acknowledgements

Table of Contents

Chapter 1 Introduction

1.1Background of the thesis

1.2Delimitation

1.3Purpose of the Thesis

1.4Methodology of the Thesis

Chapter 2: Franchise contract - Some general contents and the issues of protection for the franchisee’s interests

2.1Some general issues of contract

2.1.1The concept of contract and its characteristics

2.1.2The general principles for the conclusion of the contract

2.1.3Unfair contract

2.2Some general issues of the franchise contract

2.2.1The concept of Franchising

2.2.2Franchise contract

2.2.3The Parties of franchise contract

2.2.4The relations between nature of franchise contract and unfair contract terms

2.3The measures to protect the franchisee

2.3.1The franchisee protect his interests himself

2.3.2The protection through the rules of commercial law and competition law

2.4Conclusion chapter 1:

Chapter 3: Vietnamese Law – Status and Solutions for improvement in comparison with the Law of some European countries on Protecting the Franchisee’s Rights in Franchise Agreement

3.1The regulation on franchising in Vietnam and experience of some countries in EU on protecting the Franchisee

3.1.1Franchisee’s rights on being provided information about franchise system before signing the franchise contract

3.1.2Right to require the franchisor providing all technical assistance related to the franchise system

3.1.3Right to refuse purchase goods, material from the franchisor or the supplier selected by the franchisor if this purchase is not effect to synchronism of the franchise system

3.1.4Right to set retail price

3.2Infringement upon the franchisee’s interests – Some assessment

3.2.1Infringement upon the franchisee’s interest – Inference from the nature of franchise relationship

3.2.2Fact of infringement the franchisee’s interest

3.3Solutions for improvement Vietnamese Law on protecting Franchisee’s interest in franchising

3.3.1Improving regulations on contract to protect the franchisee’s interests.

3.3.2Improving regulations of competition to protect the franchisee’s interests.

3.4Conclusion chapter 2

Conclusion

Bibliography

Chapter 1 Introduction

1.1Background of the thesis

In recent times, commercial activities in general and franchising activity in particular are “hot” in Vietnam, specially, after Vietnam became a member of the World Trade Organization (WTO). Franchising mode has a lot of advantages such as restricting the ricks for the person who has the first time joined in the market; the low investment costs; high success ability because they do business under the successful trade name in the market.

This is the cause that lead many businessman to attend to franchising so that several trade name is developed rapidly under franchise mode in Vietnam, such as: McDonald’s, Loterria, Seven Eleven, Kentucky, Trung Nguyen Coffee, Kinh do Bakery, Pho 24, Pho Vuong, AQ Silk, Qualitea, Dilmah, Foci…

In franchise relation, the franchisor grants the franchisee the right to use franchisors' trademarks, trade names, business knows-how, business slogans, business logos and advertisements, and in return the franchisee must pay franchise fees to the franchisor. Sothat, the franchisor and the franchisee do business under a trade name, have the same quality of goods/services as well as the same service style.

Although the franchisor and the franchisee are independent in legal status and finance, the franchisee is often in disadvantage position because he does his business under the commercial right of the franchisor.

The reason of this situation comes from the unequal in access to information between the party who know clearly about the franchise system (the franchisor) and other party who almost always expects the information provided by the contract partner (the franchisee).

Besides that, the franchise contract is a kind of “joining contract” which has been drafted by the franchisor, contained the basis clauses and in fact it is exact requirements of the franchisor to the intended franchisee. Thus, these clauses normally are not the subject of negotiation among the parties. The franchisee can only decide signing or not signing the contract after considering deeply about the franchise contract form and the information that provided by the franchisor.

Furthermore, to ensure the uniform, reputation of franchise system, the competition law has ruled exceptions to permit the franchisor giving the clause that control the franchisee and it may be liked as agreement in restraint competition.

These are main causes that may lead to unfair contract terms, thus the franchisee may face the franchisor’s infringement action on franchisee’s rights.

To ensure equal fair business environment, any modern legal system must pays due attention to protecting the weaker party, to reach equality between the parties.

Thus, setting regulations to protect the franchisee’s right is important and necessary in the law on franchising of any countries.

However, in Vietnam, the law on franchise as well as regulations on the rights, obligations of the parties in franchise contract is still inadequate, incomplete. It has not really considered to protecting the franchisee’s right. This is the gap in the law that may lead to infringement action on the franchisee’s right.

In reality, franchising as well as the law on franchising has risen and developed very early, rapidly in some countries in Europe. Thus, examining and comparing between Vietnamese law and some European countries law on franchising will help Vietnam learning their legislation experience.

From analyses above, I decided examining the topic: “Protecting Franchisee’s interests in Franchise Agreement under Vietnamese Law in comparison with the Law of some European countries”

1.2Delimitation

With this topic, my thesis only focus on fours basic franchisee’s rights that are: (1) Right to be provided information by the franchisor; (2) Right to require the franchisor to provide all technical assistance related to the franchise system; (3) Right to refuse purchase goods, material from the franchisor or the third parties who is appointed by the franchisor if this purchase is not effect to synchronism of the franchise system; (4) Right to freely fix the price for his goods or services.

Thus, the regulations, precedents, articles, opinions, commentaries and franchise contract related to four franchisee’s right above in Vietnam and some European countries such as United Kingdom, France, Germany, Italy will be the research subjects of the thesis due to its topic. Because that the franchising in these European countries are quite developmental in Europe.

1.3Purpose of the Thesis

The Thesis desires to make clear some issues:

Firstly, make clear the nature of franchising activity.

Secondly, examine regulations of Vietnamese law and the law of some European countries on protecting the franchisee’s right as well as regulations to reject the un-equality between the franchisor and the franchisee.

Thirdly, examine reality of infringement the franchisee’s right which is mentioned in the thesis.

Fourthly, propose solution to improve Vietnamese law on protecting the franchisee’s right as well as on rejecting un-equality between the parties in franchise contract.

1.4Methodology of the Thesis

In order to reach to the issues identified in the purpose, the thesis applied some methods:

Enumerative and analysis methods are used to make clear the concepts of “contract”, “franchising” and “franchise contract” through finding and analyzing the different opinions/definitions about “franchising” and “franchise contract”, then concluding special characters of this commercial activity.

Following, analysis and synthetic methods are used to define the causes of unfair contract terms, infringement the franchisee’s right in franchise relationship base through analyzing the concept of the unfair term in contract and make clear the relationship between nature of franchise contract which the unfair term.

Analysis and comparative methods are used to define the content of Vietnam and European countries law related to protecting the franchisee’s right through analyzing the different rules in Vietnam and four European countries as mention in the delimitation, therefore evaluating whether or not Vietnamese law in this issueis suitable or not suitable with the nature of franchise activity.

Lastly, synthetic method is used to assess generally and propose solution to improve Vietnamese law related to research delimitation of the thesis.

Chapter 2: Franchise contract - Some general contents and the issues of protection for the franchisee’s interests

2.1Some general issues of contract

2.1.1The concept of contract and its characteristics

Likely other countries, Viet Nam pays due attention to the law of contract, because it is a legal foundation to set up the social relationships in general and the economic relationships in particular. From the legal viewpoint, contract is considered as a legal action means to enforce and to ensure the parties’ agreements. It is also mentioned as a consensus of two or more parties to harmonize their interests and to reach their certain intentions. In the context of a market economy, the development of the economic relationships may lead to the diversification of the types of contract. Among them, the franchise contract has also been considered as an important type to contribute to the success of the business system in general and of the franchise system in particular.

Relating to the concept of contract, one can realize that it has been defined in different ways. For example: According to the Napoleon Code Article 101, a contract is an agreement which binds one or more persons, towards another or several others, to give, to do, or not to do something[1]. In American, in Uniform Commercial Code (UCC), Art.1, Part 2.§1-201(11) has defined "Contract" means the total legal obligation which results from the parties' agreement as affected by this Act and any other applicable rules of law.[2]In China,Article 2, the Contract Law of the People’s Republic of China, adopted and promulgated by the Second Session of the Ninth National People's Congress March 15, 1999 ruled that “A contract” is an agreement between natural persons, legal persons or other organizations with equal standing, for the purpose of establishing, altering, or discharging a relationship of civil rights and obligations.[3]Similarly, in Vietnam, the concept of contract is defined under the Civil Code 2006 that “A civil contract” is an agreement between the parties to establish, change or terminate civil rights and/or obligations.[4]

From the above different definitions, one can see that a contract may be understood as a legal action which established rights and/or obligations for the parties through their agreements on transferring, doing or not doing something. According to those definitions, a contract is mentioned with the following characteristics:

Firstly, contract must be an agreement based on the freedom of will between the parties.

Secondly, the subject of a contract may be a certain asset, or the requirement of doing or not doing something.

Thirdly, the content of contract contains rights and obligations of the parties.

2.1.2The general principles for the conclusion of the contract

To protect the contractual parties’ benefits, and to avoid the violation on the public as well as the third party’s interests, the process of concluding a contract should base on the following major principles:

Firstly, the principle of freedom of contract, and do not violate the law and social moral. This principle recognizes the parties’ freedom in entering into and deciding the content of the contract. This principle is stipulated in law of many countries in the world. However, one may also realize that the freedom of contract cannot ensure fairness. In fact, there are many cases where the contracts have been used to bind one party in the situation of depending on the other, especially in the relationships between the weak parties on the one hand and the stronger partners on the other hand. In those situations, it will be lack of fairness in negotiation. To ensure the fairness, therefore, the content of contract should be adjusted by law. This is a main reason for the need to limit the principle of freedom of contract in general and in franchise contract in particular.

Secondly, the principle of equality. All the parties into a contract are equal in legal position and under the same protection by law. Even in the relation between the State with other parties, the State must also obey the law to implement exactly, completely all the terms of contract. If the State violates its contractual obligations it also bears its liability as other parties.

Thirdly, the principle of good faith. This is an important principle in contract relation, especially in economic relation. Likely law of other countries and international organization, Vietnamese law considers this is necessary principle in modern business environment. This principle expresses on several aspects such as, helping and creating the best conditions for the partner, mitigating damages that may occur to the partner in performance of the contract.

Forth, the principle of honesty and righteousness. This principle emphasizes righteousness and honesty of all parties in process negotiation and performance the contract. It usually expresses in some aspects such as provided fully completely, clearly, exactly information about the goods or services which are the subjects of the contract. In franchise relationship, this is a very important principle; it is expressed the most clearly in the franchisor’s duty of providing the necessary information about the franchisor and the franchise system for the franchisee before concluding the contract.

2.1.3Unfair contract

Unfair contract is a kind of contract drafted by one party, contains unfair terms relating to the parties’ rights and obligations. Other party, therefore, is very difficult to negotiate these terms. This type of contract usually exists in relation between a strong party and a weaker party.

As to unfair contract, it is recognized by the EC law that: “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer”[5]

Unfair term is usually occurred in “joining contract”. It means that the contract has already drafted by one party, the other party only decides “join” or “not join”, even they has not aware all clauses in the contract, or otherwise some information is one-sided, difficult to check. To protect legal rights and interests of the weaker party, Vietnamese law and many countries in the world has regulations to rule out the abuse of power by stronger party and to ensure “the principle of equality and freedom of contract”. For example, the UK has regulations on Unfair Contract Terms Act 2005; the EU Council has adjusted this matter in at Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts; Vietnam has Ordinance on protecting customer to reject and not recognize validity of unfair terms.

Unfair contract terms often exist in customer contract such as the contract between the suppliers (to supply such things as electricity, water, telephone, internet services and other goods) with their customers.

2.2Some general issues of the franchise contract

2.2.1The concept of Franchising

Franchise is a mode of popular business in the world, originated in some of Western countries. Most of countries are now interested in franchise, because it may bring a lot of economic benefits, such as helping businessman to develop their business system, strengthen the prestigeand trade-name by money of other businessman; or minimizing the risk for businessman who the first time joins market and desire to run business under a famous, successful trade-name. However, to govern this kind of business, it is supposed that the concept of “franchise” should be clarified by law.

In Vietnam, franchise is a new concept in business and legal practice. After finishing of Vietnam War since 1975, this kind of business was present in Vietnam for the first time at the end of 1990s beginning with an investment in supplying water filter equipment. However, Vietnamese market at that time was not familiar with franchise activity. Furthermore, the enterprises which applied the franchise mode were not able to establish their position in the market because of some following reasons : Firstly, in this time, the regulation on intellectual property was still inadequate, executing this law met a lot of difficulty, special in protecting the subject of intellectual property right; Secondly, social awareness about intellectual property still has limitation, so the businessman often trend to infringement the intellectual property right of other, if the franchisor want to apply franchise mode, he may meet difficulty, the franchisee will not havethe feeling of safenesswhen the subject of intellectual property right which franchised may be violated easily; Thirdly, up to year of 1986, Vietnam admitted enterprise which is owned by private person, so these enterprises met a lot of difficulty in making a strong trade-name that can franchise successfully, therefore this initial franchising system rapidly fallen into failure.

The success of franchising activities in Vietnam has been marked by the success of the Trung Nguyen Cafe Company. Running this mode of business, Trung Nguyen Cafe has established a franchise system with more 500 outlets throughout Vietnam and some outlets in other countries, such as Thailand, Campuchia, Singapore, Japan, and the US.

From the legal angle, franchising activities have been recognized in Vietnamese legislation for the first time since 1998. The initial regulations on this kind of business were set forth in the Circular No. 1254/1998/TT-BKHCN promulgated by the Ministry of Science and Technology to provide the guidance for the Decree 45/1998/ND-CP on technology transfer. It then continues to be regulated by the Decree No. 11/2005/NĐ-CP and the Circular No. 30/2005/TT-BKHCN on technology transfer. Under those legal documents, franchising activities were regarded as a form of technology transfer only. However, until the promulgation of the Vietnamese Commercial Law (2005), franchise has already been recognized as an independent commercial activity.