SOLVING DISPUTES IN COMMERCIAL FRANCHISE CONTRACTS - OTIS LAWYERS

Currently, with the trend of an increasingly expanding and developing economy, there are many forms of business being implemented. Among them, franchise activities are receiving considerable attention. However, accompanying this is the risk of disputes in franchise contracts. Let's now explore these disputes together with OTIS LAWYERS to gain a better understanding and find ways to resolve disputes in commercial franchise contracts.

Common disputes in franchise contracts

Today, when parties enter into franchise contracts, the occurrence of disputes in franchise contracts is one of the risks that parties need to be wary of. According to the current situation, franchisors and franchisees often encounter the following disputes in franchise contracts:

Disputes about prices, franchise fees

According to the provisions of Article 11 of Decree No. 35/2006/ND-CP dated March 31, 2006 of the Government, when signing franchise contracts, if the parties choose to apply Vietnamese law, the franchise contract may contain the following main contents:

• Content of the franchise.
• Rights, obligations of the franchisor.
• Rights, obligations of the franchisee.
• Prices, periodic franchise fees, and payment methods.
• Contract term.
• Extension, termination of the contract, and dispute resolution.

Therefore, regarding the fourth provision, periodic franchise fees will be the fee that the franchisee pays to the franchisor periodically as agreed upon by the parties.

However, during the operation after signing the contract, since the periodic fee is usually a fixed amount, the profit from franchise activities will fluctuate over time. Therefore, issues may arise such as the franchisee operating at a loss, ineffective operations, etc., making it very difficult to maintain the periodic franchise fee.

Or for the franchisor, when the revenue of the franchisee increases significantly, the periodic franchise fee compared to the profit from the franchised brand becomes increasingly disparate, the franchisor also begins to desire to increase the periodic franchise fee.

Thus, disputes in franchise contracts between the franchisor and the franchisee regarding changes in the periodic franchise fee to be suitable for the needs and circumstances of each party can easily arise.

Disputes regarding the transfer of commercial rights

According to the provisions of Article 15 of Decree No. 35/2006/ND-CP dated March 31, 2006 of the Government, the franchisee may transfer commercial rights to another intended recipient when meeting the following conditions:

a) The intended recipient meets the provisions of Article 6 of this Decree;

b) Obtaining the consent of the franchisor who granted the commercial rights to them (hereinafter referred to as the direct franchisor).

In which, the direct franchisor has the right to accept or reject the transfer of commercial rights of the franchisee.

However, according to the provisions of Clause 3 of Article 15, the direct franchisor is only allowed to refuse the transfer of commercial rights of the franchisee for one of the following reasons:

a) The intended recipient cannot fulfill the financial obligations that the intended recipient must perform according to the franchise contract;

b) The intended recipient has not met the selection standards of the direct franchisor;

c) The transfer of commercial rights will significantly disadvantage the current franchise system;

d) The intended recipient does not agree in writing to comply with the obligations of the franchisee under the franchise contract;

đ) The franchisee has not fulfilled the obligations to the direct franchisor, except when the intended recipient commits in writing to perform those obligations on behalf of the franchisee.

It can be seen that most of the reasons that the direct franchisor is allowed to refuse belong to the conditions and circumstances of the intended recipient and the original franchisee, rather than the subjective will of the direct franchisor.

Thus, there will be cases where the direct franchisor does not want the intended recipient to transfer their commercial rights but has no appropriate reason to refuse the transfer of commercial rights. From there, the parties will easily generate disputes in franchise contracts regarding the transfer of commercial rights to another party.

Disputes about providing technical assistance related to the franchise system

According to the provisions of Clause 2 of Article 287 of the 2005 Commercial Law, when entering into franchise contracts, the franchisor will have the obligation to provide initial training and regularly provide technical assistance to the franchisee to operate according to the franchise system.

At the same time, according to the provisions of Clause 1 of Article 288, the franchisee also has the right to request the franchisor to provide full technical assistance related to the franchise system;

However, the law does not have specific provisions on how much technical assistance should be provided. Therefore, when signing franchise contracts, disputes between the parties are likely to arise concerning the provision of technical support.

In that case, there will be cases where the technical assistance provided by the franchisor does not meet the needs of the franchisee, but at the same time, the franchisor does not agree to provide further assistance.

Disputes about accepting control, supervision, and guidance from the franchisor; compliance with requirements on design, arrangement of sales locations, provision of services by the franchisee

According to the provisions of Article 14 of Decree No. 35/2006/ND-CP dated March 31, 2006 of the Government, the franchisee must accept the control, supervision, and guidance from the franchisor, and comply with the requirements on the design, arrangement of sales locations, provision of services by the franchisor.

However, according to the provisions of Clause 2 of Article 7, Article 8, Clause 1 of Article 9, and Article 10, Decree No. 35/2006/ND-CP dated March 31, 2006 of the Government, the franchisor must set out specifically and clearly the control, supervision, and guidance to be carried out by the franchisee, as well as the requirements on the design, arrangement of sales locations, provision of services by the franchisee.

However, as mentioned above, there are no specific provisions in the law on how much control, supervision, and guidance should be carried out by the franchisor, nor are there any provisions on how much the franchise needs to comply with the requirements on the design, arrangement of sales locations, provision of services by the franchisor. Therefore, disputes between the parties concerning the aforementioned issues are likely to arise.

Dispute over business secrets retention

According to the provisions of Article 289(4) of the 2005 Commercial Law, when signing a commercial franchise contract, the recipient party shall have the obligation to keep confidential the business secrets that have been franchised, even after the commercial franchise contract has ended or been terminated.

However, in reality, there have been many cases where, even though the commercial franchise contract has ended or been terminated, the recipient party will use the business secrets to generate profits for themselves.

As a result, disputes in commercial franchise contracts due to the recipient party's illegal acts of violating the law by using franchised business secrets may arise.

Dispute over the use of trademarks, trade names, business slogans, business symbols, and other intellectual property rights (if any) or the franchise system of the franchisor when the commercial franchise contract ends or is terminated

According to the provisions of Article 289(5) of the 2005 Commercial Law, when signing a commercial franchise contract, when the contract has been terminated or ended, the recipient party shall have the obligation to stop using trademarks, trade names, business slogans, business symbols, and other intellectual property rights (if any) or the franchise system of the franchisor when the commercial franchise contract ends or is terminated.

However, similar to disputes in commercial franchise contracts regarding the retention of business secrets, there may be cases where, even though the commercial franchise contract has ended or been terminated, the recipient party continues to use trademarks, trade names, business slogans, business symbols, and other intellectual property rights.

As a result, disputes in commercial franchise contracts between the parties due to violation of this legal provision may arise.

Dispute over the extension of the term, refusal to perform the contract in cases of force majeure

According to the provisions of Article 296(1) of the 2005 Commercial Law, in cases of force majeure, the parties may agree to extend the term of performing the contract; if the parties do not agree or cannot agree, the term of performing the contract shall be extended for a period equal to the time of the force majeure event plus a reasonable time to remedy the consequences.

At the same time, according to the provisions of Article 296(2), in cases where the extension exceeds the time limits prescribed in this Article, the parties have the right to refuse to perform the contract, and neither party has the right to claim compensation for damages from the other party.

As a result, there may be cases where while one party is experiencing a force majeure event and is making efforts to remedy it, the other party unexpectedly refuses to perform the contract on the grounds that the other party has exceeded the time limits as prescribed by law.

This will lead to disputes in commercial franchise contracts when the terminated party does not accept the actions of the terminating party, citing efforts to remedy force majeure and requesting an extension or compensation as required by law. However, the other party refuses to extend the deadline and decides to refuse to perform the contract.

Methods of resolving disputes in commercial franchise contracts. Advantages and disadvantages of each method

According to the provisions of Article 317 of the 2005 Commercial Law, when disputes arise in commercial franchise contracts, the parties may choose the following methods of dispute resolution:

• Negotiation between the parties.
• Mediation between the parties by a third party, organization, or individual agreed upon by the parties as a mediator.
• Resolution by Arbitration or Court.

Depending on the different forms, these methods will have the following advantages and disadvantages:

Negotiation, Mediation

This is the most chosen method of resolving disputes in commercial franchise contracts today. According to the provisions of Article 7(2) of the 2015 Civil Code, in civil relationships, reconciliation between the parties in accordance with the law is encouraged.

This is a method of dispute resolution in which both parties will negotiate, mediate with each other without the intervention of a third party or any legal authority. Therefore, this method will have the following advantages and disadvantages:

Advantages:

– Firstly, since this is a method voluntarily conducted by the parties, the process does not require any specific procedures or formalities. The parties can completely decide on the procedure and method of resolution.

– Secondly, this method of dispute resolution is entirely internal to the parties, so the dispute content and information between the parties will be entirely internal, without worrying about disclosure.

– Thirdly, with this method, the parties can express goodwill towards each other, demonstrate long-term cooperation without the need for legal intervention when disputes arise.

– Fourthly, according to legal provisions, the parties have the freedom to agree with each other if not violating the law. Therefore, when negotiating, mediating with each other, the parties can completely choose the direction of dispute resolution according to the will of the parties without being forced to follow legal provisions, as long as that agreement does not violate the law.

Disadvantages:

Firstly, since this is a method conducted voluntarily and internally between the parties, there will be no legal guarantee and oversight.

Secondly, negotiation, mediation can only be conducted when all parties agree to implement this method, it cannot be unilaterally implemented.

Thirdly, this method only applies and succeeds when all parties come to a final decision and all parties agree.

Commercial Arbitration

For the method of mediation between the parties by a third party, organization, or individual agreed upon by the parties as a mediator, choosing commercial arbitration is currently a method that many parties are aiming for. Therefore, this method will have the following advantages and disadvantages:

Advantages:

Firstly, the commercial arbitration procedure will be simpler, faster than resolving through a court, but still be legally guaranteed.

Secondly, the parties can be proactive in terms of time, place of dispute resolution, without going through many trial levels.

Thirdly, the parties have the right to freely choose the arbitration center, arbitrators according to their own preferences, without territorial restrictions.

Fourthly, the principle of non-public trial, information about disputes of the channels is kept confidential, somewhat helping the parties maintain their reputation.

Fifthly, for disputes where at least one party is a foreign-invested enterprise, the language used in arbitration proceedings is agreed upon by the parties. In cases where the parties do not agree, the language used in arbitration proceedings is determined by the Arbitration Council.

Disadvantages:

Firstly, the cost for resolving disputes through commercial arbitration is quite high, depending on the value of the dispute.

Secondly, to conduct dispute resolution through commercial arbitration, the parties must agree to resolve the dispute by arbitration with each other.

Thirdly, the arbitral award is also influenced by the voluntary nature of the parties.

Court

Currently, it can be said that resolving disputes in commercial franchise contracts through people's courts is the most stable method. Accordingly, the parties will resolve disputes through litigation in the court. This method will have the following advantages and disadvantages:

Advantages:

Firstly, the people's court is a state agency to resolve disputes. Therefore, when the court makes a decision on dispute resolution, that decision will be enforced by the coercive power of the State through the Enforcement Agency.

Secondly, the cost of resolving disputes in commercial franchise contracts will be much lower than resolving through commercial arbitration.

Thirdly, resolving disputes in commercial franchise contracts through the court does not require the consent of the other parties, one of the parties can unilaterally file a lawsuit in court.

Disadvantages:

Firstly, resolving disputes in commercial franchise contracts through the court will strictly comply with the legal provisions and procedures, litigation procedures. Therefore, the time for resolving disputes will be prolonged, going through many procedures.

Secondly, according to legal provisions, the court will be judged publicly, so it will not ensure the confidentiality of business secrets as well as the reputation of the parties.

Thirdly, the process of litigation and dispute resolution must go through many stages, multiple trials to reach a final decision, making the dispute resolution process prolonged.

Fourthly, the court's decisions must be based accurately on legal provisions, reducing the flexibility in choosing dispute resolution options in commercial franchise contracts.

For any questions or comments, please contact:

OTIS AND PARTNERS LAW FIRM

Office address: 2nd Floor, CT3 Building, Yen Hoa Park View Urban Area, No. 3 Vu Pham Ham Street, Yen Hoa Ward, Cau Giay District, Hanoi

Email: [email protected]

Hotline: 0987748111