The Role and Influence of Vietnam’s Franchise Law on the Development of Franchising: a Multiple Case Study
Nguyen Ba Binh
Supervisor: Professor Andrew Terry
Submitted in total fulfillment of the requirements for the Degree of Doctor of Philosophy at the University of New South Wales
Research undertaken in the Australian School of Taxation and Business Law in the Australian School of Business at the University of New South Wales
September 2012
Originality Statement
‘I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project’s design and conception or in style, presentation and linguistic expression is acknowledged.’
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ACKNOWLEDGMENT
Doing a PhD research is such a long and lonely journey and this thesis would not have been possible without the consideration, support and encouragement of many.
First and foremost, I would especially like to express my sincere and great thanks to my supervisor, Professor Andrew Terry. His support, guidance and encouragement have been invaluable in my research. His kindness and friendliness has helped me feel more comfortable in my PhD research and less homesick during such a long time pursuing this research so far from home. He has treated me not only as his student but also as his son. I cannot imagine that I would have a better supervisor, and he is an excellent example for me not only in working but also in living.
I also thank all the academic and administrative staff in the Australian School of Taxation and Business Law at the University of New South Wales, particularly Professor John Taylor, Professor Michael Walpole, Bill Butcher, Dr Jenny Buchan, Bibi Moore and Tim Neems, for their kindness and support. It has been also my pleasure to share an office with Pornchai Wisuttisak, my fellow PhD student. Our interactive discussions on PhD research have been very helpful to me.
I greatly acknowledge the Vietnamese Government and the University of New South Wales for providing me with a scholarship. My appreciation is extended to the leaders and colleagues at Hanoi Law University and at Vietnam’s Ministry of Justice for their support and encouragement.
On the data collection, I am in debt to my friends, Nguyen Hong Chung, Dang Kim Khoi, Phi Thi Quynh Nga, and Dr Dang Kim Son from Vietnam’s Ministry of Rural and Agricultural Development, who helped me in contacting the interviewees. I am grateful to the interviewees who shared their insights on franchising and Vietnam’s Franchise Law. I would like to thank Pham Dinh Thuong, Associate Director of the Legal Department at Vietnam’s Ministry of
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Industry and Trade, and Hoang Xuan Bac, former Associate Director of the Legal Department at Vietnam’s Ministry of Industry and Trade, for their kind help in relation to the collection of material and information about Vietnamese laws.
To my best friends, Nguyen Hong Chung, Nguyen Trong Hiep, Nguyen Hoang Phuong, Nguyen Ba Son, Ngo Thanh Chung and Vu Hong Hanh, thank you so much for always helping, encouraging and trusting me. Many thanks also go to all fellow Vietnamese students and their families in Australia, current and past, for their help and friendship during my PhD time. Special thanks to Luu Tu Anh and Dr Dang Xuan Hop, Partner at Allens Arthur Robinson (Hanoi, Vietnam), who initially introduced me to my supervisor.
My deep gratitude goes to my parents, my parents-in-law, my uncle - Nguyen Ba Dien, my aunt - Cao Thi Vinh, my brothers and sister, my brothers-in-law and sisters-in-law, and my cousin - Nguyen Hung Cuong, who always provide me with their eternal affection.
I would especially like to express my deepest gratitude and appreciation to my wife, Tran Thi Thu Thuy, and my daughter, Nguyen Thu An, for their unconditional and endless love, encouragement, and patience during my study abroad at UNSW.
This thesis is dedicated to my late grandparents who experienced difficult times in Vietnam when many people died as a result of wars and continuous poverty. They always believed that learning would help their children and grandchildren have a better life. The special memories of them during my childhood, particularly of my late grandmother who was very intelligent but unfortunately did not have chance for education, continue to inspire me.
Nguyen Ba Binh 19 September 2012
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ABSTRACT
Franchising is an increasingly popular business expansion strategy. In its contemporary business format mode it is a method of business operation which has revolutionised the distribution of goods and services in virtually all industry sectors in most countries. The late development of franchising in Vietnam has been the result of the late development of the economic and legal system necessary to support it. The Doi Moi reforms in 1986 introduced a market economy which is a necessary prerequisite for the development of franchising - but the development of the franchise sector was constrained by the lack of a clear legal framework. Franchising was not recognised as a discrete business relationship and there were both legal and commercial challenges to its implementation.
As part of its extensive law modernisation process preparatory to WTO accession in January 2007 Vietnam introduced a dedicated franchise law which provided the legal infrastructure for the orderly development of its franchise sector. The Franchise Law introduced in 2006 was the turning point in the development of franchising in Vietnam. It has been the Government’s response to the demand for a definitive legal framework for franchising through the introduction of the Franchise Law which has led to the adoption of the franchising strategy by local and international entrepreneurs.
This thesis investigates the role of the Franchise Law in the development of franchising in Vietnam. It reports the result of a qualitative multiple case study which suggests that although the Franchise Law is a necessary prerequisite for the healthy development of franchising in Vietnam it is not an exclusive factor. Social, cultural, commercial and economic factors, and legal enforcement issues, also play an important role in the adoption of franchising. The thesis also suggests that the comprehensive western business format franchise strategy is not necessarily the most appropriate model for Vietnam’s developing franchise sector.
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LIST OF PUBLICATIONS
Book Chapter Nguyen Ba Binh, 'Rules Governing International Franchising' in Surya P. Subedi (editor) International Trade and Business Law (2012) (in both English and Vietnamese), the People’s Public Security Publishing House. This book was funded by European Union’s Multilateral Trade Assistance Project III for Vietnam.
Government Reports Nguyen Ba Binh, A Critical Assessment of the Franchise Dedicated Legal Framework in Vietnam and the Role of Vietnam’s Ministry of Industry and Trade in Administering Franchising (in Vietnamese), 2012 Report to Vietnam’s Ministry of Industry and Trade, presented at the Workshop on “Franchising: Opportunities and Challenges” held by Vietnam’s Ministry of Industry and Trade and the USAID (Ho Chi Minh City, Vietnam, 12 June 2012).
Pornchai Wisuttiisak and Nguyen Ba Binh, Competition Law in ASEAN Countries (Thailand, Singapore, and Indonesia) (in both English and Vietnamese), 2010 Report to Vietnam’s Ministry of Justice.
Journal Articles Nguyen Ba Binh and Andrew Terry, ‘Good Morning Vietnam! Opportunities and Challenges in a Developing Franchise Sector’, (2011) 18 Journal of Marketing Channels.
Andrew Terry and Nguyen Ba Binh, ‘Vietnam’s New Regulatory Regime for Franchising’, (2010) LAWASIA Journal.
Nguyen Ba Binh, ‘Prior Disclosure under Vietnam’s Law (in Vietnamese)’, Legislative Research Journal - Parliament Office of Vietnam, No. 2(163), 2010.
Nguyen Ba Binh, ‘International Franchise Agreements under Vietnam Law (in Chinese)’, Law Edition Journal of Yunnan University, No.5, 2009.
Conference Papers Nguyen Ba Binh and Andrew Terry, ‘Meeting the Challenges to Franchising in Developing Countries: The Vietnamese Experience’, Paper at the 27th Annual
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International Society of Franchising Conference (Zhuhai, China, 13-16 March 2013) (submitted for review).
Nguyen Ba Binh and Andrew Terry, ‘The Franchising Road to Integration and Sustainable Development: The Role of Vietnam’s Franchise Law’, Paper at the 4th International Conference on Vietnamese Studies “Vietnam on the Road to Integration and Sustainable Development” (Hanoi, Vietnam, 26-28 November 2012) (forthcoming).
Nguyen Ba Binh and Andrew Terry, ‘Franchising in Developing Countries’, Paper at the 2012 SIBR Conference on Interdisciplinary Business & Economics Research (Bangkok, Thailand, 7-9 June 2012).
Pornchai Wisuttisak and Nguyen Ba Binh ‘ASEAN Competition Law and Policy Toward Trade Liberalisation and Regional Market Integration’, Paper at the ICIRD 2012 Conference "Towards an ASEAN Economic Community (AEC): Prospects, Challenges and Paradoxes in Development, Governance and Human Security” (Chiang Mai, Thailand, 28-29 July 2012).
Nguyen Ba Binh and Andrew Terry, ‘The Development of Franchising in Vietnam’, Paper at the 12th Westlake International Conference on SMB (Hangzhou, China 23-26 October 2010).
Nguyen Ba Binh and Andrew Terry, ‘Prior Disclosure Obligations under Vietnam’s Franchise Law and International Comparisons’, Paper at the 22nd Annual Conference of LAWASIA (Ho Chi Minh, Vietnam 9-12 November 2009).
Seminar Paper Nguyen Ba Binh and Andrew Terry, ‘Vietnam’s Franchise Law: A Critical Assessment and International Comparisons’, Paper at the 2nd Vietnamese Legal Studies Graduate Student Workshop on “Researching and Writing: Vietnamese Legal Change” (University of Melbourne, Australia, 16 December 2010).
Magazine Article Nguyen Ba Binh and Andrew Terry, ‘Franchising in Vietnam: Relatively New but Undoubtedly Promising (in Vietnamese)’, (September 2011) Vietnam Franchise World.
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Chapter 6 of this thesis - ‘The Development of Franchising in Vietnam’ - adapts material that has been published as ‘Good Morning Vietnam! Opportunities and Challenges in a Developing Franchise Sector’, (2011) 18 Journal of Marketing Channels.
Chapter 7 of this thesis - ‘The Regulation of Franchising in Vietnam’ - adapts material that has been published as ‘Vietnam’s New Regulatory Regime for Franchising’, (2010) LAWASIA Journal ‘Vietnam’s Franchise Law: A Critical Assessment and International Comparisons’, Paper at the 2nd Vietnamese Legal Studies Graduate Student Workshop on ‘Researching and Writing: Vietnamese Legal Change’ (University of Melbourne, Australia, 16th December 2010).
Chapter 8 - ‘Case Study Methodology and Profile of Selected Cases’ - and Chapter 9 - ‘Case Study Analysis and Findings’ - of this thesis adapt material that has been published as ‘Franchising in Developing Countries’, Paper at the 2012 SIBR Conference on Interdisciplinary Business & Economics Research (Bangkok, Thailand, 7-9 June 2012).
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TABLE OF CONTENTS
ORIGINALITY STATEMENT COPYRIGHT STATEMENT AUTHENTICITY STATEMENT ACKNOWLEDMENTS ABSTRACT LIST OF PUBLICATIONS TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES LIST OF ABBREVIATIONS
PART ONE ...... 1 INTRODUCTION AND LITERATURE REVIEW ...... 1
CHAPTER ONE ...... 2 INTRODUCTION ...... 2 1.1 RESEARCH BACKGROUND ...... 2 1.1.1 Franchising ...... 2 1.1.2 Franchising in Developing Countries ...... 4 1.1.3 Regulating Franchising ...... 5 1.1.4 Franchising in Vietnam...... 7 1.2 RESEARCH OBJECTIVES AND QUESTIONS ...... 9 1.3 RESEARCH METHODOLOGY ...... 11 1.4 THESIS STRUCTURE ...... 12
CHAPTER TWO ...... 16 FRANCHISING: NATURE, DEVELOPMENT AND REGULATION ...... 16 2.1 INTRODUCTION ...... 16 2.2 FRANCHISE: CONCEPT AND GROWTH ...... 16 2.2.1 The Franchise Concept ...... 16 2.2.2 The Growth of Franchising ...... 20
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2.3 EXPLANATIONS FOR THE DEVELOPMENT OF FRANCHISING...... 23 2.3.1 The Explanations for the Development of Franchising at the Macro Level .... 23 2.3.2 The Explanations for the Development of Franchising at the Organisational Level ...... 25 2.3.3 The Explanations for the Development of Franchising at the Individual Level ...... 29 2.4 INTERNATIONAL FRANCHISING ...... 31 2.4.1 Explanations for International Franchising ...... 32 2.4.2 International Expansion Strategies of Franchising Companies ...... 37 2.4.3 Entry Mode Considerations for Foreign Franchisors ...... 43 2.5 FRANCHISE REGULATION ...... 46 2.5.1 The Nature of the Franchise Relationship and the Challenges for Regulators ...... 46 2.5.2 The Rationale for the Introduction of Franchising Regulation ...... 52 2.5.3 The Regulatory Strategies ...... 55 2.5.4 Regulating Franchising Internationally ...... 62 2.6 CHAPTER CONCLUSION...... 64
PART TWO ...... 65 THE ENVIRONMENT FOR FRANCHISING IN VIETNAM ...... 65
CHAPTER THREE ...... 66 THE ECONOMIC, SOCIAL AND CULTURAL CONTEXT FOR FRANCHISING IN VIETNAM ...... 66 3.1 INTRODUCTION ...... 66 3.2 SOCIAL AND CULTURAL CHARACTERISTICS ...... 66 3.2.1 Geography ...... 66 3.2.2 History ...... 68 3.2.3 Population and Ethnic Groups ...... 69 3.2.4 Language, Religion and Culture...... 70 3.3 ECONOMIC ENVIRONMENT ...... 74 3.3.1 From a Centrally Planned Economy to a Socialist Oriented Market Economy ...... 74
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3.3.2 From Isolation to WTO Membership ...... 76 3.3.3 The Contemporary Economic Environment ...... 79 3.3.3.1 Recognition of the Role of the Private Economic Sector and the Equitisation of State Owned Enterprises ...... 79 3.3.3.2 Foreign Investment ...... 83 3.3.3.3 Economic Performance ...... 86 3.3.3.4 Commercial Challenges for Businesses ...... 87 3.4 CHAPTER CONCLUSION...... 88
CHAPTER FOUR ...... 90 THE LEGAL CONTEXT FOR FRANCHISING IN VIETNAM AND THE TRANSITION TO “NHA NUOC PHAP QUYEN” (A LAW- BASED STATE) ...... 90 4.1 INTRODUCTION ...... 90 4.2 THE MAJOR CHARACTERISTICS OF VIETNAM’S LEGAL SYSTEM PRIOR TO THE DOI MOI REFORMS ...... 90 4.3 THE CONTEMPORARY LEGAL SYSTEM ...... 94 4.3.1 The Changing Role of Law: Building a Law-Based State...... 94 4.3.2 State Structure ...... 98 4.3.3 Legislation ...... 106 4.3.4 The Role of the Communist Party of Vietnam and Its Relationship with the State ...... 110 4.3.5 Dispute Resolution Mechanisms for Commercial Conflicts ...... 113 4.3.5.1 Litigation and Judicial Independence ...... 113 4.3.5.2 Arbitration ...... 116 4.3.6 Legal Enforcement ...... 119 4.4 CHAPTER CONCLUSION...... 125
CHAPTER FIVE ...... 126 THE UNDERLYING COMMERCIAL LEGAL FRAMEWORK FOR FRANCHISING IN VIETNAM ...... 126 5.1 INTRODUCTION ...... 126 5.2 THE CONTEMPORARY COMMERCIAL LEGAL FRAMEWORK ...... 129 5.3 CONTRACT LAW ...... 133
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5.3.1 Regulation of Contracts Prior to 1 January 2006 ...... 133 5.3.2 Regulation of Contracts Since 1 January 2006 ...... 138 5.3.2.1 The 2005 Civil Code ...... 138 5.3.2.2 The 2005 Commercial Law ...... 142 5.4 REGULATION OF ENTERPRISES ...... 143 5.4.1 Pre-2005 Law on Enterprises ...... 143 5.4.2 The 2005 Law on Enterprises ...... 145 5.5 REGULATION OF FOREIGN INVESTMENT ...... 149 5.6 REGULATION OF INTELLECTUAL PROPERTY ...... 151 5.7 REGULATION OF TECHNOLOGY TRANSFER ...... 157 5.8 REGULATION OF COMPETITION ...... 162 5.9 CHAPTER CONCLUSION...... 165
PART THREE ...... 167 DEVELOPMENT AND REGULATION OF FRANCHISING IN VIETNAM ...... 167
CHAPTER SIX ...... 168 THE DEVELOPMENT OF FRANCHISING IN VIETNAM ...... 168 6.1 INTRODUCTION ...... 168 6.2 STATISTICS AND DATA SOURCES ...... 170 6.3 THE DEVELOPMENT OF FRANCHISING IN VIETNAM PRIOR TO THE INTRODUCTION OF THE FRANCHISE LAW ...... 171 6.3.1 The Introduction of the Franchise Concept to Vietnam ...... 171 6.3.2 The Adoption of Franchising by Domestic Companies ...... 172 6.3.3 A Decade of Slow and Constrained Franchising Development ...... 174 6.4 THE DEVELOPMENT OF FRANCHISING IN VIETNAM SINCE THE INTRODUCTION OF THE FRANCHISE LAW ...... 176 6.4.1 Steady Increase of Franchise Systems and Outlets ...... 176 6.4.2 Substantial Sales Growth and Spread of Franchising over Different Sectors ...... 180 6.4.3 Developing Franchising Expertise ...... 182
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6.5 THE CHALLENGES AND OPPORTUNITIES FOR FRANCHISORS IN VIETNAM ...... 184 6.6 CHAPTER CONCLUSION...... 190
CHAPTER SEVEN ...... 192 THE REGULATION OF FRANCHISING IN VIETNAM ...... 192 7.1 INTRODUCTION ...... 192 7.2 THE REGULATION OF FRANCHISING PRIOR TO VIETNAM’S FRANCHISE LAW ...... 193 7.3 THE MOVE TO A NEW LEGAL FRAMEWORK FOR FRANCHISING ..198 7.3.1 The 2005 Commercial Law Chapter VI Section 8 ...... 198 7.3.2 The Franchise Decree ...... 203 7.3.3 The Franchise Circular ...... 204 7.3.4 The Franchise Decision ...... 205 7.4 VIETNAM’S FRANCHISE LAW...... 205 7.4.1 Introduction ...... 205 7.4.2 Definition ...... 206 7.4.3 Qualifications of Franchisor and Franchisee ...... 207 7.4.4 Disclosure ...... 209 7.4.5 The Franchise Agreement ...... 210 7.4.6 Relationship/Conduct Issues ...... 211 7.4.7 Registration and Reporting ...... 214 7.4.8 Foreign Franchisors ...... 217 7.4.9 Administration ...... 218 7.4.10 Sanctions ...... 219 7.5 THE RELATIONSHIP BETWEEN THE FRANCHISE LAW AND THE UNDERLYING COMMERICAL REGULATIONS ...... 221 7.6 CRITICAL ASSESSMENT AND INTERNATIONAL COMPARISONS ...223 7.6.1 Jurisdiction ...... 224 7.6.2 Definition ...... 225 7.6.3 Qualifications of Franchisor and Franchisee ...... 230 7.6.4 Disclosure ...... 232
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7.6.5 The Franchise Agreement ...... 235 7.6.6 Relationship/Conduct Issues ...... 236 7.6.7 Registration and Reporting ...... 237 7.6.8 Foreign Franchisors ...... 239 7.7 THE ROLE OF THE MINISTRY OF INDUSTRY AND TRADE IN REGULATING, ENFORCING AND ADMINISTERING FRANCHISING...... 241 7.8 CHAPTER CONCLUSION...... 245
PART FOUR ...... 248 THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING: A MULTIPLE CASE STUDY ...... 248
CHAPTER EIGHT ...... 249 CASE STUDY METHODOLOGY AND PROFILE OF SELECTED SUBJECTS ...... 249 8.1 INTRODUCTION ...... 249 8.2 METHODOLOGY ISSUES IN USING A MULTIPLE CASE STUDY FOR ASSESSING THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING IN VIETNAM ...... 249 8.2.1 Qualitative Case Study and Data Collection Methods ...... 249 8.2.2 Case Study Design and Case Selection ...... 252 8.2.3 Approaching Participants and Ethical Concerns ...... 254 8.2.4 Data Collection ...... 255 8.2.5 Data Analysis ...... 257 8.2.6 Validity, Reliability and Limitations of the Research ...... 260 8.3 VIETNAM’S FAST FOOD/COFFEE SECTORS AND PROFILE OF THE SELECTED CASES ...... 261 8.3.1 The Fast Food/Coffee Sectors in Vietnam ...... 261 8.3.1.1 Vietnam – Towards a Fast Food Nation ...... 261 8.3.1.2 Vietnam – Developing a Coffee Culture ...... 263 8.3.2 The Development of Lotteria in Vietnam...... 265 8.3.2.1 Profile of Lotteria ...... 265
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8.3.2.2 Lotteria in Vietnam ...... 268 8.3.3 The Development of Gloria Jean’s Coffees in Vietnam ...... 271 8.3.3.1 Profile of Gloria Jean’s Coffees ...... 271 8.3.3.2 Gloria Jean’s Coffees in Vietnam ...... 272 8.3.4 The Development of Trung Nguyen Coffee in Vietnam ...... 273 8.3.5 The Development of Pho 24 in Vietnam ...... 278 8.4 CHAPTER CONCLUSION...... 281
CHAPTER NINE ...... 282 CASE STUDY ANALYSIS AND FINDINGS ...... 282 9.1 INTRODUCTION ...... 282
PART 1: THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FOREIGN FRANCHISE SYSTEMS ...... 283 9.2 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF LOTTERIA IN VIETNAM ...... 283 9.2.1 Decision to Enter Vietnam and Entry Mode ...... 283 9.2.2 Expansion Strategy ...... 286 9.3 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF GLORIA JEAN’S COFEES IN VIETNAM ...... 287 9.3.1 Decision to Enter Vietnam and Entry Mode ...... 287 9.3.2 Expansion Strategy ...... 290
PART 2: THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF DOMESTIC FRANCHISE SYSTEMS ...... 291 9.4 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF TRUNG NGUYEN COFFEE IN VIETNAM ...... 291 9.4.1 Decision to Franchise ...... 291 9.4.2 Expansion Strategy ...... 293 9.5 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF PHO 24 IN VIETNAM ...... 295 9.5.1 Decision to Franchise ...... 295 9.5.2 Expansion Strategy ...... 296
PART 3: CROSS-CASE FINDINGS ...... 297
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9.6 THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING: THE EXPERIENCE OF LOTTERIA, GLORIA JEAN’S COFFEES, TRUNG NGUYEN COFFEE AND PHO 24 ...... 297 9.7 BUILDING A VIABLE MODEL FOR FRANCHISING IN VIETNAM ...... 300 9.7.1 The Experience of Foreign and Domestic Franchisors in Vietnam ...... 300 9.7.2 Adapting the Franchise Model for Vietnam ...... 305 9.8 CHAPTER CONCLUSION...... 312
PART FIVE ...... 315 CONCLUSION ...... 315
CHAPTER TEN ...... 316 CONCLUSION ...... 316 10.1 CONCLUSIONS ON RESEARCH QUESTIONS ...... 316 10.1.1 Research Question 1: What is the Rationale for the Introduction of a Dedicated Franchise Law in Vietnam? ...... 316 10.1.2 Research Question 2: To What Extent Does Vietnam’s Franchise Law Provide an Appropriate Legal Regime for Franchising? ...... 318 10.1.3 Research Question 3: To What Extent Has Vietnam’s Franchise Law Influenced the Development of Franchising in Vietnam? ...... 320 10.1.4 Research Question 4: To What Extent is It Necessary to Adapt the Contemporary Western Franchise Model for Vietnam? ...... 323 10.2 CONTRIBUTIONS AND IMPLICATIONS OF THIS RESEARCH ...... 324 10.3 LIMITATIONS AND FUTURE RESEARCH ...... 326
APPENDIX I: THE REGULATED FRANCHISE SECTORS INTERNATIONALLY ...... 328
APPENDIX II: FOREIGN FRANCHISE SYSTEMS IN VIETNAM ...... 330
APPENDIX III: DOMESTIC FRANCHISE SYSTEMS ...... 335
APPENDIX IV: SECTION 8, CHAPTER VI, THE 2005 COMMERCIAL LAW ...... 336
APPENDIX V: THE 2006 DECREE ON FRANCHISING ...... 339
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APPENDIX VI: THE 2011 AMENDMENTS TO THE 2006 DECREE ON FRANCHISING ...... 352
APPENDIX VII: THE 2006 CIRCULAR ON FRANCHISING ...... 354
APPENDIX VIII: THE 2008 DECISION ON FRANCHISING ...... 370
APPENDIX IX: UNSW ETHICS APPROVAL ...... 373
APPENDIX X: PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM ...... 374
APPENDIX XI: REVOCATION OF CONSENT FORM ...... 377
APPENDIX XII: CONSENT FOR IDENTIFYING COMPANY AND INTERVIEWEE IN FUTURE PUBLICATION...... 378
BIBLIOGRAPHY ...... 379
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LIST OF FIGURES
Figure 1: Entry Mode Choices ...... 39 Figure 2: The Evolution of Franchising Entry Strategies ...... 44 Figure 3: Models of International Franchising Entry Mode Choice ...... 44 Figure 4: Map of Vietnam ...... 67 Figure 5: The Amount of Vietnam’s Exports and Imports ...... 79 Figure 6: FDI Growth ...... 85 Figure 7: Vietnam’s GDP and GDP per capita ...... 87 Figure 8: The State Structure (at the Central Level) ...... 98 Figure 9: Vietnam’s Court Hierarchy ...... 103 Figure 10: The Preference Level for Choosing Different Mechanisms of Dispute Resolution ...... 114 Figure 11: The Franchise-Specific Law and Underlying Commercial Regulations Impacting on Franchising in Vietnam ...... 128 Figure 12: Number of Franchise Systems in Vietnam ...... 177 Figure 13: Number of Foreign Franchise Systems in Vietnam ...... 178 Figure 14: Number of Domestic Franchise Systems in Vietnam ...... 179 Figure 15: Distribution of Franchise Systems by Industry Sector ...... 182 Figure 16: The Organisational Structure Hierarchy of the Ministry of Industry and Trade...... 242 Figure 17: The Data Analysis Process ...... 258 Figure 18: The Revenue of Vietnam’s Fast Food Sector ...... 262 Figure 19: The Growth of Lotteria in South Korea ...... 267 Figure 20: The Growth of Lotteria in Vietnam ...... 269 Figure 21: Trung Nguyen Coffee’s Expansion Milestones ...... 278 Figure 22: The Expansion of Pho 24 in Vietnam and Overseas ...... 280
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LIST OF TABLES
Table 1: Thesis Structure ...... 12 Table 2: The Regulatory Models ...... 55 Table 3: Legislation in Vietnam ...... 106 Table 4: The Number of Cases Dealt with by Vietnam’s Commercial Arbitration Centres ...... 118 Table 5: The Major Difference between the Regulations on Technology Transfer and the Regulations on Licensing ...... 195 Table 6: The Initial Template ...... 259
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LIST OF ABBREVIATIONS
AFTA ASEAN Free Trade Area APEC Asia-Pacific Economic Cooperation AJCEP ASEAN-Japan Comprehensive Economic Partnership ASEAN The Association of South East Asian Nations ASEM The Asia-Europe Meeting BO Build-Operate BOT Build-Operate-Transfer BT Build-Transfer BTA Bilateral Trade Agreement BTO Build-Transfer-Operate CEPT The Common Effective Preferential Tariff COMECON The Council for Mutual Economic Assistance CPV Communist Party of Vietnam EU European Union FDI Foreign Direct Investment FIE Foreign Investment Enterprise FTC Federal Trade Commission GDP Gross Domestic Product IFA International Franchise Association MOIT Ministry of Industry and Trade NSW New South Wales SMEs Small and Medium Enterprises SOE State Owned Enterprise TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights UFOC Uniform Franchise Offering Circular UK United Kingdom UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Conference on Trade and Development UNIDROIT International Institute for the Unification of Private Law US United States WFOE Wholly Foreign Owned Enterprise WIPO World Intellectual Property Organisation WTO World Trade Organisation
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PART ONE INTRODUCTION AND LITERATURE REVIEW
CHAPTER 1 INTRODUCTION CHAPTER 2 FRANCHISING: NATURE, DEVELOPMENT AND REGULATION
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CHAPTER ONE INTRODUCTION
1.1 RESEARCH BACKGROUND
1.1.1 Franchising
Franchising is a dynamic method of distributing goods and services which has been described by the US House of Representatives Committee on Small Business as “the dominating force in the distribution of goods and services”.1 It is, as explained by the Australian House of Representatives Standing Committee on Industry, Science and Technology, a form of economic organisation in which:
... the franchisor, holding property rights over a marketing system, business service or product (identified by a brand name or trademark) enters a contract or agreement with the franchisee and grants, under certain conditions, the right to use a business brand name or trademark and the right to produce or distribute the franchisor’s product or service.2
Franchising originated in the mid nineteenth century as a form of exclusive branded distributorship agreements - today known as product and trade name franchising -
“characterised by an independent sales relationship between supplier and dealer in which franchised dealers concentrate on one company’s product line and to some extent identify their business with that of the supplier”.3 However, the significant development and innovation in franchising occurred a century later, in the 1950s, when the current iteration of franchising - business format franchising - evolved.4 In
1 US House of Representatives Committee on Small Business, 'Franchising in the US Economy: Prospects and Problems' (1990). 2 The House of Representatives Standing Committee on Industry, Science and Technology, Finding a Balance: Towards Fair Trading in Australia (May 1997). 3 Andrew Terry and Des Giugni, 'Franchising' in Andrew Terry and Des Giugni (eds), Business and the Law (Cengage Learning, 5 ed, 2009) , p. 401. 4 ibid.
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its contemporary business format mode franchising is a sophisticated business relationship whereby the franchisor provides the franchisee not only with an established branded product or service but with an overall image and a method of doing business in accordance with a proven business system.5
Business format franchising is a “symbiotic relationship in which the needs of the franchisor and the franchisee blend in a commercial marriage of convenience”6 which merges “the seemingly conflicting interests of existing businesses with those of aspiring entrepreneurs in a single process that promotes business expansion, entrepreneurial opportunity and shared cost and risk”.7 Both the franchisor and the franchisee receive many benefits from franchising. The franchisor can rapidly expand its system without having to directly invest in and manage outlets which are financed and managed by the franchisee. The franchisor also benefits from ongoing franchise fees and, in many systems, income from product sales and service supplies. The franchisee benefits from the public’s recognition of goodwill in the brand, and from the provision of a complete business system including initial and ongoing training and support, marketing, and economies of scale.8 Compared with running completely independent small businesses, the franchisee can have “higher profit margins, lower failure rates, easier entry into the market place, lower capital requirement, and access to management assistance and training”.9
5 The development of franchised distribution is outlined in Martin Mendelsohn and Robin Bynoe, Franchising (1995), pp. 19-29. 6 Terry and Giugni, above n 3, p. 398. 7 US House of Representatives Committee on Small Business, above n 1, p. 13. 8 Andrew Terry, 'Small Business, Service Exports and the Role of Business Format Franchising' (Paper presented at the Asia Pacific International Business: Regional Integration and Global Competitiveness, Perth, Western Australia, June 20-23,1995). 9 ibid.
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1.1.2 Franchising in Developing Countries
Franchising has proved to be “a viable method of distributing goods and services which can have a positive influence on economic development”.10 It is a particularly effective tool for economic development and international integration in developing countries11 and is a proven strategy for small and medium enterprise development. Franchising may be the most effective method for developing countries to build a services oriented economy.12 Through the international expansion of foreign franchise systems, developing countries are introduced not only to new products, services and technologies but also to training, business advice and operational and managerial experience in relation to those systems. Foreign franchisors provide franchisees not only with system know-how but also with a range of management skills. The most enduring legacy of the expansion of international franchise systems to developing countries is undoubtedly the development of domestic franchise sectors. The international systems stimulate entrepreneurial activity and are the catalyst for the development of domestic franchise systems not only for the benefit of local entrepreneurs and their franchisees but also consumers and society generally.13 The 1997 Consultative Survey on Franchising in the APEC Member Economies stated that:
By supporting and encouraging the development of business format franchising, APEC governments can help the growth of small and medium enterprise. The franchising track record is full of examples of small businesses that grow and in turn foster other small businesses.14
10 Martin Mendelsohn, The Guide to Franchising (Cassell, 5th ed, 1992). 11 Ilan Alon, 'Global Franchising and Development in Emerging and Transitioning Markets' (2004) 24 Journal of Macromarketing 156. 12 Nguyen Ba Binh and Andrew Terry, 'Franchising in Developing Countries' (Paper presented at the 2012 SIBR Conference on Interdisciplinary Business & Economics Research, Bangkok, Thailand, 7-9 June 2012). 13 Andrew Terry, 'A Comparative Analysis of Franchise Regulation in the Asia-Pacific Region' (Paper presented at the LAWASIA Conference, Christchurch, New Zealand, 4-8 October, 2001) 14 Asia Pacific Economic Cooperation, 'Consultative Survey on Franchising in APEC Member Economies' (1997).
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While business format franchising has a long heritage in the US (where it developed in the 1950s) and other developed countries shortly after, franchising in developing countries did not commence until the 1990s.15 While franchising faces increasing saturation in developed countries of North America (the US and Canada) and Western Europe (particularly Germany and the UK), it is still relatively untapped in developing countries.16 With four fifths of the world’s population and three fifths of the world’s natural resources17 the developing countries are attractive destinations for foreign franchisors. The US Department of Commerce has recently estimated that the developing countries will account for over three quarters of the world’s expected trade growth in the next two decades.18 In recent years franchising has been experiencing rapid development in developing countries, such as China.19 Franchising was introduced to China only in the late 1980s, yet China today is the world’s most franchised country with respect to the number of franchise systems with over 4,000 systems by the end of 2009.20
1.1.3 Regulating Franchising
Franchising requires a healthy underlying commercial law environment to support its orderly development.21 Whether a dedicated franchise law is necessary to
15 See generally Olafemi Ayopo Olotu, 'Reinventing Business Growth through Franchising in Developing Economies: A Study of the Nigerian Fast Food Sector' (2011) 3(1) International Journal of Marketing Studies 162. 16 Ilan Alon and Dianne H.B. Welsh, 'Global Franchising in Emerging and Transitioning Economies' (2002) 2(1) International Journal of Business and Economics 332; Dianne H.B. Welsh, Ilan Alon and Cecilia M. Falbe, 'An Examination of International Retail Franchising in Emerging Markets' (2006) 44(1) Journal of Small Business Management 130; Olotu, above n 15. 17 Ilan Alon, Dianne H.B. Welsh and Cecilia M. Falbe, 'Franchising in Emerging Markets' in Ilan Alon (ed), Franchising Globally (Palgrave Macmillan, 2010) 11. 18 ibid. 19 ibid. 20 Zhiqiong June Wang, The Impact of China's Regulatory Regime on Foreign Franchisor's Entry and Expansion Strategies (PhD Thesis, The University of New South Wales, 2010), p. 4; Yun Zhang, The Information Imbalance in the Franchising Relationship: a Best Practice Model for Prior Disclosure and an Evaluation of China's Regulatory Regime (PhD Thesis, the University of New South Wales, 2011), p. 336. 21 Andrew Terry, 'A Comparative Analysis of Franchise Regulation in Asia' (Paper presented at the 16th Annual Conference of International Society of Franchising, Orlando, Florida, the US, 2002).
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supplement commercial laws of general application is a matter of increasingly vigorous controversy.22 There are concerns that the development of franchising could be threatened by a franchise-specific law which curtails the entrepreneurial nature of franchising.23 On the other hand, it is believed that the introduction of a franchise-specific law can help to ensure the sustainable growth of franchising. Franchise-specific laws are introduced because of “a desire to take care of problems that have arisen, to redress the balance between the parties to an agreement where the necessary balance either does not exist or has been distorted, and of course to make sure that abuses either do not occur or, where they have occurred, that they do not occur again”.24 The case of Australia is instructive in this context. In 1998, Australia introduced a mandatory Franchising Code of Conduct prescribed under the Trade Practices Act 1974 (Cth) in response to the 1997 report, Finding a Balance: Towards Fair Trading in Australia, of the Australian House of Representatives Standing Committee on Industry, Science and Technology.25 The Committee concluded that previous system of self-regulation has “not worked” and “there is no option but to underpin codes of conduct with legislation”.26 The Franchising Code of Conduct requires franchisor prior disclosure and regulates aspects of the franchisor-franchisee relationship. It has met with broad support from the franchise sector. The Franchise Council of Australia in a later submission to the Government on the review of the Franchising Code of Conduct commented that:
Our members believe the Code has had a beneficial effect on the franchising sector. There is overwhelming support for the existence of a Code ... and the franchise sector does not seek to revise the Code from a policy perspective.27
22 Andrew Terry, 'Franchise Sector Regulation: The Australian Experience' (2003/2004) LawAsia Journal 57. 23 ibid; Martin Mendelsohn, 'Franchise Regulation - Is the World Going Mad?' (1999) 8(1) Franchise New Zealand Magazine 49. 24 Lena Peters, 'UNIDROIT Prepares a Model Franchise Disclosure Law' (2000) Business Law International 279. 25 The House of Representatives Standing Committee on Industry, above n 2. 26 ibid, pp. 117, 120. 27 quoted in Terry, above n 22.
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Surveys of franchising conducted by the University of Southern Queensland in 1999 and 2002 found that there was a slowing of franchising development after the introduction of the Franchising Code of Conduct, but this may be regarded as “a positive sign as it indicates the sector is consolidating” and that the “reduction in net growth reflects the Australian sector’s increasing maturity”.28
The international trend towards adopting dedicated franchise laws stems from the increasing acknowledgment that, in the words of the Council of Small Business
Organisations in Australia, “in the particular circumstances of franchising there are elements quite different to normal business development”.29 Franchise-specific laws are adopted to address the information and power imbalances which are inherent in franchise relationships.30
1.1.4 Franchising in Vietnam
Franchising is a relatively new but steadily developing strategy in Vietnam which is one of the world’s newest franchise countries. At the time when franchising was becoming popular in many developed countries, Vietnam was at war. The Anti-
French war started in 1945 only a few days after the establishment of the Democratic Republic of Vietnam (today the Socialist Republic of Vietnam) and ended in 1954. The Anti-American war started in 1954 and ended in 1975 when the Socialist Republic of Vietnam was reunited. Franchising could not develop in this environment, nor in the closed, subsidised, bureaucratic, and centrally planned economy which existed following reunification and in which private enterprise had
28 Andrew Terry, 'Franchise Sector Regulation: The Australian Experience' (Paper presented at the EMNet-Conference on "Economics and Management of Franchising Networks", Vienna, Austria, 26-28 June 2003). 29 Andrew Terry, 'The Regulation of Franchising in Asia: A Comparative Study' (Paper presented at the 6th Asian Law Institute Conference, Hongkong, May 2009). 30 Andrew Terry, 'Policy Issues in Franchise Regulation: The Australian Experience' (1991) 6 Journal of International Franchising and Distributing Law 77; Peters, above n 24.
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no place. The introduction of the Doi Moi policy in 1986, which moved Vietnam to a socialist oriented market economy and opened the door to the outside world including western countries, led to an economic environment in which franchising could operate.
Franchising did not appear in Vietnam until the mid-1990s when the business environment became more attractive to foreign investors because of many economic and legal reforms and its deeper international integration, particularly after the lifting of the US commercial embargo in 1994. As in most countries, franchising first appeared in Vietnam through the expansion of foreign franchisors. The pioneer franchisors, including Jollibee (from the Philippines), Lotteria (from South Korea) and KFC (from the US), came to Vietnam in the period 1996-1997. However, in the first 10 years following the introduction of franchising, there were only 23 franchise systems which, with few exceptions, owned and operated their outlets rather than franchised them. Franchising has experienced steady development since 2006 when
Vietnam introduced dedicated franchise regulations which for the first time recognised franchising as a discrete business organisation. In only five years after the introduction of Vietnam’s Franchise Law, the number of franchise systems had increased over fourfold, from 23 to 96.
Although the size of franchising sector in Vietnam is still limited, and most system outlets are owned and operated by franchisors, Vietnam is a promising franchise market. A high and stable GDP growth rate (at around eight percent in recent years),31 a highly literate and young population, political stability, wide international integration, and extensive legal reforms driven by WTO accession commitments - in
31 Although Vietnam’s economy was also affected by the global financial crisis in 2007, the country weathered the storm well with 5.32 percent growth in 2009, 6.78 percent growth in 2010, and 5.89 percent growth in 2011 (Source: Vietnam’s General Statistics Office [Tong Cuc Thong Ke Viet Nam]). See generally McKinsey, 'Growing up Fast: Vietnam Discovers the Consumer Society' (2010)
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particular the introduction of a dedicated franchise law - has made Vietnam an attractive country for franchising. In the words of the General Director of KFC Vietnam, “Vietnam is not only a promising market for fast food but also for franchising in other areas”.32
1.2 RESEARCH OBJECTIVES AND QUESTIONS
The healthy development of franchising requires appropriate environmental factors - political, commercial, economic, social-cultural, and legal. This thesis focuses on the development of franchising in Vietnam under the influence of the Franchise Law. The aim of this thesis is to assess the impact of Vietnam’s Franchise Law on the development of franchising in Vietnam. This thesis also considers a viable model for franchising in Vietnam having regard to its current state of development. To achieve those objectives, this thesis addresses the four following research questions:
Research Question 1: What is the rationale for the introduction of a dedicated franchise law in Vietnam?
To date, only about 30 countries, including Vietnam, have enacted a dedicated franchise law. Most countries simply rely on the underlying commercial laws to regulate franchising, and the question of whether franchise-specific regulations are necessary for the healthy development of franchising remains controversial.33 Many commentators are concerned that the introduction of a dedicated franchise law will discourage entrepreneurial development of franchising.34 Therefore, the first
32 Bao Vietnamnet [Vietnamnet Newspaper], 'KFC Exec Speaks on the Growth of Fried Chicken' (2006)
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research question examines the reasons for the introduction of a franchise-specific law in Vietnam in advance of the development of a franchise sector.
Research Question 2:
To what extent does Vietnam’s Franchise Law provide an appropriate legal regime for franchising?
There is a growing body of franchising literature, including literature on the legal regimes for franchising in particular countries.35 However, the legal environment for franchising in Vietnam has not yet been analysed in depth. The second research question is directed to the efficacy of Vietnam’s Franchise Law. It examines the approach to regulating franchising in Vietnam’s Franchise Law, compares
Vietnam’s Franchise Law with international best practice, and critically analyses this law.
Research Question 3: To what extent has the Vietnam’s Franchise Law influenced the development of franchising in Vietnam?
It has been observed by Alon that “there is little evidence of the impacts of
[franchise regulations] on franchising development”.36 Alon further suggests that
“research on this topic will help host governments devise regulations that will foster
35 Ilan Alon and Dianne H.B. Welsh, International Franchising in Emerging Markets (China, India, and Other Asian Countries) (2001); Hanane El Zeiny and Gérard Cliquet, 'The Influence of Culture on the Relationship between the Entrepreneurial Orientation and the Potential of Franchising in Emerging Countries: The Case of Egypt' (Paper presented at the 5th International Conference on Economics and Management of Networks, Limassol, Cyprus, 1 - 3 December 2011); Alon, above n 11; Darek Klonowski, Jacqueline L. Power and Daniel Linton, 'The Development of Franchise Operations in Emerging Market: The Case of a Poland-Based Restaurant Operator' (2008) 49 Cornell Hospitality Quarterly 436; Welsh, Alon and Falbe, above n 16; Dianne H.B. Welsh and Ilan Alon, in Dianne H.B. Welsh and Ilan Alon (eds), International Franchising in Emerging Markets: Central and Eastern Europe and Latin America (CCH Incorporated, 2001) ; Olotu, above n 15; Andrew Terry and Zhiqiong June Wang, 'China's Long March to a Franchise Law: the 2007 Franchise Regulation' (2007) LawAsia Journal 79. 36 Alon, above n 11.
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franchising and minimise its negative impacts”.37 Such research has not yet been carried out in relation to Vietnam. The third research question focuses on the impact of the Vietnam’s Franchise Law on the development of franchising.
Research Question 4:
To what extent is it necessary to adapt the contemporary western franchise model for Vietnam?
Franchising has been described as “one of the greatest inventions of western capitalism”.38 However it would be surprising if this western business strategy could simply be transplanted in significantly different socio-cultural, legal and commercial contexts without real challenges as franchising must be influenced by the underlying environment and the real life context. The final research question considers the viability of the western franchise model in the Vietnamese context.
1.3 RESEARCH METHODOLOGY
As this thesis involves interdisciplinary research a number of research methodologies have been used - doctrinal legal research, empirical legal research and comparative legal research. Chapters Four, Five and Seven are based on doctrinal legal research methodology - analysing in-depth legal provisions through primary and secondary sources of law, which involves vertical and horizontal comparisons and critical analysis. Chapter Seven also applies comparative research methodology to compare Vietnam’s Franchise Law with international best practice.
37 ibid. 38 US House of Representatives Committee on Small Business, above n 1.
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These methodologies are appropriate and necessary to review and assess the development of law in Vietnam, especially Vietnam’s Franchise Law.
In Chapters Three, Six, Eight and Nine, an empirical research methodology has been applied to identify the social-legal context for franchising and the development of franchising in Vietnam, to assess the influence of Vietnam’s Franchise Law on the decision to franchise, the entry mode, and expansion strategies of franchisors, and to consider a best practice model for franchising in Vietnam. In particular, a qualitative multiple case study has been conducted for this research. Four leading fast food/coffee franchisors in Vietnam - two foreign franchise systems and two domestic systems - have been chosen as the cases. In depth and semi-structured interviews were conducted with senior managers of these companies. A detailed explanation for and description of this case study is provided in Chapter Eight.
Although franchising, legal reform and social-cultural, commercial and economic conditions are still ongoing in Vietnam, this research has used data updated to
August 2012.
1.4 THESIS STRUCTURE
This thesis is arranged in five parts comprising 10 chapters as outlined in the following table.
Table 1: Thesis Structure
PART ONE: INTRODUCTION AND LITERATURE REVIEW
Chapter One: Introduction
Chapter Two: Franchising: Nature, Development and Regulation
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PART TWO: THE ENVIRONMENT FOR FRANCHISING IN VIETNAM
Chapter Three: The Economic, Social and Cultural Context for Franchising in Vietnam
Chapter Four: The Legal Context for Franchising in Vietnam and the Transition to “Nha Nuoc Phap Quyen” (‘a Law-Based State’)
Chapter Five: The Underlying Legal Framework for Franchising in Vietnam
PART THREE: DEVELOPMENT AND REGULATION OF FRANCHISING IN VIETNAM
Chapter Six: The Development of Franchising in Vietnam
Chapter Seven: The Regulation of Franchising in Vietnam
PART FOUR: THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING: A MULTIPLE CASE STUDY
Chapter Eight: Case Study Methodology and Profile of Selected Cases
Chapter Nine: Case Study Analysis and Findings
PART FIVE: CONCLUSION
Chapter Ten: Conclusion
Part One – ‘Introduction and Literature Review’ - comprises two chapters introducing and providing the research background to this thesis. Chapter One has set out the overall research context and the research questions. It also describes the research objectives, the research scope, and the research methodology, and outlines the thesis structure. Chapter Two reviews the literature on the nature of franchising, the explanations for the development of franchising and international franchising, and the regulation of franchising. This chapter provides the theoretical background for the thesis.
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Part Two – ‘The Environment for Franchising in Vietnam’ - comprises three chapters which introduce the social/cultural/commercial/economic/legal context for franchising in Vietnam. Chapter Three describes Vietnamese social and cultural characteristics which are relevant to the development of franchising and its regulation. This chapter also reviews the economic development of Vietnam since the Doi Moi reforms which marked the shift from a centrally planned economy to a socialist oriented market economy which could support franchising. Chapter Four reviews the legal context for franchising in Vietnam and focuses on law-making in
Vietnam and the transparency and stability of Vietnam’s legislation as well as judicial independence and legal enforcement. Chapter Five examines the underlying legal framework for franchising in Vietnam and reviews a range of laws directly relating to franchising including contract law, enterprise law, foreign investment law, intellectual property law, technology transfer law, and competition law.
Part Three – ‘Development and Regulation of Franchising in Vietnam’ - in two chapters, reviews and assesses the development and regulation of franchising in Vietnam. Chapter Six addresses the development of franchising in the periods before and after the introduction of Vietnam’s Franchise Law and assesses the challenges and opportunities for franchisors. Chapter Seven examines the move to the introduction of the Franchise Law and the regulation of franchising under the Franchise Law, and makes a critical assessment of the law having regard to international best practice. It also assesses the role of Vietnam’s Ministry of Industry and Trade in enforcing and administering the law.
Part Four – ‘The Impact of Vietnam’s Franchise Law on the Development of Franchising: A Multiple Case Study’ - analyses the impact of Vietnam’s Franchise
Law on the development of franchising through a multiple case study. Chapter Eight explains the case study methodology and profiles the four franchisors chosen for the
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case study - two foreign franchisors - Lotteria and Gloria Jean’s Coffees, and two domestic franchisors - Trung Nguyen Coffee and Pho 24 - and the sectors in which they operate. Chapter Nine provides the findings of the multiple case study. It assesses the influence of Vietnam’s Franchise Law on the development of these franchisors in three aspects: their decisions to franchise in Vietnam, their entry modes and their expansion strategies. This chapter also considers a viable model for franchising in Vietnam based on the case study.
Part Five – ‘Conclusion’ - provides a brief epilogue to the research. Chapter Ten reviews the findings in relation to the research questions, considers the contributions, the implications and the limitation of the research, and gives suggestions for future research.
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CHAPTER TWO FRANCHISING: NATURE, DEVELOPMENT AND REGULATION
2.1 INTRODUCTION
This chapter reviews the literature addressing the nature and operation of franchising as well as its development and regulation. It considers the explanations for franchise system expansion both domestically and internationally and for the adoption of specific regulatory regimes for franchising.
This chapter contains six sections. Chapter 2.1 is an introduction drawing the overall picture of the chapter. Chapter 2.2 examines the development of franchising as a business model with an emphasis on key issues including the origin of the franchising concept and the development of the franchise model. Chapter 2.3 analyses the explanations for franchising from three levels - macro, organisational and individual. Chapter 2.4 reviews international franchising with respect to explanations for franchising internationally, entry mode choices, and considerations in the choice of entry modes. Chapter 2.5 explains the nature of the franchise relationship which poses challenges for regulators, the rationale for the introduction of dedicated franchise regulation to supplement underlying laws of general application and examines the major strategies for regulating franchising internationally. The last section, Chapter 2.6, provides a conclusion to this chapter.
2.2 FRANCHISE: CONCEPT AND GROWTH
2.2.1 The Franchise Concept
Franchising is, in the words of the Australian House of Representatives Standing Committee on Industry, Science and Technology, “an increasingly popular form of
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economic organisation providing an alternative means of expanding an existing business or an alternative means of entering an industry”.39 It is a method of business operation which has revolutionised the distribution of goods and services in virtually all industry sectors and has transformed the business landscape of most countries.40
The original meaning of “franchise” is to grant a freedom to do something or a right of use of something in a certain place. It is derived from the French verb
“affranchir” which means “to free”.41 In the middle Ages, Europe’s local authorities granted “franchises” inside their domain. “Franchisees” had the exclusive right to conduct a certain business inside that domain and to prevent other people from interfering with their business. In the eighteenth or nineteenth century, the term
“franchise” became popular in Britain to describe certain business privileges granted by royal and legislative bodies.42 Today, however, the term “franchise” usually refers to a commercial relationship for distributing products or services.43 The 1976
Swanson Committee of Australia suggested that franchising may be divided into three types: product franchising, processing or manufacturing franchising, and system franchising (more commonly referred to as “business format franchising”).44
Product franchising and processing or manufacturing franchising are more commonly collectively referred to as product and trade name franchising.45 In product franchising, the franchisee has the role as a distributor, either wholesaler or retailer, for a specific product. This kind of franchise is often used in retailing new
39 The House of Representatives Standing Committee on Industry, above n 2, para. 3.4. 40 Andrew Terry and Nguyen Ba Binh, 'Vietnam's New Regulatory Regime for Franchising' (2009) LawAsia Journal 82. 41 Dov Izraeli, Franchising and The Total Distribution System (Longman, 1972), p. 3. 42 ibid. 43 Trade Practices Act Review Committee, Australia, 'The Report to The Minister for Business and Consumer Affairs (also known as the 1976 Report of the Swanson Committee) ' (1976), para. 5.2. 44 ibid. 45 Mendelsohn, above n 10, pp. 20-37; Charles L. Vaughn, Franchising - Its Nature, Scope, Advantages, and Development (Lexington Books, 1979), p. 3.
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motor vehicles or petrol. In processing or manufacturing franchising, the franchisor grants an essential ingredient or know-how to the franchisee as in the soft drink industry. Product and trade name franchising, the first generation of modern franchising,46 first appeared in the mid-nineteenth century.47 The first product and trade name franchise is believed to be the Singer Sewing Machine Company. Because of the lack of the capital for hiring a large number of sales staff or establishing branches for distributing sewing machines, training potential customers and servicing the machines, the company granted the right to agents to use its trademark within exclusive territory to sell and service its sewing machines.
While product and trade name franchising is a relatively unsophisticated form of franchising essentially comprising branded distribution arrangements, business format franchising - the major contemporary form of franchising48 - is a sophisticated business relationship. In the business format franchise, the franchisor provides the franchisee with not only a trademarked product and/or service but an entire business model and operational and managerial systems supported by standards, training and ongoing assistance.49 The business format franchise may be defined as “a contractual arrangement between two legally independent firms in which one firm, the franchisee, pays the other firm, the franchisor, for the right to sell the franchisor’s product and/or the right to use its trademarks and business format in a given location for a specified period of time”.50 The Harper Beauty Shops established by Martha Mathilda Harper in the 1890s is widely accepted as the
46 Lawrence S. Welch, 'Diffusion of Franchise System Use in International Operations' (1989) 6(5) International Marketing Review 7; Roger D. Blair and Francine Lafontaine, The Economics of Franchising (Cambridge University Press, 2005), p. 5. 47 Thomas S.Dicke, Franchising in America (The University of North Carolina Press, 1992), p. 3. 48 Despite a decline of the number of system outlets, product and trade name franchising had had a growth in sales and dominated market until the 1930s (see Robert Justis and Richard Judd, Franchising (1989), p. 11). 49 Andrew Terry, 'Business Format Franchising: The Cloning of Australian Business' in Business Format Franchising in Australia (Robert Burton Printer Pty. Ltd., 1991) , p. 3. 50 Blair and Lafontaine, above n 46, pp. 3-4.
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first business format franchising system.51 However, this type of franchising began developing strongly in the 1950s pioneered by the establishment of McDonald’s and Kentucky Fried Chicken (now KFC). The business format franchise “has been mainly responsible for the recent impressive growth of franchising”.52 A comprehensive report of the International Franchise Association on the economic impact of franchised businesses in 2005 found that business format franchising in the US prevailed over product distribution franchising, accounting for about 5.7 times as many establishments and nearly 4.5 times as many jobs.53
The traditional and most basic business format franchise model is the single-unit franchise which “is an agreement where the franchisor grants a franchisee the rights to open and operate one franchise unit”.54 Today this traditional form of franchising is commonly referred to as “mom and pop” franchising in which the franchisees dedicate all their time and energy to opening only one outlet.55 With the increasing sophistication of franchisors, their systems and their franchisees, multi-unit franchising - where a franchisee operates more than one unit - has become more common.56 Particular structured forms of multi-unit franchising are area development franchising and master franchising.57 In an area development franchise, the franchisor grants a franchisee (so-called ‘developer’) the rights to open and operate more than one unit in agreed time frame and within a specified area.58 In a master franchise agreement, the franchisor grants a franchisee the rights to exploit a
51 Jane R. Plitt, Martha Mathilda Harper and the American Dream: How One Woman Changed the Face of Modern Business (2000). 52 Terry, above n 49, p. 4. 53 IFA Educational Foundation, 'The Economic Impact of Franchised Businesses (Volume II: Results for 2005)' (2008), p. 9. 54 Barbara Beshel, An Introduction to Franchising (2001). 55 Marko Grunhagen and Robert A. Mittelstaedt, 'Multi-Unit Franchising: An Opportunity for Franchisees Globally?' in Dianne H.B. Welsh and Ilan Alon (eds), International Franchising in Industrialized Markets: North America, the Pacific Rim, and Other Countries (CCH, 2002) 95, p. 98. 56 Beshel, above n 54; Grunhagen and Mittelstaedt, above n 55. 57 For further discussion see Chapter 2.4.2. 58 Mendelsohn and Bynoe, above n 5, p. 64; Beshel, above n 54, p. 3.
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territory where the franchisee can open and operate a number of company owned units and also can grant franchises to others through sub-franchise agreements.59
Franchising is indeed capable of infinite variation to adapt different circumstances and changing market conditions. Franchising’s capacity for adaptation and innovation, in the words of Terry and Di Lernia, “drives its relentless development”.60
2.2.2 The Growth of Franchising
It was suggested above that the development of franchising has been from product and trade name franchising to business format franchising. Hackett suggests that there have been five main periods in franchising development: the primitive stage
(pre-1865 to 1919), the emergence stage (1920 to 1949), the acceptance and boom stage (1950 to 1964), the retrenchment period (1965 to 1970), and the neo-growth stage (1970 to present).61
The Primitive Stage (pre-1865 to 1919) includes the appearance of franchising.
Bernard Goodwin believes that the licensing and financing agreements between beer brewers and tavern owners that occurred in Germany and England before the 18th century are the first examples of franchising.62 Other scholars assert that when Queen Isabella of Spain granted the licence/franchise to Christopher Columbus to
59 Mendelsohn and Bynoe, above n 5, p. 64; Beshel, above n 54, p. 4. 60 Andrew Terry and Cary Di Lernia, 'Quasi-Franchising: A New Model for Strategic Business Cooperation' (Paper presented at the EMNet 2011 Conference, Limassol, Cyprus, 1-3 December 2011) 61 Donald W. Hackett, Franchising: The State of the Art (1977), p. 5. Although Hackett’s division was developed for US franchising, it is also essential valid for the development of franchising in other countries in which franchise development occurred at a later date (See generally DLA Piper US LLP, 'Expanding a Business by Franchising' (2003)
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find a new way to the East in 1492 she granted the world’s first franchise.63
However, as a form of distribution, there is wide agreement that the earliest commercial franchise appeared in the US when the Singer Sewing Machine
Company began setting up a dealer network in around 1850.64
The Emergence Stage grew out of the success of the industrial revolution in the US at the turn of the last century. The great progress in technology and improved transportation and communication resulted in the mass production society, and manufacturers discovered that the distribution of their products to local markets were key factors in their success.65 Soft drink, automobile and petroleum industries pioneered the use of franchising as an effective method of distribution and it also became popular in other sectors including food and hardware industries during the period between 1920 and 1949. By the end of the “Emergence Stage”, franchising in its unsophisticated product and trade name form franchising had developed.
The Acceptance and Boom Stage (1950 to 1964) was marked by a tremendous increase in the popularity of the franchising concept led by the development of business format franchising and the provision of comprehensive business and operation systems. In this period, there was an adoption of franchising in new categories including accounting and business services, car rental, motels, rental equipment stores, counselling services, recreation services, fast food restaurants, and cleaning establishments.66 Many well-known franchising names appeared in this time: Holiday Inn (1952), Kentucky Fried Chicken (now KFC, 1952), Burger King
(1954), Dunkin’ Donuts (1954), McDonald’s (1955), and Budget Rent a Car
63 ibid. 64 Mendelsohn, above n 10, p. 19; Terry, above n 49, p. 4; Vaughn, above n 45, p. 19. 65 Hackett, above n 61, p. 12. 66 ibid, p. 6.
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(1958).67 In the 1960s, franchising experienced an explosive development in the US and “the potential for franchising seemed unlimited”.68
The Retrenchment Stage (from 1965 to 1970) posed great challenges for franchising because of abuses and outright illegal activities in the latter part of the 1960s. The fast food industry, for example, faced many difficulties because of the adverse publicity on franchising from franchisor opportunism. Many newer franchisors required a high “initial franchise fee” but they had only a name, did not invest much in building a good system, and provided very little support and training for the franchisees.69 Additionally, tight monetary policy and high interest rates which applied during liquidity crisis of the early 1970s was another reason for the failure of many franchise systems. Class actions against franchisors were common. In response to well documented abuses, California enacted the world’s first franchise- specific legislation in 1970. Specific legal requirements such as prior disclosure were applied in a number of states in the US. The courts also became more sensitive to anti-trust charges against franchisors.70
The Neo-Growth Stage from 1970 has proved franchising’s resilience. Franchising has shown remarkable growth and popularity, not only in the US but also in many other countries. The growth has witnessed not only franchising in new industry sectors, a rapid increase in the number of franchise systems and outlets and the emergence of international franchising,71 but also the effective sales of goods and services through franchising - “one out of every three dollars spent by Americans for goods and services is [now] spent in a franchised business”.72 Although franchising, as well as world economy in general, has experienced a slight decline during the last
67 Mendelsohn and Bynoe, above n 5, pp. 24-25. 68 Hackett, above n 61, p. 6. 69 ibid, p. 7. 70 ibid. 71 For further discussion see Chapter 2.4. 72 said by Sidney J. Feltenstein - Chairman of IFA Educational Foundation, Chairman and Chief Executive Officer of Yorkshire Global Restaurants (A&W and Long John Silver’s) in the Foreword & Acknowledgement of the book written by Beshel, above n 54.
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few years because of the global financial crisis, it is an effective strategy in difficult financial environment73 and is expected to continue increasing.74
2.3 EXPLANATIONS FOR THE DEVELOPMENT OF FRANCHISING
Franchising has attracted the interest of many scholars who have sought to explain its development during over the last 40 years. Franchising is of interest to many academic disciplines including law, marketing, economics, entrepreneurship, human resource management, psychology, and sociology. The explanations for franchising are, as a result, diverse.75 Perhaps the most useful conceptual explanation model is that proposed by James Curran and John Stanworth,76 who argue that the explanations of franchising generally can be considered at three levels: the macro, the organisational, and the individual.
2.3.1 The Explanations for the Development of Franchising at the Macro Level
According to Stanworth and Curran, culture, economy and politics (including laws) can provide a favourable or unfavourable environment for franchising and their influences on franchising “may shift from one to the other over time”.77 They argue that these contexts have been increasingly favourable to franchising from the late 20th century.78 After analysing the literature, Stanworth and Curran suggest the
73 Alisa Harrison, 'Franchise Businesses Can Help Lead the Economic Recovery with Access to Capital' (10 June 2009)
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macro level propositions for a general theory of franchising. In terms of culture, the extent to which economic individualism is a valued means of initiating or operating economic activity is considered as of considerable importance.79 Where this is strong “franchising may be expected to prosper”.80 With regard to economic environment, where there is a high ratio of small and dispersed outlets far from head office the emergence of franchising is likely.81 Franchising helps companies overcome the problems of personnel motivation, supervision and quality control over their remote outlets. In the political context, the State’s attitude to small businesses influences the emergence and persistence of franchising. Where the State highly appreciates the benefit of small businesses to the economy, the political context will be more favourable to franchising.82 However, Stanworth and Curran also state that these propositions are not meant in any way to be exhaustive and that more detailed propositions should be developed.83 They nevertheless acknowledge that the explanation for franchising at the macro level (or societal level) is “perhaps the most neglected aspect of franchising”.84 Tuunanen used the conceptual explanation model of Stanworth and Curran to conduct an empirical research on franchising in Finland, but was not able to draw exact conclusions on the existence of cultural, commercial, economic and political context because the findings concerned only the manifestations of franchising in that country.85
79 ibid. 80 ibid. 81 Curran and Stanworth, above n 76. 82 Stanworth and Curran, above n 75. 83 ibid. 84 ibid. 85 Mika Tuunanen, Essays on Franchising in Finland - Empirical Findings on Franchisors and Franchisees, and Their Relationships (PhD Thesis, University of Jyvaskyla, 2005).
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2.3.2 The Explanations for the Development of Franchising at the
Organisational Level
In spite of the popular adoption of franchising concept, the reasons why a company chooses to expand through franchising rather than through company owned units have been widely discussed86 but there is no universal consensus on this matter. Resource Scarcity Theory and Agency Theory are the most common explanations for franchising.87
Resource Scarcity Theory
“Resource Scarcity Theory” (also called ‘Resource Acquisition Theory’)88 indicates that a company adopts franchising for its expansion in order to address resource constraints including capital, human capital, managerial talent, and local knowledge.89 This theory also suggests that as the company grows and accumulates sufficient capital, it will buy back franchised units.90 Adopting franchising means that franchisees are responsible for the financial burdens and the human capital required for setting up and operating franchised units. Moreover, franchisors can partly raise their capital through various franchising fees including an initial fee and
86 Sanja S. Mehta and Lou E. Pelton, 'Limitations of Existing Theories: A Need for a General Theory of Franchise Relationships' (Paper presented at the 14th Annual International Society of Franchising, San Diego, 2000); Paul H. Rubin, 'The Theory of the Firm and the Structure of the Franchise Contract' (1978) 21(1) Journal of Law and Economics 223; James A. Brickley, Frederick H. Dark and Michael S. Weisbach, 'An Agency Perspective on Franchising' (1991) 20(1) Financial Management 27; G. Frank Mathewson and Ralph A. Winter, 'The Economics of Franchise Contracts' (1985) 28(3) Journal of Law and Economics 503. 87 B Elango and Vance H. Fried, 'Franchising Research: A Literature Review and Synthesis' (1997) 35(3) Journal of Small Business Management 68. 88 The content of this theory first created by Oxenfelt and Kelly through proposing a “life cycle model of franchising” in 1969 and then their view was suggested referring as the “resource scarcity theory” by Carney and Gedajlovic in 1991 (see generally Mick Carney and Eric Gedajlovic, 'Vertical Integration in Franchising Systems: Agency Theory and Resource Explanations' (1991) 12(8) Strategic Management Journal 607). 89 Alfred R. Oxenfeldt and Anthony O. Kelly, 'Will Successful Franchise Systems Ultimately Become Wholly-Owned Chains?' (1969) 44(4) Journal of Retailing 69; Shelby D. Hunt, 'The Trend Toward Company-Owned Units in Franchise Chains' (1973) 49(2) Journal of Retailing 3; Richard E. Caves and William F. Murphy II, 'Franchising: Firms, Markets, And Intangible Assets' (1976) 42(4) Southern Economic Journal 572. 90 Oxenfeldt and Kelly, above n 89.
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other continuing payments. In addition, franchisors can obtain and exploit knowledge about local conditions from franchisees who are mostly recruited from local personnel.91
In 1969, Kelly and Oxenfelt, through a life cycle model of franchising, contended that at the initial stage a company often lacks capital, local knowledge and managerial talent, so in order to cease these constrains it adopts franchising to expand.92 The lack of capital is a crucial consideration in embracing franchising.93
Kelly and Oxenfelt’s model is initially supported by an empirical study of franchising in the fast food sector conducted by Hunt. He discovered that there was a trend towards company owned units. Furthermore, larger and older franchise systems were more likely to increase the company owned units. This finding supports the hypothesis that lack of capital is the primary motivation for franchising.94 A similar tendency towards company owned units in restaurants, hotels, and motels was found by Caves and Murphy.95 Anderson also found that there had been a strong trend towards company owned units in educational products, restaurants, rental services, and retailing (non-food) over the decade 1969-1980.96 Thompson’s empirical investigation of the choice between the company ownership and franchising discovered that company ownership falls with the initial capital cost for outlets.97 This is consistent with the view that franchising supports the financing of the system.98
91 Caves and William F. Murphy II, above n 89. 92 Oxenfeldt and Kelly, above n 89. 93 ibid. 94 Hunt, above n 89. 95 Caves and William F. Murphy II, above n 89. 96 Evan E. Anderson, 'The Growth and Performance of Franchise Systems: Company Versus Franchisee Ownership' (1984) 36 Journal of Economics and Business 421. 97 R. S. Thompson, 'Company Ownership Versus Franchising: Issues and Evidence' (1992) 19(4) Journal of Economic Studies 31. 98 ibid.
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The Resource Scarcity Theory has nevertheless been criticised both on the basis that raising capital by franchising is inefficient99 and because it cannot explain why large companies which have full access to capital markets still use franchising as their expansion strategy.100 Moreover, although the resource scarcity theory has been supported by some empirical studies at the sector level it is not supported by empirical studies at the firm level.101
Agency Theory
Instead of relying on Resource Scarcity Theory, a growing number of theorists have explained the existence of franchising by Agency Theory (also called Transaction Cost Theory). The Agency Theory elucidates the ways to effectively organise relationships in which one party (the principal) entrusts another party (the agent) a work.102 This theory suggests that under conditions of incomplete information and uncertainty in business settings an agency problem occurs which includes two aspects: moral hazard and adverse selection. Moral hazard is the condition in which the principal cannot be sure if the agent has maximised his/her efforts. Adverse selection arises when the principal cannot be sure if the agent accurately performs the work for which the agent is being paid.103 The problems of moral hazard and adverse selection in the context of the management of retail outlets have been reported by many scholars.104 Moral hazard and adverse selection imply that a fixed salary for a manager of agents is not always the best method of structuring
99 Rubin, above n 86. 100 Francine Lafontaine and Patrick J. Kaufmann, 'The Evolution of Ownership Patterns in Franchise Systems' 70(2) Journal of Retailing 97. 101 Carney and Gedajlovic, above n 88; James A. Brickley and Frederick H. Dark, 'The Choice of Organizational Form: The Case of Franchising' (1987) 18(401-420) Journal of Financial Economics . 102 Kathleen M. Eisenhardt, 'Agency Theory: An Assessment and Review' (1989) 14(1) The Academy of Management Review 57. 103 ibid. 104 Rubin, above n 86; Mathewson and Winter, above n 86; Brickley and Dark, above n 101.
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relationships between principals and agents.105 The fixed salary provides an incentive for agents to shirk their responsibility to the principal because it is defined independently of their performance.106 Consequently, high monitoring costs will be incurred by the principal in order to ensure that agents perform their duties.107
Franchising is a response to the agency problem. Franchise monitoring costs are often less than the cost of monitoring company owned units because the interests of the franchisor and the franchisee are better aligned than the interests of the company and the managers of the company owned units.108 A franchisee’s compensation is not fixed but varies directly with unit performance.109 The franchisee is paid by residual claims from its particular unit.110
Although there is a significant support for Agency Theory as an explanation for franchising,111 it has been criticised by other scholars. The essential limitation of Agency Theory stems from its key assumption112 that “companies involved in franchising generally have identifiable brand names that help to assure the customer of uniform product quality”.113 However, there are a number of small and young franchise systems which are not well endowed with brand name capital and have not enough organisational capacity to assure uniform product quality.114 Both brand
105 Michael C. Jensen and William H. Meckling, 'Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure' (1976) 3(4) Journal of Financial Economics 305. 106 Eisenhardt, above n 102. 107 Rubin, above n 86. 108 James G. Combs and Gary J. Castrogiovanni, 'Franchisor Strategy: A Proposed Model and Empirical Test of Franchise Versus Company Ownership' (1994) 32(2) Journal of Small Business Management 37. 109 Carney and Gedajlovic, above n 88. 110 Brickley, Dark and Weisbach, above n 86. 111 Chutarat Inma, 'Purposeful Franchising: Re-thinking of the Franchising Rationale' (2005) 27(1) Singapore Management Review 27. 112 Carney and Gedajlovic, above n 88. 113 Brickley and Dark, above n 101. 114 ibid.
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name capital and technical expertise are company specific assets115 that require managerial effort to develop.116
Because Resource Scarcity Theory and Agency Theory cannot alone explain perfectly the reasons for franchising expansion, a contemporary view suggests that in order to give an effective explanation the combination of both Resource Scarcity and Agency theories is needed.117
2.3.3 The Explanations for the Development of Franchising at the Individual Level
At the individual level, the explanations for the development of franchising concern franchisee motivation. Although franchisor motivation is also involved at the individual level, analysis has been at the organisational level. Interestingly, almost all research on franchising has focused on the franchisor perspective rather than on the franchisee perspective.118 However, several empirical scholars have tried to understand why an individual chooses to become a franchisee. The perceived advantages of franchising are considered as motivational factors for becoming a franchisee.119 However, there is no consensus on what are the most important benefits of franchising from a franchisee perspective.
In 1977, in a study with British franchisees, Stanworth indentified “national affiliation” (affiliation with nationally known trademark) to be the most important
115 Paul H. Rubin, 'The Expansion of Firms' (1973) 81(4936-949) The Journal of Political Economy 116 Carney and Gedajlovic, above n 88. 117 Combs and Castrogiovanni, above n 108; Carney and Gedajlovic, above n 88; Inma, above n 111. 118 John Stanworth and Patrick Kaufmann, 'Similarities and Differences in UK and US Franchise Research Data: Towards a Dynamic Model of Franchisee Motivation' (1996) 14(3) International Small Business Journal 57. 119 Patrick Kaufmann and John Stanworth, 'The Decision to Purchase a Franchise: A Study of Prospective Franchisees' (1995) 33(4) Journal of Small Business Management 22; Tuunanen, above n 85.
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benefit of franchising.120 However, in other research several scholars have found that
“franchisor support” is the most important factor.121 After conducting research on a group of Canadian franchisees, Knight found that a “known trade name” and “independence” were the most important benefits.122 In 1991, Withane found that a
“proven business format” was the most important factor for a group of Canadian franchisees.123 In an effort to discover the difference in the motivation, Peterson and Dant found that for previous business owners an “established name” and “lower development costs” were the most important advantages of franchising whereas for franchisees without previous business experience “greater independence” and “training” were most important.124
Unlike the previous research which focused only on existing franchisees, Stanworth,
Kaufmann and Purdy conducted surveys in 1995 of UK and US individuals at the time those people were considering whether to acquire a franchise, and found that individuals with no prior self-employed history rated “independence” or “being your own boss” and “a proven business system” as the main reasons to become a franchisee whereas individuals with self-employed history saw “a proven business system” and “a known trade name” as their main incentives.125
120 Cited in Kaufmann and Stanworth, above n 119. 121 John Stanworth, Jim Curran and Jensine Hough, 'The Franchised Small Business: Formal and Operational Dimensions of Independence' in J. Lewis, J. Stanworth and A. Gibb. Aldershot (eds), Success and Failure in Small Business (Gower Publishing, 1984) 157; Jensine Hough, Power and Authority and Their Consequences in Franchise Organizations - A Study of the Relationship between Franchisors and Franchisees (PhD Thesis, University of Westminster, 1986). 122 Russell M. Knight, 'Franchising From the Franchisor and Franchisee Points of View' (1986) Journal of Small Business Management 8. 123 Sirinimal Withane, 'Franchising and Franchisee Behavior: An Examination of Opinions, Personal Characteristics, and Motives of Canadian Franchisee Entrepreneurs' (1991) 29(1) Journal of Small Business Management 22. 124 Alden Peterson and Rajiv P. Dant, 'Perceived Advantages of the Franchise Option from the Franchisee Perspective: Empirical Insights from a Service Franchise' (1990) 28(3) Journal of Small Business Management 46. 125 John Stanworth, Patrick Kaufmann and D. Purdy, 'The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and USA Data' (International Franchise Research Centre, 1995).
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2.4 INTERNATIONAL FRANCHISING
Franchising has recently experienced rapid international expansion, particularly under the influence of expanding US franchise systems. The international expansion of franchising began in the late 1960s and early 1970s by US pioneer franchisors such as McDonald’s and Pizza Hut who expanded first to developed countries and then later to developing and transitional countries.126 From 1971 to 1985, the number of US franchisors operating overseas more than doubled - from 156 to 354 respectively - while the number of outlets established by these companies had a much larger increase - from 3,500 to 35,000 respectively.127 During this time, US franchisors had added foreign outlets at a rate of 17 percent per year.128 In 1992, about 20 percent of US business format franchisors operated in a foreign market.129
The international expansion of US franchisors has introduced the franchise concept to other countries and provided the catalyst for the development of local franchising. Australia is an example of the impact of US franchisors on the development of the domestic franchising sector. The Australian invasion by US fast food franchisors - KFC, McDonald’s and Pizza Hut - in the 1970s led to the adoption of the franchise concept by local entrepreneurs.130 Research shows that in 2010, there were 1,025 business format systems in Australia, in which 91 percent are originated in Australian.131 The local franchisors in Australia and other countries not only absorb and apply the techniques of US franchisors in the home markets but may also themselves expand overseas.132
126 Welch, above n 46. 127 Andrew Kostecka, 'Franchising in the Economy' (US Department of Commerce, Washington D.C., 1969 - 1988). 128 Nizamettin Aydin and Madhav Kacker, 'International Outlook of US-based Franchisers' (1990) 7(2) International Marketing Review 43. 129 Richard C. Hoffman and John F. Preble, 'Franchising into the Twenty-First Century' (1993) Business Horizons 35. 130 Welch, above n 46. 131 Lorelle Frazer, Scott Weaven and Kelli Bodey, 'Franchising Australia 2010' (2011), p. 10. 132 By 2010, about 28 percent of Australian franchisors were believed to be operating internationally (ibid, p. 13).
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2.4.1 Explanations for International Franchising
The boom in international franchising expansion has led to research seeking to explain why franchisors internationalise and which factors influence their decision to internationalise. Walker and Etzel suggest that franchisors operate internationally in response to inquiries of potential franchisees.133 On the other hand, a survey conducted by Hackett in 1976 found that franchisors moved overseas primarily to take advantage of market with great potential, to overcome domestic market saturation, and to establish a brand name.134 Although there have been a series of explanations for international franchising expansion, they are generally divided into environmental (external) and organisational (internal) factors.135
Organisational Factors of International Franchising
The organisational explanations for international franchising expansion focus on company capacities and characteristics - including size, age, growth, price bonding and dispersion - which lead a franchisor to internationalise.136 Resource-based and Agency theories have been used to explain international franchising.137 However, the application of these theories is not the same as in domestic franchising. In the domestic context, these theories are used to explicate the reasons companies like franchised outlets more than company owned ones, while in the international context they are applied to explain the decision of franchisors to internationalise.138 After
133 Bruce J. Walker and Michael J. Etzel, 'The Internationalization of U.S. Franchise Systems: Progress and Procedures' (1973) 37(2) The Journal of Marketing 38; Bruce J. Walker, A Comparison of International vs. Domestic Expansion by US Franchise Systems (International Franchise Association, 1989). 134 Donald W. Hackett, 'The International Expansion of U.S. Franchise Systems: Status and Strategies' (1976) 7(1) Journal of International Business Studies 65. 135 Ilan Alon, The Internationalization of U.S. Franchising Systems (Garland Publishing, Inc., 1999), p. 14. 136 ibid. 137 Karin Fladmoe-Lindquist, 'International Franchising: Capabilities and Development' (1996) 11 Journal of Business Venturing 419; Karin Fladmoe-Lindquist and Laurent L. Jacque, 'Control Modes in International Service Operations: The Propensity to Franchise' (1995) 41(7) Management Science 1238. 138 Alon, above n 135, p. 24.
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conducting empirical research in retailing, hotel and professional business service industries, Alon found that organisational factors, or company specific variables, could differentiate between domestic and international franchisors within each industry. Moreover, he concluded that organisational factors significantly influence the decision of franchisors to seek franchisees in foreign markets.139
Environmental Factors
The environmental explanations focus on the macro environment of both home and host countries,140 and include the franchising life cycle and domestic market saturation theories, and environmental factors of the host countries affecting international franchising expansion.141
Proposing a franchise life cycle theory, Welch142 described the international franchising expansion of US franchisors and asserted that franchising follows a life cycle that starts with internationalisation into developed countries similar to the US including Canada, the UK and Australia, then continues into dissimilar developed economies, for example Japan, and before progressing into emerging countries which are culturally distinct and economically less developed. The cycle is finished by the penetration of franchisors from the latter countries back into original home markets. The theory of domestic market saturation suggests that the internationalisation of franchising occurs when franchisors exhaust the domestic market.143
139 ibid, p. 76. 140 Sevgin Eroglu, 'The Internationalization Process of Franchise Systems: A Conceptual Model' (1992) 9(5) International Marketing Review 19. 141 Alon, above n 135, p. 4. 142 Welch, above n 46; Welsh, Alon and Falbe, above n 16. 143 Hackett, above n 134; Aydin and Kacker, above n 128.
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Based on the key environmental factors of the host countries, Alon and Mckee have developed a normative macro-environmental model of international franchising.144 The key environmental factors of the host country are defined by four major categories - economic, demographic, distance, and political/legal factors - which lead to either a choice of country or a choice of entry strategy.145 economic factors
A substantial body of research suggests that market potential is the most important determinant for the international franchising expansion of US franchisors.146 Economic factors mentioned in the literature include individual incomes, economic growth, and the level of urbanisation.147 The income of the citizenry, particularly disposable income, can determine how often the average person is likely to frequent the proposed franchise and thereby determine if market potential exists.148 Through empirical research, Yavas found that per capita income related positively to the number of international restaurant franchises.149 The level of economic growth was considered as the third most important factor in deciding which foreign country was likely to be the easiest for franchising.150 In 1996, a survey of US international franchisors by Arthur Andersen revealed that 85 percent of international franchisors rated economic growth as either “important” or “the most important” consideration in host country evaluation.151 The Arthur Andersen report also stated that the level of urbanisation was ranked as the fifth most important factor in the acceptance of a
144 Ilan Alon and David McKee, 'Towards a Macro Environmental Model of International Franchising' (1999) 7(2) Multinational Business Review 76. 145 ibid. 146 Alon, above n 135, p. 17; Alon and McKee, above n 144. 147 Alon, above n 135, p. 78; Alon and McKee, above n 144. 148 Alon and McKee, above n 144. 149 Burhan F. Yavas, 'The Role of Economic-Demographic Factors in US International Restaurant Franchising: An Empirical Investigation' (1988) 2(1) Journal of Global Marketing 57. 150 Alon and McKee, above n 144. 151 Arthur Andersen, 'International Expansion by U.S. Franchisors' (Arthur Anderson LLP Chicago in cooperation with the International Franchise Association, Chicago, Illinois, 1996).
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franchise system in a foreign market with 73 percent of respondents assessing it as either “important” or “very important”.152 demographic factors
The demographic variables affecting a franchisor’s decision to internationalise include the size of the middle class, population growth, the level of education, and female labour force participation.153 Of these factors a substantial middle class is considered as the most important one.154 A high level of population growth in the host country is also a guide to the future potential for franchising.155 Moreover, the level of education156 and female labour force157 are frequently mentioned as important determinants in attracting foreign based franchisors into the host country. distance factors
Physical and cultural distance plays an important role in franchisors’ choosing which countries to expand to. Research has found that physical distance is among the most important factors mentioned by franchisors.158 This is supported by a survey conducted by Arthur Andersen which reported that most US based franchisors planning to operate internationally chose Canada first followed by Mexico.159
Cultural distance refers to the difference in the culture and language of the host and home countries.160 Hofstede161 stated that cultural distance can be evaluated by four
152 ibid. 153 Alon and McKee, above n 144; Alon, above n 135, p. 19. 154 Andersen, above n 151. 155 ibid. 156 ibid. 157 Yavas, above n 149. 158 Kostecka, above n 127. 159 Andersen, above n 151. 160 Eroglu, above n 140. 161 Geert Hofstede, Culture's Consequences: International Differences in Work-Related Values (Sage Publications, 1980); Geert Hofstede, 'Management Scientists Are Human' (1994) 40(1) Management Science 4.
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measures including power distance,162 individualism,163 uncertainty avoidance,164 and masculinity.165 This variable is a key determinant in the success of US franchisors.166 Culture impacts on contract negotiation, operations, personnel, hiring as well as the franchising format.167 It also influences internal managerial and operational business practices, communication and performance evaluations as well as supplying an attractive service to consumers in host country.168 A larger cultural difference leads to less perceived benefits and to greater costs of internationalisation.169 The use of English in the host country is also adopted as an available measure by US based franchisors.170 In 1996, Arthur Andersen’s research suggested that the wide use of English was recognised by 39 percent of franchisors as an “important” or “very important” factor in their success in the host country.171 political/legal factors
The political/legal factors comprise political/legal risk variables including governmental regulations and red tape, political stability, monetary/exchange controls, proliferation of bribery, import restrictions, and ownership restrictions.172
Research by Hackett suggests that the regulations and red tape of the host
162 Power Distance is defined by Hofstede as “the degree of inequality among people which the population of a country considers as normal: from relatively equal (that is, small power distance) to extremely unequal (large power distance)”. 163 According to Hofstede, Individualism is “the degree to which people in a country prefer to act as individuals rather than as members of groups”. 164 Hofstede defined Uncertainty Avoidance as “the degree to which people in a country prefer structured over unstructured situations”. Structured situations are those in which there exist clear rules (in written or unwritten as tradition) to help one know how to behave. 165 As explained by Hofstede, Masculinity is “the degree to which values like assertiveness, performance, success and competition, which in nearly all societies are associated which the role of men, prevail over values like the quality of life, maintaining warm personal relationships, service, care for the weak, and solidarity, which in nearly all societies are more associated with the role of women”. 166 Welch, above n 46; Andersen, above n 151; Aydin and Kacker, above n 128. 167 Fladmoe-Lindquist, above n 137; Justis and Judd, above n 48. 168 Eroglu, above n 140. 169 Alon and McKee, above n 144. 170 ibid. 171 Andersen, above n 151. 172 Alon, above n 135, p. 20.
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government are ranked as the most common problems for US franchisors operating overseas.173
2.4.2 International Expansion Strategies of Franchising Companies
There are essentially three entry modes for a company to enter a foreign market: export entry modes (including indirect export, direct export through agents, distributors, branches, and subsidiaries), contractual entry modes (including licensing, franchising, technical agreements, service contracts, management contracts, construction/turnkey contracts, manufacturing contracts, and co- production contracts), and investment entry modes (including joint ventures and sole manufacturing ventures).174 Like any other company, a franchisor can use any of these modes to expand into other countries. However, when adopting an entry mode, franchisors have to determine whether it should maintain company ownership or conduct franchising and, if the latter, which franchising mode is the most suitable for its international expansion.175
There are several ways to classify international franchising entry modes. Through analysing the process of international entry by Australian franchisors, Welch illustrated four main entry modes of franchisors: direct establishment, master licensee, subsidiary, and joint venture.176 Konigsberg mentioned three entry modes of international franchising expansion: direct franchising (consisting of direct unit
173 Hackett, above n 134. 174 Franklin R. Root, Entry Strategies for International Markets (1998); Yigan Pan and David K. Tse, 'The Hierarchical Model of Market Entry Modes' (2000) 31(4) Journal of International Business Studies 535. 175 Alon, above n 135, p. 14. 176 Lawrence S. Welch, The Process of International Entry by Australian Franchisors (1989), p. 5.
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franchising, establishment of a foreign subsidiary or branch office, and area development agreements), master franchise agreements, and joint venture arrangements.177 However, in analysing the different commercial vehicles for expanding into foreign countries, he classified five alternatives separately which were also stated by McLean:178 direct franchising, subsidiary or branch, area development agreement, master franchise, and joint venture agreement.179
Mendelsohn suggests seven entry modes: company owned only operations, direct franchising, the establishment of a branch operation, the establishment of a subsidiary, the establishment of an area developer, the grant of master franchise rights, and the entry into of a joint venture.180 Developing existing theories,
Duniach-Smith divided entry modes into two main streams: direct and indirect modes,181 as illustrated in the figure below:182
177 Alex S. Konigsberg, 'Analyzing the International Franchise Opportunity' in Yanos Gramatidis and Dennis Campbell (eds), International Franchising: An In-depth Treatment of Business and Legal Techniques (Kluwer Law and Taxtation Publishers, 1991) p. 16. 178 Ernest C. McLean III, 'An American Perspective on Franchising as an Entry Strategy to the European Communities' in Dennis Campbell and Louis Lafili (eds), Distributorships, Agency and Franchising in an International Arena: Europe, the United States, Japan and Latin America (1990) pp. 144-146. 179 Alex S. Konigsberg, 'International Franchising' (2008) 180 Martin Mendelsohn, 'Techniquies of International Expansion' in Martin Mendelsohn (ed), Franchising in Europe (1992) p. 31. 181 There exists a direct relationship between the franchisor and its foreign franchisees in direct entry modes whereas there is an intermediary in the host country intervening the franchisor- franchisee relationship in indirect modes. 182 Krista Duniach-Smith, 'Franchising and the Choice of International Entry Mode' in Josef Windsperger et al (eds), Economics and Management of Franchising Networks (2004) 243.
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Figure 1: Entry Mode Choices
Entry Mode Choice
Exporting Contractual Modes Direct Investment
Management Licensing Franchising Joint Venture Contract
Direct Modes Indirect Modes
Direct Subsidiary Area Joint Master Franchising Development Venture Franchising Agreement
Although there are differences between scholars about the classification of entry modes, six methods of international expansion are often mentioned: direct franchising, master franchising, area development agreement, branch, subsidiary, and joint venture.
Direct Franchising Direct franchising involves franchisors directly entering into franchise agreements with individual franchisees in the host country without the intervention of any third party.183 This form of franchising is rarely employed in international franchising, unless the host country and the home country are close in terms of geography and culture.184 Franchisors may also conduct direct franchising if there are legal restrictions which make establishing a subsidiary or branch difficult or impossible, or if tax benefits can be gained without a physical presence.185 Although this entry mode may give franchisors financial advantages both in the short term and in the
183 Mendelsohn, above n 10, p. 217. 184 UNIDROIT, Guide to International Master Franchise Arrangements (1998), p. 13. 185 Konigsberg, above n 179, pp. 87-88.
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long term186 as well as helping franchisors through direct control over their franchise system, direct franchising limits the speed and also the scale of the expansion of their franchise systems because of the complication in negotiating, controlling, and servicing each franchisee from the home country.
Master Franchising
Master franchise agreements are the most common choice for international franchising.187 In 1996, the Arthur Anderson study found that 81 percent of US franchisors adopted master franchising for international expansion.188 Master franchising offers franchisors many advantages including speed to market, faster system growth rate, low capital outlay, and the local partner’s knowledge of the host market environment.189 Especially in developing countries where the inadequacy of commercial infrastructure, the unavailability of reliable sources of market information, and the deficiency of sufficient legal safeguards are common problems, master franchising will reduce the risks of internationalisation.190 However, master franchising means that the franchisor may lose direct access and control over franchisees and markets in host countries,191 and face commercial risks through a poor choice of master franchisee and brand name deterioration.192
Area Development Agreement
This form of franchising, which until recently was not a popular strategy for international expansion, is increasingly accepted in countries which are
186 ibid, p. 89. 187 UNIDROIT, above n 184, p. 2. 188 Andersen, above n 151. 189 Ilan Alon and Rollins College, 'Market Conditions Favoring Master International Franchising' (2007) 14(2) The Multinational Business Review 67. 190 C. M. Sashi and Devi Prasad Karuppur, 'Franchising in Global Markets: Towards a Conceptual Framework' (2002) 19(5) International Marketing Review 499. 191 ibid. 192 Alon and College, above n 189.
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geographically distant from the franchisor’s home country.193 An area development agreement resembles a combination of direct franchising and master franchising. It looks like direct franchising because the franchisor enters into a direct franchise agreement with franchisee (developer) without the intervention of a third party. On the other hand, an area development agreement resembles the characteristic of master franchising as the developer is responsible for financial and management resources for promoting the franchising system in the host country.194 Although an area development agreement offers the advantage of exploiting the financial and management investment of the developer, the franchisor may be seriously damaged in the event of the developer’s failure because all outlets in the developed area are owned by the developer.195
Subsidiary
The subsidiary of the franchisor in the host country is a legal entity which has an independent legal status separate from the franchisor. The subsidiary can open its own outlets or enter into franchise agreements with franchisees in the host country. Because of the existence of the subsidiary in the host country, the franchisor can effectively control its intellectual property rights, and easily open a pilot outlet to test the success, to train and service franchisees. The franchisor still has the advantages of direct franchising because of the direct relationship between the franchisor and franchisees. However, the establishment of a subsidiary demands additional costs and a greater commitment from the franchisor.196
Branch
A branch, like the subsidiary, gives the franchisor advantages of testing the franchise concept, and of training and servicing franchisees in the host country. The
193 UNIDROIT, above n 184, p. 14. 194 Konigsberg, above n 179, p. 95. 195 ibid. 196 McLean III, above n 178, p. 145.
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establishment of a branch requires lower initial financial and management resources than the establishment of a subsidiary. However, it is not an independent legal entity and the franchisor assumes legal responsibilities for the branch’s business in the host country. The choice between a branch and a subsidiary is usually based on tax considerations.197 If the franchisor expects that its franchise system in the host country will incur losses in the initial years, it may be better to establish a branch rather than a subsidiary. Under the regulations of most countries, a franchisor may offset the losses that its branch causes in the host country against the profits it earns in the home country.198 In fact, both the franchisor and franchisees in the host country almost always prefer a subsidiary to a branch office.199
Joint Venture
In this entry mode, a franchisor enters into a joint venture agreement with a
“partner” who is usually a national of the host country. A joint venture company is usually established but the agreement may operate simply as a contractual relationship.200 The franchisor will enter into either an area development agreement or a master franchise agreement with the joint venture,201 which leads to a network of either the joint venture owned outlets or franchised outlets. Therefore, the joint venture has advantages and disadvantages similar to those of master franchise agreements and area development agreements.202 Through the joint venture the franchisor also gets greater control of the franchising system and the intellectual property.203 However, the joint venture may not operate to the franchisor’s
197 Konigsberg, above n 177, p. 20. 198 ibid. 199 ibid. 200 ibid, p. 26. 201 ibid. 202 ibid. 203 ibid, p. 27.
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expectations because of conflicts of interest between the franchisor and the partner.204 The joint venture is particularly adopted for expanding into culturally distant countries where the franchisor needs a partner who has local knowledge.205
2.4.3 Entry Mode Considerations for Foreign Franchisors
Entry mode determination is a key issue for an internationally expanding franchisor.206 Although motivations for the internationalisation of franchising have been considered by many researchers, there has been little research on the choice between different franchising modes of entry.207 Most studies focus on master franchising which is the most common entry mode.208 Meanwhile other research has explained the choice between international franchising and foreign direct investment, or the franchisor’s choice between franchised outlets and company owned outlets in foreign countries.209
Having regard to the level of commitment, assumed risk and control of franchisors,
Alon identified the choice between entry modes as in the figure below:210
204 ibid, p. 26. 205 Barry Quinn, 'Towards a Framework for the Study of Franchising as an Operating Mode for International Retail Companies' (1998) 8(4) The International Review of Retail, Distribution and Consumer Research 445. 206 Alon and College, above n 189. 207 Krista Duniach-Smith, 'International Entry Mode Choice in a Franchise Setting' (Paper presented at the Economics and Management of Franchising Networks, Vienna, Austria, 2003). 208 Ilan Alon, 'The Organizational Determinants of Master International Franchising' in Dianne H.B. Welsh and Ilan Alon (eds), International Franchising in Industrialized Markets (North America, the Pacific Rim, and Other Countries) (2002) . 209 Duniach-Smith, above n 207; Scott Shane, 'The Effect of National Culture on the Choice between Licensing and Direct Foreign Investment' (1994) 15(8) Strategic Management Journal 627; Fladmoe-Lindquist and Laurent L. Jacque, above n 137. 210 Alon, above n 208, pp. 120-121.
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Figure 2: The Evolution of Franchising Entry Strategies211
Time
Direct International Sole Venture Franchising with a Subsidiary
Joint Venture
Control Master International Franchising
Direct International Franchising
Risk
A more recent study conducted by Duniach-Smith suggested a model of international franchising entry mode choice, in which organisational and environmental factors are determinants not only affecting the choice of entry mode but also underpinning the explanation for the decision to internationalise and the choice of the host country.212
Figure 3: Models of International Franchising Entry Mode Choice
Organisational Direct Modes Factors
Decision to Franchising Internationalise Entry Mode Choice
Environmental Factors Indirect Modes
211 In this figure, the area development agreement is considered as a kind of master franchising. 212 Duniach-Smith, above n 207.
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In Duniach-Smith’s research, local regulation is ranked as the fourth most important determinant among 17 major environmental factors which affect the choice of entry modes by franchisors.213 Duniach-Smith identifies the following environmental determinants:
Ranking Environment Factors
1 Financial situation of local partners
2 Economic risk
3 Brand protection conditions
4 Local regulations
5 Market size
6 Political risk
7 Competitive situation
8 Level of economic development
9 Cultural differences
10 Sources of supply
11 Conditions of outgoing money transfer
12 Tax system
13 Geographical/physical distance
14 Franchisor’s national culture
15 Penetration rate of foreign firms
16 Marketing infrastructure
17 Importance of franchising in the host country
213 ibid.
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2.5 FRANCHISE REGULATION
2.5.1 The Nature of the Franchise Relationship and the Challenges for Regulators
Franchise contract is both a relational contract and a standard form contract
Franchising in its contemporary business format is increasingly recognised as a relational contract214 which is largely defined by two main features: incompleteness and longevity.215 A relational contract exists in part because the parties cannot always ex ante determine their obligations:216
A contract is relational to the extent that the parties are incapable of reducing important terms of the arrangement to well-defined obligations. Such definitive obligations may be impractical because of the inability to identify uncertain future conditions or because of inability to characterize complex adaptations adequately even when the contingencies themselves can be indentified in advance.217
A New Zealand appellate judge has recently identified essence of a relational contract in terms which have received academic approval:218
In essence, relational contracts recognise the existence of a business relationship between the parties and the need to maintain that relationship; the difficulty of reducing important terms to well defined obligations; the impossibility of foretelling all the events which may impinge upon the contract; the need to adjust the relationship over time to provide for unforeseen factors or contingencies which cannot readily be provided for in advance; the commitment, likely to be extensive, which one party must make to the other, including significant investment; and that they are in an economic sense likely to be incomplete in failing
214 Andrew Terry, 'Franchising, Relational Contracts and the Vibe' (2005) 33 Australian Business Law Review 289; Elizabeth Crawford Spencer, The Regulation of Franchising in the New Global Economy (Edward Elgar, 2010), p. 77. 215 Alan Schwartz, 'Relational Contracts in the Courts: An Analysis of Incomplete Agreements and Judicial Strategies' (1992) 21(2) The Journal of Legal Studies 271. 216 Charles J. Goetz and Robert E. Scott, 'Principles of Relational Contracts' (1981) 67 Virginia Law Review 1089. 217 ibid. 218 Terry, above n 214; Wang, above n 20.
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to allocate, or allocate optimally, the risk between the parties in the event of certain future contingencies...
Consequently, a relational contract is one which involves not merely an exchange but a relationship between the contractual parties. The parties are not “strangers” in the accepted sense and much of their interaction takes place “off the contract” requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence. Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties.219
Franchising is a long term relationship which involves a continuing relationship rather than discrete transactions - “one-shot deals”.220 In the franchise relationship, as Terry observed, the obligations of the parties stem not only from the written contract but also from the external norms which supplement the defined contractual obligations and influence the ongoing relationship.221 Many obligations are broadly and loosely defined in the franchise contract.222 Having regard to the relational nature of franchise agreements, the Parliamentary Joint Committee on Corporations and Financial Services of Australia suggested that:
The variable nature of the franchise agreement reflects the reality that successfully managing a franchising relationship over time requires flexibility of terms to adapt to constantly changing business conditions. Contracts between franchisees and franchisors therefore need continuing cooperation and agreement between the parties to ensure the arrangement provides benefit to the both.223
219 Thomas J, dissenting in Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1 NZLR 506 at 316. 220 Bill Dixon, 'What is the Content of the Common Law Obligation of Good Faith in Commercial Franchises?' (2005) 33 Australian Business Law Review 207; Spencer, above n 214, p. 86. 221 Terry, above n 214. 222 The Australian Parliamentary Joint Committee on Corporations and Financial Services, 'Opportunity not opportunism: improving conduct in Australian franchising' (Parliamentary Joint Committee on Corporations and Financial Services, 2008), para. 2.9. 223 ibid, para. 2.7.
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The relational nature of the franchise contract sits uneasily with its standard form characteristic.224 Rosenfield points out that:
The reputable company [the franchisor] will not change its contract; it will rarely let it be examined until the prospective purchaser [the franchisee] has made a deposit towards the purchase. It will not compromise or negotiate any part of it. The attorney representing a prospective purchaser need only determine with him if the client can live within the framework of the franchise agreement. If it is oppressive or confiscatory, the client is best advised not to sign. If the franchise company [the franchisor] offers to negotiate away any of its requirements to make the sale, it can only be an indication of the weakness of the company. The intangible that the purchaser seeks in joining the franchise network is the organisation and power of a professional management group; if that group is willing to give away any part of its basic contract it can only indicate a fatal weakness in the structure and philosophy of the company.225
As a type of standard form contract, the franchise agreement is characterised by a lack of negotiation of terms and unequal bargaining power.226 The franchisor offers the contract to the franchisee on take-it-or-leave-it basis: the franchisee’s only choice is to agree to join the franchisor’s system under the standard terms or not sign the contract.227
The coexistence of the qualities of both the relational contract and the standard form contract in the franchise contract reflects and reinforces asymmetries of power and risk between the franchisor and the franchisee. In the franchisee relationship, the
224 Gillian K. Hadfield, 'Problematic Relations: Franchising and the Law of Incomplete Contracts' (1989-1990) 42 Stanford Law Review 927. 225 Coleman R. Rosenfield, 'Franchising and the Lawyer' (1968) The Florida Bar Journal 17. 226 Spencer, above n 214, p. 78. 227 The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222, para. 2.12.
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franchisee is invariably in the weaker and disadvantaged position compared to the franchisor. Spencer has noted that:
In the franchise context, it is important to understand not only the nature of these contracts [the relational contract and the standard form contract] independently, but also the interaction of the standard form and relational qualities.
For a franchisee, the unequal bargaining power and lack of negotiation of the standard form combine with the relational contract’s reliance upon flexibility and trust to reinforce an imbalance of power and uncertainty, so that the franchise contract reflects and reinforces the asymmetries in the franchise relationship already put in place by the market interaction.
The relational and standard form qualities of the contract, independently and in combination, enhance the power of a franchisor and allow a franchisor to shift risk to franchisees, increasing uncertainty and risk for franchisees and depriving them of the capacity to manage risk through contract.228
Power and Information Imbalances Inherent in the Franchise Relationship
In its contemporary business format mode, franchising includes two inherent characteristics: a power imbalance and an information imbalance.229 The power imbalance results from the reality that in most franchise relationships “the franchisor has a significant capacity to control the activities of the franchisee in great detail”.230 The information imbalance flows from “the franchisor’s monopoly of much of the information that would be useful, even necessary to the prospective franchisee in making an informed decision to buy franchise”.231
228 Spencer, above n 214, pp. 77-78. 229 Elizabeth Crawford Spencer, 'Submission to the Review of Franchising Regulation' (Ministry of Economic Development, Wellington, New Zealand, 2008). 230 Harold Brown, Franchising: Trap for the Trusting (1969), p. 41. 231 ibid
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Effective franchising requires standardisation and uniformity which demands that the franchisor has the power to control the franchisee’s use of franchise brand and system.232 It was acknowledged by the Australian Parliamentary Committee on Corporations and Financial Services that the standard form contract designed by the franchisor is necessary to ensure the uniformity of the franchise system.233 The accumulated capital of the franchisor represents the commercial value of the brand and system and the franchisor needs to be able to protect these intangibles in its own interest as well as in the interest of franchise as a whole.234 To ensure quality standards the franchisor imposes strict terms and conditions on operating the franchise system by the franchisee.235 Terry explains in more detail the need for the franchisor to have the power to control their systems:
The franchisor must have the right and the power to get rid of non- performing franchisees, because a non-performing franchisee risks not only the intellectual property of the franchisor but also the investment of every other franchisee. If you have had a bad experience in one particular franchise outlet, you are going to take it out against that franchise system. That is one of the by products of standardisation and uniformity, which distinguish franchises. The franchisor has to have the power to get rid of non-performing franchisee or those who are not acting in accordance with the system. Not only that, the franchisor must have the power to respond, to introduce new menu items, new shop fits, or new whatever. The reality is that, if you have a franchise system of a substantial size, it is wonderful to think that all the franchisees will get together and agree to do something, but it does not work like that. That is not how it is, and
232 Veronica L Taylor, 'Contracts with the Lot: Franchises, Good Faith and Contract Regulation' (1997) New Zealand Law Review 459; The Economic and Finance Committee, Parliament of South Australia, 'Final Report: Franchises' (May 2008), p. 11; The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222, para. 2.12. 233 The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222. 234 The Economic and Finance Committee, Parliament of South Australia, above n 232, p. 14. 235 The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222, para. 2.12.
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that is not how it can be. It has to be a one-sided agreement. For the franchisor, I think that it is the reality. It should not be surprising.236
An information imbalance is also inevitable in the franchise relationship of the business format franchising. Accurate information on the franchisor and the franchise system is very important to a prospective franchisee in deciding whether to join the franchisor’s system. However, the franchisors may provide biased and unreliable information to prospective franchisees.237 The report of the US House of
Representative Committee on Small Business indicated that: “Despite its growing significance, there is a surprising lack of comprehensive and accurate information concerning all aspects of franchising nationally”.238 Spencer has identified five principal reasons for the lack of balanced, reliable and accurate information in franchising as following:
The first and most fundamental is that the sources of information about the sector are limited and the available information is dominated by franchisors’ interest. Second, franchisors are selling the franchise product and so have a strong interest in projecting a positive image of the sector. Third, not only at the beginning, but throughout the relationship, franchisors and franchisees have conflicting interests, and so do not readily share information as readily as an outside observer might expect. Fourth, defamation and competition law are both of concern for franchisees that may wish to communicate to others their experiences with franchising. Fifth, it is difficult to garner evidence from dispute processes.239
236 The Economic and Finance Committee, Parliament of South Australia, 'Committee Hansard to the Economic and Finance Committee' (12 March 2007), pp. 102-103. 237 Spencer, above n 229, p. 6. 238 The US House of Representatives Committee on Small Business, 'Franchising in the US Economy' (1990). 239 Elizabeth Crawford Spencer, The Regulation of the Franchise Relationship in Australia: A Contractual Analysis (Bond University, Australia, 2008), p. 124.
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The information and power imbalances inherent in the franchise relationship can lead to the franchisor’ opportunism240 and pose challenges for regulators.
2.5.2 The Rationale for the Introduction of Franchising Regulation
The introduction and development of franchising has inevitably led to a debate as to the need of franchise-specific laws to govern the franchise relationship. This issue of franchise regulation is increasingly attracting the attention of regulators. The healthy development of franchising of course requires an effective underlying commercial law environment without which franchising is not able to function.241 However, as Terry comments, “whether an effective legal environment requires a regulatory regime dedicated to the franchising sector is of course a much more controversial issue”:
The business format franchise model is a unique and proven method for exploiting the synergy created by marrying the entrepreneurial spirit and commitment of the franchisee with the proven business system and management expertise of the franchisor which may be threatened by regulation. However, franchisees are damaged, and franchising is diminished, by the inappropriate practices of those who trade off the reputation of franchising without the ability to deliver on the promise of franchising. The search for an appropriate form of regulation which protects the interest of both parties in a manner that does not curtail the entrepreneurial nature of franchising or threaten its development is difficult but significant. The accompanying debate is vigorous and passionate.242
240 Spencer, above n 229, p. 5; Andrew Terry and Yun Zhang, 'The Power and Information Imbalance in Franchising: The Role of Prior Disclosure under the Franchising Code of Conduct' (2011) 39 Australian Business Law Review 245. 241 Terry, above n 22; UNIDROIT, above n 184, p. 265. 242 Terry, above n 21.
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Until 1990 franchise-specific legislation existed only in the US and four other countries (Barbados, Canada (the province of Alberta), Japan, and France). The prevailing view until recently was that the adoption of a franchise-specific law threatened the entrepreneurial development of franchising. There was for example a wide criticism of franchise-specific regulation which was introduced in Russia “in advance of any viable franchising sector”.243 Konigsberg asserts that “most people who are knowledgeable about franchising matters would conclude... that the popularity of franchising is in spite of franchise legislation and not because of such legislation”, and that legislating franchising creates difficulties not only for foreign franchisors but also for growing domestic franchise systems.244 Professor Martin Mendelsohn, a leading UK academic on franchising, states that “where [franchise- specific laws] exist they present a potentially formidable obstacle to entry to the marketplace”.245 Writing at the introduction in 1998 of Australia’s Franchising Code of Conduct, Mendelsohn commented that:
The proposed new Australian regulation makes Australia the least desirable destination in the world for franchise systems... [Franchisors] should avoid Australia until they have nowhere else to go and even then it would be a close call.246
Consistent with the views expressed above, in 1994, the International Bureau of the World Intellectual Property Organisation published a Franchising Guide which in its introduction stated that:
From a legal standpoint, franchising relies on contract law and, therefore, does not necessarily require any special regulatory or legislative structure in order to function and develop. It is, therefore, appropriate to stress at the outset that no specific regulation of franchising has been or would be necessary for franchises to thrive in any economy. However, some
243 Wissels, above n 34. 244 Konigsberg, above n 34. 245 Mendelsohn and Bynoe, above n 5, p. 348; Martin Mendelsohn, Franchising Law (2004), p. 385. 246 Mendelsohn, above n 23.
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governments have nevertheless chosen to adopt legislation to regulate franchising. Overregulation could, however, have the effect of discouraging investment in this area.247
However, throughout the decade of the 1990s there was “a clearly discernible trend to regulation with a number of states introducing a form of regulatory regime”.248 Because an information imbalance and a power imbalance are inherent in the typical franchising relationship,249 the introduction of a franchise-specific regulation is based on “a desire to take care of problems that have arisen, to redress the balance between the parties to an agreement where the necessary balance either does not exist or has been distorted, and of course to make sure that abuses either do not occur or, where they have occurred, that they do not occur again”.250 In its submission on the First Exposure Draft of the abandoned 1986 proposal to enact a dedicated franchise-specific law for Australia, the Council of Small Business Organisations in Australia stated that:
Entrepreneurship and business creation in a free enterprise society such as ours necessarily includes an element of risk and it should certainly not be the role of Government to remove risk. Nevertheless in the particular circumstances of franchising there are elements quite different to normal business development because of the control of the franchisor which can be an overriding risk for other than purely business or commercial reasons. Those special additional risks arising in part because of the balance of power in the franchising relationship should be minimised while leaving the commercial risks and decision to be handled by the parties concerned.251
Although the debate as to whether a dedicated franchise regulatory regime is necessary to support the development of franchising has not yet ended, the last two
247 International Bureau of WIPO, above n 34, pp. 9-10. 248 Terry, above n 22. 249 Terry, above n 30. 250 Peters, above n 24. 251 cited in Terry, above n 30.
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decades have witnessed an increasing number of countries adopting franchise- specific regulations to address the special risks arising from the unique nature of franchising.252
2.5.3 The Regulatory Strategies
Despite the trend to franchise-specific laws, there is a little uniformity among the countries which have introduced franchise-specific laws in relation to the nature, extent, scope and comprehensiveness of the law. To address the information and power imbalances inherent in the typical franchise relationships, the regulated sectors rely on a number of regulatory strategies including prior disclosure, alternative dispute resolution, registration and standards of conduct. There is nevertheless no uniformity in the regulatory model adopted by the regulated regimes or even the extent of protection by regimes adopting the same model. The decision to adopt franchise-specific regulation of course raises the challenge of defining the particular relationships to be considered as franchising - an issue discussed in
Chapter 7.
Table 2: The Regulatory Models253
The Regulatory Models Jurisdictions
Belgium, Brazil, France, Japan, Sweden, Taiwan, and the Disclosure US (federal)
Albania, Canada (Alberta, New Brunswick, Ontario, Prince Disclosure and Conduct Edward Island, Quebec), Georgia, Italy, and Romania
252 Terry and Yun Zhang, above n 240. 253 Andrew Terry, 'Global Trends in Franchise Regulation and the Australian Experience: Lessons for New Zealand' (Paper presented at the Franchise Law Reform Symposium, New Zealand Governance Conference, University of Auckland, Auckland, New Zealand, 2009).
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Disclosure and Registration Indonesia, Mexico, and Spain
Disclosure, Registration and China, Macau, Malaysia, Moldova, and Vietnam Conduct
Disclosure, Conduct and South Korea and Australia Dispute Resolution
Registration Croatia, Barbados, and 15 US states254
Estonia, Lithuania, Russia, Ukraine, Venezuela, and US Conduct states
Registration and Conduct Belarus, Kazakhstan, Kyrgyzstan, and Saudi Arabia
prior disclosure
Prior disclosure is widely accepted as the key to franchising regulation.255 It is the most appropriate tool to deal with the information imbalance inherent in the typical franchising relationship.256 It facilitates due diligence by ensuring that the franchisee has full and reliable information which is useful and necessary in making an informed decision to acquire the franchise.
Although franchisors generally do not welcome regulatory intervention “there is a consensus among franchisors that comprehensive disclosure of information to prospective franchise buyers improves the franchisee recruitment process and is generally good for franchising”.257 In one of the earliest government reports in Australia, prior disclosure was not considered as a restriction on business but as a “common sense and firm basis for doing business within the peculiarly close
254 Spencer, above n 214, p. 147. 255 Terry, above n 22. 256 ibid. 257 Lewis G. Rudnick, 'Trends: Where do Franchisors and Franchisees stand on Regulation?' (1999) Franchising World 24.
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relationship of a franchise and in accordance with normal business practice”.258
However, there is still a considerable debate relating to whether or not particular matters need to be disclosed and the level of detail which may turn “not so much on the relevance of the information to a franchisee but whether the costs of providing the information can be justified”.259
Although prior disclosure is widely adopted in the franchising regulation of almost all countries, only few countries require a template for disclosure in the form of a prescribed disclosure document.260 In the countries requiring a prescribed disclosure document there is generally a requirement of an annual update. In the template for disclosure, there is a little uniformity in terms of the extent and content of disclosures. The prescribed disclosure document regimes of countries which have based their disclosure requirement on the US Uniform Franchise Offering Circular (UFOC) format are very comprehensive and require over 200 separate items of information to be provided.261 At the other extreme there are minimalist disclosure regimes which impose few specific disclosure obligations or rely on a general formula such as “such information as is needed in the circumstances” (in Sweden) or “such information necessary to enable the franchisee to take part in a franchise agreement in full awareness” (in Romania).262 The publication of the UNIDROIT’s
Model Franchise Disclosure Law - an exclusively disclosure law which provides a minimum content of the disclosure document - is expected to be influential in accelerating the acceptance of disclosure laws and in shaping their content.263
258 Trade Practices Consultative Committee, Parliament of Australia, 'Small Business and the Trade Practices Act' (1979) [11.32]. 259 Office of Small Business, Canberra, Australia, 'Final Exposure Draft of the Franchising Code of Conduct' (1998) [18]; Andrew Terry, 'A Census of International Franchise Regulation' (Paper presented at the 21st Annual International Society of Franchising Conference, Las Vegas, Nevada, the US, 2007). 260 Terry, above n 259. 261 ibid. 262 ibid. 263 Peters, above n 24.
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registration
Registration is used as a regulatory strategy to monitor and improve regulatory compliance but it also facilitates the collection of franchising data and statistics.264 Among those jurisdictions which require registered documents there is wide variety as to the subject of registration: registration of the franchisor’s disclosure; registration of the franchisor’s intellectual property; registration of the franchise system; and registration of franchise consultants and brokers.265 There is also wide divergence in the extent of the required registration which may vary from comprehensive registration and audit regime in respect of disclosure documents, agreements, manuals, audited accounts, financial statements, auditor and director’s reports as well as other necessary information and the approval power of the authority to a more modest requirement of recording and/or filing annual updated disclosure documents may be supported.266 The filing of annual updated disclosure documents facilitates the collection of sector statistics.
Although registration regime has been a common regulatory instrument in the US where it is required by fifteen states, this regime has not received much attention by other countries. Fifteen jurisdictions include registration obligations which may vary from a full audit to a mere recording.267 The fifteen US registration states introduce the most onerous registration and audit mechanisms which nevertheless vary in the level of censorship from state to state and from franchisor to franchisor.268 These states and five other registration countries, including China, Indonesia, Malaysia,
Spain and Vietnam, also impose an annual reporting obligation.269
264 Terry, above n 29. 265 Spencer, above n 214, p. 248. 266 Terry, above n 259. 267 Terry, above n 253; Terry, above n 259. 268 Terry, above n 259. 269 ibid.
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In addition to a registration obligation, three countries - China, Italy and Vietnam - impose pre-conditions to franchising. They are the operation of two stores for one year, the concept tested in the market, and the operation of the business to be franchised for one year in China, Italy, and Vietnam, respectively.270
standards of conduct
Regulating standards of conduct is a legal strategy which imposes restrictions on rights and obligations of the parties in the franchise relationship. The use of the law to deal with the power imbalance in franchise relationships has not received universal support because it encroaches on freedom of contract and raises difficult issues in relation to fairness and the appropriate allocation of risk in doing business.271 There is nevertheless an increasing trend to regulation impacting on conduct in the franchise relationship in order to remedy the power imbalance.272 The Australian Parliamentary Joint Committee on Corporations and Financial Services has recently noted that laws may be necessary to address unduly onerous obligations and opportunistic conduct:
Franchisor opportunism has been described as predatory conduct and strong arm tactics by franchisors involving the exploitation of a pre- existing power relationship between the franchising parties, which makes the franchisee vulnerable or economically captive to the demands of the franchisor. There is an inherent and necessary imbalance of power in franchise agreements in favour of the franchisor, but abuse of this power can lead to opportunistic practices including encroachment, kickbacks, churning, non-renewal, transfer, termination at will, and unreasonable unilateral variations to the agreement.273
270 ibid. 271 Rudnick, above n 257; Terry, above n 29. 272 Terry, above n 29. 273 The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222, p. 101.
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About half of the countries adopting franchise regulation deal with particular issues in the franchisor-franchisee relationship.274 Restriction on unilateral termination by the franchisor is the most common provision with the most common formula being prescribed termination events and/or notice of default and opportunity to remedy.275
Instead of specifying a fixed term for the relationship, most regulatory regimes simply require a term long enough for the franchisee to recover the initial investment. While a mandatory right to renew the agreement is not imposed by the majority of the jurisdictions, advance notice of non-renewal is more commonly required.276 Most prior disclosure regimes request a notice of the franchisee’s entitlement to assign the agreement, but a few of them mandate a right of assignment.277 Many other relationship issues are also redressed idiosyncratically such as encroachment, unilateral variation, general releases from liability, rights to associate, confidentiality, and non-competition, although there is not “a consistent international approach to relationship regulation”.278
General standards of conduct are imposed by some countries including the Canadian provinces, China, Italy, South Korea, and Malaysia, where there is a requirement of “fair dealing in performance and enforcement” (Canada), “compliance with principle of fair dealing and honesty” (China), “good faith” (Italy and South Korea), and “the best franchise business practice of the time and place” (Malaysia).279 In other countries, these issues can be prescribed in the underlying law of general application. Australia is a typical example as the prohibitions of “misleading conduct” and “unconscionable conduct”280 has been influential in raising standards
274 Terry, above n 259. 275 ibid. 276 ibid. 277 ibid. 278 ibid. 279 ibid. 280 Australia’s misleading and unconscionable conduct laws were prescribed in the Trade Practices Act 1974 but are now contained in the Australian Consumer Law enacted as Schedule 2 to the Competition and Consumer Act 2010 (Cth).
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of conduct within the franchising sector.281 Some countries such as South Korea and
Japan provide the prohibitions on various vertical restraints which are normally under competition laws in other jurisdictions.282
It is also important to note that in some countries, particularly developing economies, statements of the prescribed rights and obligations of franchisors and franchisees are also provided, which is considered significant with respect to “educational” impact.283
Only a minority of countries introduce prescribed content of a franchise agreement.284 Of the countries that do not require the prescribed content of the agreement, the majority require prior disclosure of at least some of the key contractual provisions.285 Given the importance of the franchise agreement, it seems strange that not all countries require the franchise agreement to be delivered along with the prescribed disclosure.286
Only Australia requires the sensible provision that before entering into a franchise agreement the perspective franchisee must certify that advice has been received from an independent legal or business advisor or independent accountant or that the obtaining of such advice has been recommended but not been sought.287 Australia and Malaysia also give the franchisee a “cooling off” period in which the franchisee can withdraw from the agreement and be reimbursed paid fees less an amount to cover reasonable expenses incurred by the franchisor provided that this is stipulated in the agreement.288
281 Terry, above n 258. 282 ibid. 283 ibid. 284 ibid. 285 ibid. 286 ibid. For example, Australia, Belgium, Brazil, Canada, France, Japan, Kazakhstan, Spain, Sweden, Taiwan, and the US. 287 ibid. 288 ibid.
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alternative dispute resolution
This is a regulatory strategy which is aimed at encouraging the parties to deal with disputes more quickly, more efficiently and at a lower cost rather than relying on litigation or arbitration. In 1997, the Australian House of Representatives Standing
Committee on Industry, Science and Technology concluded that it was difficult for small business to access justice289 and the Franchising Code of Conduct introduced in the following year required mediation as a prerequisite to any litigation or arbitration. This was expected as “engender greater participation by franchisees in conflict resolution”.290 Australia has been successful in using mediation as an integral component of its regulatory scheme. Over 75 percent of disputes referred to the Government sponsored office of the Meditation Advisor (established according to the Franchising Code of Conduct in Australia) for meditation are solved within only a day and at minimal cost compared to traditional dispute resolution.291
Many countries require dispute resolution processes to be introduced in the franchise agreement of prior disclosure.292 However, only Australia, Alberta (a province of Canada), and South Korea impose mediation as a prerequisite to litigation.
2.5.4 Regulating Franchising Internationally
The US is not only the homeland of modern franchising but is also the first country to have introduced a specific law on franchising. In 1970, California became the first US state to enact legislation (the California Franchise Investment Law) covering registration and disclosure obligations.293 Today, fifteen states in the US have
289 The House of Representatives Standing Committee on Industry, Science and Technology, above n 2, para. 7.1. 290 Terry, above n 29; Spencer, above n 214, p. 281. 291 Terry, above n 259. 292 ibid. 293 Thomas M. Pitegoff and W. Mechael Garner, 'Franchise Relationship Laws' in Rupert M. Barkoff and Andrew C. Selden (eds), Fundamentals of Franchising (3rd ed, 2008) p. 187.
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franchise regulations relating to the franchise registration and offering disclosure requirements,294 while franchise relationship laws exist in a further eighteen states,295 either separately or as part of the registration and disclosure laws. The Federal Trade Commission’s 1979 Franchise Rule (Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures) was first US federal regulation on franchising. In 2007, the US Federal Trade Commission approved a comprehensively revised Franchise Rule which became effective on an optional basis on 1 July 2007 and on a mandatory basis on 1 July 2008.296
The world has rapidly embraced the US franchising concept but not the US manner of its regulation.297 By 1990, although franchising had spread from the US to many developed countries, only four (Barbados, Canada (the province of Alberta), Japan, and France) had introduced franchise law.298 Since then, however, franchising has been regulated in an increasing number of countries.299 Although most countries still rely on underlying commercial laws to regulate franchising - supplemented in many cases by voluntary self-regulatory codes of practice - the last two decades has experienced a quickened pace of introducing the franchise-specific regulation. Today, over 30 countries,300 including Vietnam, have enacted a franchise-specific law and the trend to regulation of franchising sector throughout the world is expected to intensify.301
294 Including California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wincosin; See Spencer, above n 214, p. 147. 295 Including Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington, and Wisconsin. Puerto Rico and the US Virgin Islands also have franchise relationship laws. See Pitegoff and Garner, above n 293, p. 187. 296 CCH, FTC Disclosure Rules for Franchising and Business Opportunities (Wolters Kluwer, 2007), p. 9. 297 Terry, above n 259. 298 Terry, above n 253. 299 Charles Keith Hawkes and Soumava Bandyopadhyay, 'International Growth of U.S. Franchising: Cultural and Legal Barriers' in Dianne H.B. Welsh and Ilan Alon (eds), International Franchising in Industrialized Markets (North America, the Pacific Rim, and Other Countries) (2002) p. 203; Konigsberg, above n 34. 300 See Appendix 1. 301 Peters, above n 24.
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2.6 CHAPTER CONCLUSION
Franchising as a business strategy is attracting increasing academic interest and a growing body of literature has developed seeking to explain a range of issues relating to its adoption, operation and development. The major focus of Chapter Two has nevertheless been on the unique nature of the franchise relationship enshrined in contracts described by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2002] 2 All ER (Comm) 849 as “not ordinary commercial contracts” and the challenges thereby posed for its regulation.
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PART TWO THE ENVIRONMENT FOR FRANCHISING IN VIETNAM
CHAPTER 3 THE ECONOMIC, SOCIAL AND CULTURAL CONTEXT FOR FRANCHISING IN VIETNAM CHAPTER 4 THE LEGAL CONTEXT FOR FRANCHISING IN VIETNAM AND THE TRANSITION TO “NHA NUOC PHAP QUYEN” (A LAW-BASED STATE) CHAPTER 5 THE UNDERLYING COMMERCIAL LEGAL FRAMEWORK FOR FRANCHISING IN VIETNAM
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CHAPTER THREE THE ECONOMIC, SOCIAL AND CULTURAL CONTEXT FOR FRANCHISING IN VIETNAM
3.1 INTRODUCTION
Franchising is of course affected by a country’s macro-environment which includes not only its legal framework but also economic, social-cultural, and commercial factors. This chapter reviews the economic and social-cultural environments in Vietnam and their influence on the development of franchising. The impact of the legal framework is discussed in Chapter 4.
3.2 SOCIAL AND CULTURAL CHARACTERISTICS
3.2.1 Geography
Vietnam is an elongated S-shaped strip of land which is located on the Indochina peninsula in Southeast Asia. It is bordered by China to the North, Laos and
Cambodia to the West, and the Pacific Ocean to the East.302
302 There is no unified name for the sea to the East of Vietnam. On several maps in the world, this sea is mentioned as “South China Sea”, however, on the official map of Vietnam’s Government it is called as “Eastern Sea” (‘Bien Dong’).
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Figure 4: Map of Vietnam303
Vietnam is the country with 65th largest landmass in the world304 comprising
331,698 square kilometres. From the northernmost point to the southernmost point Vietnam is 1,650 kilometres in length. It is only 50 kilometres wide at its narrowest point and 600 kilometres at its widest section.305 Three quarters of its land area is low mountains and hills which form a large bow from the Northwest to the Southeast.306 With such a long and narrow strip of land coupled with its many mountains and hills, Vietnam poses challenges for the rapid geographic expansion of franchise systems throughout the country.
303 Vietnam Travel Guide, Vietnam Map (
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3.2.2 History
Vietnam has a long history of over 4,000 years commencing with the Van Lang State307 and the legendary Hong Bang Dynasty during the period 2879-258BC.308 However, its history has been marked by interminable wars and the rule of foreign countries. Vietnam was dominated by China for a thousand years from 111BC to 939AD,309 and then by France for almost a hundred years - the first French occupation lasted from 1858 to 1945 and the second occupation in response to
Vietnam’s declaration of independence lasted from 1945 to 1954.310 Vietnam also has a long history of feudalism which continued until 1945. The Democratic Republic of Vietnam (now the Socialist Republic of Vietnam) was established with the proclamation of independence by Ho Chi Minh, the first President, on 2
September 1945. This marked the end of feudalism in Vietnam. However, independence did not exist in practice until 1975 when Vietnam was reunified after 30 years of being partitioned by two wars - first against France (until 1954), and then against the US and its allies (from 1954 to 1975).
Vietnam’s history of both war and feudalism led to a weak economy based primarily on agricultural production and small trading. In these circumstances, the legal system had little impact on the development of Vietnam’s economy.
307 ‘Van Lang’ was the name of Vietnam at that time. 308 Van Ta Tai and Nguyen Ngoc Huy, 'The Le Code: Law in Traditional Vietnam' (Ohio Univ. Press, 1987), p. 4. 309 U.S. Department of State, 'Background Note: Vietnam' (2010)
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3.2.3 Population and Ethnic Groups
The latest national census survey conducted by Vietnam’s General Statistics Office in April 2009 recorded Vietnam’s population at about 86 millions311 making it the third largest population in Southeast Asia (after Indonesia and the Philippines) and the 13th largest in the world.312 Vietnam’s population growth rate has been stable at around 1.2 percent annually since 1999.313 Vietnam is also one of the world’s youngest populations, and Asia’s second youngest population,314 with about 57 percent of its population under 30 years old.315
Vietnam is one of the world’s most densely populated countries, with 260 people per square kilometre.316 However, the population is unevenly distributed across the country. The number of people living in one square kilometre in the area of Red
River Delta (in the North), midland and mountain area in the north, north central part and central coastal provinces, the highlands, North South Vietnam, and Cuu Long River Delta (in the South) is 932, 116, 197, 94, 597, and 425, respectively.317
Most people - approximately 70 percent of the population - live in rural areas. The number of rural inhabitants is nevertheless rapidly decreasing because of rapid urbanisation. Hanoi (the capital) and Ho Chi Minh City (the major business centre) are the largest cities with around seven million inhabitants in each. They are also the
311 Tong Cuc Thong Ke Viet Nam [Vietnam's General Statistics Office], Dan So Trung Binh Phan Theo Dia Phuong [Avarage Population Distributed in Every Province] (
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most densely populated areas. The number of people living in one square kilometre in Hanoi and Ho Chi Minh City is 1,935 and 3,419, respectively.
Ethnically the Kinh318 people account for about 86 percent of Vietnam’s population.319 The other 14 percent of the population comprise 53 different ethnic groups, the major groups being Muong, Thai, Tay, Nung, Hoa and Khmer.320
The large and young population coupled with a stable and manageable population growth rate makes Vietnam an attractive market for both foreign and domestic franchisors. However, the uneven population distribution and the existence of many different ethnic groups with different cultural preferences pose challenges for franchisors in their national expansion.
3.2.4 Language, Religion and Culture
Vietnam has great diversity in its languages, religions and cultures. Vietnamese is the official language of Vietnam and is widely spoken in this country. Twenty four of the 53 remaining ethnic groups also have their own written languages. English is increasingly favoured as a second language while other foreign languages including
French, Russian, Chinese, Japanese and German are also used to various degrees.
There are six major religions in Vietnam - Buddhism, Catholicism, Protestantism, Muslim, Caodaism and Hoa Hao Buddhism.321 Around 25 percent of Vietnam’s population are believers of different religions. Buddhism was introduced to Vietnam
318 The name of the main ethnic Vietnamese group. 319 Bo Ngoai Giao Viet Nam [Vietnam's Ministry of Foreign Affairs], Ethnic Groups (
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at an early stage and is the most common religion with about 10 million followers representing about 50 percent of Vietnam’s religious population.322 Catholicism has around five and a half million believers while the followers of the Caodaism, Hoa Hao, Buddhism, Protestantism and religious Muslim number appropriately 2.4 million, 1.3 million, 1 million, and about 60 thousand, respectively.323 Religions are equal before, and protected by, the law and the people have freedom of religious belief. The 1992 Vietnamese Constitution states that:
Citizens have the right to freedom of belief and religion, and may practise or not practise any religion. All religions are equal before the law. Public places of religious worship are protected by law. No one has the right to infringe on the freedom of belief and religion or to take advantage of the latter to violate State laws and policies.324
In 2004, an Ordinance on Religion and Belief was introduced which further supports freedom of religion and belief in Vietnam as stipulated in the Constitution. Although sometimes criticised by the foreign media for not totally ensuring the right to religious freedom, Vietnam has been removed from the US religion blacklist.325 Moreover, Vietnam has recently hosted several global religious activities such as the United Nations Day for Vesak 2008 and the Sixth World Buddhist Summit in 2010.
Vietnam’s long history of feudalism has influenced, to some extent, Vietnamese legal culture. Under feudalism, the law was considered as punishment (hinh phat) - as a tool for the Emperor to rule over citizens.326 Strict criminal sanctions were used
322 Bo Ngoai Giao Viet Nam [Vietnam's Ministry of Foreign Affairs], Ve Van De Ton Giao O Viet Nam [Religion in Vietnam] (2011)
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to regulate not only criminal but also administrative and civil relationships.327 In the eyes of Vietnamese peasants who accounted for majority of Vietnam’s population, laws were merely to protect the rich people and the mandarins who worked as State officials under the feudalism.328 Therefore, most Vietnamese tended to be hostile to laws. This attitude is also attributed to Vietnam’s long history under foreign domination under which the laws imposed by aggressors were often harsh and were considered, in the eyes of Vietnamese, as rules of the enemy.329
Having a long history of small agriculture, Vietnam traditionally has had a village culture330 in which the sense of community responsibility is dominant. People care much about their family, their village and their country. There is a saying in Vietnam that “if there is a flood the entire community will be immersed” (‘Nuoc Lut Thi Lut Ca Lang’). Unlike in western countries which support individualism, individual self-consciousness is limited in Vietnam.331 Moreover, it is widely accepted that Vietnamese culture has been deeply influenced by Chinese culture,332 in particular Confucianism. Confucianism was introduced to Vietnam during the time of China’s rule (111BC to 939AD), and had a strong influence on Vietnamese society during the Le (1428-1788) and Nguyen dynasties (1802-1845).333 Confucian
327 Nguyen Thi Minh, Legal and Professional Challenges Confronting Practising Lawyers in Contemporary Vietnam (SJD Thesis, University of New South Wales, 2008), p. 17. 328 Nguyen Viet Huong, 'Correlation Between "Huong uoc" Village Codes and Laws in Regulating Social Relations in Vietnamese Traditional Villages' (2003) 9(102) Vietnam Law & Legal Forum 27. 329 Minh, above n 327, p. 17; Nguyen Minh Tuan, 'Nhan Dien Xa Hoi Lang Xa - Xua Va Nay [Identifying Village Society - Past and Present]' (2004) 11-12 Tap chi Khoa hoc va To quoc [Journal of Science and Homeland] . 330 Tran Quoc Vuong, Van Hoa Viet Nam: Tim Toi Va Suy Ngam [Vietnam Culture: Researches & Reflections] (2003), p. 71. 331 Bui Ngoc Son, 'Mot Vai Dac Diem Tam Ly Dan Toc voi Viec Thuc Hien To Tung Tranh Tung o Viet Nam [Some Traditional Psychological Features of Vietnamese Related to the Implementation of Adversarial Litigation in Vietnam]' (2003) (Special Bulletin on Judicial Reform) Tap chi Nghe Luat [Legal Profession Review] 17. 332 Phan Ngoc, Ban Sac Van Hoa Viet Nam [Vietnamese Cultural Character] (Nha Xuat Ban Van Hoc [The Publishing House of Literature], 2006), p. 90; Tai and Huy, above n 308. 333 Nguyen Duc Su, 'Vi Tri Va Vai Tro Cua Nho Giao Trong Xa Hoi Viet Nam [The Place and Role of Confucianism in Vietnam's Society]' (2011)
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philosophy gives prominence to the rule of a society by virtues, rather than by laws. According to Confucianism, to build a well-ordered society it is necessary to have people who achieve five virtues: Nhan (compassion, charity and kindness), Nghia (righteousness), Le (good manners, politeness), Tri (wisdom), and Tin (faithfulness, fulfilling one’s promises).334 Both traditional village culture and the influence of Confucianism emphasise sentimentalism, harmonisation, and collectivism.335 These cultural characteristics, which are still common today,336 have led to the Vietnamese respecting affection (Tinh) more than laws (Ly).337 This traditional characteristic has had a significant influence on the perception of people in general and businessmen in particular in relation to the law and to the choice of dispute resolution strategy - an issue further discussed in Chapter 4.
Vietnam was traditionally a country of small villages. The former biggest city,
Thang Long (today named Hanoi) had only small shops selling agricultural products. Vietnam exhibited characterises of rural culture338 which respected agriculture (Trong Nong) rather than commerce (Trong Thuong). Consequently, there were few independent businessmen339 and business was essentially small business.340 This has resulted in a young market economy where most businesses are small or medium sized and lack management ability.
Vietnam’s culture also differs among ethnic groups as well as among provinces. This cultural difference leads to diversity in consumption behaviors of the people. For example, in speaking about coffee consumers in Ho Chi Minh City and Hanoi as part of the case study in Chapter 9, Ms Nguyen Phi Van - International Marketing
334 John M. Koller, Oriental Philosophies (Scribner, 1985); Wang, above n 20, p. 22. 335 Vuong, above n 330, p. 71; Son, above n 331. 336 Son, above n 331. 337 Minh, above n 327, p. 19. 338 Ngoc, above n 332, pp. 56-57. 339 ibid. 340 Vuong, above n 330, p.71.
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Manager at Gloria Jean’s Coffees International and former Director of Gloria
Jean’s Coffees in Vietnam - commented that:
Ho Chi Minh City customers are easy adopters of global brands and concepts... They are also people who earn 10 dollars, borrow one more and spend 11. Therefore, frequency of consumption and average checks are always higher in the South. However, Southern customers have very low level of loyalty and are easy to switch brands when there are more choices. Hanoi, on the other hand, is a very conservative market where it takes more time to reach out to local consumers. It is a market where consumers earn 10 dollars, spend one and save nine. However, they are more loyal customers once they adopt the brand.341
3.3 ECONOMIC ENVIRONMENT
3.3.1 From a Centrally Planned Economy to a Socialist Oriented Market Economy
In 1975 the “Anti-American War” in Vietnam ended and the South and North regions of Vietnam were reunified as one country - the Democratic Republic of Vietnam (today the Socialist Republic of Vietnam). On reunification, the entire country followed a centrally planned economy based on the model that previously existed in the North of Vietnam and was then widely adopted in communist countries.342 Under the centrally planned economy the State comprehensively managed and directed all economic activities by administrative commands planned in detail from the centre,343 including what should be done, and by whom, for whom,
341 Heneage Mitchell, 'Vietnam Embraces Western Coffee Shop Culture ' (2010)
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in what amounts, and at what prices.344 The State worked out plans for and prices of everything, from rice to even a bar of soap.345 Administrative bodies of the State intervened directly in the production and business of economic units which had neither autonomy nor responsibility for their business outcomes.346 Agreements were not entered into by businesses freely but were signed under the orders of administrative bodies of the State. The State recognised and encouraged the development of only two main economic sectors: the State owned economic sector and the collective owned economic sector.347 The private economic sector virtually did not exist.348 This bureaucratic and centrally planned regime led Vietnam into a serious economic crisis.349 Economic inflation looked like a “flying horse”.350 From 1985 to 1986, for example, the retail price index increased by 587.2 percent.351
The turning-point for Vietnam occurred when the Communist Party of Vietnam realised its mistakes in managing the economy and introduced the Doi Moi reforms which were approved at the Party’s Sixth Congress in December 1986. According to the Doi Moi policy, it was necessary to build a five-sector economy352 in which the private economic sector was actually recognised and encouraged, comprising the
State owned economy, the collective economy, the small-scale individual economy, the private capitalist economy, and the State capitalist economy.353 Although the five-sector economy had previously been recognised in the documents of the Fourth
344 Phong, above n 342, p. 84. 345 Pham Duy Nghia, 'Tu Nha Nuoc Toan Tri Den Thoi Dai Dan Doanh: Gia Tai Cua 60 Nam Nganh Luat Kinh Te Viet Nam [From a Completely Ruled State to the Era of Private Ownership: 60 Years of the Economic Law Branch in Vietnam]' (2005) (8) Tap chi Nha nuoc va Phap luat [Journal of State and Law] 4. 346 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343, p. 744. 347 Article 18 of the 1980 Vietnamese Constitution. 348 Chu Van Lam and Nguyen Van Huan, 'So Huu Tap The Trong Nen Kinh Te Thi Truong Dinh Huong Xa Hoi Chu Nghia [Collevive Ownership in a Socialist Oriented Market Economy]' (2005) (12) Tap Chi Nghien Cuu Kinh te [Journal of Economic Studies] 9; Phong, above n 342, p. 276; Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343, p. 704. 349 Phong, above n 342, pp. 116-139. 350 ibid, p. 254. 351 ibid. 352 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343. 353 ibid, pp. 737-738.
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Congress of the Communist Party of Vietnam in 1976, a number of “measures” had the effect of eliminating all economic sectors except for the State owned and collective owned economic sectors.354 There was also a shift from a bureaucratic and centrally planned economy to a socialist business model which gave businesses the control over doing business.355 The principle of building an economy in accordance with “market mechanisms” was recognised in a resolution of the Seventh Congress of the Communist Party of Vietnam in 1991,356 and was again confirmed in the 1992
Vietnamese Constitution.357 It was not until 2001 that the principle of building a
“Socialist Oriented Market Economy” was recognised in the documents of the Ninth
Congress of the Communist Party of Vietnam.358 This principle was quickly prescribed in the amendments to the Vietnamese Constitution in 2001.359
3.3.2 From Isolation to WTO Membership
Although Vietnam was reunified in 1975 it was, except for its relationships with the
Soviet Union and the then other communist countries, a closed door to the western world until 1986. Vietnam’s international economic relations with foreign countries were limited to COMECON360 countries.361 The level of international trade was low
- the annual growth rate of exports, mostly primary products, was only 3.5 percent
354 Phong, above n 342, p. 276. 355 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343, p. 746. 356 Phong, above n 342, p. 279. 357 Article 15, the 1992 Vietnamese Constitution. 358 Phong, above n 342, p. 279. 359 Article 15 of the amendments to the Vietnamese Constitution in 2001. 360 COMECON is the abbreviation for the Council for Mutual Economic Assistance which was an economic organisation under hegemony of the Soviet Union including the countries of the Eastern Bloc and a number of communist countries in the world. 361 Rhys Jenkins, 'Globalization, FDI and Employment in Vietnam' (2006) 15(1) Transnational Corporations 115.
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during the period 1977-1988 accounting for only 10 percent of domestic production.362
A significant impact of the Doi Moi reforms introduced in 1986 was the shift from a self-sufficient economy to an open-door economy.363 The political report to the
Sixth Congress of the Communist Party of Vietnam emphasised that:
The development of technology and science revolution and the tendency of extending the allocation and co-operation between different countries, including the countries having different social-economic regimes, are also very important conditions... we [Vietnam] have to... take full advantage of all the possibilities of extending trade relations, and of co- operating technology, science and economy with the outside world...364
This is also codified in the 1992 Vietnamese Constitution which “extends the exchanges and co-operation to all countries in the world, no matter which social, political regime they have”.365 Immediately after the introduction of the Doi Moi reforms, Vietnam passed its first Law on Foreign Investment in 1987 in order to attract foreign businesses to Vietnam.
Since the introduction of the Doi Moi reforms, Vietnam has quickly integrated into the world economy. The first major milestone in Vietnam’s international integration was the agreement with the European Union on Trade in Textile and Clothing Products in December 1992. After restoring relationships with the World Bank and the International Monetary Fund in 1993, a normal trading relationship with the US was re-established in 1994. In 1995, Vietnam joined the Association of Southeast Asian Nations (ASEAN), and also submitted its application for WTO accession. It
362 ibid. 363 Bo Ke Hoach va Dau Tu [Ministry of Planning & Investment], Cac Thoi Ky Phat Trien [Development Stages] (2011)
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became a member of the Asia-Pacific Economic Cooperation Forum (APEC) in
1998. The trade relationship between Vietnam and the US was strongly encouraged when a bilateral trade agreement was signed in 2000 which was built on the basis of WTO principles. In the two years following this agreement, from 2001 to 2003,
Vietnam’s exports to the US increased more than fourfold, from US$ 1.05 billion to US$ 4.55 billion.366 In 2003, the US became the largest export market for Vietnam.367 Vietnam also started reducing its tariff barriers in compliance with CEPT/AFTA (2001), the ASEAN-China trade agreement (2002), and the trade agreements signed with South Korea (2003) and Japan (2003). In 2008 Vietnam signed the ASEAN-Japan Comprehensive Economic Partnership (AJCEP) and the ASEAN-Australia-New Zealand Free Trade Agreement. Currently Vietnam has concluded over 90 bilateral trade agreements.368
In addition to trade integration, Vietnam has quickly assumed an important position in international social and political forums. Vietnam hosted the ASEAN Summit in
2001, and took over as chair of this organisation in January 2010 for a one-year term. It also hosted the APEC Summit in 2006. Two years later, Vietnam won a temporary seat on the United Nations Security Council. The most important integration milestone for Vietnam occurred on 11 January 2007 when Vietnam was officially admitted to the WTO - the culmination of 12 years of negotiations and substantial reform activity.
Since the Doi Moi reforms, and especially since WTO accession, Vietnam’s international trade has risen strongly in terms of both imports and exports as indicated below:
366 Vo Tri Thanh, 'Vietnam's Trade Liberalization and International Economic Integration: Evolution, Problems, and Challenges' (2005) 22(1) ASEAN Economic Bulletin 75. 367 ibid. 368 Doanh Chinh, 'Hoi Nhap Kinh Te La Nhan To De Viet Nam Thuc Day Thuong Mai Va Thu Hut Dau tu [International Integration is a Way for Vietnam to Motivate and Attract Investment]' (2009)
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Figure 5: The Amount of Vietnam’s Exports and Imports369
180000 160000 140000
120000 100000 80000
Million US$ Million 60000 40000 20000 0
Year Import Export
3.3.3 The Contemporary Economic Environment
3.3.3.1 Recognition of the Role of the Private Economic Sector and the Equitisation370 of State Owned Enterprises
Since the Doi Moi reforms, the private economic sector has been recognised as a necessary and important part of Vietnam’s economy and is increasingly encouraged by both the Communist Party of Vietnam and the Government. The Political Report of the Central Committee of the Communist Party of Vietnam at the Sixth Party Congress stated that in addition to developing the State owned economy and the collective owned economy, the State needed to have policies on using and soundly improving other economic sectors including private economy. All the economic
369 Tong Cuc Thong Ke Viet Nam [Vietnam's General Statistics Office], Tong Muc Luu Chuyen Hang Hoa Xuat Nhap Khau [The Total Amount of Import and Export] (2011)
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sectors are to be equal under the law.371 This is also prescribed at the 1992
Constitution:
The economic policies of the State are to build a strong country with prosperous life for its people, and aimed at ever better satisfying the material and spiritual needs of the people by liberating all productive capacities, and by bringing into full play all the potentials of the various economic sectors comprising the State, collective, individual, private capitalist, and State capitalist...372
The 2001 amendments to the 1992 Constitution emphasise that the private economy, like other economic sectors, is an important part of the Socialist oriented market economy.373 Following the introduction of the Doi Moi reforms, two of the first laws were the Law on Private Enterprises and the Company Law which were passed in
1990 and became effective in 1991. These laws allowed, for the first time, private investors to establish and operate business under different structures. Since then, the improvement of the legal framework for the private economy, especially during the period of legal modernisation preparatory to WTO accession, has further supported the development of this sector.374
By the end of 1993, there were only 4212 private enterprises which were concentrated in the biggest cities of Vietnam.375 By 1999, there were more than 40,000 registered companies in Vietnam.376 As a result of the significant legal reforms for the private sector in the late 1990s and the early 2000s, the period 2000- 2004 saw over 73,000 private businesses established, an increase of 3.75 times over
371 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343, p. 737. 372 Article 16 of the 1992 Vietnamese Constitution amended in 2001. 373 ibid. 374 For further discussion see Chapter 5. 375 Vu Tuan Anh et al, Vietnam's Economic Reform: Results and Problems (Social Science Publishing House, 1994), pp. 41-42. 376 Henrik Schaumburg-Muller, 'Private-Sector Development in a Transition Economy: The Case of Vietnam' (2005) 15(3/4) Development in Practice 349.
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the period 1991-1999.377 By 2004, there were 150,000 private businesses.378 During the first three years following WTO accession, from 2007 to 2009, around 200,000 businesses were newly registered, including 58,000 in 2007, 65,000 in 2008, and 76,000 in 2009.379 By 2009, Vietnam had 454,000 private businesses - more than double the number of businesses established during the previous eight years from 1999 to 2006.380 The share of the private sector’s investment in proportion to total economic investment has steadily increased during the period 2001-2007, from 22.6 percent in 2001 to 38.5 percent in 2007. Although being affected by the global financial crisis, there was only a slight decrease in this sector’s share in all investment in the following years - 35.2 percent in 2008 and 33.9 percent in 2009.381 The private sector has had an increasingly important role in Vietnam’s GDP - 45.6 percent of GDP in 2006, and 48 percent of GDP in 2010.382 It created 50.2 percent of the employment of all the country, and had an annual growth rate of 10 percent during the period 2006-2010.383
Before 1986, and as a result of the prominence of the State sector, a large number of State owned enterprises (SOEs) had been established, which dominated Vietnam’s economy despite efficiency concerns. It was reported that the SOEs were operating
377 Bo Ngoai Giao Viet Nam [Vietnam's Ministry of Foreign Affairs], 'Mot So Net Kinh Te Viet Nam [Some Characteristics of Vietnam Economy]' (2009)
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at only 30-50 percent of their productive capacity.384 Since the introduction of the Doi Moi reforms, Vietnam has undertaken a complete reform of the State economic sector. SOEs were given self-control over their business.385 Equitisation was chosen as an effective method of SOE modernisation. This was based on a Decision of the then Chairman of the Ministerial Council (now the Government) in 1990.386 The Government then issued a Decree in 1996 to extend the process of SOE equitisation.387 From 1992 to June 1998, there were 30 SOEs equitised. After the pilot period, the Government decided to officially equitise the SOEs through issuing Decree 44/1998/NĐ-CP on Shifting the SOEs to Joint-stock Companies, dated 29 June 1998. This gave a strong impetus to the equitisation of the SOEs - during only one and a half years, from June 1998 to December 1999, an additional 340 SOEs were shifted to joint-stock companies.388 The SOE equitisation process has significantly developed since 2001 as a result of the introduction of a Resolution of the Communist Party of Vietnam dedicated to SOE equitisation.389 During the three years from 2001 to 2003, 979 SOEs were equitised. The number of SOEs has significantly decreased over the past 20 years, from 12,084 SOEs in 1990 to 1,471 SOEs in 2009.390 By 2010, Vietnam only had 1,206 wholly State owned
384 Adam McCarty, 'Economy of Vietnam' (2001)
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enterprises.391 Since 1986, the significance of the State economic sector in Vietnam’s GDP has gradually reduced.392 For example, the State economic sector contribution to GDP reduced from 39.10 percent in 2004 to 33.17 percent in 2009.393
However, it is noted that most of Vietnam’s businesses - about 95 percent - are small and medium enterprises.394 They have little business experience and lack capital and management ability.395
3.3.3.2 Foreign Investment
Before 1986, the Vietnamese Government held the monopoly on import-export relations which was considered to be one of the main principles of its centrally planned economy.396 International commercial relations were conducted through agreements with foreign governments.397 Based on approved plans for the whole country, the Vietnamese Government’s delegations annually went to other countries to negotiate and conclude agreements which were the framework for import-export relations.398 All the import-export needs of each province and ministry had to be approved by the Government within that framework.399 Individuals and companies
391 Huy Thang, 'Chuyen Doi Doanh Nghiep Nha Nuoc: Khong Lam Kieu "Binh Moi Ruou Cu" [The Conversion of the State Owned Enterprises: Have Not Liked Pouring "Old Wine in New Bottle"]' (6 July 2010)
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did not have freedom of rights to import and export and foreign investors had little opportunity to enter Vietnam.400
Foreign investment was not measurable in Vietnam until 1986 when the Doi Moi reforms opened Vietnam’s door to the world and moved Vietnam’s centrally planned economy to a market economy. One year later this was intensified by the introduction of Vietnam’s first Foreign Investment Law (which has been revised five times - in 1990, 1992, 1996, 2000, and 2005) to make Vietnam’s market more attractive to foreign investors.401 In 2001, the Ninth Congress of the Communist
Party of Vietnam,402 and amendments to the 1992 Constitution,403 confirmed foreign direct investment as a sector of the economy. Since the introduction of the Doi Moi reforms, Vietnam has experienced steadily increasing inflows of foreign direct investment404 in terms of both capital and number of projects. In 2008, Vietnam had
1,171 new FDI projects with total registered capital of over US$ 60.2 billion which was triple that of 2007.405 The following figure indicates the growth of FDI during the last two decades:
400 ibid, p. 107; Jenkins, above n 361. 401 For further discussion see Chapter 5.5. 402 Dang Cong San Viet Nam [The Communist Party of Vietnam], 'Phat Huy Suc Manh Toan Dan Toc, Tiep Tuc Doi Moi, Day Manh Cong Nghiep Hoa, Hien Dai Hoa, Xay Dung va Bao Ve To Quoc Viet Nam Xa Hoi Chu Nghia [Bringing into Play All National Strengths, Continuing Reforms, Enhancing Industrialisation and Modernisation, Building and Protecting the Socialist of Vietnam]' (2001)
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Figure 6: FDI Growth406
80000
70000
60000
50000
40000
30000
20000 Total amount of FDI (Million US$) (Million FDI of amount Total 10000
0
Year
Registered Capital Implemented Capital
Since Vietnam joined the WTO, the implemented capital of foreign investment has risen sharply, with growth rates of 75.3 percent and 42.6 percent in 2007 and 2008, respectively.407 In 2009, despite being affected by the global financial crisis, the implemented capital decreased by only 13 percent compared to that of the previous year.408 A recent Bloomberg study puts Vietnam at 12th place on a list of the world’s top 25 economies in luring foreign direct investment.409
406 Tong Cuc Thong Ke Viet Nam [Vietnam's General Statistics Office], Dau Tu Truc Tiep Nuoc Ngoai Duoc Cap Giay Phep Thoi Ky 1988 - 2010 [Foreign Investment During the Period 1988- 2010] (2011)
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3.3.3.3 Economic Performance
During the two and a half decades since the Doi Moi reforms, Vietnam’s economic achievements have been impressive not only in themselves but also in comparison with other developing/transitional countries.410 From an economic perspective
Vietnam has been called “the Star of Southeast Asia”.411 The Doi Moi reforms set in motion a massive transformation which has led to Vietnam, with GDP growth rate of over eight percent in recent years,412 being one of the world’s fastest economies and Asia’s second fastest growing country.413 Over the last 20 years (from 1990 to 2009) its annual average GDP growth rate has been 7.1 percent.414 Although being affected by the global financial crisis, the Vietnamese economy still achieved an annual growth rate of 6.8 percent in 2010.415 Moreover, Vietnam has had an impressive poverty reduction program416 with the national poverty rate rapidly reducing - from 57 percent in 1993417 to 11.3 percent in 2009.418 The living standards of the Vietnamese people have also significantly improved. Average income increased by about 700 percent in the period 1992 to 2007 and in 2010 Vietnam was classified as a lower middle-income country with GDP per capita of
410 Schaumburg-Muller, above n 376. 411 Ayumi Konish, Country Director Asian Development Bank cited in Special Correspondent, 'Vietnam Commits to a Market-based Plan', Asia Today International April/May 2007, 70. 412 Although Vietnam’s economy was also affected by the global financial crisis in 2007, the country weathered the storm well with 5.32 percent growth in 2009, 6.78 percent growth in 2010, and 5.89 percent growth in 2011 (Source: Vietnam’s General Statistics Office [Tong Cuc Thong Ke Viet Nam]). See generally McKinsey, above n 31. 413 Taylor Nelson Sofres, above n 314, p. 22; McKinsey, above n 31. 414 Asian Development Bank, 'Vietnam' (2011)
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about US$ 1,160.419 The impressive economic growth of Vietnam is outlined in the
Figure below:420
Figure 7: Vietnam’s GDP and GDP per capita
8,000,000.00 Vietnam Gross domestic product per capita, constant prices 7,000,000.00 Vietnam Gross domestic product, constant prices 6,000,000.00
5,000,000.00
4,000,000.00
3,000,000.00 Billion VND Billion
2,000,000.00
1,000,000.00
0.00
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Year
3.3.3.4 Commercial Challenges for Businesses
Despite the opportunities for business since the Doi Moi reforms, there remain several commercial constraints for business, including franchised business, in Vietnam. According to the Enterprise Surveys of the World Bank in 2009,421 the main constraints on business include access to finance, practices of the informal
419 Kim Phuong, 'Viet Nam Tro Thanh Nuoc Co Thu Nhap Trung Binh [Vietnam Becomes a Middle-Income Country]', Vietnam Business Forum 28 December 2010
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sector, transportation, and an inadequately educated workforce. Only 49.33 percent of the surveyed enterprises were able to obtain a line of credit or loan from a financial institution and 87.46 percent of the surveyed enterprises reported that they had to compete with unregistered or informal businesses.422 According to the global competitiveness rankings of the World Economic Forum in 2008-2009, transport and electricity are the weakest elements of Vietnamese infrastructure with blackouts and traffic jams becoming more frequent.423 There is a lack of a skilled workforce. In 2007, the number of trained workers accounted for only 25 percent of Vietnam’s labour force.424 A recent report of the Ministry of Investment and Planning confirms that unskilled workers make up a very high percentage of the total workforce and that there are insufficient skilled workers to satisfy the need of industry.425 In 2009, the number of workers who had graduated from colleges/universities accounted for only 6.8 percent of Vietnam’s workforce.426 Furthermore, the awareness of Vietnamese consumers and businesses about intellectual property and its protection, although improving, is still weak.427 Infringements of intellectual property rights frequently occur.428
3.4 CHAPTER CONCLUSION
The Doi Moi reforms - and the consequent economic, political and legal reforms - have led to an environment in which the private economic sector is recognised as an
422 ibid. 423 Nguyen Xuan Thanh and David Dapice, 'Vietnam's Infrastructure Constraints' (2011)
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important part of the economy and whose development is encouraged. This makes franchising possible in practice. In addition, the impressive economic achievements of Vietnam over the past two and a half decades make it an attractive market for franchisors. However, difficulties in obtaining finance, the existence of informal businesses, weak infrastructure, lack of a skilled workforce, and the low awareness of intellectual property protection remain great challenges for businesses. In addition, the long history and unique culture of Vietnam also raises many difficulties for entrepreneurs including franchisors.
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CHAPTER FOUR THE LEGAL CONTEXT FOR FRANCHISING IN VIETNAM AND THE TRANSITION TO “NHA NUOC PHAP QUYEN” (A LAW-BASED STATE)
4.1 INTRODUCTION
The development of franchising in any country is influenced by its institutional environment of which the legal system is a significant factor.429 This chapter reviews Vietnam’s legal system since the introduction of the Doi Moi reforms to better understand the general legal environment within which franchising operates. The structure of state institutions, the legislative process and dispute resolution mechanisms are also addressed. As a result of the Doi Moi reforms and WTO accession, Vietnam is now moving to a law-based State, and this chapter reviews the main factors which are influential in this transition: the trend to the transparency in, and stability of, legislation, judicial independence, and effective legal enforcement machinery.
4.2 THE MAJOR CHARACTERISTICS OF VIETNAM’S LEGAL SYSTEM PRIOR TO THE DOI MOI REFORMS
Vietnam has an eclectic and complicated legal history which reflects the influence of both feudalism and foreign intervention. Feudalism has a long history - from the appearance of the first State in Vietnam, Van Lang State430 (2879-258BC),431 to the establishment of the Democratic Republic of Vietnam (now the Socialist Republic of
Vietnam) in 1945. Although under feudalism the Emperor had unlimited power,
429 See generally Chapter 2.3.1 and Chapter 2.4.1. 430 ‘Van Lang’ was the name of Vietnam at that time. 431 Tai and Huy, above n 308, p. 4.
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Vietnam’s feudal legal system developed and included unique advanced laws and regulations such as the Le Code (also known as Hong Duc Code) under the Le Thanh Tong Dynasty (1460-1497). The Le Code has been described as an “unusual genius of the Vietnamese legal tradition”432 which reflected the customs and practices of Vietnam society and had considerable influence on subsequent legal development in Vietnam.433 The Le Code included several advanced provisions relating to fundamental civil liberties which did not appear in western law until centuries later.434
The long legal history of Vietnam is also characterised by the influence of Chinese, French, and Soviet Union law.435 Under Chinese rule for about a thousand years (111BC-938AD), Vietnamese law was considerably influenced by the Chinese
Confucian-legalist tradition436 - which continues after the long period of Chinese rule.437 In Vietnam, as in China, Emperors gave prominence to virtue-rule while using laws (legal rules) to encourage good behaviour. As Professor Hue-Tam Ho Tai comments,438 both virtue-rule and legal rules supported the supremacy of the state. Although imperial codes included provisions on private commercial rights, such provisions addressed only the relationship between the state and individuals and did not resolve conflicts involving the private rights of individuals.439
432 Nguyen Quoc Lan, 'Traditional Vietnamese Law - The Lê Code - and Modern United States Law: A Comparative Analysis' (1989) 13 Hastings International & Comparative Law Review 141. 433 Vu Van Mau, Dan Luat Khai Luan [General Notions of Civil Law] (1961). 434 Lan, above n 432. 435 Ta Van Tai, 'The Legal Systems and Trade Laws of Thailand and Vietnam: The Legal Systems of Vietnam' (Paper presented at the Annual Meeting of American Association of Law Librarians, 13 July 1993) cited in Rose, above n 333; Gillespie, above n 333; Mark Sidel, 'Vietnam: The Ambiguities of State-directed Legal Reform' in Poh-Ling Tan (ed), Asian Legal Systems: Law, Society and Pluralism in East Asia (1997) p. 360. 436 Tai and Huy, above n 308. 437 Although Confucianism did not have much influence on the state during the Ly (1009-1225) and Tran dynasties (1225-1400) in which Buddhism was the most influential, the Vietnamese law still affected by the Chinese law. See Tai and Huy, above n 308, pp. 9, 14. 438 cited by Mark Sidel in Sidel, above n 435, p. 360. 439 Gillespie, above n 333.
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Under the first French domination (1858-1945), parallel legal systems, one in the
North and Centre of Vietnam and another in the South, were recognised. In the North and Central regions protectorates were established. The codes under the Nguyen Dynasty (1802-1945) governed the Vietnamese and the Chinese, but not
French citizens who were subject to French law. In the South, a colony was established and Vietnamese could choose to be bound by French law. However, in terms of commerce, Vietnamese rarely submitted their disputes to the French law.440
Vietnam declared independence in 1945 but the next 30 years were marked by wars - with the French (1945-1954) and with the US and its allies (1954-1975). During the period 1945-1975 there were two different legal systems in Vietnam because of the North-South partition. In the North, controlled by the Democratic Republic of
Vietnam (now the Socialist Republic of Vietnam), the first Constitution was enacted in 1946 soon after independence, and established a democratic State.441 However, because of the priority given to prosecuting the anti-French war (1945-1954) the
1946 Constitution existed more as an aspirational text than as a working document.442 From 1946 to 1959 the Democratic Republic of Vietnam in fact continued to use a number of French colonial civil provisions as the Government had not enacted new laws and regulations.443 In 1959, through the enactment of a new Constitution which formalised the socialist political-legal structure,444 the Democratic Republic of Vietnam embraced the building of a socialist legal system. A highly centralised legal system was established which was suitable for a Soviet-
440 ibid. 441 The 1946 Constitution was passed by the Parliament of the Democratic Republic of Vietnam (now the Socialist Republic of Vietnam) on 9 November 1946. 442 Ngo Duc Manh, 'Building up a Legal Framework aimed at Promoting and Developing a Socialist-Oriented Market-Driven Economy in Vietnam' in John Gillespie (ed), Commercial Legal Development in Vietnam: Vietnamese and Foreign Commentaries (Butterworths, 1997) , p. 281. 443 Order 90/SL of the President of Vietnam’s temporary Government dated 10 October 1945, and Order 97/SL of the President of Vietnam’s temporary Government, dated 22 May 1950, which revised some provisions in Civil Codes under the previous regime. 444 John Gillespie, Transplanting Commercial Law Reform: Developing a "Rule of Law" in Vietnam (2006), p. 60.
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style command economy445 in which land, agriculture, and industry were under state or collective ownership.446 The South of Vietnam throughout the period 1945-1975 was controlled by different governments - the French Government (1945-1948), the National Vietnam Government (Quoc Gia Viet Nam) supported by the French
(1948-1954), and the Government of the Republic of Vietnam (Viet Nam Cong Hoa) supported by the US (1955-1975). However, the legal system which developed under the French colonial period in effect continued to be in operation in the South of Vietnam over the period 1945-1975.447
After the reunification of the country in 1975, the centrally planned economy and the Soviet-style legal system which had been implemented in the North spread throughout the country. However, under the centrally planned economy the role of law was “fuzzy” and uncertain. Mr Hoang The Lien, a high-ranking official of Vietnam’s Ministry of Justice, has commented that:
Everything was prearranged by the State, while personal interests had to entirely submit to the interests of the State and the collective. Thus, there was only one option left for social relations: to obey the administrative orders issued from above and at all levels. In such a situation even a semblance of legality became superfluous or just a formality.448
Therefore, prior to the Doi Moi reforms, Vietnam’s society and economy were governed by the resolutions and the bureaucratic management of the Communist Party of Vietnam (CPV). Administrative commands and planning documents were more important than the law.449 Rules were usually executive decrees and other
445 Rose, above n 333. 446 Gillespie, above n 333. 447 Gillespie, above n 444, p. 5. 448 Hoang The Lien, 'On the Legal System of Vietnam' (September 1994) Vietnam Law & Legal Forum 34. 449 Nguyen Nhu Phat, 'The Role of Law during the Formation of a Market-Driven Mechanism in Vietnam' in John Gillespie (ed), Commercial Legal Development in Vietnam: Vietnamese and Foreign Commentaries (1997) , p. 398.
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subordinate regulations rather than laws of the Parliament.450 Consistent with the marginal role of law and the Parliament in making laws, the Ministry of Justice was also dismantled for a significant period, from 1960 to 1981.451
4.3 THE CONTEMPORARY LEGAL SYSTEM
4.3.1 The Changing Role of Law: Building a Law-Based State
The Doi Moi reforms in 1986 which moved Vietnam from a centrally planned economy to a market economy led to legal reforms which changed the role of law. The CPV was aware both that bureaucratic management could no longer regulate the emerging mixed-market economy452 and that the law plays an important role in governing society and the economy. Under a centrally planned economy the law was considered as a subjective requirement rather than an objective demand.453 At the Sixth Party Congress, at which the Doi Moi reforms were introduced, the importance of the role of law was expressly acknowledged:
The management of the country should be performed through laws rather than moral concepts. The law is the institutionalisation of Party lines and policies and the manifestation of the people’s will, and it must be applied throughout the country. To observe the law is to implement Party lines and policies. Management by law requires attention to be paid to lawmaking. It is necessary to supplement and perfect the legal system
450 Out of 1,747 legal documents issued from 1945 to 1954, only one was an actual law (1953 Agrarian Law). From 1955 to 1986, 7,167 legal documents were issued in which there were only 61 laws or ordinances (See Lien, above n 448). 451 On 14 July 1960, the Parliament enacted the Law on the Organisation of the Cabinet Council (now the Government) in which 20 Ministries without the Ministry of Justice were mentioned. Therefore, the Ministry of Justice was automatically terminated and its officials were transferred to an Institute for Legal Research. 452 Gillespie, above n 444, p. 87. 453 Manh, above n 442, p. 288.
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step by step so as to ensure that the State machinery can be organised and operated in accordance with the law.454
Legal reforms and the role of law have been emphasised since the Seventh Party Congress of the CPV in 1991. At this Congress, the CPV called for the amendment of the 1980 Constitution, the improvement of the skills of lawmakers, and the early enactment of a law on promulgating and implementing laws.455
The building of “Nha Nuoc Phap Quyen”456 (‘law-based State’) was first introduced in a speech by the then General Secretary of the CPV (Do Muoi) at the 2nd Plenum of the Seventh Central Committee on 29 November 1991. In this speech, building a “law-based State” was considered as a basic principle of the reform of state apparatus proceeding from the Doi Moi reforms. The “law-based State” is assumed to be a State promoting the “rule of law”,457 in which the law plays a critical role and indeed is the main tool for managing the State.458 Although the phrase “law-based State” was not expressly mentioned in the 1992 Constitution, the role of the law was affirmed in it. The 1992 Constitution provides that the State governs society by means of the law (article 12)459 and that the CPV operates within not only the Constitution460 but also the law (article 4). The ideology of building a ‘law-based State’ which promotes the rule of law was continually mentioned in subsequent
454 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343. 455 Dang Cong San Viet Nam [The Communist Party of Vietnam], 'Bao Cao Chinh Tri Cua Ban Chap Hanh Trung Uong (Khoa VI) Tai Dai Hoi Dai Bieu Toan Quoc Lan Thu VII Cua Dang [The Political Report of the Central Committee of the Communist Party of Vietnam (Sixth Tenure) at the Seventh Party Congress]' (1991). 456 This phrase was also translated as “rule of law State” (see Minh, above n 327, p. 34) or “the State governed by the rule of law” (see Manh, above n 442, p. 287). 457 John Gillespie, 'Changing Concepts of Socialist Law in Vietnam' in John Gillespie and Pip Nicholson (eds), Asian Socialism & Legal Change: The Dynamics of Vietnamese and Chinese Reform (2005) p. 54. 458 Ngo Duc Manh, 'Improving Legislative Work for Building a Socialist State Ruled by Law' (2005) 12(135) Vietnam Law & Legal Forum 7 cited in Minh, above n 327, p. 36. 459 Although there is only a minor change between the 1980 Constitution and the 1992 Constitution that “the State governs society in accordance with (‘Theo’) the law” (in the 1980 Constitution) is replaced by “the State governs society by means of (‘Bang’) the law”, this change is assumed to reflecting a “new mentality regarding the role and function of law in society” (See Manh, above n 442, p. 288). 460 As stipulated in the 1980 Constitution.
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documents of the CPV and, a decade after its recognition, the requirement of building a “law-based State” was officially recognised by the amendments to the 1992 Constitution in 2001. The CPV continued to show the determination to strengthen the process of building a “law-based State” and the role of law through issuing resolutions focusing on the judiciary and legal reforms.461
Rapid changes in the market economy, and the growing awareness of the important role of the law by the CPV, led to an aggressive campaign of legislative drafting in
Vietnam in the late 1980s and the 1990s. Since the Doi Moi reforms, a wide range of new laws covering most aspects of society have been issued. The Law on Foreign Investment in 1987 marked the starting point of the legal reforms.462 From 1987 to 1992, the Parliament issued 37 laws and passed a new Constitution - the 1992
Constitution.463 From 1992 to 1999 nearly 120 laws and ordinances were introduced.464 In the pre-Doi Moi period - from 1946 to 1986 - only 29 laws and 38 ordinances were introduced.465
The increasingly international integration stemming from the open-door policy - one of three main priorities of the Doi Moi reforms466 - has further motivated legal reforms in Vietnam. Since 1994 when the US lifted the trade embargo Vietnam has undergone significant international integration. Vietnam joined ASEAN in 1995,467 ASEM in 1996, APEC in 1998, and WTO in 2007. By 2009, Vietnam had signed over 90 bilateral commercial agreements (including the US-Vietnam Bilateral Trade
461 Including Resolution 08-NQ/TW on Some Judicial Principal Tasks for the Forthcoming Period (in 2002), Resolution 48-NQ/TW on Strategies for Building and Improving the Legal System in Vietnam up to 2010 with the Orientation to 2020, and Resolution 49-NQ/TW on Strategies for Judicial Reform up to 2020 (in 2005). 462 Phong Tran, 'Vietnam's Economic Liberalization And Outreach: Legal Reform' (2003) 9 Law and Business Review of the Americas 139. 463 Minh, above n 327, p. 33. 464 Brian J.M. Quinn, 'Legal Reform and Its Context in Vietnam' (2001-2002) 15 Columbia Journal of Asian Law 220. 465 Minh, above n 327, p. 23. 466 Ngo Quang Xuan, 'Vietnam: Potential Market and New Opportunities' (1995) 19(1) Fordham International Law Journal 32. 467 Vietnam also applied for WTO membership in 1995.
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Agreement in 2001) and nearly 60 agreements encouraging and protecting investment.468 Vietnam’s obligations under bilateral and multilateral trade agreements - such as AFTA, APEC, and especially WTO - have been highly influential on legal reforms.469 The legal system has been improved in both the quantity, and the quality, of laws and regulations. Many new laws and sub-law documents have been issued in accordance with the requirements of international agreements which Vietnam is, or would like to be, a signatory. In particular, the legal modernisation introduced as part of preparatory process for WTO’s accession strongly changed the face of the legal system in Vietnam. WTO accession was regarded as an opportunity for Vietnam to achieve a legal system which was transparent, clear, and predictable.470 During the negotiation period for WTO accession, Vietnam issued and revised 25 laws and ordinances.471 With this legislative output, Vietnam was the first country to complete most of its legislative commitments prior to becoming a member of WTO.472 Since becoming a WTO member, Vietnam has continued to revise, and issue, laws and regulations to ensure compliance with WTO accession commitments. A large number of laws and ordinances have been enacted in the last decade 2000 to 2010 - 166 laws and 70 ordinances, in addition to the amendments of the 1992 Constitution.473
468 Pham Gia Khiem - Deputy Prime Minister and Minister of Foreign Affairs of Vietnam, cited in Chinh, above n 368. 469 Gillespie, above n 444, p. 67. 470 Luong Van Tu, 'Tien Trinh Gia Nhap To Chuc Thuong Mai The Gioi - WTO, Co Hoi Va Thach Thuc Doi Voi Nuoc Ta [WTO Accession Process - Opportunities and Challenges for Vietnam]'
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4.3.2 State Structure
Although building a law-based State, Vietnam does not accept the doctrine of the separation of powers. According to the amended 1992 Constitution, Vietnam is:
… a law-based State of the people, by the people and for the people. All State powers belong to the people whose foundation is the alliance between the working class and the peasantry and the intelligentsia. State powers are unified and decentralised to State bodies, which shall coordinate with one another in the exercise of legislative, executive and judicial powers.474
The National Assembly (Quoc Hoi) constitutionally holds ultimate state power which is then allocated to the President (Chu Tich Nuoc), the Government (Chinh Phu), the Supreme People’s Court (Toa An Nhan Dan Toi Cao), and the Supreme People’s Procuracy (Vien Kiem Sat Nhan Dan Toi Cao).475
Figure 8: The State Structure (at the Central Level)
The National Assembly (Legislative Power) The Standing Committee of The National Assembly
The State The The Supreme The Supreme President Government People’s Court People’s (Representing (Executive (Judicial Procuracy the State Power) Power) (Prosecutorial domestically Power) and internationally)
Ministries Ministry- equivalent Bodies
474 The 1992 Vietnamese Constitution amended in 2001, article 2. 475 The 1992 Vietnamese Constitution amended in 2001, articles 83, 102, 109, 135, and 139. See generally Manh, above n 442, p. 290.
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The National Assembly
Under the Constitution, the National Assembly has three main functions: (i) constitutional and legislative (ii) determination of important national policies (such as the determination of economic and social development plans of the country, financial and monetary policies of the country, and the national budget) and (iii) supreme supervision of all activities of the State.476
The National Assembly is composed of deputies (currently 500 members) elected through direct nationwide elections. It serves a term of five years, and meets twice a year (normally at the middle and the end of year and for around a month).477 Special meetings of the National Assembly can be called by the State President, the Prime
Minister or one-third the members of the Parliament, or by the decision of the
Standing Committee of the National Assembly.478 The National Assembly is supported by a powerful Standing Committee which includes the Chairman and the
Vice-Chairmen of the National Assembly.479 The Standing Committee, the permanent body of the National Assembly, conducts most of the National
Assembly’s work, particularly when the National Assembly is not in session. It can issue ordinances and has the power to interpret the Constitution as well as laws and ordinances.480
The National Assembly is the only authority which can issue and amend the Constitution and other laws. Draft laws may be submitted to the National Assembly from a range of sources - the State President, the Standing Committee of the National Assembly, the Council of Nationalities and Committees of the National Assembly, the Government, the Supreme People’s Court, the Supreme People’s
476 The 1992 Vietnamese Constitution, article 83. 477 The 1992 Vietnamese Constitution, articles 85, 86. 478 The 1992 Vietnamese Constitution, article 86. 479 The 1992 Vietnamese Constitution, article 90. 480 The 1992 Vietnamese Constitution, article 91.
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Procuracy, the Vietnam Fatherland Front and its member organisations, and members of the National Assembly. The adoption of laws and resolutions requires the agreement of a majority of the Assembly except for special cases such as the adoption of constitutional amendments which require the agreement of two-thirds of the members of the National Assembly.481 Although the real State power resides in the Government, the role of the National Assembly as the monitoring and legislative body has increased during over the last two decades.482
The State President
The State President is recognised by the Constitution as the head of State and represents the State domestically and internationally.483 Although the State President has a range of powers and duties,484 the position is largely ceremonial. The President
481 The 1992 Vietnamese Constitution, article 88. 482 Gillespie, above n 444, pp. 106-107; Quinn, above n 464; Sidel, above n 435, p. 369. 483 The 1992 Vietnamese Constitution, article 101. 484 Including: (i) Promulgating the Constitution, Laws, and Ordinances (ii) Assuming overall command of the armed forces and serving as Chairman of the National Defence and Security Council (iii) Recommending to the National Assembly the election, removal or dismissal of the Vice President, Prime Minister, Chief Justice of the Supreme People’s Court, and Chief Prosecutor of the Supreme People’s Procuracy (iv) Appointing, Removing and Dismissing Deputy Prime Ministers, Ministers and other members of the Government on resolutions of the National Assembly (v) Proclaiming a state of war and amnesties on resolutions of the National Assembly or of the Standing Committee of the National Assembly (vi) Proclaiming general or local mobilisation on resolutions of the Standing Committee of the National Assembly, and declaring a state of emergency on resolutions of the Standing Committee of the National Assembly or by itself in case the Standing Committee of the National Assembly fails to convene (vii) Recommending to the Standing Committee of the National Assembly to review ordinances within 10 days of their approval; if these ordinances are still approved by the Standing Committee of the National Assembly without the consent of the State President, the State President can submit them to the National Assembly for decision at the earliest meeting (viii) Appointing, removing and dismissing the Deputy Chief Justice, Judges of the Supreme People’s Court, the Deputy Chief Prosecutor and members of the Supreme People’s Procuracy (ix) Deciding on granting of senior officers' ranks and titles in the armed forces, ambassadorial titles and ranks, and State titles and ranks in other fields, and to decide on conferral of State awards, orders, medals and other honorific State titles (x) Appointing or recalling extraordinary and plenipotentiary diplomatic representatives of Vietnam, to receiving foreign extraordinary and plenipotentiary diplomatic representatives; conducting on behalf of the State’s negotiations and signing international treaties with foreign Heads of State; submitting international treaties directly signed to the National Assembly for ratification; and deciding on ratification of, or accession to international treaties, except where they must be submitted to the National Assembly for determination (xi) Deciding on the granting, withdrawal or deprivation of Vietnamese citizenship and (xii) Signing decrees granting special amnesties. See the 1992 Constitution, article 103.
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is elected by members of the National Assembly, and for the same term as the National Assembly.485 The State President is responsible to, and reports to, the National Assembly. The State President also exercises a limited legislative power.486 In recent years the State President has been the head of the Judicial Reform Steering Committee which plays an important role in conducting significant reforms in judicial system, especially the court system.487
The Government
The Government of Vietnam is the executive body of the National Assembly and the State’s highest administrative body.488 The Government includes the Prime Minister, Deputy Prime Ministers, Ministers and the heads of Ministry-equivalent bodies.489 Its term is five years, conterminous with that of the National Assembly.490 The Government is responsible to the National Assembly, and reports to the National Assembly, the Standing Committee of the National Assembly and the State President.491 Although the National Assembly is the primary law-making body, the Government also has legislative power as a second tier of legislative authority.492 It is nevertheless important to note that, in Vietnam, it is not uncommon for implementing regulations to be treated in practice as having a higher validity than the source document.493 Moreover, the Government influences much of the law-
485 The 1992 Vietnamese Constitution, article 102. 486 Gillespie, above n 444, p. 107. 487 Mark Sidel, The Consitution of Vietnam - A Contextual Analysis (Hart Publishing, 2009), p. 100. 488 The 1992 Vietnamese Constitution, article 109. 489 There are currently 18 Ministries and 4 Ministry-equivalent bodies (The Office of Government, The Government’s Inspection, The State Bank of Vietnam, and the Nationality Committee). 490 The 1992 Vietnamese Constitution, articles 110, 113; The 2001 Law on Government Organisation, article 3. 491 The 1992 Vietnamese Constitution, article 109. 492 The 2008 Law on the Promulgation of Legal Documents, article 2. 493 See generally Ngo Duc Manh, 'Nang Cao Chat Luong Hoat Dong Lap Phap Cua Quoc Hoi [Improving the Legislative Quality of the Parliament]' (2007) 138(18)
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making of the National Assembly because most bills are drafted and submitted by the Government.494 In practice, the interpretation of laws and regulations is often conducted by the Government and Ministries rather than by the Standing Committee of the National Assembly as stipulated by the Constitution.495
The Supreme People’s Court and the Supreme People’s Procuracy
The role of the People’s Courts and the People’s Procuracy is constitutionally entrusted with the role:
… to protect socialist legality, the socialist regime and the people’s rights as masters, the property of the State and the collectives, and the lives, property, freedom, honour and dignity of the citizen.496
The judicial bodies consist of the Supreme People’s Court, the Local People’s Courts (including Provincial People’s Courts (of which there are currently 63 corresponding to the 63 provinces and central administered cities) and District
People’s Courts (being established in every district or district equivalent-bodies)), Military Courts, other courts established by law, and special courts which may be set up under special circumstances by the National Assembly.497 The Supreme People’s Court includes the Grand Panel of the Supreme People’s Court, the Central Military
Court, the Criminal Court, the Civil Court, the Economic Court, the Labour Court, the Administrative Court, and the Appellate Courts.498 The Provincial People’s Courts consists of the Grand Panel of the Provincial People’s Court, the Criminal
Court, the Civil Court, the Economic Court, the Labour Court, and the Administrative Court.499
494 Sidel, above n 435, p. 367. 495 Rose, above n 333, p. 102; Anh Luu, 'Update: Vietnam Legal Research' (2010)
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Figure 9: Vietnam’s Court Hierarchy
Grand Panel of The Supreme People’s Court The Supreme Criminal Civil Economic Labour Adminis- Appellate Central People’s Court Court Court Court trative Courts Military Court Court Court
Grand Panel of The Provincial People’s Court
Provincial Criminal Civil Economic Labour Adminis- Courts Court Court Court Court trative Court
District Courts
The Supreme People’s Court is the highest judicial body of Vietnam responsible for judicial work. It hears appeals, and supervises and reviews the decisions made by other courts.500 Vietnam adopts a two-tier court system including a court of first instance and a court of appeal. The Provincial People’s Courts can hear first instance and appeal cases whereas the District People’s Courts can hear cases only at first instance.501
Under the Constitution the Supreme People’s Procuracy exercises the right of public prosecution and supervision of judicial activities and thereby ensures the strict and uniform observance of laws.502 The People’s Procuracy in Vietnam comprises the Supreme People’s Procuracy, the Provincial People’s Procuracies, and the District
500 The 1992 Vietnamese Constitution, article 134; The 2002 Law on the Organisation of the People’s Court, articles 19, 20. 501 The 2002 Law on the Organisation of the People’s Court, articles 28, 32. 502 The 1992 Vietnamese Constitution, article 137.
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People’s Procuracies.503 The Local People’s Procuracies and the Military
Procuracies exercise the right of public prosecution and supervision of judicial activities within their responsibility as defined by law.504
The Chief Justice of the Supreme People’s Court and the Chief Prosecutor of the
Supreme People’s Procuracy are elected by the National Assembly and serve a term corresponding to that of the National Assembly.505 The Chief Justice of the Supreme People’s Court and the Chief Prosecutor of the Supreme People’s Procuracy are responsible to, and report to, the National Assembly. When the National Assembly is not in session they are responsible to, and report to, the Standing Committee of the National Assembly and the State President.506
Although mainly acting as the judicial and prosecutorial power, the Chief Justice and the Justice Council of the Supreme People’s Court and the Chief Prosecutor of the Supreme People’s Procuracy also have limited legislative power. The Justice Council of the Supreme People’s Court can issue resolutions.507 The Chief Justice of the Supreme People’s Court, as well as the Chief Prosecutor of the Supreme People’s Procuracy, can issue circulars or coordinate with other state bodies to issue joint circulars.508
People’s Councils and People’s Committees at the local level
At the local level, Vietnam is currently divided into 63 provinces and centrally administered cities (the provincial level), which are subdivided into rural districts, urban districts, county towns or cities under provincial administration (the district level). Under districts and district-equivalent bodies are communes or wards or
503 The 2002 Law on the Organisation of the People’s Procuracy, article 30. 504 The 1992 Vietnamese Constitution, article 137. 505 The 1992 Vietnamese Constitution, articles 84, 128, and 139. 506 The 1992 Vietnamese Constitution, article 135. 507 The 2008 Law on Promulgation of Legal Documents, article 2.6. 508 The 2008 Law on Promulgation of Legal Documents, articles 2.6, 2.7, and 2.11.
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townlets (the commune level). Although local People’s Councils and local People’s
Committees are established at all of the three levels, since 2008 the People’s Councils in a number of rural districts, urban districts and wards have been removed under a pilot program introduced by the National Assembly.509
Local People’s Councils are the State authorities in their respective localities,510 and are similar to the National Assembly at the national level. Local People’s Councils comprise Deputies elected through direct elections at the local level and serve for a term of five years.511 The Deputies can question the People’s Committees, the Chief Justice of the People’s Courts, and the Chief Prosecutor of the People’s Procuracies in their respective localities.512 Local People’s Councils are under the supervision and guidance of the Standing Committee of the National Assembly, and under the guidance and inspection of the Government in implementing legal documents of higher State bodies.513 Local People’s Councils can also issue resolutions to ensure the strict observance of the Constitution and other laws in their localities provided that such resolutions are based on the Constitution, other laws and legal documents of the higher State bodies.514
Local People’s Committees are the executive bodies of the respective local People’s
Councils, and are the local administrative State bodies.515 Local People’s Committees comprise Deputies (Chairman, Vice Chairmen and other members) elected by the respective local People’s Councils.516 People’s Committees are
509 See the Resolution 26/2008/NQ-QH12 of the National Assembly, dated 15 November 2008, on Conducting the Pilot Program of Not Establishing the People Councils of Rural Districts, Urban Districts and Wards. 510 The 1992 Vietnamese Constitution, article 119. 511 The 2003 Law on the Election of Deputies of the local People’s Council, articles 1, 6. 512 The 1992 Vietnamese Constitution, articles 119, 122; the 2003 Law on the Election of Deputies of the local People’s Council, article 1. 513 The 2003 Law on the Organisation of the People’s Council and the People’s Committee, article 7. 514 The 1992 Vietnamese Constitution, article 120. 515 The 1992 Vietnamese Constitution, article 123. 516 ibid; the 2003 Law on the Election of Deputies of the Local People’s Council, article 119.
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responsible for implementing the Constitution, and the laws and sub-law documents of higher State bodies, and the resolutions of the respective local People’s Councils and can issue decisions and instructions for this purpose.517
4.3.3 Legislation
Vietnam’s laws and regulations must be in writing.518 Case law is not accepted as a source of law. In other words, Vietnamese judges cannot create laws. Legislation in Vietnam consists of various types of legal documents including the Constitution, laws, ordinances, resolutions, orders, decisions, decrees, circulars, and instructions, which are issued by various State bodies.519
Table 3: Legislation in Vietnam520
LAWS AND REGULATIONS AUTHORITY
The Constitution Laws (including Codes) The National Assembly Resolutions
Ordinances The Standing Committee of the National Assembly Resolutions
Orders The State President Decisions
Decrees The Government
Decisions The Prime Minister
Resolutions The Grand Panel of the Supreme People’s Court
517 The 1992 Vietnamese Constitution, articles 123-124; the 2004 Law on the Promulgation of the Legal Documents of the People’s Council and the People’s Committee, article 2. 518 The 2008 Law on Promulgation of Legal Documents, article 1. 519 The 2008 Law on Promulgation of Legal Documents, article 2; the 2004 Law on the Promulgation of the Legal Documents of the People’s Council and the People’s Committee, article 1. 520 ibid.
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The Chief Justice of the Supreme People’s Court; or Circulars The Chief Prosecutor of the Supreme People’s Procuracy; or Ministers/Heads of Ministry-level Bodies
Decisions The State’s Auditor General
The Standing Committee of the National Assembly and the Central Bodies of Social Political Organisations; or Joint Resolutions The Government and the Central Bodies of Social Political Organisations
The Chief Justice of the Supreme People’s Court and the Chief Prosecutor of the Supreme People’s Procuracy; or Ministers/Heads of Ministry-level Bodies and The Chief Justice of the Supreme People’s Court and/or the Chief Prosecutor of the Supreme Joint Circulars People’s Procuracy Ministers Ministers and Heads of Ministry-level Bodies Heads of Ministry-level Bodies
Resolutions Local People’s Councils
Decisions Local People’s Committees Instructions
The Constitution of Vietnam is the supreme and basic law of the country. It is supplemented by laws passed by the National Assembly, ordinances issued by the Standing Committee of the National Assembly, decrees issued by the Government, ministerial circulars issued by Ministries and ministry-level bodies, and other legal documents as indicated in the above table.
In 1996, in order to improve the quality and effectiveness of promulgating laws and regulations,521 the National Assembly issued the Law on Promulgation of Legal Documents which stipulates the authority and procedure of promulgating all legal documents. This law was amended in 2002 and replaced by a new law in 2008.522 In
2004, the Law on Promulgation of the Legal Documents of the People’s Council and
521 The Preamble of the 1996 Law on Promulgation of Legal Documents. 522 This Law focuses on the promulgation of legal documents except for which issued by People’s Councils and People’s Committees.
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the People’s Committee was also introduced which stipulates the authority and procedure for issuing the legal documents of People’s Councils and People’s Committees. Since 1996, the legal documents of the central State bodies must be published on the Official Gazette (‘Cong Bao’) except for legal documents which contain State secrets.523 Since 2004, the legal documents of the Provincial People’s Councils and the Provincial People’s Committees must be also published in the Official Gazette whereas the legal documents of the People’s Council and the People’s Committee at the district and commune levels must be posted at the office of the issuing bodies and other places determined by the Chairmen of the respective People’s Committees.524 These provisions have significantly contributed to the increase in the transparency of Vietnamese legal system.
Since the Doi Moi reforms, legislation in Vietnam has developed significantly. In only one and a half decades following the Doi Moi reforms, from 1986 to 2001, Vietnam issued five codes, 87 laws and 111 ordinances - more than double the number of laws and ordinances which were issued from independence in 1945 to the Doi Moi reforms in 1986.525 The rapid growth of legislation is readily apparent from the Official Gazette. From two issues per month in 1995, the Official Gazette has been published daily since 2004.526 The size of the Official Gazette increased fourfold from 1994 to 2004.527 As noted above the preparation for WTO accession and the implementation of WTO accession commitments have led to many laws and ordinances being issued and amended over the last decade.
Despite the significant developments since the Doi Moi reforms, there are still some inadequacies in the legislative process in Vietnam. The National Assembly does not
523 The 1996 Law on Promulgation of Legal Documents, article 10; the 2008 Law on Promulgation of Legal Documents, article 78. 524 The 2004 Law on the Promulgation of the Legal Documents of the People’s Council and the People’s Committee, article 8. 525 Gillespie, above n 444, p. 65. 526 Luu, above n 495. 527 Gillespie, above n 444, p. 65.
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entirely comprise professional and specialised legislators and it meets only twice per year. At the meetings - usually lasting about a month - the National Assembly has to spend much time on deciding the important matters of the country and questioning the Government, the Chief Justice of the Supreme People’s Court and the Chief
Prosecutor of the Supreme People’s Procuracy. The time for discussion and approval of laws is therefore very short. With the limited time available for legislative work, and the unprofessional status of the National Assembly’s members, the de facto legislators are the administrators, particularly the Ministries as the Ministries usually chair the drafting committees. A report by officials in the Office of Government discovered that the Ministries have often used open-textured and opaque drafting techniques to provide them with more discretionary powers.528 Moreover, the laws often contain broad principles which cannot be directly enforceable without subordinate regulations such as Government decrees and the Ministry circulars. Delay in issuing subordinate regulations is not uncommon,529 which leads to the frequently repeated paradox that “laws have to wait for the decrees and circulars”
(‘Luat Phai Cho Nghi Dinh, Thong Tu’). There is also a high level of inconsistency between the subordinate regulations and the laws.530 Although their role is to implement the laws, subordinate provisions may alter the meaning of the laws.531 A
Vietnamese scholar comments that “the main legal documents are the raw materials used to produce a series of subsequent regulations, but the guiding regulations have covered all these decisions and replaced the role of the main documents”.532 The
528 The Office of Vietnamese Government, 'Study Report to Improve the Quality of Laws and Ordinances Drafted by the Government to be Submitted to the National Assembly and the National Assembly's Standing Committee (unpublished report, Working Delegation No.804, Hanoi)' (December 2003) cited in Gillespie, above n 444, p. 179. 529 See Gillespie, above n 444, p. 178. The delay in issuing the subordinate regulations has also appeared in franchising as being discussed in Chapter 7. 530 Vietnam's Ministry of Justice, 'Final Report Legal Needs Assessment' (2002), point 2.3.2, cited in Gillespie, above n 444, p. 178. 531 Gillespie, above n 444, p. 178. 532 Truong Thanh Duc, 'Nhung Bat Cap Trong Viec Xay Dung va Ban Hanh Van Ban Quy Pham Phap Luat [Defects in Building and Promulgating Legal Instruments]' (1999) (2) Tap chi Nha nuoc va Phap luat [Journal of State and Law] 22.
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broad content of the laws also contributes to the unwritten “power” of the Executive in interpreting the laws - a power which constitutionally belongs to the Standing Committee of the National Assembly.533 Although the Ministry of Justice in 2003 established a Department of the Inspection of Legal Documents with responsibility for legislative consistency,534 its power is limited to inspecting the legal documents issued by Ministries, Ministry-equivalent bodies, Provincial People’s Councils and Provincial People’s Committees. Moreover, it seems to lack the resources to assess thousands of legal documents enacted by those State bodies every year.535
4.3.4 The Role of the Communist Party of Vietnam and Its Relationship with the State
Although this thesis does not focus on politics in Vietnam, it is also necessary to provide a brief overview of the role of the Communist Party of Vietnam (CPV) in its relations with the State. Several scholars suggest that in the Vietnamese context it is not possible to talk of the State without talking about the CPV.536
Vietnam is currently one of the world’s five remaining single party socialist states.
The CPV hold its National Congress every five years and elects a Central Committee (currently 175 official members and 25 alternate members) which leads the CPV between National Congresses.537 Apart from the General Secretary of the CPV (the highest leader of the CPV), the leading bodies of the Central Committee are the Politburo (currently 14 members) and the Secretariat of the CPV Central
533 Luu, above n 495. 534 This Department has found several legal documents inconsistent with source documents and the Constitution; See generally Decision 336/2003/QD-BTP of the Minister of Justice, dated 5 August 2003, on the Establishment of the Department of the Inspection of Legal Documents. 535 Gillespie, above n 444, p. 179. 536 Fall and Huynh Kim Khanh cited in Pip Nicholson, Vietnamese Jurisprudence: Informing Court Reform, Asian Socialism & Legal Change: the Dynamics of Vietnamese and Chinese Reform (2005), p. 171; Gillespie, above n 444, p. 106; Sidel, above n 435, p. 364. 537 Dieu Le Dang Cong San Viet Nam Nam 2011 [The 2011 CPV’s Statutes], article 9.
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Committee (currently 10 members). The organisational network of the CPV, which corresponds with the administrative structure of the State, includes four levels: central, provincial, district, and ward.538 The CPV retains the leading role in accordance with the 1992 Constitution which stipulates that:
The Communist Party of Vietnam, the vanguard of the Vietnamese working class and loyal representative of the interests of the working class, the working people and the whole nation, who adheres to Marxism- Leninism and Ho Chi Minh's thought, is the force assuming leadership of the State and society.539
Vietnam has been operating under the formula that: “the party leads, the State manages, and the people own”.540 Under this formula, the CPV leads the country by its policies541 whereas the State manages the country under laws which are the institutionalisation of the CPV’s policies.542 The CPV also nominates its members to be appointed to leadership positions in the State bodies.543 It is suggested by some scholars that all three power branches (legislative, executive and judicial) are effectively controlled by the CPV.544 The State President, the Chairman of the National Assembly, and the Prime Minister are members of the CPV Politburo, whereas all members of the Government, the Chief Justice of the Supreme People’s
Court and Chief Prosecutor of the Supreme People’s Procuracy are members of the Central Committee. Moreover, almost all important positions in the Government are
538 Dieu Le Dang Cong San Viet Nam Nam 2011 [The 2011 CPV’s Statutes], article 10. 539 The 1992 Vietnamese Constitution, article 4. 540 Dang Cong San Viet Nam [The Communist Party of Vietnam], above n 343, p. 791; Tran Duc Luong, Member of the CPV Politburo and Vietnam's President of State, 'Doi Moi - Su Lua Chon Dung Dan Vi Muc Tieu Phat Trien Hien Dai Cua Viet Nam [Doi Moi - A Right Choice for the Modern Development of Vietnam]' (2005)
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most likely to be held by members of the CPV.545 The rate of the National
Assembly’s members having CPV membership was between 73 percent and 93 percent from the first to the 11th National Assembly.546 For the 12th National Assembly (2007-2011), 450 (91.28 percent) of 493 the National Assembly’s members were the CPV members.547 Similarly, most judges in the court system are also members of the CPV.548
Prior to the Doi Moi reforms, the functions of the CPV and the State overlapped, and the CPV substituted for the State.549 Today, although there is still debate as to the CPV leadership of the State,550 the direct intervention of the CPV into State operations is much less common.551 Unlike the 1980 Constitution which required all CPV’s organisations to operate within the Constitution,552 the 1992 Constitution requires all CPV’s organisations to operate “within the framework of the Constitution and the law”.553 It is also undisputed that, under the leadership of the CPV, politics in Vietnam have remained stable since the reunification of the country in 1975.
545 Minh, above n 327, p. 30. 546 Van phong Quoc hoi [The Office of the National Assembly], 60 Nam Quoc Hoi Viet Nam [60 Years of the National Assembly of the Socialist Republic of Vietnam] (2005), pp. 104-114. 547 Tieu Ban Tuyen Truyen, Hoi Dong Bau Cu Quoc Hoi Khoa XII [The Propaganda Subcommittee, The Election Council of the 12th National Assembly], 'Ket Qua Cuoc Bau Cu Dai Bieu Quoc Hoi Khoa XII [The Result of the Election of the Members of the 12th National Assembly]' (2007)
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4.3.5 Dispute Resolution Mechanisms for Commercial Conflicts
As disputes between the members of a community are “inevitable”,554 mechanisms to resolve such disputes are an integral part of a legal system. In Vietnam, commercial disputes can be resolved by litigation as well as by alternative dispute resolution techniques which include negotiation, mediation, and arbitration.
4.3.5.1 Litigation and Judicial Independence
Litigation is conducted through the courts. Vietnam is, traditionally, not a litigious society555 and people prefer to deal with disputes by mechanisms outside of courts.556 With a tradition of village life and a culture of giving prominence to morality,557 the Vietnamese prefer using informal dispute resolutions to court processes. There is a saying in Vietnam that “the law of the Emperor ends at the village gate” (‘Phep Vua Thua Le Lang’). Another popular saying is that “hundreds of legal arguments are not equal to a little affection” (‘Hang Tram Cai Ly Khong Bang Mot Ty Cai Tinh’). However, a consistently increasing number of cases are being resolved by courts - an increase of around seven percent per year over recent years.558 The number of cases dealt with by the courts was 169,379, 181,339, and 194,652 in 2002, 2003, and 2004, respectively.559 According to a recent survey of the Ministry of Justice which was conducted with 237 business organisations and
554 Donald Gifford, Understanding the Australian Legal System (1997), p. 69. 555 Nguyen Hung Quang, 'Lawyers and Prosecutors under Legal Reform in Vietnam: The Problem of Equality' in Stephanie Balm and Mark Sidel (eds), Vietnam's New Order: International Perspectives on the State and Reform in Vietnam (2007) 164; Luu, above n 495. 556 Minh, above n 327, p. 19; Quinn, above n 464, p. 258. 557 See generally Chapter 3. 558 To Van Hoa, Judicial Independence: A Legal Research on Its Theoretical Aspects, Practices from Germany, the United States of America, France, Vietnam, and Recommendations for Vietnam (2006), p. 381. 559 ibid.
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individuals, the highest preference was for negotiation. Figure 10 below outlines the use of different mechanisms of dispute resolution:560
Figure 10: The Preference Level for Choosing Different Mechanisms of Dispute Resolution
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00% Negotiation Conciliation Litigation Arbitration
Judicial independence is recognised as an important principle of Vietnam’s legal system and is enshrined in the 1992 Constitution: “when adjudicating, judges and honorary judges are independent and only conform to the law”.561 This principle has been further entrenched in the various laws relating to the court system including the 2002 Law on the Organisation of the People’s Court, the 2002 Ordinance on Judges and Honorary Judges, the 2003 Code of Criminal Procedure, and the 2004 Code of
Civil Procedure.562
560 Hoi Luat Gia Viet Nam [Vietnam Jurist Association], 'Bao Cao Tong Ket Thi Hanh Phap Lenh Trong Tai Thuong Mai 2003 (Trinh Quoc Hoi Nuoc Cong Hoa Xa Hoi Chu Nghia Viet Nam Khoa XII) [The Summary Report of the Implementation of the 2003 Ordinance on Commercial Arbitration (a Submission to the 12th Parliament of the Socialist Republic of Vietnam)]' (30 April 2009)
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Since the Doi Moi reforms, particularly after the introduction of the 1992
Constitution, the judicial system in general and judicial independence in particular have been constantly improved. Many remedies have been used to address the shortcomings related to the judicial independence. In 1993, the appointment and promotion of judges was vested in the President of State rather than in representative bodies in order to stop the influence of the leading local executives on the judicial selection563 which would be detrimental to the independence of judges.564 A significant judicial reform was introduced in 2002, which originated from Resolution
08-NQ/TW of the Politburo of the Communist Party of Vietnam on Some Principal Tasks of the Judicial Work for the Forthcoming Period. The 2002 judicial reform has removed a number of obstacles to judicial work in general as well as on judicial independence. It can be argued that since 2002 the court system has been freed from its former dependence on the executive.565 Prior to 2002 the court system was highly dependent on the executive.566 In particular, the Government estimated the budget for the entire court system and its personnel,567 and the Ministry of Justice, and the
Department of Justice in the provinces, had a decisive role in the management of the Local Courts including the appointment and reappointment of judges.568 Since the 2002 judicial reform, the budget estimate and the management of the court system have been the responsibility of the Supreme People’s Court rather than of the
563 Prior to 1993, judges were appointed by the representative body, however, this body significantly relied on the local executive. The local executive was recognised as the standing body of the local representative body so that it played the role of preparing for meetings, including the proposal for appointing judges, of the local representative body. The selection of judges, therefore, was depended much on the chief local executives. 564 Hoa, above n 558, p. 362. 565 To Van Hoa, Tinh Doc Lap Cua Toa An: Nghien Cuu Phap Ly Ve Cac Khia Canh Ly Luan, Thuc Tien O Duc, My, Phap, Viet Nam Va Cac Kien Nghi Doi Voi Viet Nam [Judicial Independence: a Legal Research on Its Theoretical Aspects, Practices from Germany, the United States of America, France, Vietnam, and Recommendations for Vietnam] (Nha Xuat Ban Lao Dong [Labour Publishing House], 2007), p. 471. 566 ibid, p. 470. 567 Articles 43-44 of the 1992 Law on the Organisation of the People’s Court as amended in 1994 and 1995. 568 Hoa, above n 558, p. 414.
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Government, and the Local Courts have not been influenced by the Ministry of
Justice or the Department of Justice in the provinces.569
There are still obstacles which could undermine judicial independence both institutionally and individually. Firstly, a lower court strongly depends on a higher court, not only for appeal procedures and advice but also in organisational aspects.570 Secondly, the chief judge of the Supreme People’s Court and the provincial court’s chief judge have much influence on the selection of the judges of the Supreme People’s Court and selection of local judges, respectively.571 Thirdly, the limited five-year terms of appointment or reappointment could make judges psychologically insecure and vulnerable to influence by members of the selection council of judges.572
However, the reform of the court system in general as well as of judicial independence in particular is ongoing and supported by the continuous efforts of the CPV and the Government. In 2005, the CPV issued Resolution 48-NQ/TW of the
Politburo on Strategies for Building and Improving Vietnam’s Legal System up to 2010 with the Orientation to 2020 and the Resolution 49-NQ/TW of the Politburo on Strategies on Judicial Reform up to 2020. One of the main focuses of these resolutions is judicial independence.
4.3.5.2 Arbitration
In 1960, under Decree 20/TTg of the Prime Minister on the Organisation of the State Economic Arbitration, arbitration was first introduced in Vietnam through
569 Articles 45-46 of the 2002 Law on the Organisation of the People’s Court; Hoa, above n 565, p. 415. 570 Hoa, above n 558, p. 422. 571 ibid, pp. 427-428. 572 Minh, above n 327, p. 130; Quinn, above n 464.
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establishing arbitration centres (‘the State Economic Arbitration Centres’) as State organs. From 1960 to 1975, these centres dealt mainly with violations of economic contracts.573 However, they were operating as State organs responsible for managing economic contracts during the period 1975-1993.574 During this period, non- government arbitration also existed. The Foreign Trade Arbitration Commission and the Maritime Arbitration Commission were established by the Vietnam Chamber of Commerce and Industry in 1963 and 1964 respectively.575 The former could deal with foreign contractual conflicts in which a party was a foreign entity or individual whereas the latter could deal with cases involving international maritime transportation in which one party was foreign.576
In 1993, driven by a need that stemmed from the process of building a market economy and integrating into the world, the Vietnamese Government abolished the rigid state economic arbitration system and established centres for economic arbitration.577 That same year, the Foreign Trade Arbitration Commission and the Maritime Arbitration Commission were also merged to establish the Vietnam International Arbitration Centre of the Vietnam Chamber of Commerce and Industry.578 Until 2003, in addition to the Vietnam International Arbitration Centre, there were five other economic arbitration centres in Vietnam.579 The economic arbitration centres had power only to hear conflicts related to international commercial relations.580 However, during this period, the legal framework for
573 Hoi Luat Gia Viet Nam [Vietnam Jurist Association], above n 560, p. 16. 574 ibid. 575 ibid. 576 ibid, pp. 16-17. 577 According to Decree 116/CP of the Government, dated 5 September 1994, on the Organisation and Operation of Economic Arbitration. 578 According to Decision 204/TTg of the Prime Minister, dated 28 March 1993. 579 Hoi Luat Gia Viet Nam [Vietnam Jurist Association], above n 560, p. 18. 580 ibid, p. 17.
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arbitration was still insufficient and the role of the arbitration bodies in practice was very limited.581
In 2003, the Standing Committee of the Parliament adopted the Ordinance on Commercial Arbitration to further support the development of arbitration. This Ordinance recognised international principles and rules on arbitration, which mostly imitated the 1985 UNCITRAL Model Law on International Commercial Arbitration and provided the legal framework for the operation of arbitration.582 However, the number of cases settled by the arbitration was very limited583 as indicated below for the period 2004-2006:584
Table 4: The Number of Cases Dealt with by Vietnam’s Commercial Arbitration Centres
Year The Arbitration Centre 2004 2005 2006
The Asian International Commercial Arbitration Centre 6 5 7
The Vietnam International Arbitration Centre 26 17 31
The Ho Chi Minh City Commercial Arbitration Centre 0 3 5
The Hanoi Commercial Arbitration Centre 5 9 3
The Cantho Commercial Arbitration Centre 0 0 0
The Pacific International Arbitration Centre 0 0 0
The Far East Arbitration Centre 0 0 0
Total Amount of Cases 37 34 46
581 ibid, p. 18; Vu Anh Duong, 'Thuc Tien Ap Dung Phap Lenh Trong Tai Thuong Mai Tai Trung Tam Trong Tai Thuong Mai Quoc Te Viet Nam [The Practice of Applying the Ordinance on Commercial Arbitration at the Vietnam International Arbitration Centre]' (2008) (3) Tap chi Khoa hoc Phap ly [Journal of Legal Science] 5. 582 Pham Duy Nghia, 'Law on Arbitration in Vietnam: Development and Issues' (2008) Law & Development . 583 Hoi Luat Gia Viet Nam [Vietnam Jurist Association], above n 560, p. 19. 584 ibid.
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Recently, in order to address the weaknesses which had appeared in the implementation process of the 2003 Ordinance on Commercial Arbitration the Parliament passed the Law on Commercial Arbitration in 2010 which came into effect on 1 January 2011. This law is recognised as a further step in the improvement of the legal framework for arbitration necessary to support its development in Vietnam. In relation to foreign arbitral awards, Vietnam has been a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 1958 New York Convention) since 1995. Under this
Convention Vietnamese courts will recognise and enforce awards made in the territory of the 1958 New York Convention’s States. Moreover, under the 2004 Code of Civil Procedure, Vietnamese courts can also recognise and enforce foreign arbitral awards on the principle of reciprocity without requiring membership of the same international arbitration agreements.
4.3.6 Legal Enforcement
Although Vietnam’s legislation has been comprehensively improved since the Doi Moi reform, particularly during the preparatory process of WTO’s accession, legal enforcement is still a significant problem that reduces the efficiency of laws in practice. In 2005, the Central Committee of the Communist Party of Vietnam realised that Vietnam’s legal implementation had been still weak and that “the law goes into real life slowly”.585 This assessment is still valid today. The Vietnamese people have some popular sayings reflecting the inefficiency of laws - “Law is in the sky but the life is on the ground” (‘Luat Tren Troi Cuoc Doi Duoi Dat’) and
585 Ban Chap Hanh Trung Uong Dang Cong San Viet Nam [The Central Committee of the Communist Party of Vietnam], 'Nghi Quyet Cua Bo Chinh Tri Ve Chien Luoc Xay Dung Va Hoan Thien He Thong Phap Luat Viet Nam Den Nam 2010, Dinh Huong Den Nam 2020 [The Resolution 48-NQ/TW of the Politburo on Strategies for Building and Improving Vietnam’s Legal System up to 2010, towards 2020]' (2005).
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“Although we have a jungle of laws, people still act according to the law of the jungle” (‘Du Chung Ta Co Ca Mot Rung Luat Nhung Nguoi Dan Van Hanh Xu Theo Luat Rung’). People also often use the phrase “Laws on paper” (‘Luat Tren Giay’) which refers to the weak enforcement of laws in practice. According to the World
Bank Institute, Vietnam’s indicator of legal enforcement efficiency has increased but is still very low: -0.53 in 2004, -0.51 in 2005, -0.41 in 2006, -0.50 in 2007, and -0.43 in 2008.586
The activities of administrative bodies can be criticised for being carried out according to the habits of officials rather than according to the law.587 In practice the resolution of complaints in relation to administrative processes is usually not yet based on the law, and such complaints are commonly transferred between State bodies.588 Weak legal enforcement has been attributed to several reasons including the lack of transparency, uniformity and consistency in the laws as well as by red tape, corruption and the low levels of awareness of legal rights and obligations among the people.589 Many legal documents are in effect but have not yet been published in the Official Gazette.590 There are still too many guiding legal documents to laws. This leads to overlapping provisions and difficulties in understanding legal rights and obligations.591 According to statistics from the
Ministry of Justice in 2007, 320 of 1,506 legal documents which were inspected
586 Bo Ke Hoach Va Dau Tu [Ministry of Planning & Investment], above n 379, p. 95. 587 Ta Thi Minh Ly, 'Ban Ve To Chuc Thuc Hien Phap Luat [A Discussion About the Organisation of Legal Implementation]' (2010) Tap chi Nghien cuu Lap Phap [Journal of Legislative Research] . 588 ibid. 589 ibid. 590 ibid. 591 Thu Hang, 'De An 30: Cuoc Dau Tranh Cat Bo Quyen Hanh Dan [Project 30: A Combat to Cuting the Right of Bothering Inhabitants]' (20 February 2011)
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were illegal. In 2008 the numbers were 490 and 1,968 respectively.592 In 2010, the
Head of the Department of Normative Document Inspection of the Ministry of Justice stated that seven ministries and 13 provinces and cities directly under the central government had issued several legal documents contrary to the source documents which had not yet been revised.593 Consistency in the law is also an issue as many legal documents are frequently revised.594 For example, in only four years from 2006 to 2009, the decree guiding the Law on Tenders was revised three times.595
It is widely accepted that red tape and corruption are still relatively common in Vietnam.596 For example, a report of the World Bank in 2005 stated that although the 1999 Law on Enterprises required the completion of the business registration process within 15 days, this deadline was only obeyed in two third of the cases.597 Recently, the Government has made a consistent effort to simplify administrative procedures. However, the procedures and the time for starting a business remained at 11 procedures and 50 days during the period 2007-2010. In 2011, the procedures and the time for starting a business were reduced to nine procedures and 44 days, but still higher than the average level of the rest of Asia - eight and 39 respectively.598 Meanwhile, one third of Vietnam’s public investment expenditure in 1998, equivalent to five percent of GDP, was reported to have been lost through fraud and
592 Hang, above n 591. 593 ibid. 594 ibid; Bo Ke Hoach Va Dau Tu [Ministry of Planning & Investment], above n 379, p. 92. 595 ibid. 596 ibid. 597 The World Bank, above n 417, p. 46. 598 Bo Ke Hoach Va Dau Tu [Ministry of Planning & Investment], above n 379, p. 98; Soren Davidsen et al, 'Implementation Assessment of the Anti-Corruption Law: How far has Vietnam come at the Sector Level? - A Case-Study of the Construction Sector' (May 2009)
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corruption.599 In the Vietnam Household Living Standards Survey in 2008, 28 percent of respondents had no idea of the level of corruption while the majority thought that the corruption was a serious problem in Vietnam.600 In addition, the 2008 Provincial Competitiveness Index of the Vietnam Chamber of Commerce and
Industry reported that more than half of all businesses said that commissions were given to public officials.601
The legal awareness of Vietnamese people is still low.602 Most Vietnamese still do not have a habit of respecting and using laws to protect their rights and benefits.603 This has, to some extent, stemmed from the characteristics of Vietnamese traditional culture - people tend to be hostile to laws and respect relationships more than the law.604 In 2008, a survey of 500 citizens in four provinces (Hanoi, Quang Binh, Ninh
Thuan, and An Giang) found that many did not know important laws impacting on their daily lives such as the Civil Code and the Law on Personal Income Tax.605 Similarly, a recent survey of around 2,600 small and medium enterprises in 10 provinces in Vietnam shows that many had little knowledge of relevant laws and regulations.606 In Vietnam, SMEs usually “remain embedded in a relational transactional environment that is indifferent toward law-based standards and processes”.607 An Australian legal researcher stated a decade ago that “there is little evidence of law or courts being relevant to either daily life in Vietnam or the
599 Clay Wescott, 'Combating Corruption in Southeast Asia'
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resolution of disputes”.608 This conclusion is still valid today. With regard to daily business-to-business deals, a small-scale survey of businesses conducted by the World Bank reported that:
All the firms in the survey do indeed use some form of written contract to formalise their deals. However, none of them places much faith in the ultimate legal enforcement power of those contacts, nor do they seriously entertain the possibility of resorting to legal action if the other party violates its obligations. The main purpose of the contracts seems to be to minimise the room for misunderstanding between the parties. And although very few firms adhere strictly to their terms, suppliers generally attempt to fulfill them. They do so for the sake of building their reputation and boost the goodwill of the contractor, rather than because they are concerned about the possibility of any legal consequences of a breach.609
However, it is necessary to note that the Vietnamese government has been carrying out many measures to strengthen legal enforcement. The Government has seriously attempted to reduce red tape. Since 2003, Vietnam has officially introduced “One Stop Shops” (‘Co Che Mot Cua’) for administrative services based on an initiative piloted in the 1990s.610 This mechanism helps people do business with the state through only one division of the state which is responsible for receiving requests from and giving results to people. By October 2009, 84 percent of departments in the provinces had “One Stop Shops”. The “One Stop Shops” are recognised as a successful and efficient mechanism.611 By 2008, around 90 percent of respondents to the Provincial Competitiveness Index Survey conducted by the Vietnam Chamber of Commerce and Industry knew that this mechanism had been implemented locally,
608 Penelope Nicholson, 'Judicial Independence and the Rule of Law: The Vietnam Court Experience' (2001) 3 Asian Law Journal 37. 609 The World Bank, above n 417, p. 45. 610 This was introduced by Decision 181/2003/QĐ-TTg of the Prime Minister, dated 4 September 2003, on Issuing the Regulations on Implementing “One Stop Shops” Mechanism at Local Administrative Bodies. 611 The World Bank, above n 600, p. vii.
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and many agreed that this provincial implementation was good for business.612 In
2005, an interdisciplinary working group was established by the Prime Minister to deal with difficulties and proposals related to administrative procedures of businesses.613 In 2007, the Government introduced Project 30614 to streamline administrative procedures and it has been making real progress.615 An online national database with over 5,400 administrative procedures, 9,000 legal documents and 100,000 dossiers with administrative procedures, templates and forms was first introduced on 26 October 2009.616 Through this project, the Government has simplified around 5,000 administrative procedures with an estimated 37 percent saving in complying with administrative procedures.617 Besides the Judicial Reform Strategy,618 the Government has been strongly supporting an anticorruption strategy.
For example, in 2005, the Committee for Internal Affairs of the CPV released a Report of the Survey on Corruption in Vietnam, and a Law on Anticorruption which includes many corruption prevention measures was introduced in 2005 and amended in 2007.619 In 2009, a “Strategy for Preventing and Combating Corruption towards
2020” was also introduced by the Government. In the same year, the Government Inspectorate, together with the World Bank, organised Vietnam Innovation Day 2009 - More Accountability and Transparency, Less Corruption which had solicited many proposals for reducing corruption by associations, State bodies, large organisations and the private sector.620
612 ibid, p. viii. 613 This was introduced by Decision 25/2005/QĐ-TTg of the Prime Minister, dated 26 January 2005, on the Establishment of the Interdisciplinary Working Group for Dealing with Difficulties and Proposals related to Administrative Procedures of Businesses. 614 Decision 30/QĐ-TTg of the Prime Minister, dated 10 January 2007, on Approving the Project for Simplifying Administrative Procedures in all Fields under the State Management in the period 2007-2010. 615 The World Bank, above n 600, p. viii. 616 ibid. 617 Hang, above n 591. 618 As mentioned in Chapter 4.3.5.1. 619 For further discussion see The World Bank, above n 600, pp. 100-110. 620 ibid, p. 95.
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4.4 CHAPTER CONCLUSION
Since the Doi Moi reforms, Vietnam has conducted fundamental legal reforms to support its “socialist oriented market economy”. Concerns remains as to the role of law in the context of the CPV leadership in Vietnam,621 weak legal enforcement622 and the independence of courts,623 but it is difficult to deny that fundamental change has occurred in Vietnam’s legal system.624 The role of law has undoubtedly been increasingly important since the Doi Moi reforms. While the legal system has been in constant flux, the direction of legislative efforts and changes in the system appears constant: increasing transparency, reduction of arbitrariness and increased predictability in the legal system.625 Although judicial independence and legal enforcement is still limited, there have been real improvements over the last two decades. The legal achievements since the Doi Moi reforms and the continuous efforts from the Government towards building “Nha Nuoc Phap Quyen” (‘a law- based State’) will further support the development in Vietnam of business in general and franchising in particular.
621 Sidel, above n 487, p. 120; Nicholson, above n 536, p. 178. 622 Minh, above n 327, p. 40. 623 Hoa, above n 558, pp. 443-460. 624 Gillespie, above n 444, p. 287. 625 Quinn, above n 464.
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CHAPTER FIVE THE UNDERLYING COMMERCIAL LEGAL FRAMEWORK FOR FRANCHISING IN VIETNAM
5.1 INTRODUCTION
Franchising of course operates in the context of the underlying commercial legal framework. UNIDROIT notes that an effective commercial legal environment is of
“paramount importance for franchising” and “without it franchising is not able to function”.626 However whether or not franchise-specific laws to supplement the underlying commercial legal framework are needed for the development of franchising is a controversial question and the subject of much debate internationally.627 Vietnam’s Franchise Law,628 and the reasons for its introduction, is discussed in Chapter 7. This chapter addresses the underlying commercial legal framework in Vietnam.
The Doi Moi reforms in 1986 were not simply economic reforms. They impacted on
Vietnam’s legal framework, particularly its commercial legal environment. Since the late 1980s wide legal reforms have been introduced to build a legal framework which could facilitate the healthy development of Vietnam’s economy. Particularly since the submission of Vietnam’s application to join the WTO in January 1995,
626 UNIDROIT, above n 184, p. 265. 627 Terry, above n 22. 628 Vietnam’s ‘Franchise Law’ is a conventional term referring to dedicated franchise regulations which includes four parts - Section 8, Chapter VI of the new 2005 Commercial Law providing a framework for regulating the franchise relationship, Decree 35 (in 2006) of the Government Making Detailed Provisions for the Implementation of the Commercial Law with Respect to Franchising Activities, Circular 09 (2006) of the Ministry of Trade (now the Ministry of Industry and Trade) Providing Guidelines on Procedures for Registration of Franchising Activities, and Decision 106 (2008) of the Minister of Finance Providing the Regime for the Collection and Payment, Management and Use of Charges for Commercial Franchising Registration. Recently, some articles in Decree 35 have been amended by Decree 120 (in 2011) of the Government Amending and Supplementing Administrative Procedures Stipulated in a number of Decrees of the Government Detailing the Implementation of the Commercial Law.
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Vietnam extensively modernised its laws and regulations to comply with WTO accession requirements. In 2005, two years before its WTO accession, Vietnam issued and revised a series of important laws including the Civil Code, the
Commercial Law, the Intellectual Property Law, the Law on Investment, the Law on
Enterprises (all in 2005), and the Law on Technology Transfer (in 2006).
For both franchisors and franchisees in Vietnam, the underlying commercial legal framework is of great significance. In Vietnam, franchising is a “civil relationship” and, as such, is subject to the 2005 Civil Code which is considered as the “mother law” as it regulates all civil relationships including commercial relationships.
Franchising is also a commercial activity which is subject to other specific laws. The commercial legal framework for franchising therefore encompasses not only the provisions of the 2005 Commercial Law (and other legal documents guiding this law) but also the 2005 Intellectual Property Law, the 2005 Law on Investment, the
2005 Law on Enterprises, the 2006 Law on Technology Transfer, and the 2004 Law on Competition.
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Figure 11: The Franchise-Specific Law and Underlying Commercial
Regulations Impacting on Franchising in Vietnam
The 1992 Constitution and International Agreements
The Civil Code
The Commercial Law
The Law on Enterprises The Intellectual Property Law
Franchise-Specific Law
The Law on Competition The Law on Franchising Investment
The Law on Technology Transfer
This chapter reviews the development of the underlying commercial legal framework for franchising in Vietnam, which only focuses on laws particularly relevant to franchising as in Figure 11.629 This chapter reviews the development and operation of these laws and their impact on franchising.
629 Franchising is of course subject to a range of other specific laws such as labour laws, tax laws, advertising laws and consumer protection laws, but these are not discussed.
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5.2 THE CONTEMPORARY COMMERCIAL LEGAL FRAMEWORK
Although Vietnam became independent in 1945, and was reunited in 1975 after 30 years of wars, there was no discernible commercial law in this country until the introduction of the Doi Moi reforms in 1986.630 The Doi Moi reforms which moved
Vietnam from a centrally planned economy to a market economy demanded a legal framework, particularly a commercial legal framework, to support the development of the economy. Following the decision of the Communist Party of Vietnam to introduce the Doi Moi reforms, a number of commercial legal documents were enacted in order to attract foreign investment and respond to the emergence of the private sector and entrepreneurship. The laws included the Foreign Investment Law (in 1987), the Ordinance on the Transfer of Foreign Technology into Vietnam (in
1988), the Ordinance on Industry Property Protection (in 1989), the Ordinance on Economic Contracts (in 1989), the Law on Private Enterprises (in 1990), and the Company Law (in 1990).631
In 1991, the Seventh Communist Party Congress focused on legal reforms required by the Doi Moi policy and paved the way for the adoption of a new Constitution. The 1992 Constitution states that “the State develops a multi-component commodity economy functioning in accordance with market mechanisms under the management of the State and following a socialist orientation”.632 The fundamental shift in the 1992 Constitution is “the legal recognition of private ownership of property and recognition of the private sector economy”.633
630 Claude Rohwer, 'Progress and Problems in Vietnam's Development of Commercial Law' (1997) 15 Berkeley Journal of International Law 275 . 631 and in 1990, the then Council of Ministers (now the Government) enacted Decree 17-HDBT Making Detailed Provisions for the Implementation of the Ordinance on Economic Contracts. 632 Article 15 of the 1992 Vietnamese Constitution. 633 Rose, above n 333.
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Based on the principles of the 1992 Constitution, the first Civil Code of Vietnam634 was introduced in 1995 after several years of drafting. It was considered as “the basic law of the country”.635 Like the Civil Codes of the countries belonging to the Civil Law tradition such as France and Germany, the 1995 Civil Code of Vietnam covered a wide range of subjects including some aspects of commercial law such as the basic rules of contract law.636 Soon after the introduction of the 1995 Civil Code, a Commercial Law was enacted (in 1997). The 1997 Commercial Law nevertheless did not replace the Ordinance on Economic Contracts and the accompanying
Decree. Until the introduction of the 2005 Civil Code there was uncertainty in the commercial legal regime637 as to whether a contract was an economic contract or a commercial contract or a civil contract. The law which was applied depended on the categorisation of the contract. Because of the inherent defects in the 1997 Commercial Law,638 as well as the uncertainty as to relationships governed by this law, the 1997 Commercial Law was considered as a “dead law” with little effect in practice. The 1997 Commercial Law nevertheless had an important symbolic role - it represented a meaningful effort from the Vietnamese Government towards building a commercial legal framework as a part of the process of the Doi Moi reforms.
The Asian economic crisis of the late 1990s provided further incentive for reform, particularly in relation to enterprise development under the 1999 Enterprise Law which introduced comprehensive corporate governance rules drawing on Anglo- American company law principles.639 Barriers to private investment were removed
634 In the beginning of the independence, Vietnam continued using the previous Civil Codes which were enacted under the colonial France. 635 Rohwer, above n 630. 636 ibid. In 1991, an Ordinance on Civil Contracts was introduced. However it did not include aspects of commercial contracts. 637 Under the then laws, contracts were divided into three types: economic contract, commercial contract, and civil contract. 638 There was much criticism of the 1997 Commercial Law that many of its articles were backward and not consistent with international practice. 639 John Gillespie, 'Transplanted Company Law: An Ideological and Cultural Analysis of Market- Entry in Vietnam' (2002) 51 International and Comparative Law Quarterly 641
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and the Constitution was amended (in 2001) to recognise the long term role for the private sector in the economy. The amended Constitution provides that:
The economic sectors constitute important components of the socialist- oriented market economy. Individuals and organisations from different economic sectors may conduct production and business in industries and trades that not prohibited by law, may jointly carry out long term development and co-operation, and shall be equal and shall compete in accordance with the law.640
Furthermore, the fifth Plenum of the Ninth Party Congress in March 2002 emphasised that the private sector was “an integral part of the national economy” and endorsed measures to create an attractive business climate and a fair and competitive playing field for all enterprises.641
Vietnam’s transformation over the last decade has been particularly impressive. The US trade embargos were lifted in the mid 1990s - 20 years after their introduction - and in 2000 the US-Vietnam Bilateral Trade Agreement (BTA) was negotiated. The
BTA put in place much of the infrastructure necessary for later WTO accession. Under the BTA Vietnam committed to opening key services (including banking, insurance and accounting), introducing WTO-consistent protection of intellectual property rights, phasing out WTO-inconsistent measures in relation to trade-related investment measures and introducing transparency into the legal system. On 11 January 2007 Vietnam was admitted to the WTO - the culmination of 12 years of negotiations.
The “new Vietnam” provides a comprehensive framework for business. Contract law has been upgraded by the new Civil Code (effective 1 January 2006 and referred to as the 2005 Civil Code), and specific commercial transactions, including
640 Article 16 of the 1992 Vietnamese Constitution amended in 2001. 641 Raymond Mallon, 'Approaches to Support the Development of an Enabling Environment for Small Enterprises - Country Report: Vietnam' (2002), p. 12.
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franchising, have been accommodated in the new 2005 Commercial Law (effective 1
January 2006). The outdated economic contract regulations642 have been repealed. In 2005 the National Assembly enacted a new Intellectual Property Law (effective 1 July 2006) which is compliant with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and is therefore consistent with international best practice. After a long consultation exercise and drafting process the National Assembly passed a Competition Law in 2004643 which applies to organisations and individuals conducting business in Vietnam, including enterprises engaged in the production or supply of public utility products or services, state monopolies and industry associations. It deals with restraint of competition, abuse of dominant market position, economic concentration and other “unhealthy” anti-competitive practices and sets out procedures for resolution of anti-competition cases and measures for dealing with breaches.
Business operation and investment has been transformed by the 2005 Law on Enterprises and the Law on Investment (both taking effect from 1 July 2006) which create “a level playing field for all types of enterprises and provide equal treatment to all investors”.644 The Law on Enterprises governs enterprises of both foreign and domestic investors: any individual or organisation645 is permitted to establish and manage enterprises in Vietnam in accordance with the Law on Enterprises. Four types of enterprises are recognised - limited liability companies, joint-stock companies, partnerships and private enterprises (sole proprietorship). The Law on Enterprises provides for their establishment, organisation and operation and sets out principles for conversion of state owned enterprises into limited liability or joint- stock companies. The Law on Investment governs the investment activities in Vietnam of foreign and local individuals and entities. It allows direct or indirect
642 The 1989 Ordinance on Economic Contracts and the 1990 Decree on Economic Contracts. 643 Which was passed by the National Assembly in December 2004 and took effect on 1 July 2005. 644 Deacons, Doing Business in Asia: Vietnam (3rd ed, 2006), p. 298. 645 Certain individuals or organisations are prohibited from business operation including State officials and members of the defence and police forces.
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investments in all types of business except for those which are specifically prohibited or restricted. Direct investment can be through establishment of an entity, investment under contracts, investment for expansion, purchase of shares or contribution of capital, and merger and acquisition.
5.3 CONTRACT LAW
As contracts are the ultimate tool to define the relationship between the franchisor and the franchisee the contract law is of great significance to both parties. In Vietnam, contract law is not governed by a separate law but by a set of provisions directly relating to contracts included in different Laws such as the Civil Code, the Commercial Law, the Intellectual Property Law, and the Law on Technology Transfer. In this chapter the term “contract law” is used to refer to any laws or regulations directly relevant to contracts. The Doi Moi reforms and the international integration process have led to a remarkable development of Vietnam’s contract law. The introduction of the 2005 Civil Code and the 2005 Commercial Law (both effective 1 January 2006), together with the 2005 Intellectual Property Law (effective 1 July 2006), the 2006 Law on Technology Transfer (effective 1 July 2007), and other laws and regulations relevant to contracts in specific industries constitute a consistent and comprehensive legal framework for contracting.
5.3.1 Regulation of Contracts Prior to 1 January 2006
Contract law in Vietnam has a long heritage. It existed in the feudal period with several articles under Hong Duc Code (popularly called in Vietnamese ‘Bo Luat Hong Duc’ or ‘Le Trieu Hinh Luat’) which was introduced under the Le Dynasty in the period 1470-1497. During the time of the first French occupation in the period 1858-1945, there were three Civil Codes which were separately applied in three
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regions of Vietnam: the 1883 Abbreviated Civil Code for Cochin China (Southern
Vietnam), the 1931 Civil Code for Tonkin (Northern Vietnam), and the 1936 Civil Code for Annam (Central Vietnam). However, there were no provisions on contracts in the 1883 Abbreviated Civil Code.646 In 1942, a Commercial Law was enacted by the King of the Nguyen Dynasty (Bao Dai) and applied to Annam (Central Vietnam). However, in the feudal and colonial periods where there was little encouragement for the development of a commercial environment, contract law had little effect in practice.
On 2 September 1945, Vietnam became independent. However in early years of independence, the laws of the old regime, including the contract law, continued in use.647 Soon after the declaration of independence, the Democratic Republic of Vietnam was again at war with the colonial French. In 1954, with the victory of the then Democratic Republic of Vietnam (in Dien Bien Phu) the French withdrew from Vietnam. However, from 1955 to 1975 two Governments existed in parallel in Vietnam: the Government of the Democratic Republic of Vietnam which continued to control the North and the Government of the Republic of Vietnam (Viet Nam Cong Hoa), supported by the US Government, which controlled the South. In the North of Vietnam, the contract law of the old regime was terminated by the Instructions 772/TATC of Supreme Court, dated 1 July 1959. In the South of Vietnam, the President of the Republic of Vietnam (Nguyen Van Thieu) in 1972 enacted a Civil Code and a Commercial Law which also contained provisions on contracts. However, these laws came to an end when the Democratic Republic of Vietnam defeated the Republic of Vietnam and the country was reunited in 1975.
646 Sidel, above n 435, p. 361. 647 See Order 90/SL of the President of the temporary Government of the then Democratic Republic of Vietnam (Viet Nam Dan Chu Cong Hoa) (now the Socialist Republic of Vietnam (Cong Hoa Xa Hoi Chu Nghia Viet Nam)), dated 10 October 1945. On 22 May 1950, the President of the Government of the then Democratic Republic of Vietnam issued Order 97/SL to revise some provisions in the Civil Codes of the previous regime.
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During the period 1945 to 1975 when the North and the South were at war, contract law existed only on paper rather than in practice.
From 1975 to 1986, Vietnam pursued a centrally planned economy where there was no scope for the development of private business and all commercial activities were planned and controlled by the Government. The contract law could not develop in these circumstances. With the Doi Moi reforms in 1986, Vietnam moved from a centrally planned economy to a socialist oriented market economy. Since then a number of laws and regulations, including laws affecting contracts, have been continuously enacted to meet the requirement of economic reform.
The Ordinance on Economic Contracts (1989)
Soon after the commencement of the Doi Moi reforms, the Ordinance on Economic Contracts was enacted (on 29 September 1989) by the then State Council.648 The Ordinance regulated only economic contracts which were defined as “agreements in writing and/or transaction documents between contracting parties on the implementation of the production, exchange of goods, services, research and scientific-technical application, and other agreements with business goals, which have clearly defined rights and obligations of each party to develop and implement their plans”.649 Moreover, this Ordinance only applied to economic contracts between legal entities, or between legal entities and legal persons having a business licence.650 However, it applied not only to contracts between Vietnamese parties but also to contracts between Vietnamese legal entities and foreign organisations or foreign individuals.651 The Ordinance was supplement with more detail by Decree 17-HDBT of the then Council of Ministers (now the Government), dated 16 January
648 This State organ was repealed by the 1992 Constitution and replaced by the President of State and the Standing Committee of the National Assembly. 649 Article 1 of the Ordinance on Economic Contracts. 650 Article 2 of the Ordinance on Economic Contracts. 651 Article 43 of the Ordinance on Economic Contracts.
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1990, and Circular 108/TT-PC of the then State Economic Arbitration Centre,652 dated 19 May 1990.
The Ordinance on Civil Contracts (1991)
In 1991, following the Ordinance on Economic Contracts which regulated only “economic contracts”, the Ordinance on Civil Contracts was issued to regulate civil contracts. Civil contracts were defined as “agreements between the parties on the establishment, change or termination of the rights and obligations of the parties to the sale, lease, loan, borrowing or donation of property as well as agreements to do or not do something, and other agreements in which one or both parties contract for meeting daily need or consumption”.653 This Ordinance originally applied to civil contracts where the parties were Vietnamese organisations and individuals, but was extended to civil contracts where at least one party was a foreign individual and/or a foreign legal entity provided that the contract was implemented in Vietnam.654 Moreover, the Ordinance also regulated contracts in which a party was an individual who had a business licence and contracting for the purpose of profit provided that this individual was not a private enterprise as stipulated under the then Law on Private Enterprises.655
The 1995 Civil Code
The introduction of 1995 Civil Code (effective 1 July 1996) was an important development for the legal system656 in general and for contract law in particular. This was the first Civil Code of the Socialist Republic of Vietnam and it included all
652 Which belonged to the then Council of Ministers and was repealed in 1995 and replaced by economic courts under the court system. 653 Article 1 of the Ordinance on Civil Contracts. 654 Article 57.2 of the Ordinance on Civil Contracts. 655 Article 57.1 of the Ordinance on Civil Contracts. 656 This Code repealed 6 previous Ordinances including the Ordinance on Civil Contracts (1991), the Ordinance on Housing (1991), the Ordinance on Inheritance (1990), the Ordinance on the Transfer of Foreign Technology into Vietnam (1988), the Ordinance on Industrial Property Protection (1989), and the Ordinance on Copyright Protection (1994).
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basic aspects of civil law.657 It applied both to contractual relationships between domestic parties and to contracts involving foreign parties.658 Basic rules of contract law for both civil and commercial contracts659 were covered by this Code.
The 1997 Commercial Law
The 1989 Ordinance on Economic Contracts regulated only a few aspects of economic contracts, and was considered as an outdated regulation which could not assist the development of the economy. The 1997 Commercial Law (effective 1 January 1998) was therefore introduced to set up a commercial legal framework which could encourage and supervise commercial activities. The Commercial Law classified “commercial activities” as including the 14 following activities:660 Sale of goods; Trade representatives; Commercial brokerage; Purchase of goods in trust; Agency for the sale of goods; Outsourcing; Auctions; Tenders; Delivery services; Inspection of goods; Promotion; Advertising; Display of goods; and Fairs and trade exhibitions. It stipulated different contracts for each commercial activity. The Commercial Law applied not only to commercial contracts between domestic parties but also to commercial contracts between domestic and foreign parties. However, the 1997 Commercial Law did not replace the 1989 Ordinance on Economic
Contracts and repealed only “all previous provisions which are contrary to this Law”.661 Therefore, until the introduction of the 2005 Civil Code, there was much
657 The Code includes seven parts (838 articles): Part 1 mentions basic principles including personal and family rights; Part 2 deals with property and property rights; Part 3 deals with civil obligations and contracts; Part 4 deals with inheritance; Part 5 deals with the transfer of the right to use land; Part 6 deals with intellectual property; and Part 7 deals with civil relationships involving foreign elements, which was defined as civil relationships with foreigners, foreign legal entities involved or the grounds for establishment, change or terminate such relationship overseas or property assets related to such relationship abroad. 658 Which were mentioned in Part 7 as “civil relationships involving foreign elements”. 659 Although there are not any provisions on the application of the Code to commercial contracts, it was generally credited that the Code also applied to them. 660 There is much criticism that the definition of commercial activities was too narrow and inconsistent with international practice such as the Model Law on International Commercial Arbitration of UNCITRAL. 661 Article 263 of the 1997 Commercial Law.
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uncertainty in determining the relationship between the 1989 Ordinance on
Economic Contracts, the 1995 Civil Code, and the 1997 Commercial Law in terms of regulating contracts. Moreover, due to inherent defects, the 1997 Commercial Law had little significance in practice and was considered as a “dead law”.
5.3.2 Regulation of Contracts Since 1 January 2006
As part of Vietnam’s law modernisation process prior to WTO accession, a series of laws relevant to contracts were issued or revised including the 2005 Civil Code, the 2005 Commercial Law, the 2005 Intellectual Property Law, the 2005 Law on Investment, the 2006 Law on Technology Transfer, and the 2004 Law on
Competition. Since 1 January 2006 when both the new Civil Code and the new Commercial Law became effective, a comprehensive and transparent contract law has emerged. The 2005 Civil Code has ended the uncertainty in defining the relationship between different types of contracts through repealing the 1989 Ordinance on Economic Contracts.662 It is considered as the death certificate for the concept of the “economic contract” - a concept which had been “unclear”, incomprehensible and outdated since the introduction of the 1997 Commercial Law.
Unlike the 1995 Civil Code, the 2005 Civil Code is officially considered as the basic law in all civil relationships and takes precedence over laws dealing with specific civil relationships.
5.3.2.1 The 2005 Civil Code
The 2005 Civil Code, which repealed the 1995 Civil Code and the 1989 Ordinance on Economic Contracts, took effect on 1 January 2006. The Code was introduced in
662 This Code also repeals the 1995 Civil Code.
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order to remedy loopholes in the 1995 Civil Code (particularly in relation to its provisions on assets and property rights, contract and civil obligations, land use rights, and inheritance)663 and also to satisfy the law modernisation requirement of Vietnam’s WTO accession.
The 2005 Civil Code has 7 parts, 36 chapters, and 777 articles dealing with the following matters: General Provisions (Part 1, Chapters 1-9, articles 1-162), Property and Ownership Rights (Part 2, Chapters 10-16, articles 163-279), Civil
Obligations and Civil Contracts (Part 3, Chapters 17-21, articles 280-630), Inheritance (Part 4, Chapters 22-25, articles 631-687), Provisions on the Transfer of Land Use Rights (Part 5, Chapters 26-33, articles 688-735), Intellectual Property Rights and Technology Transfer (Part 6, Chapters 34-36, articles 736-757), and
Civil Relationships Involving Foreign Elements (Part 7, articles 758-777). The 2005 Civil Code has a broad scope and covers all civil relationships including marriage and family, business, trade, and labour relationships. Franchising as a type of commercial relationships is also regulated by the 2005 Civil Code in relation to the matters not specifically stipulated by the Franchise Law.664 The parts of the 2005 Civil Code that have most impact on franchising are the General Provisions (Part 1), Civil Obligations and Civil Contracts (Part 3), Intellectual Property Rights and
Technology Transfer (Part 6), and Civil Relationships Involving Foreign Elements (Part 7).
The 2005 Civil Code provides 10 basic principles for civil relationships in general as well as for civil contracts in particular. The principles which are laid down in Part 1 Chapter 2 include: Freedom of contract (article 4), Equality of parties (article 5),
663 Le Hong Hanh and Nguyen Thi Anh Van, 'Major Developments in Vietnam Law Achieved by the Seventh Session of the 11th Legislature of the National Assembly ' (2006) (1) Law & Development 664 The provisions of the Civil Code shall apply to a commercial activity which is not governed by provisions of the Commercial Law or by provisions of other laws (article 4.3 of the 2005 Commercial Law).
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Goodwill and honesty (article 6), Bearing civil liability (article 7), Respect for good morals and traditions (article 8), Respect for and protection of civil rights (article 9), Respect for State interests, public interests, and the legitimate rights and interests of other persons (article 10), Compliance with law (article 11), Conciliation (article
12), and Bases for establishment of civil rights and obligations (article 13). Based on these principles, the 2005 Civil Code also contains principles for entering into civil contracts (article 389) and principles for the performance of civil contracts (article 412) which include freedom of contract, equality of parties, good will, honesty, and good faith.
The principle of freedom of contract, one of the most important principles of contract law, is recognised for the first time in Vietnam by the 2005 Civil Code.
According to this principle, civil relationships can be concluded and performed with more freedom than under the provisions of the 1995 Civil Code. Under the 1995 Civil Code, parties could only agree on the issues which were provided for in the law. However, since the 2005 Civil Code took effect, the parties may agree on any issues not prohibited by law. Moreover, the provisions relating to civil contracts specified in the 2005 Civil Code has been improved to expand the freedom of parties to the negotiation and signing of contracts. Unlike the 1995 Civil Code, the 2005
Civil Code (article 402) does not specify mandatory terms in the contract. It simply gives instructions and suggestions for the contents of contracts. Consistently with the principle of freedom of contract in the 2005 Civil Code, the Franchise Law gives franchisors and franchisees the rights to freely agree on the content of the contract.665
The validity of a civil contract is the same as for all civil transactions. A civil contract is effective when it meets all three of the following conditions: (i) both
665 For further discussion see Chapter 7.4.5 and Chapter 7.6.5.
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parties to the contract have civil capacity (ii) the purpose and contents of the contract do not violate prohibitory provisions of law and are not contrary to social ethics and (iii) the parties act completely voluntarily (article 122.1). The forms in which civil contracts are made must comply with any provision specified in by law
(article 122.2). A civil contract, including a franchise agreement, is invalid if it fails to satisfy one of these conditions (article 127). However, unlike the other conditions, in cases where the parties fail to comply with a prescribed formal requirement, the court or other competent State organ shall, at the request of one or all the parties, compel the parties to comply with the formal provisions within a given period. A failure to comply with such provisions renders the contract invalid.
In terms of the choice of applicable law for international franchise agreements,
Decree 35 (in 2006) of the Government Making Detailed Provisions for the
Implementation of the Commercial Law with Respect to Franchising Activities provides that "in cases where the parties choose to apply the law of Vietnam, the franchise contract may contain the following main issues: ..." (article 11). The
Franchise Law does not define the legal system to be applied to determine the legality of the contents of international franchise contracts. The parties to an international franchise contract can therefore agree on the applicable law for their contract. The 2005 Commercial Law does not specifically provide for the choice of applicable law. Therefore, the 2005 Civil Code is applied to regulate this matter.
According to Article 769 of the 2005 Civil Code, if a franchising agreement is signed and performed entirely in Vietnam, the applicable law must be Vietnamese.
In other situations, franchisors and franchisees can agree on any applicable law.
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5.3.2.2 The 2005 Commercial Law
The 2005 Commercial Law was passed at the seventh Session of the 11th National Assembly in 2005 and came into force on 1 January 2006. It repeals the 1997 Commercial Law. The 2005 Commercial Law has a broader scope of application than the 1997 Commercial Law and is recognised as being consistent with international practices. Under the 2005 Commercial Law, a new concept of “commercial activities” is introduced which covers all commercial activities including buying and selling goods or providing services, investment, trade promotion, and other activities aimed at making a profit. Transactions which were not previously recognised are allowed by this Law including transactions made by a party which does not have a profit purpose with a trader if the first party has chosen the 2005 Commercial Law as the applicable law for the transactions.
The 2005 Commercial Law has nine chapters comprising 324 articles, and covers the following issues: General Provisions (Chapter I, articles 1-23), Purchase and Sale of
Goods (Chapter II, articles 24-73), Provision of Services (Chapter III, articles 74- 87), Commercial Enhancement (Chapter IV, articles 88-140), Intermediary Commercial Activities (Chapter V, articles 141-177), Other Specific Commercial
Activities (Chapter VI, articles 178-291), Remedies in Commerce and Dispute
Resolution in Commerce (Chapter VII, articles 292-319), Dealing with Breaches of Commercial Legislation (Chapter VIII, articles 320-322), and Implementing Provisions (Chapter IX, articles 323-324).
The 2005 Commercial Law dedicates Chapter VI to eight specific commercial activities including franchising. Section 8 of Chapter VI comprises eight articles (articles 284-292) which provide a framework for regulating the franchise relationship. This section is the source of Vietnam’s Franchise Law and is supplemented by further details laid down in Decree 35 (in 2006) of the Government
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Making Detailed Provisions for the Implementation of the Commercial Law with
Respect to Franchising Activities. In addition, franchising as a type of commercial activity, is also governed by other provisions of the 2005 Commercial Law including the General provisions (Chapter I), Remedies in Commerce and Dispute Resolution in Commerce (Chapter VII), and Dealing with Breaches of Commercial Legislation (Chapter VIII).
Consistently with the principles of the 2005 Civil Code, the 2005 Commercial Law also provides that traders are equal before the law (equality of parties)666 and are free to agree on commercial activities (freedom of contract).667 To ensure further compliance with the law by traders, the 2005 Commercial Law has expanded the range of trade sanctions. The 1997 Commercial Law defined four types of sanction: requiring contract performance, penalty for breach of contract or violation of law, compensation, and cancellation of the contract.668 The 2005 Commercial Law has added two new types of sanction: moratorium on contract performance and suspension of contract performance. The 2005 Commercial Law even acknowledges other remedies agreed upon by both parties provided that the sanctions do not contravene the basic principles of Vietnam laws or international commercial practices or the international agreements to which Vietnam is a member.669
5.4 REGULATION OF ENTERPRISES
5.4.1 Pre-2005 Law on Enterprises
Prior to 1986, the implementation of a centrally planned economy left no role for the private sector. The introduction of the Doi Moi reforms in 1986, which moved
666 Article 10 of the 2005 Commercial Law. 667 Article 11 of the 2005 Commercial Law. 668 Article 222 of the 1997 Commercial Law. 669 Article 292 of the 2005 Commercial Law.
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Vietnam from a centrally planned economy to a market economy with socialist orientation, has opened the way for the emergence of the private sector. The Law on Private Enterprises and the Company Law enacted in 1990 and effective in 1991, and the Law on State Owned Enterprises introduced in 1995, were the first laws encouraging business. During this period the following types of enterprises were provided: private enterprises (regulated by the 1990 Law on Private Enterprises), limited liability companies and joint-stock companies (regulated by the 1990 Company Law), and State owned enterprises (regulated by the 1995 Law on State
Owned Enterprises).
In 1999 the Law on Enterprises, which repealed the 1990 Law on Private Enterprises and the 1990 Company Law, was promulgated. With the introduction of the 1999 Law on Enterprises, the separate laws on private businesses were consolidated into one law (the 1999 Law on Enterprises), with State owned enterprises being governed by another law (the 1995 Law on State Owned
Enterprises).670 The 1999 Law on Enterprises also provided for an additional form of enterprise - the partnership. Since the introduction of the 1999 Law on Enterprises, private businesses have had more favorable conditions for development. This Law has institutionalised the freedom to conduct business by individuals and businesses in all lines of business not prohibited by law and repealed the principle of previous laws that individuals and businesses were only allowed to do business in the lines specifically stipulated by law. The 1999 Law on Enterprises also removed administrative barriers such as permits, procedures, and fees which were obstacles to business activities. In 1999, the drafting Committee of the 1999 Law on Enterprises conducted a country wide survey and identified over 300 different types of permits that businesses were required to obtain from the competent authorities. The
670 The 1995 Law on State Owned Enterprises was replaced in 2003 by the 2003 Law on State Owned Enterprises.
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Government has acted to remove unnecessary permits. Decision 19/2000/QD-TTg of the Prime Minister, dated 3 February 2000, abolished 84 kinds of permits regarded as unnecessary and contrary to the 1999 Law on Enterprises.671 Under the new legal environment for business, private enterprise developed rapidly. In the period 2000-2004, 73,000 private businesses were established - 3.75 times the number established in the period 1991-1999.672 By 2004, there were 150,000 private businesses.673
5.4.2 The 2005 Law on Enterprises
The current 2005 Law on Enterprises came into effect on 1 July 2006 and repealed the 1999 Law on Enterprises, the 2003 Law on State Owned Enterprises, the regulations on organisation and management of business activities in the 1996 Law on Foreign Investment, and the 2000 Law Amending the Law on Foreign Investment.
The 2005 Enterprise Law has established the general legal environment for all businesses in the territory of Vietnam. The 2005 Law on Enterprises also sets out principles for conversion of state owned enterprises into limited liability or joint- stock companies (article 166). By 1 July 2010 all State owned enterprises were required to convert into limited liability or joint-stock companies and from that time they have been governed by the 2005 Law on Enterprises. Prior to the introduction of this law, domestic invested and foreign invested enterprises were basically governed by two different legal regimes. Under the 2005 Law on Enterprises, all enterprises in all economic sectors, whether domestic or foreign, whether State owned or private owned, operate at the same level (article 3.1).
671 Decree 59/2002/NĐ-CP of the Government, dated 4 June 2002, continued this strategy and removed a further four permits as well as replacing 10 kinds of permits with business conditions. 672 Bo Ngoai Giao Viet Nam [Vietnam's Ministry of Foreign Affairs], above n 377. 673 ibid.
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Although the Government made great efforts to reduce a number of unreasonable business permits since 2000, the reality is that some Ministries and other authorities still continued providing unreasonable permits. Therefore, to control the types of business permits, the 2005 Law on Enterprises stipulates that only the Government is currently entitled to issue business permits if necessary and that Ministries,
Ministerial-level Agencies, People's Councils and People's Committees at all levels cannot prescribe lines of business with business conditions and business conditions
(article 7.5).
The 2005 Law on Enterprises (article 7), as with the 1999 Law on Enterprises, provides that enterprises in any economic sectors have the right to conduct lines of business which are not prohibited by law.674 In terms of lines of business which are subject to conditions stipulated by laws, an enterprise is only allowed to conduct such lines of business if it satisfies all of the stipulated conditions.675 However, it is noted that all enterprises have to conduct business strictly in accordance with the lines of business recorded in the business registration certificate (article 9.1). Thus, to conduct franchising as a way to expand business franchisors have to do franchising within the scope of its business.
The 2005 Law on Enterprises provides for four types of enterprise: limited liability companies, joint-stock companies, partnerships, and private enterprises (sole proprietorship) (article 1).
674 However, State officials in effect have to do activities clearly stipulated by laws, so it is still difficult for businesses or individuals to conduct any activities which are not yet clearly prescribed by laws. 675 Business condition means a requirement which an enterprise must satisfy or perform when it conducts a specific line of business and which shall be demonstrated by way of a business permit, certificate of satisfaction of conditions for business, practicing certificate, certificate of professional indemnity insurance, requirement for legal capital or other requirements (article 7.2).
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Private Enterprises/Sole Proprietorship
The private enterprise is the least sophisticated form of business organisation. It is a business entity owned by one person who retains all profits and bears unlimited liability. The private enterprise cannot issue any form of securities and each person can establish only one private enterprise.676 Under the 1999 Law on Enterprises, if an individual wanted to establish an independent enterprise that did not link with other organisations and individuals, he/she had to choose the private enterprise form.
However, the 2005 Law on Enterprises now allows individuals wishing to operate an independent enterprise to establish a limited liability company owned by only one individual (article 63.1). Under the previous laws, only organisations could establish one member limited liability companies.
Partnership
Partnership, as a form of business organisation, was first recognised by the 1999
Law on Enterprises, and is currently governed by the 2005 Law on Enterprises. Under the 2005 Law on Enterprises, a partnership is defined as an enterprise677 which has the following features:678
there are at least two members being co-owners of the company jointly
conducting business under one common trade name (hereinafter referred to as unlimited liability partners); in addition to unlimited liability partners there may be limited liability
partners; unlimited liability partners must be individuals who shall be liable for the obligations of the company to the extent of all of their assets;
676 The 2005 Law on Enterprises, article 141. 677 In Vietnam, a partnership is a company. 678 The 2005 Law on Enterprises, article 130.
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limited liability partners shall only be liable for the debts of the company to
the extent of the amount of capital they have contributed to the company. The partnership may not issue any form of securities.
Limited Liability Company
Under the 2005 Law on Enterprises, a limited liability company is an enterprise which has following characteristics:679
member may be organisations or individuals. the number of members shall not exceed 50. members of the company shall be liable for the debts and other property obligations of the enterprise within the amount of capital that they have
undertaken to contribute to the enterprise. the limited liability company may not issue shares.
Based on the number of company members, the 2005 Law on Enterprises also divides the limited liability company into two types: limited liability companies with two or more members680 and one member limited liability companies.681
Joint-stock Company
The joint-stock company is an enterprise which has the following features:682
the charter capital shall be divided into equal portions called shares; shareholder may be organisations or individuals, and the minimum number
of shareholders shall be three and there is no restriction on the maximum number of shareholders;
679 The 2005 Law on Enterprises, articles 38, 63. 680 The 2005 Law on Enterprises, article 38. 681 The 2005 Law on Enterprises, article 63. 682 The 2005 Law on Enterprises, article 77.
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shareholders shall be liable for the debts and other property obligations of the
enterprise only within the amount of capital contributed to the enterprise; shareholders may freely assign their shares to other persons except in some cases stipulated by the Law on Enterprise.
the joint-stock company can issue all form of securities.
5.5 REGULATION OF FOREIGN INVESTMENT
Prior to 2005, there were two separate legal systems corresponding to two kinds of investment in Vietnam - foreign investment and domestic investment. In terms of regulating foreign investment, the Law on Foreign Investment683 was first enacted in
1987 and marked the start of the legal renovation process to implement the Doi Moi reforms. The 1987 Law on Foreign Investment was amended in 1990 and 1992, and was replaced by the 1996 Law on Foreign Investment which was amended in 2000.
These laws provided for three types of investment vehicle - the business cooperation contract, the joint venture company, and the wholly foreign owned company (article
4). They applied to foreign individuals and businesses investing into Vietnam.
Under the 1996 Law on Foreign Investment, joint venture and wholly foreign owned companies were required to be in the form of a limited liability company (articles 6 and 15).
In 2005, as part of the legal modernisation process preparatory to WTO accession, the 2005 Law on Investment was enacted and repealed the 1996 Law on Foreign
Investment and the 1998 Law on Domestic Investment Encouragement. The 2005
Law is the first unified law on both foreign and domestic investment and provides equal treatment before the law to all investors from all economic sectors and as
683 Prior to 2005, foreign investment laws regulated only direct foreign investment.
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between domestic investment and foreign investment (article 4.2). The 2005 Law on
Investment allows investment in all types of business except for those specifically prohibited (article 4.1). Foreign investors can directly invest into Vietnam through the following vehicles: (i) joint venture or wholly foreign owned companies (ii) contractual forms of build-operate-transfer (BOT), build-transfer-operate (BTO), build-operate (BO) and build-transfer (BT) (iii) investment for expansion (iv) purchase of shares or contribution of capital and (v) merger and acquisition (article
21). Unlike the 1996 Law on Foreign Investment, the establishment of joint venture or wholly foreign owned companies can be in any company form provided by the
2005 Law on Enterprises including private enterprises. In addition to the entry forms provided by the 2005 Law on Investment, under the 2005 Commercial Law foreign businesses can also establish representative offices or branches in Vietnam (articles
16-23).
Under Vietnam’s WTO accession commitments, foreign investment enterprises
(FIE) participating in franchising were required to be in the form of a joint venture with maximum 49 percent foreign ownership. The foreign capital restriction was lifted on 1 January 2008 but the joint venture requirement remained. However from
1 January 2009 FIE franchisors established in Vietnam can be 100 percent foreign owned. From 11 January 2010 - after three years from the date of WTO accession - foreign franchisors have been able to establish branches in Vietnam. There is no restriction on the establishment of the representative offices of foreign franchisors in
Vietnam.
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5.6 REGULATION OF INTELLECTUAL PROPERTY
Although Vietnam issued regulations on intellectual property from the start of independence,684 a legal framework for intellectual property has only been built since the 1980s following the issuance of the then Government Council’s Decree
31/CP dated 23 January 1981, Providing the Regulations on Ideas for Technical
Renovation, Manufacture Rationalisation, and Inventions.685 In 1982, the then
Council of Ministers (now the Government) enacted Decree 197/HDBT
Promulgating the Regulations on Trademarks. On 18 October 1983 the chairman of the State Committee of Science and Technology686 issued Circular 125/SC to guide the implementation of the regulations on trademarks. Although a protection regime for patents and trademarks was stipulated by these legal documents, under
Vietnam’s centrally planned economy such a regime existed more on paper than in practice. After Doi Moi, many sub-law documents continued to be promulgated687 which provided the protection regime for other objects of intellectual property such as industrial designs and utility solutions.
Since 1995, with the purpose of quickly integrating into the international community and attracting more foreign investment, Vietnam has taken many regulatory
684 Including Instruction 105/TTg of the Prime Minister, dated 11 March 1959, on the Organisation and Management of the Movement on Technical Innovations and Inventive Activities of the Public, Instruction 07/TTg of the Prime Minister, dated 22 January 1963, on the Study, Supplement of Awarding Measures for Innovations and Discoveries, Including Remuneration, Decree 20/CP of the Government, dated 8 February 1956, on Awards for Technical Innovations, Production Rationalisation and Improvement of the Working Manners, and Circular 567/KHKT- PMSK of the then State Committee of Science and Technology, dated 9 July 1966, on the Organisation of Registration, Verification, Application, Dissemination and Award for Innovations. 685 See generally Sesto E. Vecchi and Michael J. Scrown, 'Intellectual Property Rights in Vietnam' (1992) 11 Pacific Basin Law Journal 67. 686 Now the Ministry of Science and Technology. 687 Including Decree 85/HDBT of the then Council of Ministers, dated 13 May 1988, on Regulations on Industrial Designs; Decree 200/HDBT of the then Council of Ministers, dated 28 December 1988, on Regulations on Utility Solutions; Decree 201/HDBT of the then Council of Ministers, dated 28 December 1988, on Regulations on Licensing; Ordinance of the then Council of State, dated 11 February 1989, on the Protection of Industrial Property Rights.
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initiatives to make its intellectual property regulatory regime fully compliant with
TRIPS. The initial milestone for this effort was the introduction of the first Civil
Code (in 1995) which included Part VI (articles 745-825) addressing intellectual property and technology transfer which repealed all previous intellectual property provisions. The 1995 Civil Code provided a framework for regulating copyright and related rights, patents, utility solutions, industrial designs, trademarks and appellations of origin,688 but did not expressly stipulate the protection of other objects of intellectual property such as trade secrets, trade names, and layout-designs of integrated circuits. From 1996 to 2003, a number of sub-law documents were issued to implement the provisions on intellectual property rights in the 1995 Civil
Code. They, along with provisions in Part VI of the 1995 Civil Code, covered numerous matters of intellectual property rights including patents, trademarks, trade names, industrial designs, trade secrets, geographical indications, layout-designs of integrated circuits, copyright and related rights, new plant varieties, and the right to prevent unfair competition. By 2003, Vietnam’s intellectual property regulatory regime basically satisfied the TRIPS requirement in relation to the scope of protection.689
In 2005, as a result of the legal modernisation process preparatory to WTO accession, Vietnam first introduced an Intellectual Property Law,690 effective 1 July
2006, which was later amended in 2009. This is the first unified law for all aspects of intellectual property. The 2005 Intellectual Property Law has six Parts, 18
Chapters and 222 articles which recognise copyright, copyright-related rights,
688 To some extent, the term “appellations of origin” was referred to as the term “geographical indications” in TRIPS. 689 Council for Trade-Related Aspects of Intellectual Property Rights, WTO, 'Review of Legislation: Vietnam' (2010)
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“industrial property rights” and rights in plant varieties and provide for the enforcement of these rights. The objects of “industrial property rights” include inventions, industrial designs, layout-designs of semi-conductor integrated circuits, business secrets, trademarks, trade names, and geographical indications. The 2005
Intellectual Property Law also provides administrative, civil, criminal and border control measures to combat intellectual property right infringements. The 2005
Intellectual Property Law, combined with the basic civil law principles of intellectual property rights in Part VI (articles 736-757) of the 2005 Civil Code and subordinate regulations,691 constitute a comprehensive and consistent legal regime for intellectual property in Vietnam.692
Vietnam has also quickly joined global multilateral intellectual property agreements including the Paris Convention for the Protection of Industrial Property and the Madrid Agreement on International Registration of Marks (in 1949), the Convention Establishing the World Intellectual Property Organisation (in 1976), the Patent Cooperation Treaty (in 1993), the Berne Convention for the Protection of Literary and Artistic Works (in 2004), the Geneva Convention for the Protection of Protection of Producers of Phonograms Against Unauthorised Duplication of Their
691 To implement the Intellectual Property Law, the Government and Ministries have issued a series of Decrees and Decisions including Decree 100/2006/NĐ-CP of the Government, dated 21 September 2006, Guiding the Implementation of a Number of Articles of the 2005 Civil Code and the 2005 Intellectual Property Law Concerning Copyright and Related Rights; Decree 103/2006/NĐ-CP of the Government, dated 22 September 2006, Providing Detailed Provisions and Guidelines for Implementing Certain Articles of the 2005 Intellectual Property Law Concerning Industrial Property; Decree 104/2006/NĐ-CP of the Government, dated 22 September 2006, Providing Detailed Provisions and Guidelines for Implementing Certain Articles of the 2005 Intellectual Property Law Concerning Rights to Plant Varieties; Decree 105/2006/NĐ-CP of the Government, dated 22 September 2006, Providing Detailed Provisions and Guidelines for Implementing Certain Articles of the 2005 Intellectual Property Law Regarding the Protection of Intellectual Property Rights and State Management of Intellectual Property; Decree 106/2006/NĐ-CP of the Government, dated 22 September 2006, on Handling Administrative Violations in the Industrial Property Field; Decision 69/2006/QD-BNN of the Minister of Agriculture and Rural Development, dated 13 September 2006, on Data Confidentiality of Testing Data of Agro-Chemical Products; and Decision 30/2006/QD-BYT of the Minister of Health, dated 30 September 2006, on Promulgation of Regulations on Data Protection Applied to Drug Registration Dossiers. 692 Council for Trade-Related Aspects of Intellectual Property Rights, WTO, above n 689.
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Phonograms (in 2005), the Brussels Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite (in 2006), the Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (in 2006), and the International Convention for the Protection of New Varieties of Plants (in 2006). Moreover, as a WTO member Vietnam has to comply with the TRIPS Agreement.693 In addition, Vietnam has concluded bilateral agreements relevant to protection of intellectual property with the US (the Vietnam- US Copyright Agreement in 1997 and the Vietnam-US Bilateral Trade Agreement in 2000 Chapter II of which is devoted to intellectual property issues), with Switzerland (the Vietnam-Switzerland Agreement on the Protection of Intellectual Property and on Cooperation in the Field of Intellectual Property in 1999), and with Japan (the Agreement between Japan and the Socialist Republic of Vietnam for an Economic Partnership in 2008 Chapter IX of which is devoted to intellectual property issues).
As prescribed under Vietnam’s Franchise Law, the transfer of the right to use objects of industrial property in a franchise contract is governed by the law on industrial property (article 10.2, Decree 35). According to the 2005 Intellectual Property Law, industrial property rights in inventions, industrial designs, layout- designs, trademarks, and geographical indications shall be established on the basis of the competent State authority’s decision on the grant of protection certificate in accordance with registration procedures stipulated in this law or on the recognition of international registration under international treaties to which Vietnam is a party.
Vietnam has adopted the “first-to-file” principle for determining priority in the registration of objects of industrial property. However, in terms of well-known
693 TRIPS was negotiated in the 1986-1994 Uruguay Round. On 1 January 1995, the WTO agreements, including TRIPS, became effective. All members of WTO were given a period to ensure that their laws comply with TRIPS: one years for the developed countries, five years (until 2000) for the developing countries and (under certain conditions) transition countries, and 11 years (until 2006) for the least-developed countries. However, the least-developed countries are currently extended the period to comply with TRIPS to 2013 in general, and to 2016 for pharmaceutical patents and undisclosed information.
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trademarks, the ownership rights shall be established on the basis of use independently from registration procedures.694 Industrial property rights to trade names are established on the basis of the lawful use of the trade names. Industrial property rights in business secrets are established on the basis of legal acquisition and the keeping of business secrets.695 The National Office of Intellectual Property, which belongs to the Ministry of Science and Technology, is responsible for the registration and administration of the objects of industrial property.
Under Vietnam’s Franchise Law, the licensing of industrial property in the franchising agreement must comply with Vietnamese laws on industrial property (article 10 of Decree 35). Under the 2005 Intellectual Property Law, the licence contract must be in writing (article 141). For the industrial property rights established on the basis of registration, the licence contract has effect as agreed by the parties but is only binding on a third party upon registration with the State authority (article 148.2). The contents of a licence contract must include the prescribed provisions (article 144.1).696
The 2005 Intellectual Property Law also provides a list of prohibited conditions in licence contracts (article 144.2):
Prohibiting the licensee from improving the industrial property objects other than trademarks; and/or compelling the licensee to grant a free license or to assign to the licensor the right to industrial property registration or an
industrial property right in respect of such improvements; Directly or indirectly restricting the licensee to export goods produced or services supplied under the license contract for use of industrial property
694 Article 6.3.a of the 2005 Intellectual Property Law. 695 Article 6.3.b and article 6.3.c of the 2005 Intellectual Property Law. 696 Including full name and address of the licensor and the licensee; bases of the licence; type of the contract; scope of the licence (limitations to use; territorial limitations); term of licence; price for the licence; and rights and obligations of the licensor and the licensee.
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object to the territories where the licensor neither hold the respective
industrial property right nor has the exclusive right to import such goods; Compelling the licensee to buy all or a given percentage of materials, components or equipments from the licensor or the persons designated by the
licensor without aiming at ensuring the quality of goods produced or services supplied under the licensee; Prohibiting the licensee from contesting validity of the industrial property right or the right to license.
Although the current legal framework for intellectual property is compliant with
WTO TRIPS and is consistent with international best practice697 there are still concerns as to some specific provisions in the 2005 Intellectual Property Law which are not compatible with Vietnam’s Franchise Law. Firstly, under the 2005
Intellectual Property Law a trade name cannot be licensed (article 142.1): this is not only contrary to the essence of franchising which is built on the licensing of trade names but is contrary to the Franchise Law itself which stipulates that franchisees can conduct a business associated with the trade name of the franchisor (the 2005
Commercial Law, article 284). Secondly, the 2005 Intellectual Property Law provides that the licensor cannot prohibit the licensee from improving the industrial property objects other than trademarks. However, in order to maintain uniformity in a franchise system, the franchisor normally requires franchisees not to change any part of the system including industrial property objects. Therefore, to support the
697 As commented by Daniel Keller, coordinator of the Viet Nam-Switzerland Special Cooperation Program on Intellectual Property cited in Ngoc Van, 'VN Progressing in Intellectual Property Protection' (2010)
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development of franchising, the 2005 Intellectual Property Law should provide exceptions from its general provisions to accommodate franchising.
As with many developing countries the enforcement of intellectual property rights in
Vietnam is, in practice, still problematical.698 Many infringements occur without the violators being held to account.699 There are also infringements in franchising relevant to intellectual property rights, such as the conflict between Pho 24 and Pho
5 Sao (Five Stars Noodle) in 2006.700 However, as acknowledged by Niclas
G.Morey, the director of an EC-ASEAN cooperative program on intellectual property rights (ESCAP II), the Vietnamese Government has been also making strong efforts to improve the enforcement of intellectual property rights.701
5.7 REGULATION OF TECHNOLOGY TRANSFER
One of the aims of the Doi Moi reforms was to attract foreign investment702 which led to the introduction of Ordinance on the Transfer of Foreign Technology into Vietnam in 1988. In order to implement the Ordinance, the then Council of Ministers (now called the Government) issued Decree 49-HĐBT, dated 4 March
1991, Making the Detailed Stipulations on the Implementation of the Ordinance on
698 United Nations University and World Intellectual Property Organisation, above n 428, p. 123. 699 ibid. 700 Pho 24 established and registered its trademark in 2003 whereas Pho 5 Sao established in Ho Chi Minh City in 2006. Mr Trung - the founder of Pho 24 argued that the layout design of Pho 5 Sao’s restaurants exactly resembled the design of architectural space of Pho 24 which is registered copyright, and Pho 5 Sao had infringed the copyright of Pho 24. For further information, see generally Bao Phap Luat Thanh Pho Ho Chi Minh [Ho Chi Minh City Legal Newspaper], 'Anh Em Nha Pho Cai Nhau [Two Noodle Restaurants Argue With Each Other]' (2007)
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Transfer of Foreign Technology into Vietnam, and the then Ministry of Science,
Technology and Environment also issued Circular 28 dated 22 January 1994, on the Transfer of Foreign Technology into Vietnam. Under this legal regime, the transfer of technology included the following activities: i) Transfer of utilisation or ownership rights of patents, licences, utility models or other industrial property right ii) Transfer of know-how or specialised technical knowledge in the form of technical solutions, design documents, formula, and technical specifications with or without equipment and iii) Provision of technical assistance and consultancy services, including training and the supply of information (article 3, Ordinance). The
Ordinance governed the transfer of foreign technology into Vietnam. Although it provided a legal framework for technology transfer and purported to encourage foreign direct investment, it tightly controlled technology transfer contracts which “had the effect of ‘discouraging’ foreign businesses from transferring technology into Vietnam”.703 Contracts had to be approved by competent authorities (article 13, Ordinance). The duration of contracts could not be longer than seven years except in special cases permitted by the authorised State body (article 10, Ordinance). Moreover, the Ordinance provided a list of prohibited clauses in the contracts which were aimed at protecting Vietnamese transferees, including: (i) obligations on the transferee to purchase raw materials, equipment, intermediate goods and parts or to use manpower from sources specified by the transferor (ii) restrictions on production quantities, prices or terms for the sale of products (iii) restrictions on the markets to which the transferee might export its products, except for markets in which the transferor had already manufactured or sold similar products, or had granted an exclusive licence to a third party and (iv) restrictions on research and development on transferred technology or on the acquisition of competitive technology from other sources.
703 Le Net, 'Vietnam: Technology Transfer In Vietnam' (2001) http://www.mondaq.in/article.asp?articleid=13730#twitter, last accessed 27 July 2010.
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The Ordinance was replaced by the 1995 Civil Code which included a chapter on technology transfer (Part 6, Chapter III, articles 806-825). In order to implement the 1995 Civil Code, the Government issued Decree 45/1998/NĐ-CP Guiding Detail on Technology Transfer in 1998 and the then Ministry of Science, Technology and
Environment issued Circular 1254/1999/TT-BKHCNMT in 1999 to supplement Decree 45. Under Circular 1254, franchising was first mentioned as a type of technology transfer (Item 4.1.1.a). Unlike the previous provisions - which simply applied to the transfer of foreign technology into Vietnam - these legal documents applied to technology transfer from abroad to Vietnam, to technology transfer in foreign investment projects in the form of capital contribution of the value of technology or acquisition of technology on a contractual basis, to domestic technology transfer of a commercial nature between the parties to a contract, and to technology transfer from Vietnam to abroad (article 1, Decree 45). However, technology transfer was more strictly controlled by the State than under the Ordinance on Transfer of Foreign Technology into Vietnam. Under these legal documents, technology transfer contracts continued to be approved or registered by the authority. The maximum duration of such contracts was also seven years for common situations and 10 years for special situations.704 Royalties were also limited
- not over five per cent for common situations.705 Decree 45 even continued listing more prohibited conditions in technology transfer contracts, including: (i) forcing the transferee to buy or receive from the transferor, or from a third party specified by the transferor, raw materials, parts, manufacturing equipment, means of transportation, intermediate products, industrial property rights or employees with a low level of technical skills; but such conditions may be incorporated into the contract if they are reasonable (ii) forcing the transferee to accept some limitations on the quantity of products manufactured, selling prices and distributors (iii)
704 Articles 809 and 810 of the 1995 Civil Code; articles 32 and 15 of Decree 45. 705 Article 813 of the 1995 Civil Code; article 23 of Decree 45.
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restricting the local market, export market, quantity and types of exported products
(iv) forcing the transferee not to develop the transferred technology or not to receive technology from the transferor’s competitors (v) forcing the transferee to grant back improvements unconditionally (vi) granting the transferor immunity from faults and mistakes relating to the technology transfer or machines and equipment supplied by the transferor and (vii) prohibiting the transferee from using the transferred technology after the expiry of the contract, except for intellectual property rights which are still within the term of protection in Vietnam.706 Because of these provisions, few potential transferors were interested in transferring their technology.707 It was also difficult to conduct franchising under such harsh provisions.708
Decree 45 was replaced by Decree 11/2005/NĐ-CP of the Government of Vietnam dated 2 February 2005. Some of the restrictions and controls of Decree 45 were abolished by Decree 11 including the maximum royalty and approval requirements, and the limitation of payment methods, but the limitation of contract duration and the registration requirement were retained. Franchising still continued to be considered as a type of technology transfer.
In 2006, the Vietnamese Parliament enacted the Law on Technology Transfer which came into effect 1 July 2007. In order to implement this Law, the Government issued Decree 133/2008/NĐ-CP dated 31 December 2008 Providing in Detail Some Provisions of the Law on Technology Transfer which also repealed Decree 11. The
2006 Law on Technology Transfer creates more favourable conditions for the parties in technology transfer contracts. There are no requirements of royalty limitation or for approval or registration of the contract.709 This law also does not list prohibited
706 Article 13 of Decree 45. 707 Net, above n 703. 708 For further discussion see Chapter 7.2. 709 Article 25 of the 2006 Law on Technology Transfer and article 6 of Decree 133.
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conditions, providing only that technology transfer contracts shall not have any anti- competitive terms prohibited by the Competition Law.710 Under the 2006 Law on Technology Transfer, franchising is no longer considered as a type of technology transfer and technology transfer can take place as a part of a franchise contract.711
This provision is reasonable and in conformity with the essence of franchising. Vietnam’s Franchise Law is silent on technology transfer in franchising, but any such technology transfers will be subject to the 2006 Law on Technology Transfer and its implementing legal documents. The 2006 Law on Technology Transfer applies to all technology transfer712 activities - conducted by both Vietnamese and foreign business entities - in Vietnam, from Vietnam to overseas, and from overseas to Vietnam (articles 1 and 2). Like franchise agreements, a technology transfer contract must be “made in writing713 or in another form with equivalent validity” (article 14.1). Following the principle of freedom contract of the 2005 Civil Code, the 2006 Law on Technology does not impose mandatory content of the contract on the parties, but simply provides (article 15) that the technology transfer contract may include the following main items:
name of the technology transfer contract, clearly stating the name of the transferred technology;
the technology being transferred and the products created from the technology; transfer of the ownership of and/or right to use the technology;
method of technology transfer;
710 Article 20 of the 2006 Law on Technology Transfer. 711 Article 12.2 of the 2006 Law on Technology Transfer. 712 “Technology means solutions, processes and technical know-how, whether attached or unattached to tools and facilities, used to convert resources into products” (article 3.2). “Technology transfer means transfer of the ownership right or the right to use either a part or the whole of a technology from the transferor to transferees” (article 3.8). 713 The parties can agree on the language, but in the case of a transaction in Vietnam there must be a technology transfer contract in Vietnamese. The Vietnamese and the foreign language versions of a contract shall be of equal validity (article 14.2).
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rights and obligations of the parties;
price and payment method; date of effectiveness and term of validity of the contract; definition of terms and concepts (if any) used in the contract;
plan and schedule for transfer of the technology, and location for implementing the transfer of the technology; liability to provide a warranty for the transferred technology; penalties for breach of the contract;
liability for breach of the contract; applicable law for dispute resolution; jurisdiction for dispute resolution;
other agreements, on condition that they are not contrary to the law of Vietnam.
5.8 REGULATION OF COMPETITION
Vietnam has moved from a centrally planned economy to a market economy since 1986 under the Doi Moi reforms, but a discussion about competition law has only been engaged in by academics, professionals and state agencies since the late 1990s.714 The perception of the severe discrimination between the state and private sector, the power asymmetry between foreign and domestic companies, the problems occurring from domestic and cross-border anti-competitive practices, combined with the aspirations to access the WTO and the advances into deeper economic reforms eventually induced the Vietnamese Government to consider the introduction of a competition law.715 The need to adopt a law on competition was
714 Alice Pham, 'The Development of Competition Law in Vietnam in the Face of Economic Reforms and Global Integration' (2006) 26(547) Northwestern Journal of International Law and Business , p. 2. 715 ibid, p. 3.
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first stated by the Communist Party of Vietnam in its Eighth National Congress which acknowledged that there was a need to:
… establish cooperation and a healthy competitive environment in production and trade; develop state-owned monopolies in some certain industries and sectors of strategic significance to the country; eliminate monopolies in other commercial activities, and prevent abuses of monopolistic positions aimed at maintaining privileges, individual benefits and distorting competition in the market.716
This demand continued to be reconfirmed in Vietnam’s Socio-Economic Development Strategy for the period 2001-2010 which was approved by the Ninth Congress of the Communist Party of Vietnam and which required:
… comprehensively establishing and continuously developing and improving different types of market in parallel with the formation of a legal and institutional framework for the market to operate dynamically, efficiently, and orderly in a competitive, open, and transparent environment in which anti-competitive practices shall be controlled and prevented.717
The Competition Law was passed in December 2004 (and came into effect on 1 July 2005)718 after a four-year drafting process chaired by the then Ministry of Trade of Vietnam. Consideration was given to the laws of other countries and to the model laws promoted by international institutions such as UNCTAD719 and the World
716 Dang Cong San Viet Nam [The Communist Party of Vietnam], 'Bao Cao Chinh tri Cua Ban Chap Hanh Trung Uong Dang, Dai Hoi Dang Lan Thu 8 [The Political Report by the Central Committee of the Communist Party of Vietnam at the 8th National Congress in 1996]' (1996)
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Bank.720 The 2004 Competition Law has 6 chapters and 123 articles, and applies to all organisations and individuals conducting business (together referred to as enterprises), including enterprises engaged in production or supply of public utility products or services, enterprises conducting business in State monopoly industries and sectors and overseas enterprises operating in Vietnam, and industry associations operating in Vietnam (article 2). It governs practices in restraint of competition and unfair competitive practices, and provides for procedures for the resolution of competition cases and measures for dealing with contravention (article 1). All enterprises are entitled to compete freely within the framework of the law but competition must be undertaken in accordance with the principles of honesty, of “non-infringement” of the interests of the State, the public interest, and the lawful rights and interests of enterprises and consumers, and of compliance with the provisions of the Competition Law (article 4). The Government has enacted several decrees in order to implement the law.721
Although the Competition Law has provided a comprehensive legal framework for fair competition in commercial activities, including franchising, there is still concern about some provisions of the law relevant to franchising. Under the Competition Law, agreements which prevent, impede, or disallow other enterprises to participate in the market or to develop business and/or which exclude from the market other enterprises which are not parties to the agreement shall be considered as agreements in restraint of competition (article 8) which violate the Competition Law (article 9).
720 Tran Anh Son, 'The Progress of Drafting Competition Law'
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However, a franchisor may enter agreements with its franchisees which have this effect but which are generally regarded as reasonable in franchising and which are exempted from the competition law of many other countries such as US722 and the EU.723 The enactment of the Competition Law and the implementing Decree prior to the introduction of Vietnam’s Franchise Law is the most likely reason for the Competition Law not properly accommodating franchising. The Competition Law should be amended to place standard franchising arrangements outside the scope of the law.
5.9 CHAPTER CONCLUSION
The Doi Moi reforms under which a centrally planned economy was moved to a market economy have paved the way for the creation of a commercial legal framework supporting Vietnam’s market economy. The deep and wide international integration of Vietnam, particularly through WTO accession, has also demanded the improvement of the legal system and the introduction of appropriate commercial laws. A series of commercial laws and regulations have been issued, and improved, over the last two decades which are consistent with the rule of law and international practice. The development of Vietnam’s underlying commercial law has led to an increasingly favourable market environment in which franchising can operate. The development of the underlying commercial law is undoubtedly impressive - the private sector is now considered as an integral part of the economy, individuals and organisations can conduct business in any industry sectors not prohibited by law, freedom of contract is recognised, a level playing field exists for all types of enterprises and there is equal treatment for all investors, and the protection of
722 See Continental T.V.Inc. v GTE Sylvania, 433 U.S. 36, 40 & 50-59 (1977). 723 See ECJ, Case 161/84, Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis, 28/1/1986, [1986] ECR 353.
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intellectual property rights is consistent with WTO TRIPS international best practice. Although there are still some concerns about particular issues relating to the underlying commercial law and the enforcement of intellectual property rights, a comprehensive and consistent commercial legal system has been created pursuant to
WTO accession. The Government’s effort to build a law-based State undoubtedly strengthens the confidence of both franchisors and franchisees in Vietnam’s new and rapidly developing market.
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PART THREE DEVELOPMENT AND REGULATION OF FRANCHISING IN VIETNAM
CHAPTER SIX THE DEVELOPMENT OF FRANCHISING IN VIETNAM CHAPTER SEVEN THE REGULATION OF FRANCHISING IN VIETNAM
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CHAPTER SIX THE DEVELOPMENT OF FRANCHISING IN VIETNAM
6.1 INTRODUCTION
Vietnam, one of the world’s five remaining single party socialist states, has been remarkably successful in its rapid transition to a market economy. The rebuilding of the Vietnamese economy, which had been effectively destroyed by the Vietnam
War,724 proved to be beyond the capability of the planned economy introduced after the cessation of conflict in 1975. Trade embargoes imposed by the US and most of Europe, combined with inefficiency, corruption, and restrictions on economic activities, demanded radical reform. This came in December 1986 with new leadership and the introduction of significant economic reforms embracing free- market principles.725 The Doi Moi (‘Renovation’) reforms provided the foundation for foreign investment726 and for the emergence of the private sector and entrepreneurship.727
Franchising is a relatively new but steadily developing strategy in Vietnam. Although there are currently few business format franchise systems on the traditional western model currently operating in Vietnam, there is an increasing presence of established international franchise systems currently operating through company owned and managed outlets and increasing numbers of local systems albeit at an early “product distribution” evolutionary stage. The commercial environment for franchising is increasingly favourable. Vietnam is the fastest growing Asian
724 The ‘Vietnam War’ is the term used to refer to the war with the French (1945-1954) and the war with the US and its allies (1954-1975). 725 Terry and Binh, above n 40. 726 The 1987 Foreign Investment Law. 727 Gillespie, above n 639, notes that “since reforms could not wait the decades required to distil normative standards from local commercial practices, lawmakers turned to western laws for inspiration”.
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economy after China and India and is experiencing strong GDP growth (over eight percent in recent years) and retail growth (more than 20 percent per year in recent years).728 There is a steady rise in disposable income, an emerging new consumer class and increasing brand consciousness.
The development of Vietnam’s franchising sector has nevertheless been hampered until recently by its regulation under complex, unsuitable and overlapping regulations on intellectual property and technology transfer coupled with general contractual obligations. The introduction of Vietnam’s Franchise Law in 2006 was the turning point in the development of franchising in Vietnam. It was the Government’s response to the demand for a clear legal framework for franchising which has led to the strong development of this sector. Franchising first appeared in
Vietnam in the mid-1990s but by 2006, only 23 franchise systems had established operations in Vietnam and the majority of their system outlets were owned and operated by the brand owners rather than by franchisees. In the five years following the introduction of the Franchise Law, the number of franchise systems increased to 96 as both foreign and domestic companies embraced franchising. In addition, the number of outlets and the turnover of each system have also been steadily increasing.
This chapter addresses the development of franchising in Vietnam and the challenges and opportunities for franchisors in one of the world’s newest franchise sectors. The term Vietnam’s “Franchise Law” is used in this thesis to refer collectively to Section 8 of Chapter VI of the new 2005 Commercial Law (which provides a framework for regulating the franchise relationship), the 2006 Decree 35 of the Government Making Detailed Provisions for the Implementation of the
728 said by Ms Dinh Thi My Loan - General Secretary of Vietnam’s Retail Association, cited by Lan Huong, 'Nam 2010: Viet Nam Bung No Kenh Ban Le [In 2010: There is a Boom in Retail Market in Vietnam]' (2010)
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Commercial Law with Respect to Franchising Activities (which supplements the
Commercial Law), and the 2006 Circular 09 of the Ministry of Trade (now the Ministry of Industry and Trade) Providing Guidelines on Procedures for Registration of Franchising Activities, and the 2008 Decision 106 of the Minister of
Finance Providing the Regime for the Collection and Payment, Management and Use of Charges for Commercial Franchising Registration (both of which supplement the Decree). Several articles of Decree 35 were recently amended in
2011 by Decree 120 Amending and Supplementing Administrative Procedures
Stipulated in a number of Decrees of the Government Detailing the Implementation of the Commercial Law. The Franchise Law is discussed in detail in Chapter 7.
6.2 STATISTICS AND DATA SOURCES
Under the Franchise Law, intending franchisors had to register their systems with state authorities: foreign franchisors with the Ministry of Industry and Trade and domestic franchisors with the Department of Industry and Trade in each province in which they will operate.729 One of the benefits of registration is that it facilitates data collection. Unfortunately administrative inefficiencies730 have resulted in problems in obtaining reliable statistics. In response, at least in part, to this reality Decree 35 has recently been revised (by Decree 120) to remove the registration obligation for domestic franchisors. The continuing requirement to provide the authorities with annual reports should mean that this data is available but, in practice, administrative inefficiencies may limit its currency.
729 Domestic franchisors had to register with the Ministry of Industry and Trade if they franchise overseas. 730 Under the Franchise Law, the information submitted for registration is to be posted on the Ministry’s website within five days of the date of any registration or cancellation or change of registration. However, the information currently available on the Ministry’s website is not always accurate and is out of date. Moreover, the poor statistics on the Ministry’s website still contains mistakes relevant to the name of registered companies. For example, a series of companies are named twice in the list of registered franchise systems.
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Although several conferences and seminars on franchising have been held in
Vietnam since the introduction of the Franchise Law, no full survey of the franchise sector has been conducted. This situation, combined with the lack of a franchise association, has resulted in an incomplete set of statistics for franchising in Vietnam.
For the foregoing reasons, the statistics and data in this research have been collected from different sources including the Ministry’s data, newspapers and reference books, the official websites of franchisors, and field research.
6.3 THE DEVELOPMENT OF FRANCHISING IN VIETNAM PRIOR TO THE INTRODUCTION OF THE FRANCHISE LAW
6.3.1 The Introduction of the Franchise Concept to Vietnam
Vietnam is a country shaped by long-running conflicts. After the end of the Vietnam War and reunification in 1975 the Socialist Republic of Vietnam continued to pursue a closed, subsidised, bureaucratic, central and planned economy which prohibited the existence of private enterprises. Franchising could not develop under this economic environment. Fortunately, the Doi Moi reforms, begun in 1986, led to a market environment in which franchising could operate.
Despite the absence of a clear legal framework for franchising, an embryonic franchise sector has existed in Vietnam since the mid-1990s.731 As for most other countries, franchising first appeared in Vietnam through the international expansion of foreign franchisors. The foreign fast food systems Jollibee (from the Philippines, in 1996), Lotteria (from South Korea, in 1997) and KFC (from the US, in 1997)
731 However, Mr Tran Anh Tuan, a Vietnamese Consultant of FT-Pathfinder Consulting Group, suggested that franchising possibly existed in Vietnam before 1975 with the existence of Gas stations of Mobil, Exxon (Esso), and Shell coming from the US. See generally Tran Anh Tuan, 'Phat Trien Nhuong Quyen Kinh Doanh Franchise Tai Viet Nam [Developing Business Format Franchising in Vietnam]' (2009)
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were early entrants. Jollibee entered Vietnam through a subsidiary while Lotteria and KFC adopted a joint venture structure. They all chose Ho Chi Minh City, the biggest and the most dynamic city in Vietnam, as their first destination. From 1996 to 2006, other international franchisors commenced business in Vietnam including
Five Star Chicken, Texas Chicken, Carvel, Basken Robbins (from the US), Big C (from France), Dilmah, and Qualitea (from Srilanka).
Although foreign franchisors introduced the franchise concept to Vietnam, their initial expansion strategy has not been through franchising. Until 2005 all the foreign franchisors, including the renowned pioneering fast food franchisors
Jollibee, Lotteria, and KFC, operated only a small number of outlets (four for Jollibee, nine for Lotteria, and 14 for KFC), all of which were company owned and managed rather than franchised. However, the entry of the foreign franchisors raised the profile of franchising and was the catalyst for interest in the concept from local businesses and the wider society. The word “franchising” (‘nhuong quyen thuong mai’) was not a part of Vietnamese language until the arrival of the fast food pioneers. With the entry and expansion of the foreign franchisors, “franchising” has increasingly become a “hot” word in the media and for business in Vietnam. The well-known foreign brands have quickly become familiar to Vietnam’s consumers.
6.3.2 The Adoption of Franchising by Domestic Companies
The entry of the foreign franchisor pioneers, particularly the famous fast food brands KFC, Lotteria, and Jollibee, introduced the concept of franchising to Vietnam and attracted the interest of local businesses. Compared with other developing or transitional countries such as China and Malaysia, Vietnam’s domestic businesses seemed to more quickly absorb the franchising model introduced by these pioneers.
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In the year that Jollibee arrived in Vietnam, Trung Nguyen Coffee - the most famous coffee company in Vietnam and also the first domestic franchisor - was established. In 1998, two years after its foundation, it commenced using franchising as its expansion strategy. By 2001, Trung Nguyen Coffee had outlets in almost all territories of Vietnam and had also expanded to other countries including Japan, Singapore, Cambodia, and Thailand. Pho 24 - a rice noodle soup restaurant which commenced operations in 2003 - is another very successful local franchisor.
Pho 24 and Trung Nguyen Coffee are two of the most prominent and successful domestic systems expanding through franchising. Their approach to franchising is nevertheless quite different. While Pho 24 resembles a business format system on the familiar western model, Trung Nguyen Coffee has expanded through a less sophisticated product and trade name model. Trung Nguyen Coffee has quickly become the leading domestic coffee company as well as the most successful franchisor in terms of the number of outlets. By 2006 it had had nearly 1000 outlets.
Pho 24, founded by Mr Ly Quy Trung, who was a prominent businessman and an academic,732 is the first domestic company expanding through a business format system.
By 2005, impressed by the success of foreign and domestic franchisor pioneers, other domestic businesses had also adopted franchising, including cake store chain Kinh Do Bakery; fashion shops AQ Silk, Ninomaxx and Foci; convenient store 24- Seven; and tea restaurant Hoa huong duong (Sunflowers). In adopting the franchise model of the western franchisor pioneers, local franchisors have not merely copied
732 He was appointed as Adjunct Professor to the Griffith Business School, Australia in 2007. He completed his master's degree in Hospitality Management at Griffith University in 1995 before earning his PhD in Administration Management in the US with Kennedy Western University. He is also the author of the two books on franchising which are known by many people in Vietnam. Mr Trung has been often invited to teach in training courses of franchising in Vietnam and the franchise model of his company was ever researched by two researchers in Griffith University, Brisbane, Australia (see generally Lorelle Frazer and Bill Merrilees, 'Pho24 in Vietnam: A Case Study of a Newly Emerging Asian Franchise' (Paper presented at the 2009 ICSB World Conference, Seoul, Korea, 21 - 24 June 2009)).
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the model but have adapted it to suit the Vietnamese market. For example, Trung
Nguyen Coffee did not choose the contemporary franchise form - business format franchising - as its starting point and Pho 24 is not merely a franchisor but is a part owner of its franchisees’ outlet.733
6.3.3 A Decade of Slow and Constrained Franchising Development
Although franchising has existed in Vietnam since the mid-1990s, the development of the franchise sector was constrained for over a decade by the lack of a clear legal framework for franchising. Until the introduction of the new regulatory regime, franchising was not recognised as a discrete business relationship and, in a country where the general rule is that anything not specifically permitted is not allowed,734 franchise development was not practicable. Prior to the enactment of the 2005
Commercial Law, franchising was treated as technology relationship and was regulated by laws on licensing and technology transfer. These regulations created a series of problems for franchising. For example, article 15.1 of Decree 11/2005/NĐ-
CP Making Detailed Provisions on Technology Transfer limited the duration of technology transfer agreements to, in most cases, seven years. Under article 16.2 of
Decree 54/2000/NĐ-CP on Protection of Industrial Property Rights with Respect to
Trade Secrets, Geographical Indications and Trade Names, and Protection of Rights against Unfair Competition Relating to Industrial Property, the owner of a trade name could not license it to others - a major impediment to franchising which always involves the licensing of a brand.735 Businesses which wanted to franchise
733 For further discussion see Chapters 8 and 9. 734 Giles Cooper, 'Chalk Needed to Outline Franchising Fields of Play' (2007)
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had to work around these laws by dividing a franchising relationship into several agreements: a sale contract, a technology transfer contract, a management contract and a training service contract. Conducting franchising at that time was described as
“hammering a square peg into a round hole”.736
Because of the legal barriers, it is easy to understand why, despite entering Vietnam in 1997, the pioneer foreign franchisors could not use franchising to expand their systems. Similarly, until the introduction of the Franchise Law, Trung Nguyen
Coffee - the first, and now the biggest, domestic franchisor - operated its outlets through distribution agreements and trademark licences rather than through franchise agreements. The development of franchising was limited by the lack of a clear legal framework. Until 2005, there were only 23 franchise systems, foreign and domestic, with a small number of outlets the majority of which were owned and operated by the franchisors rather than by franchisees. The awareness of franchising by Vietnamese businesses was, as a consequence, very poor. Vietnam’s consumers and businesses were aware of franchising through its association with famous foreign and domestic brands but had little awareness of franchising as an increasingly popular form of economic organisation. In a seminar organised by the then Ministry of Trade737 in 2004 to discuss the draft of the franchising section of the 2005 Commercial Law, Mr Nguyen Tran Quang, the Marketing Director of
Trung Nguyen Coffee, was even not sure if Trung Nguyen Coffee had been operating through franchising.738
736 Cooper, above n 734. 737 Now the Ministry of Industry and Trade. 738 Nguyen Tran Quang, 'Kinh Nghiem Xay Dung He Thong Nhuong Quyen Thuong Mai Cua Trung Nguyen [The Experience of Trung Nguyen Coffee in the Operation of Franchising]' (Paper presented at the 'Hoi Thao Quoc Te Ve Che Dinh Nhuong Quyen Thuong Mai Trong Du Thao Luat Thuong Mai (Sua Doi)' [The International Conference on the Section of Franchising in the Draft of the Commercial Law], Hanoi, Vietnam, 1 December 2004), p. 31.
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6.4 THE DEVELOPMENT OF FRANCHISING IN VIETNAM SINCE THE INTRODUCTION OF THE FRANCHISE LAW
6.4.1 Steady Increase of Franchise Systems and Outlets
With the introduction of a dedicated Franchise Law, a clear legal framework for franchising has fostered the development of franchising. In the seven years since the introduction of the Franchise Law, there has been a significant increase in the number of franchise systems in Vietnam, including many famous brands from different countries including Subway, Gloria Jean’s Coffees, Cartridge World, and
The Body Shop. The franchise systems which existed before 2006 including KFC,
Jollibee, Lotteria, and Pho 24, have experienced strong development over this period. Reference was made above (Chapter 6.2) to the incompleteness of official ministry statistics. Research conducted for this thesis nevertheless suggests that
Vietnam currently has around 116 franchise systems, comprising 96 foreign franchisors (see Appendix 2) and 20 domestic franchisors (see Appendix 3).
Although in comparison with other countries such as the US, Australia, and China the size of franchise sector in Vietnam is still small, it has been developing steadily since 2006. In the seven years after the introduction of the Franchise Law, from
2006 to 2012, the number of franchise systems has increased over fivefold from 23 to 116 as illustrated in the following chart.
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Figure 12: Number of Franchise Systems in Vietnam
140
120 115 116 100 104 93 80
60 68
40 46
Number of Franchise Systems Franchiseof Number 20 32 23 0 Before 2006 2007 2008 2009 2010 2011 Aug-12 2006 Year
The statistics in Figure 13 also show that there has been a significant expansion of foreign franchisors since the commencement of the Franchise Law - from 13 foreign franchise systems in 2005 to 96 in August 2012. The annual rate of system growth has been around 50 percent until the last three years when the effect of the global financial crisis impacted on system growth. A number of renowned brands have expanded into Vietnam during this time, including Cartridge World, Gloria Jean’s
Coffees, BBQ Chicken, Pizza Hut and Hard Rock Coffee.
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Figure 13: Number of Foreign Franchise Systems in Vietnam739
120
100 95 96 80 85 74 60
40 50
20 29 19
Number of Foreign Franchise Systems Franchise Foreign of Number 13 0 Before 2006 2007 2008 2009 2010 2011 Aug-12 2006 Year
Although not increasing as rapidly as foreign franchisors, domestic franchisors have gradually increased from 10 franchise systems in 2005 to 20 franchise systems in August 2012 (see Figure 14). While this is not a significant increase it must be noted that 95 percent of Vietnam’s businesses740 are SMEs with little business experience and a lack of franchising knowledge. These factors have impacted on the development of franchising in the SME sector. However, a number of local companies - including such well-known local brands as Vissan Limited Company (Vissan), Agrex Saigon Foodstuffs Joint-stock Company (Agrex), and Hanoi Trade Corporation (Hapro) - are reportedly considering franchising as the best strategy to expand their systems in Vietnam and abroad.741 Moreover, several of the current local franchisors have expanded overseas including Trung Nguyen Coffee, Pho 24, AQ Silk, and Foci. With its first overseas outlet in Japan in 2001, Trung Nguyen
739 Which is collected by the author, see Chapter 6.2. 740 Chau, above n 394. 741 Phan Anh, 'Nhuong Quyen Thuong Mai La Co Hoi Kinh Doanh Thoi Khung Hoang [Franchising is the Opportunity in the Time of Economic Crisis]' (2009)
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Coffee is now operating in many other countries including Thailand, Cambodia,
Singapore, Malaysia, China, Ukraine, Poland, Germany, and the US. Pho 24 currently has 10 outlets overseas in Cambodia, the Philippines, Indonesia, Singapore, South Korea, and Australia.
Figure 14: Number of Domestic Franchise Systems in Vietnam742
25
20 20 20 19 19 18 15 17
13
Systems 10 10 5
Number of Domestic Franchise Domestic of Number 0 Before 2006 2007 2008 2009 2010 2011 Aug-12 2005 Year
In addition to the increase in the number of franchise systems, the rate of franchise outlet development is also steadily increasing. Franchise system outlet numbers increased from 700 in 2007 to 890 in June 2008.743 This can be seen very clearly in the outlet development of some franchisors. For example, in the decade to 2005, the number of outlets of Jollibee, Lotteria, and KFC increased to only four, nine, and 14, respectively. However by 2009, four years after the introduction of the Franchise Law, the numbers of outlets in these systems had increased to 10, 80, and
80 respectively. Pho 24 and Trung Nguyen Coffee, two of the most prominent and successful domestic systems expanding through franchising, currently have about 90
742 Which is collected by the author, see Chapter 6.2. 743 Thu Hien, 'Kinh Doanh Nhuong Quyen Thuong Mai Tai Viet Nam Se Tang 35% [The Sales Growth of Franchising in Vietnam will Increase to 35%]' (2009)
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outlets and over 1000 outlets, respectively. Both have also expanded overseas. After a decade of franchising, Ninomaxx and Foci, two domestic fashion brands, by 2010 had 50 and 33 outlets, respectively. A cake store chain, Kinh Do Bakery; a tea restaurant, Hoa huong duong (Sunflowers); and a cane-juice restaurant, Nuoc mia sieu sach, each commenced franchising in the year of enactment of the Franchise Law and by 2010 had 32, 40, and 28 outlets, respectively. A survey of 240 franchisees in fast food, beverage, confectionary, retail store, electronics, fashion, medicine, and mobile phone sectors conducted in 2009, found that 75 percent of the franchisees had been operating since 2006.744
Although most franchise system outlets in Vietnam are still owned and operated by franchisors, there is a clear trend to system expansion through franchising outlets since the introduction of the Franchise Law. Since 2006, many foreign franchisors have chosen master franchising or direct franchising to access the Vietnam market including Cartridge World, Gloria Jean’s Coffees, Chocolate Graphics (from
Australia); Dream Cones (from France); Daiso, Hachi Hachi, and Sarku (from Japan); Big C (from Thailand); Debenhams (from the UK); and Sandler Systems Inc, Hard Rock Coffee, CBTL Franchising, Carl Karcher Enterprises, Cold Stone Creamery, and Bud’s Ice Cream (from the US).
6.4.2 Substantial Sales Growth and Spread of Franchising over Different
Sectors
The sales growth of the franchise sector has substantially increased over recent years
- from US$ 1.5m (1996) to US$ 9m (2005), and is estimated to reach US$ 36.68m in
744 Nguyen Dong Phong, Nhuong Quyen Thuong Mai Tai Viet Nam [Franchising in Vietnam] (Nha Xuat ban Dai Hoc Kinh Te Quoc Dan [The National Economics University's Publishing House], 2009), p. 113.
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2010.745 According to Euromonitor, the revenue growth rate of the fast food sector in Vietnam - the most popular sector for franchising - was always over 13 percent annually during the period 2005-2010 (from VND 3,338 billion, about US$ 180 million, in 2005 to VND 7,126 billion, about US$ 383 million in 2010).746 In the fast food sector, the three franchisor pioneers KFC, Lotteria, and Jollibee have more than 70 percent market share. The growth rate of Lotteria was 38 percent in 2009 and the average revenue of each of its outlet was VND 700m (US$ 40,000) per
747 month. On 22 June 2006, consumers queued for the opening of KFC’s first outlet in Hanoi (its 21th outlet in Vietnam) that seats 120 customers.748 With the success in
Vietnam market, such prominent franchisors as KFC, Lotteria, and Jollibee have been expanding their systems in Vietnam.749
Franchising as method of doing business has been used by both domestic and foreign companies to access a variety of industry sectors. In Vietnam, there are currently at least 16 industry sectors which have utilised franchising with fast food restaurants, retail store and education currently the three most popular sectors. The distribution of franchise systems in industry sectors in Vietnam is indicated by the following chart:
745 Hien, above n 743, last accessed 18 June 2010. 746 Euromonitor, Market Sizes (2011)
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Figure 15: Distribution of Franchise Systems by Industry Sector750
Other Beauty & 9% Fitness 4% Retail Store Car Service 28% 2% Education 9%
Real Estate 3%
Restaurant 45%
Source: Nguyen Ba Binh
6.4.3 Developing Franchising Expertise
The rapid expansion of foreign franchisors, and the growth in domestic companies entering the franchising sector, since the introduction of the Franchise Law have also led to the development of professional expertise relating to franchised business. The Vietnam Franchise Club was established in 2006. Its goals are to establish a franchise association in Vietnam, to facilitate intercompany cooperation, to provide a forum for businesses to share ideas relating to building and developing business through franchising, to provide members with knowledge, information, and experience of franchising, and to assist young business people in starting and developing their business through franchising. For these purposes, the Club has a
750 Which is collected by the author, see Chapter 6.2.
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range of activities including holding franchise conferences, expos and seminars, assisting its members in introducing products and services that can be franchised; and providing its members with franchising training courses.
The first Vietnam franchise conference was organised in June 2005 by Vina Capital
Group and G18 (18 leading businesses in the South of Vietnam) - only two weeks after the date on which Vietnam’s Parliament enacted the 2005 Commercial Law which provides, inter alia, the foundation for the Franchise Law. Since then, around one or two franchise conferences and Expos have been organised annually by state organs, associations, and companies.
Academics have also been attracted by the strong development of franchising as an interesting research field. Research in franchising is increasingly the focus of PhD candidates and master’s students in universities in Vietnam and abroad. Books, journal articles, and websites (including blogs and facebook pages) dedicated to franchising have rapidly increased and are highly recognised. Franchising items increasingly appear in newspapers. Lawyers and law firms specialising in franchising have emerged to respond to the demands of franchise sector. Franchising is a “hot” topic for the media, business, academia, the professions and the public generally.
However, although franchising has been warmly welcomed by businesses seeking a strategy for expansion, and by individuals planning to enter a business through franchising, the development of franchising throughout Vietnam has been uneven. Almost all franchise systems have been developed, and operate, in the two major cities, Hanoi (the capital) and Ho Chi Minh City (the biggest city). However, most Vietnamese live in 61 other cities and provinces. Franchising has not yet been used, and is not well-known, in the majority of Vietnam’s territory. Where franchising has
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a presence outside the major cities it is focussed on particular industry sectors, with the fast food restaurant sector most prominent.
6.5 THE CHALLENGES AND OPPORTUNITIES FOR FRANCHISORS IN VIETNAM
Challenges
The demand from a constrained franchise sector resulted in the introduction of Vietnam’s Franchise Law. Vietnam is one of around 30 countries which have adopted a franchise-specific regulation to encourage the development of franchising and to solve problems emerging in the franchise sector. The Franchise Law has a very important role in the development of franchising in Vietnam, but it cannot deal with all problems relating to franchising. As a result of the legal reforms introduced to build a legal system based on the rule of law and in accordance with WTO principles, Vietnam has experienced significant change. The 2005 Civil Code, the 2005 Commercial Law, the 2005 Law on Investment, the 2005 Law on Intellectual Property, the 2005 Law on Enterprises, the 2006 Law on Technology Transfer, and the 2004 Law on Competition, most of which were influenced by WTO accession commitments, have provided a better underlying commercial legal framework for franchising. However, franchisors - domestic and foreign - will be frustrated by the bureaucracy, by the lack of transparency, uniformity, and consistency in the legal system, by the uncertain enforcement of intellectual property rights, by the corruption,751 and by insufficient local implementation of national goals. According to the Country Policy and Institutional Assessment of the World Bank in 2004, a
751 Morgan Mellish, 'Vietnam’s Renaissance Attracts Investors' (9 January 2007) Australian Financial Review
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particular weakness of Vietnam is the lack of transparency and accountability, and corruption. On these measures Vietnam is below the average for other East Asian
752 753 countries. The Commercial Service of the US Department of Commerce has noted, in relation to market challenges for US companies intending to invest into
Vietnam, “the evolving nature of regulatory regimes and commercial law in Vietnam, combined with overlapping jurisdiction among Government ministries” and “corruption and administrative red tape within the Government [which] have led to a lack of transparency, uniformity and consistency in Government policies”. This agency also stated that “many firms operating in Vietnam, both foreign and domestic, find ineffective protection of intellectual property to be a significant challenge”.754
The long history and unique culture of Vietnam raise serious difficulties for franchisors, especially foreign franchisors. Vietnam, a country with 58 provinces and five municipalities (Hanoi, Ho Chi Minh City, Haiphong, Danang and Cantho),
54 ethnic groups, and more than 4000 years of history, is not an easy market for franchisors to understand. Vietnamese culture is different - not only between ethnic groups but also between provinces, and particularly between the three major areas of the country: the north, the central, and the south.
Commercial challenges - from weak transportation, building and training infrastructure to an immature understanding of franchising - abound. For domestic franchisors, challenges also stem from their lack of business and management experience. Most domestic franchisors are small and medium businesses with little business experience. Most domestic franchise systems have, to date at least, been built on the less comprehensive product distribution franchise model. Domestic
752 The World Bank, above n 417, p. 61. 753 Department of Commerce of the United States, 'Doing Business in Vietnam: 2009 Country Commercial Guide for U.S. Companies' (2009), p. 3. 754 ibid.
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franchising is currently characterised by a lack of system consistency. A Vietnamese consultant suggests that Vietnamese franchise companies “can’t perform the comprehensive franchising model because they lack capital, are poor at management and control ability, don’t standardise the franchising process and brand names and don’t have suitable business strategies and models yet”.755 The limited business ability of Vietnam’s businesses also poses challenges for foreign franchisors intending to expand their franchise systems to Vietnam through joint ventures, area development agreements, or master franchising. Finding appropriate partners for their Vietnamese expansion is both time and money consuming.
Given the above challenges, the Commercial Service of the US Department of
Commerce has commented that to be successful in expanding to Vietnam, US franchisors should consider the following suggestions:756 to register intellectual property rights and be prepared to take legal action for intellectual property violations. to exercise care in preparing franchising contracts to avoid problems down the line. to understand cultural differences and adjust market access strategy accordingly. to adapt to local culture, habits, and tastes to guarantee success in the market. to minimise the price of the product and the franchise fee to achieve rapid expansion. Keep in mind that incomes are substantially lower than in the US or even other countries in the region and Vietnamese are very price- conscious. Local investors are only now becoming familiar with the franchising concept and may be reluctant to make too large an initial investment.
755 Tran Anh Tuan, FT-Pathfinder Consulting Group, cited in Bich Thuy, 'Franchising in Vietnam: Loose and Incomprehensive' (2008)
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to start working with the US Commercial Service in Vietnam on identifying potential partners and checking their credibility.
James Meyers, the Australian Trade Commissioner in Ho Chi Minh City and an informed observer of Vietnam,757 has stated that there are four market entry imperatives for foreign franchisors: (i) the right local partner is key (conduct as much due diligence as possible) (ii) frequent visits to the market (understand the market - the demand potential, the fit. develop strong relationships with your partners) (iii) seek local consulting expertise and services (legal, tax, financial; intellectual property/trademark protection) and (iv) ensure that your business is right for the market (cost, capital requirements, space needs, product inputs, skill base).
Opportunities
Vietnam has, from an economic perspective, been recognised as “the Star of Southeast Asia”.758 Since the introduction of the Doi Moi reforms, Vietnam’s economy has changed dramatically: from a centrally directed planned economy to a socialist oriented market economy and from a closed door economy to a WTO member. Over recent years, it has been one of the world’s fastest economies, with GDP growth rate of over eight percent annually.759 Foreign direct investment into Vietnam has also increased significantly. In a Bloomberg’s report in 2009, Vietnam was ranked 12th on a list of the world’s top 25 economies in attracting foreign direct investment.760 It is also an attractive retail market, with 20 percent annual retail
757 James Meyers, 'Vietnam Asia’s Next Economic Frontier: In front of the Franchise Wavefrontier?' (2007)
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growth.761 Vietnam was ranked top in 2008, and sixth in 2009, on a list of the world’s top 30 emerging economies in attracting global retailers.762 According to a Vietnamese Government estimate, retail sales reached US$ 39.1 billion in 2009,
763 which was almost double that of five years earlier. However, there is much room for growth in Vietnam’s retail market: per capita retail sales, at US$ 450, are among
764 the lowest in Asia.
Vietnam is an attractive market for domestic and foreign franchisors not only because of the strong growth of its economy but also because of its highly literate and young population, its entrepreneurial and youthful workforce, and its emerging new consumer class. 92.5 percent of the population are literate and, during the period of 2005-2008, the number of university students almost doubled.765 About 65 percent of Vietnam’s 86 million population (the thirteenth biggest population in the world) are younger than 35 years. A McKinsey report in 2010 emphasised that the country’s middle class has been growing fast in recent years - from 7 million households in 2003 to an estimated 25 million households in 2013.766 About 83 percent of Vietnamese people are under 40 and are entrepreneurial, ambitious,767 and have an increasing interest in western-style food, beverages and consumer brands.
768 Increasing numbers of people are buying more sophisticated products. According to the General Statistics Office of Vietnam, urban Vietnamese women from 20 to 45
769 years old spend 18 percent of their monthly income on apparel. Vietnamese
761 said by Dinh Thi My Loan - General Secretary of Vietnam’s Retail Association, cited by Huong, above n 728, last accessed 22 October 2011. 762 According to AT Kearny, a global consultancy firm of repute, cited in IndiaRetailBiz, 'India Bounces Back to Top Slot on Global Retail Development Index 2009' (2009)
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consumers are more brand conscious than ever before.770 Consumers tend to pay more attention to product quality than promotional offers. In the past, only 50 percent of consumers considered product quality as a determinant purchase factor whereas today almost all Vietnamese look for quality brands when they buy commodities.771 A recent report by TNS Vietnam reported that 86 percent of urban consumers are willing to pay for quality goods.772 The report emphasised that “although Vietnamese continue to show humility with regard to wealth, they do use brands to demonstrate success”.773
Since the end of the Vietnam War, political stability and wide international engagement have given businesses, franchisors and franchisees the confidence of a stable business environment. Vietnam is one of the world’s five remaining single- party socialist states. However, Vietnam’s focus is not merely on ideological orthodoxy: it pays more attention to economic development toward building a prosperous country. Since the reunification of the country in 1975, there has been no political crisis in Vietnam. Over the last one and a half decades, Vietnam has increased its international economic and political position in the world. Vietnam is currently a member of many key international organisations and forums including the World Bank, the International Monetary Fund, the Association of Southeast
Asian Nations, the Asia-Pacific Economic Cooperation Forum, and the WTO.
There are significant commercial, cultural, and legal challenges for franchising in Vietnam as the economic reforms continue to build a market economy. However, the legal reforms to implement WTO accession commitments, and the new Franchise Law, have reduced the challenges and both encourage and facilitate the use of the franchise business model. The opportunities prevail over the challenges
770 Taylor Nelson Sofres, above n 314, p. 70. 771 ibid, p. 70. 772 ibid, p. 71. 773 ibid.
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which are in any event not impossible to overcome as is shown by the success of the many foreign and local systems over the recent years. US brands are enthusiastically embraced by local consumers who often connect them with high quality, excellent services and, generally, a western lifestyle. Currently, US franchise systems make up around 50 percent of the number of foreign franchisors in Vietnam. With a presence in almost all major cities in Vietnam, KFC, in 1997 the first US franchisor to enter the market, has been the leading company in the fast food sector. Pizza Hut expanded to Vietnam in 2004 with a long term and ambitious plan. New Horizons IT
Center has smoothly run their systems across the country. Another US franchisor,
Shoe Box New York, which entered Vietnam through a master franchising agreement, opened its first store in Hanoi in December 2008 while Coldwell Banker
Real Estate Company opened its first office in Ho Chi Minh City in 2009.774 Many other well known US franchise companies are reportedly seeking to enter the market.775 Besides US franchisors, leading Australian franchisors such as Cartridge World and Gloria Jean’s Coffees have also entered Vietnam through master franchise agreements in 2006 and 2007, respectively. In the words of James Meyers, an Australian Trade Commissioner, spoken in 2006, “there is no going back on the significant market and legal reforms currently underway in Vietnam”.776 The last six years have confirmed the validity of this statement. Franchising undoubtedly has an exciting future in this emerging market.
6.6 CHAPTER CONCLUSION
Foreign occupation and wars - which have characterised Vietnam’s history until recently - along with the closed and centrally planned economy are not suitable
774 Department of Commerce of the United States, above n 753. 775 ibid, p. 78. 776 James Meyers Australian Trade Commissioner Ho Chi Minh City cited by Cheryl Scott, 'Vietnam Asia's Next Franchising Frontier?', Australian Franchising Nov/Dec 2006, p.24.
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conditions for the development of franchising. The economic reforms and the “open door” policy have facilitated the development of a market economy, of private enterprise, and of foreign investment. They have created the environment in which the franchising concept, first introduced to Vietnam in the 1990s by US and Filipino franchisors, could flourish. Although domestic companies were attracted to franchising by the example of the foreign franchise pioneers, the development of franchising was constrained during the decade 1996 to 2005 because of a lack of a clear legal framework for the sector. Franchising has shifted to a period of steady development since the introduction of Vietnam’s Franchise Law in 2006. Over the last seven years the franchise sector has increased both in terms of the number of franchise systems and outlets and also in terms of sales growth.
There are of course cultural, legal, and commercial challenges for both foreign and domestic franchisors in Vietnam. However, such challenges are not impossible to overcome, and the opportunities, including high and stable GDP growth rate, a highly literate and young population, political stability, extensive international relations, legal reforms to implement WTO accession commitments, and a dedicated Franchise Law, suggest an exciting future for franchising in Vietnam. There is a wide agreement with the statement of Pornchai Thuratum, General Director of KFC
Vietnam, that “Vietnam is not only a promising market for fast food but also for franchising in other areas”.777
777 Bao Vietnamnet [Vietnamnet Newspaper], above n 32.
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CHAPTER SEVEN THE REGULATION OF FRANCHISING IN VIETNAM
7.1 INTRODUCTION
Vietnam’s accession to the World Trade Organisation in January 2007 represents the culmination of its transition to a market economy that commenced two decades earlier with the introduction of the Doi Moi economic reform package in December
1986. Franchising is nevertheless a relatively new strategy in Vietnam - its development hampered until recently by a regulatory framework which did not recognise franchising as a discrete business relationship. In 2005 Vietnam amended its Commercial Law to provide, inter alia, a framework for an implementing decree -
Decree Making Detailed Provisions for Implementation of the Commercial Law with
Respect to Franchising Activities - which was issued in March 2006 and came in effect in July 2006.
This chapter reviews the development of franchise-specific regulation in Vietnam. It first analyses the regulation of franchising prior to the introduction of the Franchise
Law - an era when the lack of a dedicated law was a real constraint on the development of franchising. It then examines Vietnam’s Franchise Law introduced as part of its extensive law modernisation process preparatory to WTO accession.
This chapter also reviews international developments and critically evaluates
Vietnam’s Franchise Law and the role of the Ministry of Industry and Trade in its administration.
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7.2 THE REGULATION OF FRANCHISING PRIOR TO VIETNAM’S FRANCHISE LAW
Franchising concept was first introduced to Vietnam in the mid-1990s. However, its development was constrained by complex, unsuitable and overlapping regulations on intellectual property and technology transfer coupled with general contractual obligations. This section reviews the legal documents that regulated franchising prior to Vietnam’s Franchise Law.
Circular 1254/1999/TT-BKHCNMT (1999) - the first legal document acknowledging the “franchise” concept
In 1999, the then Ministry of Science, Technology and Environment (currently the
Ministry of Science and Technology) issued Circular 1254/1999/TT-BKHCNMT,778 which guides Decree 45/1998/NĐ-CP779 on technology transfer, in which the word “franchise” (‘cap phep dac quyen kinh doanh’)780 was first officially used. In this Circular, through the content of the Item 4.1.1.a of Circular 1254, franchising was defined as a contract which contains provisions in relation to the granting a licence to use a trademark accompanied by production or business know-how. Under this definition franchising was only a simple combination of a trademark licence and a transaction of production or business know-how which is quite different from the franchising concept in western countries. It reflected the lack of understanding of franchising at that time.
A decade ago, the differences between franchising and technology transfer were unclear to both the general public and government officials. The understanding of the concept was confused. Being stipulated within a legal document which regulated
778 Making Detailed Provisions for the Implementation of Decree 45/1998/NĐ-CP Detailing Provisions for Technology Transfer, 12 July 1999. 779 Making Detailed Provisions for Technology Transfer, 1 July 1998. 780 Although this Circular noted that “cap phep dac quyen kinh doanh” is referred as “franchise” in English, the literal translation is “granting a special commercial right” rather than “franchise”.
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technology transfer, franchising was classified as a form of technology transfer rather than as a form of economic organisation.
Franchising was specifically mentioned only in Item 4.1.1.a of Circular 1254 as a form of technology transfer and certain rules in relation to technology transfer were used to regulate it. Article 9 of Decree 45 stated that:
Article 9: Objects of Industrial Property in Technology Transfer Where the transferor transfers the right to use objects of industrial property and other items referred to in article 4 of this Decree to the transferee, the transfer of the ownership rights with respect to, and the right to use, such objects of industrial property shall be provided for in a separate part of the technology transfer contract. The transfer of the ownership rights with respect to, and the right to use, objects of industrial property under a technology transfer contract shall be governed by the laws on industrial property.
As required under this article, the contents relating to the licensing of industrial property objects in a franchise agreement must be provided for in a separate part of the agreement and were subject to legal provisions on industrial property. Therefore, at that time the contracting parties had to divide the franchise agreement into two separate parts and submit the same agreement to two different authorities under the then Ministry of Science, Technology and Environment.781 This was troublesome. Many franchisors asserted that the dual requirement of approval/registration was time consuming, duplicative, and ultimately unnecessary.782 Moreover, it was a problem for the parties to a franchise agreement as the then legal restrictions applied to the licensing of industrial property objects were quite different from those applied
781 The contents relating to the technology transfer agreement had to approved/registered by the Office of Evaluation of Technology and Environment for Investment Projects whereas the contents relating to the licensing of industrial property had to registered by the then National Office of Industrial Property of Vietnam (now the National Office of Intellectual Property of Vietnam). 782 Russin&Vecchi, 'Legal Framework for Franchising in Vietnam' (2006)
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to the transfer of technology with respect to prohibited contents, maximum royalty and maximum duration.
Table 5: The Major Difference between the Regulations on Technology Transfer and the Regulations on Licensing
Technology Transfer Agreement783 Licensing Agreement784
The then National Office of Industrial Property of Vietnam (under the then Ministry of Science, Technology and The Office of Evaluation of Technology Environment). Approval/ and Environment for Investment Projects Registration (For those licence contracts (under the then Ministry of Science, Authority which had to be approved by the Technology and Environment). authority, they had to be approved by the Minister of the then Ministry of Science, Technology and Environment before being registered)
1. Provisions which compel the transferee The licence contract must not to purchase or receive the following from contain any unjustifiable the transferor or a third party appointed by provision on restrictions on the the transferor: (a) Raw materials, other rights of the licence transferee, materials; (b) Production facilities, such as especially the restriction machinery, equipment and means of provisions not derived from the transportation; (c) Intermediate products; rights of the licence transferor (d) Unskilled labourers; and (e) Rights to over the industrial property use objects of industrial property. object or not for the purpose of protecting such rights, such as: Prohibited Where special guarantees are required for Contents technology in terms of raw materials, other - Provisions directly or indirectly materials, accessories, production facilities, restricting the export of products intermediate products, skilled manpower manufactured under the licence with technical expertise or rights to use to territories where the licence objects of industrial property, such transferor is not the owner of requirements shall be explained in detail corresponding industrial property and agreed by both parties. right or does not monopolise the import of corresponding 2. Provisions which compel the transferee industrial property object; to accept a certain number of limits (except for transfer of technology for the purpose - Provisions compelling the
783 See generally Decree 45 and Circular 1254. 784 See generally Decree 63/CP of the Government, dated 24 October 1996, on Detail Regulations Concerning Industrial Property; See generally Circular 3055/TT-SHCN of the then Ministry of Science, Technology and Environment (now the Ministry of Science and Technology), dated 31 December 1996, Guiding the Implementation of the Regulations on the Procedures for Establishing Industrial Property Right and other Regulations in Decree 63/CP of the Government, dated 24 October 1996, Detailing the Provisions on Industrial Property.
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of implementation of a product processing transferee of a trademark licence contract) with respect to: (a) scope of to purchase the whole or part of production and quantity of products (or the materials, components or product groups); (b) selling prices of equipment of the licence products; and (c) appointment of sales transferor or of a person agents for products of the transferee, appointed by the licence operating mechanism and relationship transferor, without aiming to between the transferee and those agents. ensure the quality of products manufactured by the transferee; 3. Provisions which restrict the market for sale of products, the export market, the - Provisions forbidding the volume and composition of the groups of licence transferee to modify the products exported by the transferee. industrial property object (except trademark), or compelling the 4. Provisions which stipulate that the licence transferee to transfer free transferee of the technology may not of charge to the transferor the research and further develop the technology modifications made by the transferred or receive similar technology transferee or the right to file from other sources. application for industrial 5. Provisions which compel the transferee property protection or industrial to transfer unconditionally to the transferor property right over such any right to use improvements or modifications. renovation of the technology created by the - Provisions forbidding the transferee from the technology transferred, license transferee to appeal right to lodge an application for protection against the validity of the of industrial property, industrial property industrial property right, or the rights and other rights with respect to such licence transferor’s right to improvements or renovations of the transfer licence. technology. 6. Provisions which grant the transferor immunity from responsibility with respect to the following: Defaults of the transferor in the transfer of technology; Machinery and equipment supplied by the transferor which fails to meet the quality standards stipulated in the contract. 7. Provisions which prohibit the transferee from continued utilisation of the technology after the expiry of the contract (except for objects of industrial property which are still within the duration of protection in Vietnam). Where the parties agree that the transferee shall not continue to use the technology transferred upon the expiry of the contract, the parties shall provide reasons for such agreement and the contract must be approved by the competent body responsible for the management of technology transfers.
5 percent of the net sale price of products Maximum during the period of validity of the contract, Agreed upon by the parties Royalty or 25 percent of after-tax profits earned from the sale of products or services to
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which the transferred technology is applied during the period of validity, or 8 percent of the total invested capital in the case of capital contribution in the form of the value of technology. With respect to technology transfers from abroad to Vietnam and domestic technology transfers, the price for transfer of technology, excluding the value of attached machinery and equipment, may be up to 8 percent of the net selling value or 30 percent of after-tax profits or, in the case of capital contribution in the form of the value of technology, up to 10 percent of the total invested capital in some special cases.
It is equal to the duration of protection of industrial property object (by law, Protection Titles for trademarks are Trademark Seven years for the maximum duration of Registration Certificates with a Maximum franchising agreements for common term of validity beginning on the Duration situations and the 10-year duration for date of the granting of the special ones. Protection Title, and expiring at the end of 10 years from the official filing date. This term is renewable indefinitely for consecutive terms of 10 years).
Decree 11/2005/NĐ-CP (2005): continued treatment of “franchising” as a form of technology transfer
It was widely acknowledged that the 1999 Circular dealt inadequately with technology transfer in practice.785 In order to encourage more technology transfer activities in particular and product and business activities in general, the Government issued Decree 11/2005/NĐ-CP Making Detailed Provisions for Technology Transfer, dated 2 February 2005, which replaced Decree 45 on technology transfer introduced in 1998. Subsequently, the then Ministry of Science and Technology promulgated Circular 30/2005/BKHCN, dated 30 December 2005, Guiding Some Provisions of Decree 11 Making Detailed Provisions for Technology Transfer. Under these legal documents, franchising continued to be considered as a
785 Central Institute for Economic Management, Vision and Associates Ltd. and Deacons Vietnam, 'The Legal Environment for Business Development Services in Vietnam' (2003), p. 45.
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form of technology transfer so that all provisions which applied to technology transfer also applied to franchising. Some of the previous inappropriate provisions such as maximum royalty,786 the approval requirement of technology transfer agreement, and the limitation of payment methods and contract duration were repealed. However, the aim of these legal documents was to regulate technology transfer so, in general, the parties to franchise agreements still faced many problems. Moreover, the regulations at that time were only Decrees and Circulars which did not have as high a legal status as laws.
7.3 THE MOVE TO A NEW LEGAL FRAMEWORK FOR FRANCHISING
7.3.1 The 2005 Commercial Law Chapter VI Section 8
Entrepreneurship and business activities are shaped not only by markets, but also by regulatory and administrative environments established by governments. OECD, Business Views on Red Tape: Administrative and Regulatory Burdens on Small and Medium Sized Enterprises - 2001
Although the Doi Moi reforms led to a market environment in which franchising could operate, the development of the franchise sector was constrained by the lack of a clear legal framework. Until the introduction of the new regulatory regime, franchising was not recognised as a discrete business relationship and, in a country where the general rule is that anything not specifically permitted is not allowed,787 franchise development was not practicable. As explained by Vision and Associates, a Vietnamese law firm specialising in franchising, “without a legal frame of reference Vietnamese authorities simply consider a franchise agreement as a trademark licence, technology transfer contract, and/or service agreement. Such agreements will therefore be subject to different regulations under current
786 Which was considered as the most concern at that time, commented by Cooper, above n 734. 787 ibid.
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Vietnamese law”.788 Instead of entering the sector through a franchise agreement, an intending franchisor generally entered through one or several other contracts which was like “hammering a square peg into a round hole”789 discouraging both potential domestic and foreign franchisors. These serious problems drew attention to the urgent need to enact a franchise-specific law for Vietnam.
Accompanying this pressure was the fact that Vietnam, as part of its preparatory steps for WTO accession, faced the urgent need to modernise its laws to provide a legal framework more consistent with international practice and more favourable for business. These factors led to a dedicated franchise regulation being introduced as a part of the new 2005 Commercial Law which replaced the 1997 Commercial Law. The necessity for the new 2005 Commercial Law was acknowledged by the Government:
Many new commercial activities have just appeared or been favoured by businesses, however, there has not yet specific regulations on them whereas general regulations under the 1997 Commercial Law could not be applied to them (for example, franchising and sale of goods through good exchange).790
The introduction of Vietnam’s Franchise Law791 - the first element of which was the inclusion of a Chapter in the 2005 Commercial Law - was a response to the practical
788 Vision & Associate, 'Laws For Franchising Scattered Amongst Many Decrees', Vietnam Investment Review 8 December 2003
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requirement for a clear legal framework for the development of franchising. This was acknowledged by the Government when submitting the eighth draft of the 2005 Commercial Law to the Parliament.792 Although there is not any statement of purpose in the 2005 Commercial Law, in the proposal document793 the Government acknowledged that the introduction of dedicated franchise regulations was to encourage the development of franchising and to ensure legal rights and obligations of parties in franchise relationships.794 This is consistent with the acknowledgement of Mr Nguyen Tran Quang, Marketing Manager of Trung Nguyen Coffee - the first domestic franchisor - that “our relationships with franchisees are currently based on business commitments or parties’ ethics. If there is a legal framework for this activity [franchising] it will facilitate our business very much”.795
In 2003, the then Ministry of Trade was authorised by the Government to lead the drafting the new Commercial Law. The Minister of Trade issued Decision 323/2003/QD-BTM, dated 24 March 2003, on Establishing Inter-Ministries Drafting
Board of Commercial Law (Revised). However, the idea of having a set of specific rules on franchising included in the 2005 Commercial Law was not raised with the Drafting Board during the early days. As stated by Mr Hoang Xuan Bac, the then Vice Head of the Legal Department of the then Ministry of Trade and the Associate
Head of the group of experts drafting the Section on Franchising in the 2005 Commercial Law, this idea was suggested later by the then Minister of Trade. This came from the Minister’s observations of the business environment in practice, and from his review of WTO agreements on services where franchising is recognised as
792 Chinh Phu Viet Nam [Vietnam's Government], above n 790, p. 6. 793 This is the document explaining the rationale for the introduction of the law and the main issues addressed in it. 794 Chinh Phu Viet Nam [Vietnam's Government], above n 790, pp. 16-17. 795 Bao Vietnamnet [Vietnamnet Newspaper], 'Se Co Mot Lan Song Franchising [There will be a Franchising Wave]' (December 2004)
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a specific type of service.796 The Government supported this proposal.797 Mr Truong
Dinh Tuyen, the then Minister of Trade, further explained that:
Franchising is a type of distribution services, including commission agents’ services, wholesale trade services, retailing services and franchising services, which has been rather developed in the world. Setting up a legal foundation to support franchising operating transparently and legally is not only to satisfy the practical need but also to strengthen technology transfer. In addition, it [Vietnam’s Franchise Law] was introduced to made legal basis for negotiations for WTO’s accession... Franchising was an issue that we had to negotiate with big partners [countries] for WTO accession.798
During the drafting period of the section on franchising in the 2005 Commercial
Law, as well as in the drafting process of the associated legal documents which guide the section on franchising in this law, Professor Andrew Terry, a prominent expert on franchise regulation, was invited to assist the then Ministry of Trade in drafting the section on franchising in the 2005 Commercial Law and the franchise
Decree which supplements the 2005 Commercial Law.799 There were ten drafts of the 2005 Commercial Law. The section on franchising was first added to the seventh draft and was changed in the ninth draft. Therefore, there were only two drafts of the section on franchising: one in the seventh and eighth drafts and the other in the ninth and ten drafts of the 2005 Commercial Law.
In the seventh and eighth drafts the section on franchising included five articles:
Definition of franchising; Franchise contracts; Rights and obligations of the franchisor; Rights and obligations of the franchisee; and The right to conduct business under franchise (which simply required the registration of the franchise). The section on franchising in the ninth and tenth drafts comprised the eight articles
796 Mr Hoang Xuan Bac, interview 8 May 2011. 797 Chinh Phu Viet Nam [Vietnam's Government], above n 790, p. 16. 798 Mr Truong Dinh Tuyen, interview 26 January 2012. 799 The drafting project was supported by AusAID.
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which, with some minor wording changes, are currently stipulated in the 2005
Commercial Law. In the ninth and tenth drafts, the article addressing the rights and obligations of franchisors was separated into two articles dealing respectively with the rights of the franchisor and the obligations of franchisors. A similar separation was also applied to the article addressing the rights and obligations of franchisees. A new article dealing with sub-franchising to a third party was added.
The strict registration obligation under the seventh and eighth drafts which required that every franchise contract had to be registered with the then Ministry of Trade (now the Ministry of Industry and Trade) was removed in the ninth and tenth drafts. This was to provide a more favourable franchise regime for franchisors and was based on the philosophy that the State should not directly intervene in business activities. Mr Truong Dinh Tuyen, the then Minister of Trade, has noted that the Franchise Law gives a degree of autonomy of franchisors which is “very huge” and that “this approach is consistent with my view - that is a shift from the direct intervention of the State into business activities to the business development encouragement role of the State”.800
Although public comments were invited on the wording of the drafts on the franchise section of the Commercial Law, the need for the introduction of a dedicated franchise regulation was not debated publicly. Given the widely acknowledged need for the recognition of franchising and the appropriateness of the legislative framework which emerged from the drafting sessions it had an easy passage through Parliament.801 While there was extensive debate on many other sections of the Commercial Law, there was a high degree of consensus on the section of franchising during the debate by parliament members about the drafts of
800 Mr Truong Dinh Tuyen, interview 26 January 2012. 801 Professor Andrew Terry, interview 2 April 2011.
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the 2005 Commercial Law.802 The 2005 Commercial Law was adopted at the 7th session of the 11th National Assembly in 2005 and was effective on 1 January 2006 - about three years after work first began on its drafting. The 2005 Commercial Law is Vietnam’s first recognition of franchising as a form of economic and legal organisation. Franchising is regulated by eight short, descriptive, general articles (articles 284 to 291, Section 8 of Chapter VI)803 which create a basic legal framework to support its development.
7.3.2 The Franchise Decree
In parallel with drafting the section of franchising in the Commercial Law, the then
Ministry of Trade was also preparing for the introduction of a decree guiding in detail the section of franchising under the 2005 Commercial Law. Decree 35/2006/NĐ-CP Making Detailed Provisions for the Implementation of the
Commercial Law with Respect to Franchising Activities plays a very important role, indeed the central role, in Vietnam’s Franchise Law. The 2005 Commercial Law simply provides a very general framework for regulating franchising while the Decree which prescribes the regulatory regime progressed through six drafts before being issued by the Vietnamese Government on 31 March 2006 and effective on 22 April 2006. The Decree was developed to ensure consistency with international best practice. Its focus is on prior disclosure.804 It also includes provisions on conduct/relationship issues between franchisors and franchisees and registration. This Decree contains twenty-eight articles, and addresses Interpretation, Authorities Responsible for State Administration of Franchising Activities, Conditions for Franchising Operations, Information Disclosure, Franchise Contracts, Registration
802 Mr Hoang Xuan Bac, interview 8 May 2011. 803 These articles refer to definition, the form of franchise contracts, obligations and rights of franchisors and franchisees, sub-franchise to a third party, and registration. 804 Cooper, above n 734.
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of Franchising Activities, Breaches of Law in Franchising Activities,
Administration, and Authority to Deal with Breaches. Professor Andrew Terry confirms that the preparatory work was very thorough and that the experience of other jurisdictions with specific franchise laws was carefully considered.805
Particular attention was given to the US, the Australian and the Chinese franchise laws.806 The final draft represented a modern and comprehensive law incorporating prior disclosure, “light touch” registration, and moderate standard of conduct provisions which would protect franchisees without unduly burdening franchisors with unnecessary obligations.807
The Government has recently issued Decree 120,808 effective 1 February 2012, which amends several articles of Decree 35 relating to the registration obligation of franchisors.809 Decree 120 removes the registration obligations of franchisors who franchise domestically or franchise from Vietnam to overseas, which is said to reduce unnecessary administrative procedures for businesses.810
7.3.3 The Franchise Circular
On 25 May 2006, the Ministry of Trade (now the Ministry of Industry and Trade) issued Circular 09 Providing Guidelines on Procedures for Registration of Franchising Activities, which became effective 22 June 2006. This Circular provides a mandatory Franchise Description Document (in the Appendix III of the
Circular) which is considered as a central feature of the Franchise Law.
805 Professor Andrew Terry, interview 2 April 2011. 806 ibid. 807 ibid. 808 This Decree was dated 16 December 2011 Amending and Supplementing Administrative Procedures Stipulated in a Number of Decrees of the Government Detailing the Implementation of the Commercial Law. 809 The registration requirements are discussed in Chapter 7.4.7 and Chapter 7.6.7. 810 Interview with officials of Vietnam’s Ministry of Industry and Trade, 22 March 2012.
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7.3.4 The Franchise Decision
Although the Franchise Law was introduced in the 2005 Commercial Law supported by the franchise Decree and Circular containing provisions for registration the registration regime was impractical because of the lack of a fee regime for registration. This issue was remedied only in 2008 by Decision 106 of the Minister of Finance, dated 17 November 2008 and effective 15 December 2008, on the Levels and Regime for the Collection and Payment, Management and Use of Charges for
Commercial Franchising Registration. As noted in Chapter 7.3.3 the registration regime was short-lived - it was repealed for domestic franchisors in 2012.
7.4 VIETNAM’S FRANCHISE LAW
7.4.1 Introduction
A decade after franchising first appeared in Vietnam, it is now regulated by a dedicated Franchise Law which provides a framework for the orderly development of the Vietnam franchise sector. The Franchise Law was introduced as part of Vietnam’s extensive law modernisation process preparatory to WTO accession in
January 2007 and replaces inadequate provisions under the regulations of technology transfer. The law is in four parts - the new 2005 Commercial Law providing a framework for regulating the franchise relationship, the 2006 Decree
Making Detailed Provisions for the Implementation of the Commercial Law with Respect to Franchising Activities (Decree 35) (recently amended by the 2011 Decree Amending and Supplementing Administrative Procedures in a number of Decrees of the Government Detailing the Implementation of the Commercial Law
(Decree 120)), a Ministry of Industry and Trade Circular Providing Guidelines on Procedures for Registration of Franchising Activities (Circular 09), and a Minister
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of Finance Decision Providing the Regime for the Collection and Payment,
Management and Use of Charges for Commercial Franchising Registration (Decision 106) addressing registration and prior disclosure which are key features of the regulatory regime. The “Franchise Law” term is used hereafter to mean the legislation noted above.
The Franchise Law applies to all franchising activities within Vietnam - by both Vietnamese and foreign business entities811 - (Decree 35, articles 1, 2). The Decree generally adopts an increasingly familiar regulatory model with prior disclosure obligations supplemented by moderate registration and relationship requirements.812 Despite the recent removal of the registration requirement the Franchise Law still displays a high level of official involvement in franchising activities which is not unusual in developing economies.
The Franchise Law applies to all franchising activities “in the territory of the Socialist Republic of Vietnam” (Decree 35, article 1), and both “Vietnamese business and foreign business entities participating in franchising activities” are applied by the Law (Decree 35, article 2).
7.4.2 Definition
The Commercial Law contains a broad definition of franchising in article 284:
Franchising means a commercial activity whereby a franchisor authorises and requires a franchisee to conduct on its own behalf the purchase and
811 An enterprise with foreign owned capital may nevertheless only conduct franchising in lines of goods in which “such enterprise is permitted to provide distribution services pursuant to international undertakings in Vietnam” (Decree 35, article 2.2). 812 International precedents including the UNIDROIT 2002 Model Law on Franchising Disclosure, the 1998 Australian Franchising Code of Conduct (the disclosure provisions of which were modelled closely on the US Uniform Franchise Offering Circular) and China’s Measures for the Administration of Commercial Franchises (effective on 1 February 2005) were of particular interest to Ministry officials. See generally, The House of Representatives Standing Committee on Industry, Science and Technology, above n 2.
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sale of goods or provision of services in accordance with the following conditions: 1. The purchase and sale of goods or provision of services be conducted according to the method of business organisation specified by the franchisor and be associated with the trademark, trade name, business know-how, business mission statements, business logo and advertising of the franchisor. 2. The franchisor has the right to control and offer assistance to the franchisee in the conduct of the business.
Decree 35 further defines franchising to include master franchising (the rights granted by a franchisor to a secondary franchisor to sub-franchise to secondary franchisees) and franchise development contracts (the rights granted by to a franchisee to set up more than one establishment to conduct the franchise business within a specific geographical area) (article 3). The Decree prohibits secondary franchisees from further sub-franchising (article 3). A critical assessment of the definition of franchising is provided in Chapter 7.6.2.
7.4.3 Qualifications of Franchisor and Franchisee
Under Decree 35, a franchisor must satisfy the following conditions:
the business system to be franchised has been operating for at least one year the business entity has registered the franchising activity with the competent authority the goods and services of the franchise are not on the list of goods and services in which business is prohibited
The only prerequisite for a franchisee is that it must have the business registration appropriate to the subject of the franchise (article 6 of Decree 35).
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one year operating requirement
Decree 35 requires franchisors, both foreign and Vietnamese, to have operated for at least one year before, respectively, franchising into Vietnam or franchising to another Vietnamese entity (article 5.1 of Decree 35). In the case of a Vietnamese master franchisee from a foreign franchisor sub-franchising in Vietnam the Vietnamese master franchisee must have operated the franchise business for at least one year before sub-franchising (article 5.1 of Decree 35). This requirement was influenced by China’s 2005 Franchise Measures which specifies that a prospective franchisor must have owned at least two directly operated company outlets for more than one year.813 registration requirement
Decree 35 requires potential franchisors to register their systems with the authority before franchising. Further discussion on this issue is provided in Chapter 7.4.7. goods or services permitted to be franchised
Any goods or services may be franchised provided that: (i) they are not under the list of goods and services prohibited from business, and (ii) if they are restricted from business or they are a conditional business activity, franchising can only be carried out if the franchisee is granted a certificate to do business in respect of such goods or services (article 7 of Decree 35). Foreign franchisors face an additional restriction. A foreign invested enterprise specialising in the purchase and sale of goods or in activities related thereof may only conduct franchising in those lines of goods for
813 Article 7.4, China’s 2005 Franchise Measures. A similar provision is retained in the 2007 Commercial Franchise Regulation which replaced the 2005 Franchise Measures. See generally, Terry and Wang, above n 35.
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which distribution is permitted pursuant to international undertakings of Vietnam
(article 2.2 of Decree 35).814
7.4.4 Disclosure
The franchisor must provide a copy of the franchise contract and the Franchise Description Document at least 15 business days prior to the date of entry into the franchise contract “if the parties do not have some other agreement” (Decree 35 article 8.1).815 Decree 35 provides for the Ministry of Trade816 to provide regulations on the compulsory content of the Franchise Description Document and these have been issued in Appendix III Franchise Description Document of the Circular
Providing Guidelines in Procedures for Registration of Franchising Activities. The Franchise Description Document must include a “warning” to the prospective franchisee to exercise due diligence, (and advises the franchisee to seek independent advice, talk to franchisees, in the system and attend educational courses). It requires a range of specific information to be given under the following general headings:
general information about the franchisor and the franchise
trademarks/intellectual property rights initial costs of the franchisee other financial obligations initial investment by the franchisee
obligations of the franchisee to buy or lease equipment for compatibility with the business system as designated by the franchisor obligations of the franchisor
814 Vietnam’s “international undertakings” have now been codified in domestic law by the Minister of Trade’s Decision 10/2007/QĐ-BTM dated 21 May 2007. 815 The Franchise Description Document itself provides that “unless the parties agree otherwise a prospective franchisee has at least 15 days” to study the Document. 816 Now the Ministry of Industry and Trade.
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description of the market of the goods/services to be franchised
the franchising contract information about the franchise system financial statements of franchisor
rewards, acknowledgements to be received and organisations to participate
In addition to pre-franchise disclosure Decree 35 also requires the franchisor to
“immediately notify all franchisees of any important change to the franchise system which affects the franchise business of a franchisee” (article 8.2 of Decree 35).
In the case of sub-franchising the “secondary franchisor” (the sub-franchisor) must provide to the “secondary” franchisee not only the Franchise Description Document but also details of the master franchisor, contents of the master franchising agreement; and the method of settlement of the sub-franchising agreement if the master franchising agreement is terminated (article 8.3 of Decree 35).
Decree 35 also requires franchisee disclosure: the proposed franchisee must provide the franchisor with all information reasonably requested by the franchisor in order to make a decision on granting a franchise (article 9 of Decree 35).
7.4.5 The Franchise Agreement
The Commercial Law simply provides in relation to a franchise agreement that it “must be made in writing or in another form with equivalent legal validity” (article 285). Decree 35 follows the principle of the Civil Code (which took effect from 1 January 2006) on the rights of parties to freely agree on contractual provisions in order to establish rights and obligations provided that such commitments and agreements are not prohibited by law or are contrary to social order. The Decree
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simply provides (in article 11) that the franchise contract may contain the following main items if the parties choose to apply Vietnamese law:
contents of franchising rights and obligations of the franchisor
rights and obligations of the franchisee price and periodic franchising fee, and payment method term of the contract
extension and termination of the contract, and dispute resolution
The terms of the contract are as agreed by the parties (article 13) and the contract takes effect from the date of its signing except where the parties agree otherwise (article 14 of Decree 35).
If the franchisor also licenses intellectual property, the licensing of the intellectual property may be made in a separate agreement or be contained in the franchising agreement. The licensing of intellectual property in the franchising agreement must comply with Vietnamese laws on intellectual property (article 10 of Decree 35).
7.4.6 Relationship/Conduct Issues
The Commercial Law contains five articles dealing, generally, with the rights and obligations of franchisors (articles 286, 287) and franchisees (articles 288, 289, 290). The franchisor has the right to receive royalties, organise network advertising and conduct inspections to ensure uniformity and quality control, and the obligation to provide a prior disclosure document, initial training, ongoing technical assistance and the intellectual property rights stipulated; to design at the franchisee’s cost the franchise outlet; and to treat franchisees equally. The franchisee has the right to
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require the franchisor to provide technical assistance, treat all franchisees equally and sub-franchise to a third party (referred to as the sub-franchisee) with the consent of the franchisor, and the obligation to pay amounts due under the contract; to invest in physical facilities, finance and human resources; to submit to the franchisor’s control, supervision and guidelines; to retain the confidentiality of business know- how during and after the term; to cease to use any trademark, trade name, business slogan, business logo and other intellectual property rights (if any) or the system of the franchisor on expiry or termination; to operate the business in accordance with the system; and to not to sub-franchise without the franchisor’s consent. transfer
Decree 35 gives a franchisee the right to assign the franchise (article 15) to a proposed assignee who has the appropriate business registration with the approval of the franchisor which may be refused only on one of the following grounds:
the proposed assignee is unable to satisfy the financial obligations which it
would have to discharge under the franchise contract; the proposed assignee has not satisfied the selection criteria of the franchisor; the assignment will have a significantly adverse effect on the existing franchise
system; the proposed assignee does not agree in writing to comply with the obligations of the franchisee under the franchise contract; the assignee has not fulfilled its obligations under the franchising agreement
(unless the assignee provides a written obligation to discharge such obligations).
The franchisee wishing to assign the franchise must provide the franchisor with a written request to assign and, within 15 days, the franchisor by written response must approve or not approve on one of the grounds noted above. If a written response is not received by the franchisee within 15 days the proposed assignment is
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deemed to be approved. On assignment all rights and obligations relating to the franchise of the assignor shall transfer to the assignee, unless there is some other agreement. termination
The franchisee has the right to unilaterally terminate the franchise agreement (article 16, Decree 35) if the franchisor breaches the obligations of article 287 of the Commercial Law:
to provide the franchisee with the disclosure document on the franchise system. to provide the franchisee with initial training and ongoing technical assistance to enable operation of the franchise
to design and layout the goods or services sales outlet at the cost of the franchisee to ensure the validity of the intellectual property rights in licensed under the
franchise contract to accord equal treatment to franchisees in the franchise system
The franchisor has the right to unilaterally terminate the franchise contract (article
16, Decree 35) in the following cases:
the franchisee ceases to have a business certificate or equivalent documents required by law for the franchisee to carry out the franchising business; the franchisee becomes bankrupt or is dissolved in accordance with Vietnamese
law; the franchisee commits a “serious breach of law” which may significantly damage the reputation at the franchise system;
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the franchisee fails to remedy a non-fundamental breach of the franchise contract
within a reasonable time after the franchisee has received written notice from the franchisor to remedy such breach.817
7.4.7 Registration and Reporting registration
The Commercial Law requires that prior to commencing franchising “a prospective franchisor must register with the Ministry of Trade”818 and provides that the Government shall provide detailed regulations “on the conditions for operating in the franchise form and on the order and procedures for registration of franchises” (article 291). Registration is also addressed in Decree 35 which requires franchising activities (in effect the franchise system) - not the prospective franchisor - to be registered (article 17, Decree 35). Detailed provision to registration is provided in
Circular 09 which makes it clear that franchisors do not have to register each franchise agreement.
Under Decree 35, the Ministry of Trade (now the Ministry of Industry and Trade) is responsible for registering franchising activities from abroad to Vietnam and from
Vietnam to abroad.819 In other cases the Department of Trade of the province where the franchisor has its business registration will register domestic franchising activities (article 18). However, Decree 120 (which became effective on 1 February 2012) has removed registration obligations of franchisors who franchise
817 Article 426.1 of the 2005 Civil Code states that “A party shall have the right to unilaterally terminate the performance of a contract if so agreed upon by the parties or provided for by law”. Under article 426 the franchisor which unilaterally terminates franchising agreement must immediately notify the other party of the termination and will be liable to compensate the franchisee if the failure to notify causes damage. 818 Now the Ministry of Industry and Trade. 819 Including franchising activities from export processing zones, non-tariff zones and other separate customs areas to Vietnam and vice versa.
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domestically or from Vietnam to overseas (article 3.2 of Decree 120). This means that only foreign franchisors820 who franchise into Vietnam now have to register their system with Vietnam’s Ministry of Industry and Trade. However, with the removal of the registration obligations of franchisors who franchise domestically, there is concern as to whether the secondary franchisors (sub-franchisors) of foreign franchisors in Vietnam still have to register their franchising activities with the Ministry as stipulated in Section II.1 of Circular 09. The implications of a decree in effect overriding a law are discussed in Chapter 7.5.
An application for registration must be made on the prescribed form and be accompanied by the Franchise Description Document, documents in respect of legal status of the franchisor and certificates of the intellectual property registered in
Vietnam or abroad if the franchisor wishes to license, as inevitably it will, such intellectual property. If any of the application documents are made in a foreign language, they must be translated into Vietnamese and consularised in accordance with the law of Vietnam.821 If the applicant is a secondary franchisor, it must present a document issued by the primary franchisor permitting it to sub-franchise the business (Decree 35 article 19 and Circular 09).
If the application is not complete, the registration authority must, within two working days of receipt, issue a written notice to request the franchisor to amend or supplement the application. Within five working days from the date of receipt of a full and valid application, the authority shall register the franchising activities and notify the franchisor of such registration. If the application is rejected, reasons must be provided (article 20). Change to registered information must be notified (article
820 Including franchisors who franchise from export processing zones, non-tariff zones and other separate customs areas to Vietnam. 821 Decree 120 article 3.2 which revises Decree 35 article 19.4.
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21). Neither Decree 35 nor the Circular provide for appeals or complaint settlement if registration is refused. Registration of franchising activities of the franchisor may be revoked if the franchisor ceases its business or changes it business activities, or if the business registration certificate or the investment licence of the franchisor is withdrawn (article 22).
A problem with the implementation of the registration system discussed in Chapter
7.6.7 was the delay in the provision of a fee regime. Although the Circular provided for “payment of fee” (article 23) no fee was actually prescribed until 17 November
2008 by Decision 106/2008/QD-BTC of the Minister of Finance dated 17 November
2008 on the Levels and Regime for the Collection and Payment, Management and
Use of Charges for Commercial Franchising Registration.822 reporting
Decree 35 also imposes on franchisors a requirement to lodge an annual report with the registration authority. Franchisors must notify the registration authority of changes in “general information” relating to the franchisor and its trademark and intellectual property rights within 30 days from the date of such changes (the
Circular). Franchising must also annually report “information relating to the franchisor”, initial costs of the franchisee, other financial obligations, initial investment by the franchisee, obligations of the franchisee to buy or lease equipment for compatibility with the business system as designated by the franchisor, obligations of the franchisor, description of the market of the goods/services to be
822 1. For foreign traders granting commercial franchises into Vietnam: VND 16,500,000 for a new notice; VND 6,000,000 for a modified or supplemented notice; VND 500,000 for a re-granted notice. 2. For Vietnamese traders granting commercial franchises overseas: VND 4,000,000 for a new notice; VND 500,000 for a modified, supplemented or re-granted notice. 3. For traders granting commercial franchises at home: VND 4,000,000 for a new notice; VND 500,000 for a modified, supplemented or re-granted notice.
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franchised, the franchising contract, information about the franchise system, financial statements of franchisor, and rewards, acknowledgements to be received and organisations to be participated to the registration authority at the latest by 15
January (the Circular). Although Decree 120 has already removed registration obligation of franchisors who franchise domestically or from Vietnam to abroad, it still requires those franchisors to comply with the reporting regime as prescribed under Decree 35. However, the franchisor who franchises from Vietnam to overseas now has to report to the Department of Trade of the province where the franchisor has its business registration rather than to the Ministry of Industry and Trade as under
Decree 35. Under Decree 35, the Department of Industry and Trade has to periodically report to the Ministry of Industry and Trade on franchising within the
Department’s geographic area.
7.4.8 Foreign Franchisors
The Franchise Law applies equally to foreign and domestic franchisors.823 There are no restrictions on master/area development franchising and from 1 January 2009 all restrictions on a foreign invested enterprises (FIE) engaged in franchising were removed pursuant to WTO accession commitments.824 Until 1 January 2008 FIEs participating in franchising were required to be in the form of a joint venture with
823 A foreign invested enterprise specialising in the purchase and sale of goods and activities directly related may nevertheless only conduct franchising in lines of goods in which the enterprise is permitted to provide distribution services (article 2.2, Decree 35). 824 Under Vietnam’s WTO accession commitments in relation to services, all restrictions on foreign investment were due to end on 1 January 2009. However, Decision 10/2007/QD-BTM of the then Minister of Trade (now the Minister of Industry and Trade) and Circular 09/2007/TT-BTM of the then Ministry of Trade, dated 21 May 2007 and 17 July 2007, respectively, implementing the Government Decree 23 Regulating the Sale and Purchase of FIEs in Vietnam, issued on 12 February 2007, are inconsistent with this and services relating to some goods such as cement, tyres, paper, iron and steel, audiovisual devices, wines and spirits, and fertilisers will not have restrictions lifted until 1 January 2010 (see Appendix 4 Decision 10 and Section I.4.1.b Circular 09).
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maximum 49 percent foreign ownership. The foreign capital restriction was lifted on
1 January 2008 but the joint venture requirement remained until 1 January 2009 when FIE franchisors established in Vietnam could be 100 percent foreign owned.
Choice of Laws
Although Vietnam’s Franchise Law does not directly prescribe the choice of law for franchise agreements the words “if the parties select application of the law of Vietnam” prefaces the provision of Decree 35 addressing contents of franchise agreements (article 11). These words imply the ability of the parties to choose as the applicable law the law of a jurisdiction other than Vietnam for franchise agreements between foreign and domestic entities. Although foreign franchisors have to follow
Vietnam’s Franchise Law, they can choose the applicable law which will govern other aspects of their franchise agreements. Franchising is a civil relationship, and the choice of law in the case of franchise agreements in Vietnam follows the rule of the 2005 Civil Code which is considered to be the “mother law”.825 This means that if the franchise agreement is signed and performed entirely in Vietnam, it is governed by Vietnam laws. In other situations, franchisors and franchisees can agree on any applicable laws.826
7.4.9 Administration
One of the main features of franchising in Vietnam is the high degree of governmental control. Article 4 of Decree 35 describes the duties of the different governmental authorities in respect of “the state’s administration of franchising activities”. This provision declares the Ministry of Industry and Trade as responsible
825 For further discussion see Chapter 5. 826 Article 769, the 2005 Vietnamese Civil Code.
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for the exercise of the state’s administration of franchising on a national level and provides it with a wide range of powers which are further discussed in Chapter 7.7.
In addition, other governmental departments are also involved in the control and regulations of franchising. The Ministry of Finance is responsible for prescribing the franchise registration fee and guidelines on tax regimes applicable to franchising activities.827 Ministries, ministerial equivalent bodies and Government bodies are, within the scope of their respective duties and powers, responsible for exercising state’s administration of franchising activities. People's Committees of provinces and cities under central authority perform the following tasks: undertaking the state’s administration of franchising activities within their localities; directing Departments of Industry and Trade to, within the scope of their authority, organise registration, inspections and control of franchising activities within their localities, and to forward periodical reports on such franchising activities to the Ministry of Industry and Trade.
7.4.10 Sanctions
A business entity engaged in franchising activities is liable to a range of administrative penalties (Decree 35 article 24.1) for specified breaches of the Franchise Law:
conducting a franchise without having satisfied all the conditions stipulated;
827 Under article 17 of the Law on Individual Income Tax 2007 and Part B.II.5 of Circular 84/2008/TT-BTC of the Ministry of Finance, dated 30 September 2008, Making Detailed Provisions for Implementation of the Law on Individual Income Tax and Decree 100/2008/NĐ- CP, dated 8 September 2008, on Individual Income Tax, a taxable income from commercial franchising is an income in excess of VND 10 million earned by a taxpayer under a franchising contract, and the tax rate shall be in accordance with the flat rate tariff at the rate of five per cent levied on the part of the income which exceeds VND 10 million pursuant to the franchising contract.
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conducting a franchise involving goods and services in which business is
prohibited;
breaching the obligation to supply information during franchising activities as
stipulated in the Decree;
providing untruthful information in the franchise description document;
breaching the provisions on registration of franchising activities;
breaching the provisions on notices in franchising activities;
failing to pay taxes in accordance with law where such failure does not warrant
criminal prosecution;
failing to comply with requests from competent State bodies during an
examination and inspection;
breaching other provisions of the Decree.
Unfortunately the list of specified breaches in Decree 35 article 24.1 which attract penalties is not exactly matched by the list of penalties in Decree 06/2008/NĐ-CP dated 16 January 2008 of the Government Regulating Administrative Penalties in
Commercial Activities.828
The business also must compensate the other party for loss and damage arising from contravention in accordance with the law (Decree 35 article 24.2).829
828 See article 50 of Decree 06. 829 The liability to compensate for damage is provided for in article 307 of the 2005 Civil Code which states that “the liability to compensate for material damage is the liability to make up for the actual material losses caused by the breaching party, which can be calculated in money and include the loss of property, reasonable expenses incurred in preventing, mitigating and/or redressing the damage and the actual loss or reduction of income”.
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7.5 THE RELATIONSHIP BETWEEN THE FRANCHISE LAW AND THE UNDERLYING COMMERICAL REGULATIONS
The relationship between the elements of Vietnam’s Franchise Law
Under the hierarchy of the status of Vietnamese legislation, Decree 35 and Decree 120 have a lower rank than the 2005 Commercial Law,830 but a higher rank than Circular 09831 and Decision 106.832 This means that Decree 35, Decree 120, Circular 09 and Decision 106 must be consistent with the section of franchising under the 2005 Commercial Law.833 Similarly, Circular 09 and Decision 106 cannot be contrary to Decree 35 and Decree 120.834 In a case where legal documents make different provisions on the same issue, the legal document of higher legal effect shall prevail.835
There are concerns as to some specific provisions in Decree 35, Decree 120, and Circular 09 which are not compatible with the Commercial Law. Firstly, the Commercial Law makes the franchisor’s obligation to provide a disclosure document subject to the proviso “unless otherwise agreed” (article 287), under the Decree 35 and Circular 09 this obligation is nevertheless mandatory.836 A similar
830 Article 14 the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009. 831 Article 16 of the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009; article 3.3 of Circular 20/2010/TT-BTP of the Ministry of Justice, dated 30 November 2010, Making Several Detailed Provisions for Implementation of Decree 40/2010/NĐ-CP of the Government, dated 12 April 2010, on Inspecting and Dealing with Legal Documents. 832 Articles 16 and 58 of the 1996 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 6 August 1996 and effective on 1 January 1997. 833 Article 83.2 of the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009. 834 Article 83.2 of the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009; article 3.3 of Circular 20/2010/TT-BTP of the Ministry of Justice, dated 30 November 2010, Making Several Detailed Provisions for Implementation of Decree 40/2010/NĐ-CP of the Government, dated 12 April 2010, on Inspecting and Dealing with Legal Documents; Section 2.3.A of Circular 01/2004/TT-BTP of the Ministry of Justice, dated 16 June 2004, Making Several Detailed Provisions for Implementation of Decree 135/2003/NĐ-CP dated 14 November 2003 of the Government on Inspecting and Dealing with Legal Documents. 835 Article 83.2 of the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009. 836 See Chapter 7.4.4 and Chapter 7.6.4.
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issue also exists when regulating the rights and obligations of franchisors and franchisees.837 Secondly, although the Commercial Law requires “a prospective franchisor must register with the Ministry of Trade [now the Ministry of Industry and Trade]” before commencing franchising, Decree 120 has recently removed registration obligations of domestic franchisors.838 However, treating implementing regulations as, in practice, having a higher validity than the source document is not uncommon.839 This paradox also exists in case of the Franchising Decrees and Circular. The courts have not yet had the opportunity to resolve this conflict.
The relationship of Vietnam’s Franchise Law with the 2005 Commercial Law, other specific laws and the Civil Code
Under the 2005 Commercial Law, franchising must comply with the Commercial Law and other relevant laws.840 This means that the issues relating to franchising which are not stipulated in the Franchise Law, for example remedies in commerce,841 are subject to other provisions of the 2005 Commercial Law. Issues in franchise relationships that are dealt with by specific laws - such as the Intellectual Property Law, the Competition Law, the Law on Enterprises, the Law on Investment and the Law on Technology Transfer - are regulated by those specific laws. For example, the transfer of the intellectual property rights in franchise agreements is governed by the Intellectual Property Law.842
837 See Chapter 7.4.6 and Chapter 7.6.6. 838 See Chapter 7.4.7. 839 See Chapter 7.6.4. 840 Article 4.1 of the 2005 Commercial Law. 841 Section 1, Chapter VII, the 2005 Commercial Law. 842 Article 10 of Decree 35/2006/NĐ-CP of the Government, dated 31 March 2006, Making Detailed Provisions for Implementation of the Commercial Law with Respect to Franchising Activities.
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The 2005 Civil Code plays an important role in regulating civil relationships - including commercial relationships such as franchising - as it is the “mother” law. The Code states that:
The Civil Code provides the legal status, legal standards for the conduct of individuals, legal persons, other subjects; the rights and obligations of subjects regarding personal identities and property in civil, marriage and family, business, trade, labour relations (hereinafter referred collectively to as civil relations).843
Therefore, issues in franchise relationships that are not dealt with either by Vietnam’s Franchise Law, the 2005 Commercial Law or other specific laws (for example the choice of the applicable law for international franchise agreements)844 are regulated by the 2005 Civil Code.
If it is the case that the franchise provisions of the Commercial Law conflict with other specific commercial laws or the Civil Code, the law that has been passed later shall prevail.845 For example, in terms of the conflict between the 2005 Intellectual Property Law and the 2005 Commercial Law in relation to the provisions on trade name,846 the provision of the Intellectual Property Law prevails because this law was passed later than the Commercial Law.847
7.6 CRITICAL ASSESSMENT AND INTERNATIONAL COMPARISONS
Currently over 30 countries have enacted dedicated and franchise-specific laws utilising one or more of the four primary regulatory strategies - registration, prior
843 Article 1 of the 2005 Civil Code. 844 For further discussion see Chapter 5.3.2.1. 845 Article 83.3 of the 2008 Law on Promulgation of Legal Documents which was passed by Vietnam’s National Assembly on 3 June 2008 and effective on 1 January 2009. 846 Although the 2005 Intellectual Property Law a trade name cannot be licensed (article 142.1) the 2005 Commercial Law stipulates that franchisees can conduct a business associated with the trade name of the franchisor (article 284) (See Chapter 5.6). 847 The 2005 Intellectual Property Law was passed on 29 November 2005 whereas the 2005 Commercial Law was passed on 14 June 2005.
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disclosure, regulating conduct in the relationship, and dispute resolution. There is nevertheless great diversity in the nature, extent and comprehensiveness of the regulatory regimes. Vietnam’s Franchise Law - constituted by a number of legal documents848 - has been described as a comprehensive rather than a “minimalist” regulatory regime849 but the recent removal of registration for domestic franchisors leaves it primarily a prior disclosure law with some relationship obligations.
7.6.1 Jurisdiction
Vietnam’s Franchise Law applies to all franchising activities “in the territory of the Socialist Republic of Vietnam” (Decree 35, article 1), and both “Vietnamese business and foreign business entities participating in franchising activities” are subject to the Franchise Law (Decree 35, article 2). However the concepts of “in the territory” of Vietnam and “participating in franchising activities” are not clear and lead to some uncertainty in the application of the Franchise Law. All franchising activities “in the territory of” Vietnam can be interpreted as applying to franchising where franchised outlets are located in Vietnam. The problem arises in cases when a Vietnamese franchisor franchises abroad or a foreign franchisor franchises into
Vietnam without a physical presence in Vietnam through direct franchising, master franchising or area development franchising. A literal interpretation of the words suggests that these forms of franchising are not regulated by the Franchise Law. In practice, Vietnamese and foreign franchisors still had to register with the authority when they franchise abroad or into Vietnam (article 18.1.b of Decree 35) but whether both parties in these situations had to comply with other articles of the law was problematic. While the registration obligation of Vietnamese franchisors
848 Section 8 Chapter VI of the 2005 Commercial Law, Decree 35 (which has recently been revised by Decree 120), Circular 09, and Decision 106. 849 Zhang, above n 20.
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franchising abroad has been recently removed by the Decree 120 (December 2011), this obligation remains for foreign franchisors.
The ambiguity in relation to jurisdictional reach also exists in the franchise laws of other countries. In China for example the 2007 Commercial Franchise Regulation applies to “commercial franchising activities conducted within the territory of the People’s Republic of China” (article 2). As with Vietnam, the concept of “conducted within the territory” is not defined clearly and leads to uncertainty in particular situations.850 In some countries, the application of the franchise law has been clearly stipulated. Australia’s 1998 Franchising Code of Conduct for instance originally provided that it did not apply to a franchise agreement if the franchisor was: (i) resident, domiciled or incorporated, outside Australia and (ii) grants only one franchise or master franchise to be operated in Australia. However, in order to resolve uncertainty and to protect Australian master franchisees who are in a vulnerable position when signing sub-franchising contracts with foreign franchisors, an amendment to the Code, effective March 2008, removed that exemption.851
7.6.2 Definition
Harold Brown has stated that “the lack of any common jurisprudential approach to franchising” is explained by the fact that there is no “generally accepted definition of franchising in court decisions, regulation or legislation”.852 Although franchising is an increasingly familiar marketing concept, there is no consensus on the appropriate legal definition:853 “legal definitions do not seek to explain, they seek to establish a method of identifying a particular business practice with which it is proposed to deal
850 Wang, above n 20. 851 ibid, p. 245. 852 Harold Brown, Franchising - Realities and Remedies (1972) cited in Terry, above n 259. 853 Terry, above n 259.
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in the legislation in which the definition appears”.854 In general, the elements of
“trademark” or “brand”, “system” and “fee”, which are attributed to this concept, are mentioned in most regulatory schemes, while elements of “control”, “dependence” and “assistance” are introduced in some jurisdictions.855 Business format franchises are invariably covered by all definitions while product and trade name franchises may or may not be. Master franchising is included in the definition of franchise in most countries.856
The definition of franchising in Vietnam is built on descriptive terms and is basically consistent with international practice which incorporates elements of brand, system or control, and payment. Unlike the franchise law of most other countries, Vietnam’s
Franchise Law does not include the obligation of the franchisee to pay fees to the franchisor. This element was deliberately omitted because payment from the franchisee to the franchisor, either directly or indirectly, is inevitable in franchising and including a payment element simply provides an invitation for the franchisor to contract around it thus removing the relationship from the scope of the Franchise
Law.857 In Alpha Centauri Enterprises Pty Ltd v Mortgage House of Australia Pty
Ltd [2010] NSWCA 188 for example the issue for the NSW Court in Appeal was whether a mortgage broking agreement which “did not in terms provide for the payment to the respondent of any fees, nor did it require the purchase (and therefore payment for) goods or services from the respondent” was a franchise agreement for the purpose of the application of Australia’s Franchising Code of Conduct which requires a payment as an integral element of the definition. The Court nevertheless found that the payment requirement was satisfied by:
854 Mendelsohn, above n 10, pp. 11-12. 855 Terry, above n 259. 856 ibid. 857 Andrew Terry, unpublished papers.
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- requiring the business partner to “use only stationery… supplied by [Mortgage
House] at the cost of [the business partner]”; - requiring the business partner to pay Mortgage House one-third of the sale price of the business when it was sold;
- requiring the business partner to collect and bank the AU$ 600 application fee paid in respect of a loan application and to account to Mortgage House for AU$ 375 for each loan that was settled.
While the element of “brand” is universal the formula of “system or marketing plan” as a key ingredient of the franchise definition is in some cases (for example the US
FTC Rule)858 replaced by the element of the franchisor exerting significant control over the operation of the franchisee. In Australia for example, the definition requires that “a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in
Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor”.859 This nevertheless leads to problems in practice as there is the uncertainty in ascertaining the meaning of the term “system or marketing plan”.860 For this reason Vietnam adopts the US
FTC formula of franchisor control of the franchisee’s business,861 which is generally considered as the most important feature distinguishing franchising from like
858 Section 436.2.(B)(1) of the US Federal Trade Commission’s Franchise Rule in 1979 as well as Section 436.1(h) of the US Federal Trade Commission’s amended Franchise Rule in 2008. 859 Regulation 4(1)(b), Australia’s Franchising Code of Conduct. 860 Warren Pengilley, 'Definitional Problems in Relation to Franchising Agreements' (Paper presented at the the 2008 Franchise Law Colloquium, Bond University, Brisbane, Australia, 20- 22 November 2008); Capital Networks Pty Ltd v .au Domain Administration Limited [2004] FCA 808 (Bennett J: 24 June 2004); ACCC v Kyloe Pty Ltd [2007] FCA (Tracey J: 18 October 2007). 861 Advice from Professor Andrew Terry who assisted MOIT in drafting Vietnam’s Franchise Law.
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commercial activities.862 The question remains as to whether the franchisor’s control must be overall or only over a part of the franchisee’s business.
In relation to the “brand” element of the definition, there is ambiguity as to whether the business of the franchisee must be associated with all the features listed in article
284 - trademark, trade name, business know-how, business mission statements, business logo and advertising of the franchisor - or only with one or some of such features. A literal interpretation would suggest a requirement of all the features. But this is not a realistic interpretation and would be very unlikely to be adopted. It would prevent a relationship being franchising if it lacks any of unimportant factors for the identity of a franchise system as a business mission statement. While some franchise systems will exhibit all of these features not all will and should not be taken out of the definition on this basis. Another issue is that while most contemporary franchising is in relation to services rather than goods, article 284 refers only to trademarks and not to service marks. Under Vietnam’s Intellectual
Property Law a service mark for services is separate and distinct from a trademark for goods.863
As in Australia864 and China,865 and indeed most jurisdictions, the definition of franchising in Vietnam is broad and has the potential to create confusion in the case of trademark licences and distribution agreements. In some countries such as
Australia the scope for uncertainty is limited by the definition expressly including
862 Warren Pengilley, 'Submission to Parliamentary Committee of Inquiry into Franchising Code of Conduct' (2008). 863 Under the 2005 Intellectual Property Law, the term “marks” is used to include both “trademarks” and “service marks”. 864 Pengilley, above n 862; The Australian Parliamentary Joint Committee on Corporations and Financial Services, above n 222, p. 30. 865 Wang, above n 20.
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certain relationships and expressly excluding other relationships.866 Problems nevertheless remain. In trademark licences and distribution agreements, the licensor and the manufacturer may offer a system of offering goods or services. There will probably be a right granted to the licensee and the distributor to use the trademark and the other features as required in the definition of franchising of the licensor and the manufacturer. Moreover, these agreements usually have provisions of quality control. Thus, trademark licences and distribution agreements may have all the features currently required by the definition of franchising and therefore be subject to the Franchise Law. This is not a problem unique to Vietnam. Despite Australia’s more comprehensive definition of franchising, problems remain as to whether licensing and distribution agreements form a “franchise agreement” under the
Code.867
In any franchise-specific law the definition of franchising is a basic issue. It is the deciding factor in determining the coverage of the franchise-specific law.868 The New Zealand Government expressly stated that the problem of definition of franchising was a factor in its 2009 decision not to introduce franchise regulation.869 In order to minimise the problems arising from the definition of franchising, it has been suggested that the definition of franchising should express “the importance of
866 For example, Australia’s Franchising Code of Conduct (article 4(3)) excludes following relationships: an employer and employee relationship; a partnership relationship; a landlord and tenant relationship; a mortgagor and mortgagee relationship; a lender and borrower relationship; the relationship between the members of a cooperative that is registered, incorporated or formed under any of the following laws: (i) Co-operatives Act 1992 of New South Wales; (ii) Co-operatives Act 1996 of Victoria; (iii) Cooperatives Act 1997 of Queensland; (iv) Co-operative and Provident Societies Act 1903 of Western Australia; (v) Co-operatives Act 1997 of South Australia; (vi) Co-operative Industrial Societies Act 1928 of Tasmania; (vii) Co-operative Societies Act 1939 of the Australian Capital Territory; (viii) Co-operatives Act 1997 of the Northern Territory; (ix) the Corporations Act 2001. 867 See ACCC v Kyloe Pty Ltd [2007] FCA 522; Capital Networks Pty Ltd v .au Domain Administration Ltd [2004] FCA 808. 868 Pengilley, above n 862. 869 Office of the Minister of Commerce, 'Outcomes of The Review of Franchising Regulation' (2009).
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franchisor control of the franchisee by use of a trademark giving rise to a public perception that the franchisee is publicly linked to the franchisor”.870 In the context of Vietnam’s Franchise Law this would be that the franchisor’s control must be of the franchisee’s overall business by use of a trademark or a service mark.
7.6.3 Qualifications of Franchisor and Franchisee
Vietnam is one of three countries which impose pre-conditions to franchising apart from registration. Under Vietnam’s Franchise Law, the business system to be franchised must have been operating for at least one year (article 6 of Decree 35) - a provision influenced by China’s Franchise Law.871 In China the franchisor must have a mature business model, the ability to provide long term business guidance, technical support, business training and in particular at least two directly operated outlets for more than one year (Regulations on the Administration of Commercial Franchises (2007), article 7). In Italy the franchisor must have a commercial formula tested on the market (Law on ‘Commercial Affiliation’ (Franchising) (2004), article 3.2). Vietnam’s requirement is less harsh than that of China and more explicit than that of Italy. In general, the pre-condition for franchisors under Vietnam’s Franchise Law is designed in order to “provide some confidence to the first mover franchisees that the franchisor has more than simply a concept to sell”.872 China’s original regulatory regime was criticised as frustrating international franchisors with successful operations in the home country because of the requirement of two directly operated outlets in China which made it difficult for franchisors using master franchising to expand internationally to satisfy. The current 2007 Commercial Franchise Regulation removes the requirement of the two outlets
870 Pengilley, above n 862. 871 Article 7.4, China’s 2005 Franchise Measures. A similar provision is retained in the 2007 Commercial Franchise Regulation which replaced the 2005 Measures. Advice from Professor Andrew Terry who assisted MOIT in drafting Vietnam’s Franchise Law. 872 Terry, above n 259.
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having to be in China. Vietnam’s Franchise Law is nevertheless reasonable because it only requires franchise systems to be proven over one year to help franchisees evaluate the actual ability of the franchise system and avoid business risks. However, such provision “can be criticised for conferring an appearance of viability which may not be consummated”.873 Concern has been expressed that this term may be too long for some simple businesses and may deprive the franchisor of business opportunities.874 Such requirement is nevertheless “interesting initiatives to address a problem faced by all franchising sectors - that of protecting a franchisee without interfering unduly with the franchisor/franchisee relationship or the underlying tenet of free enterprise”.875
A further condition for franchisors under Vietnam’s Franchise Law is that the goods and services of the franchise are not on the list of goods and services which is prohibited (article 5 of Decree 35). To clarify which goods and services can be franchised the Franchise Law provides that they must not be on the list of goods and services prohibited from business and, if they are restricted from business or they are a conditional business activity, franchising can only be carried out if the franchisee is granted a certificate to do business in respect of such goods or services, or after the franchisee satisfies the conditions for such business (article 7 of Decree 35). These provisions are reasonable although ambiguity exists in the ways of clarifying the goods and services permitted to be franchised by foreign invested enterprises. Foreign franchisors have faced an additional restriction. In addition to the requirement in the article 7 of Decree 35, a foreign invested enterprise specialising in the purchase and sale of goods or in activities related thereof may only conduct franchising in those lines of goods for which distribution is permitted pursuant to international undertakings of Vietnam (article 2.2 of Decree 35). According to WTO
873 ibid. 874 said by Ngo Duong Hoang Thao, Chairman of Vietnam Franchise Club cited by Phan Anh, 'Nhuong Quyen Thuong Mai Con Hep Cua Vi Thieu Luat [Franchising is still Constrained Because of the Lack of Rules]' (2007)
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accession commitments, some special goods cannot be franchised by foreign invested enterprises but these relate to categories in which franchising is unlikely.876 There are no restrictions on other goods.877
Unlike the requirement imposed on franchisors the only prerequisite for a franchisee is that it must have the business registration appropriate to the subject of the franchise (article 6 of Decree 35). This is reasonable and follows a generally accepted rule for all businesses under the Law on Enterprises that every business must have the business registration appropriate to their line of business.
7.6.4 Disclosure
Consistent with international practice878 franchisor prior disclosure is the central feature of the Vietnamese Franchise Law.879 Prior disclosure is “widely accepted
876 Including cigarettes and cigars, books, newspapers and magazines, video records on whatever medium, precious metals and stones, pharmaceutical products and drugs, explosives, processed oil and crude oil, rice, cane and beet sugar. See the Schedule of Specific Commitments in Services of the working party on the accession of Vietnam to WTO (WT/ACC/VNM/48/Add.2, 27 October 2006), in the section II.4 (Distribution Services); Section II.A of Decision No. 10/2007/QD-BTM of the then Minister of Trade (now the Minister of Industry and Trade), dated 21 May 2007, Announcing the Schedule for Implementation of Activities of Purchase and Sale of Goods and Activities Directly Related to Purchase and Sale of Goods. 877 However, in the legal documents providing the lines of goods permitted to be distributed pursuant to international undertakings of Vietnam FIE franchisors were restricted on the following goods: cement and cement clinkers; tyres (excluding tyres of airplanes); papers; tractors; motor vehicles; cars and motorcycles; iron and steel; audio-visual devices; wines and spirits; and fertilisers. Tractors, motor vehicles, and cars could be franchised from 1 January 2009 while other goods could be franchised from 1 January 2010. These restrictions were incompatible with Vietnam’s WTO commitments and were removed from 1 January 2010. See Decree 23/2007/NĐ-CP of the Government, dated 12 February 2007, Making Details Provisions for Implementation of the Commercial Law with Respect to the Sale and Purchase of Foreign Invested Enterprises in Vietnam; Decision No. 10/2007/QD-BTM of the then Minister of Trade (now the Minister of Industry and Trade), dated 21 May 2007, Announcing the Schedule for Implementation of Activities of Purchase and Sale of Goods and Activities Directly Related to Purchase and Sale of Goods; Circular 09/2007/TT-BTM of the then Ministry of Trade (now the Ministry of Industry and Trade), dated 17 July 2007, Making Detailed Provisions for Implementation of Decree 23/2007/NĐ-CP of the Government, dated 12 February 2007, Making Details Provisions for Implementation of the Commercial Law with Respect to the Sale and Purchase of Foreign Invested Enterprises in Vietnam. 878 Terry, above n 259.
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today”880 as an effective tool for remedying the information imbalance flowing “from the franchisor’s monopoly of much of the information that would be useful, even necessary to the prospective franchisee in making an informed decision to acquire the franchise”.881 Although a prior disclosure regime is adopted by almost all franchise regulations except for the eclectic laws of Kazakhstan, Lithuania and Russia, Vietnam is one of few countries which provides a template for disclosure in the form of a prescribed disclosure document.882 Vietnam’s disclosure provisions were influenced by international precedents including UNIDROIT’s Model Franchise Disclosure Law and are broadly consistent with the requirements of those countries which have a comprehensive disclosure regime including the US, Australia, China, and Malaysia.883
In general, almost all major issues relating to the prior disclosure under Vietnam’s Franchise Law are similar to those in other countries. The disclosure required by the Vietnam’s Franchise Law is less extensive and less comprehensive than under the franchise disclosure laws of the US884 and Australia885 (which is also based on the US model). It does not require certain information which franchisees would find
879 Franchisee disclosure is also mandated by the Decree providing that the proposed franchisee must provide the franchisor with all information reasonably requested by the franchisor in order to make a decision or grant of the franchise to such proposed franchisee (article 9). 880 Terry, above n 259. 881 ibid. 882 ibid. 883 See generally Terry, above n 29. 884 A franchise disclosure document was first provided in the US - in the Federal Trade Commission’s 1979 Franchise Rule. Since 30 December 1993, the Federal Trade Commission (FTC) permitted franchisors to use disclosure documents under one of two disclosure formats: (1) the FTC’s 1979 Franchise Rule; or (2) the Uniform Franchise Offering Circular (“UFOC”) Guidelines, adopted on 23 April 1993 by the North American Administrators Association, Inc. (“NASAA”). After NASAA adopted the UFOC Guidelines, fifteen states in the US (“registration states”) require franchisors to follow that format to comply with state franchise laws. Furthermore, in practice, most franchisors in states not requiring this format also used it for their disclosure documents. Therefore, in order to harmonise the Federal Rule with state franchise disclosure laws, in 2007 the Federal Trade Commission decided to amend the Franchise Rule. The Rule amendment closely tracks upon the UFOC Guidelines, which contains 23 specific items of information about the offered franchise, its officers, and other franchisees. 885 Australia began introducing disclosure documents in its first franchise law in 1998 (in the Annexure 1 - disclosure document and Annexure 2 - short form disclosure document). Up to now, there are four amendments (1999, 2001, 2007, and 2010) of this law which amend some issues in the disclosure document. The full disclosure document of Australia also contains 23 specific items of information as the US.
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useful including territory and financing which are prescribed under the franchise law of both the US and Australia. There is of course much controversy as to whether or not particular matters need to be disclosed, and the degree of detail.886 This may turn “not so much on the relevance of the information to a franchisee but whether the costs of providing the information can be justified”.887
Apart from not requiring disclosure of some important issues, Vietnam’s prior disclosure law is expressed very generally. For example, there is only a general requirement of disclosure of the “business experience” of the franchisor without a detailed explanation of this issue as prescribed in the franchise laws of US and
Australia. Moreover, lack of the transparency in the legal system and the financial regime, and the limitation of information sources in Vietnam, also lead to difficulties in determining the truth of the mandated franchisor disclosure.
Although consistent with international best practice in requiring a disclosure document, the governing Commercial Law unfortunately makes the franchisor’s obligation to provide a disclosure document subject to the proviso “unless otherwise agreed” (article 287) thus subjecting to question the comprehensive disclosure regime of Decree 35 and the prescriptive and detailed Franchise Description
Document issued with the Registration Guideline Circular.888 In Vietnam, it is nevertheless not uncommon for implementing regulations to be treated in practice as having a higher validity than the source document.889 This is clearly the attitude of the Ministry of Industry and Trade in relation to the Franchising Decree. Similarly,
886 Terry, above n 259. 887 Office of Small Business, Canberra, Australia, above n 259, para. 18. 888 Provision of the Franchise Description Document is nevertheless a prerequisite to registration of franchising activities. Under the Commercial Law registration is mandatory, but the Commercial Law and the Decree provide for registration of franchising activities prior to commencing franchising activity and not in respect of each franchise granted. However, the registration obligation of domestic franchisors has recently been removed by Decree 120. 889 See generally Manh, above n 493, last accessed 30 April 2010; said by Tran Dinh Long, Vice- Chairman of the Legal Committee of Vietnam’s Parliament cited by Thuy, above n 493, last accessed 30 April 2010; Nguyen Van Hau, Head of the Propaganda Department of Ho Chi Minh Jurist Association cited by Quy, above n 493, last accessed 30 April 2010.
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the requirement of the term for providing franchise disclosure is at least 15 business days prior to the date of entry into the franchise agreement also seem meaningless because of being prefaced by the proviso “unless otherwise agreed” (article 8.1 of Decree 35, the Appendix III of the Circular).
Perhaps surprisingly Vietnam is one of only three countries (two other countries are Australia and China) requiring franchisor continuing disclosure of material information. Furthermore, only Vietnam and Romania require franchisees to make prior disclosure - of information reasonably requested by the franchisor and of management capacity and financial status, respectively.890
7.6.5 The Franchise Agreement
Vietnam is one of only a few jurisdictions expressly requiring a franchise agreement to be in writing891 (or in another form with equivalent legal validity).892 This is a sensible provision. The franchise agreement has a significant role as the ultimate reference point for defining the franchisor-franchisee relationship, and the writing requirement facilitates understanding and certainty. Vietnam belongs to a minority of countries which prescribe the provisions of a franchise agreement893 but not the precise content. It is also one of few jurisdictions requiring prior disclosure of some key contractual provisions. By suggesting,894 not mandating, the content of the
890 China required this obligation of the franchisee in the 2005 Franchise Measures but it was removed by the 2007 Franchise Law. 891 Except in the case of a franchise from Vietnam to overseas in which the parties can agree on the language a franchise contract must be made in Vietnamese (Decree, article 12). This requirement is of course inconvenient for foreign franchisors granting master franchising rights: the common language for such multinational transactions is English, and the English version of the contract is the one likely to be relied upon by the parties, so requiring a Vietnamese translation of such an agreement is cumbersome. 892 Australia for example prescribes that franchise agreements may be written, oral or implied. 893 Some other countries mentioning the content of the franchise agreement are China, Indonesia, Italy, Korea, Malaysia, Mexico, Romania, and Russia. 894 The Decree prefaces the content requirement set out with the words “the franchise contract may contain the following main items”.
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franchise agreement, Decree 35 is consistent with civil law principles of freedom of contract. However, despite the use of the term “may” rather than “shall” in article 11 of Decree 35, contractual provisions are in effect mandated by the requirement of prior disclosure of term, conditions for extension, conditions for termination by the franchisee and by the franchisor, obligations of the franchisor/franchisee arising from the termination of the contract, amendment of the contract at the request of the franchisor/franchisee, conditions for assignment of contract by the franchisee to another business entity, and declaration of non-eligibility of the franchisor/franchisee in case of death. Freedom of contract is nevertheless provided for except in exceptional circumstances where franchisee protection initiatives are laid down. The content of the actual provisions which must be addressed is a matter for agreement.
7.6.6 Relationship/Conduct Issues
Vietnam, in common with the majority of regulated countries, adopts a franchise regulatory regime addressing particular issues in the franchisor-franchisee relationship.895 As with most countries, Vietnam imposes restrictions on unilateral termination by the franchisor and applies the most common formula of prescribed termination events and/or notice of default and opportunity to remedy the franchisee’s breach.
Perhaps surprisingly Vietnam does not require an advance notice of non-renewal which is “more common”896 in other jurisdictions.897 Given the acknowledgement of
895 Terry, above n 259. 896 ibid. 897 For example, “a franchisor commits an offence in Malaysia if it refuses to renew a franchise agreement or if it does not give written notice of intent not to renew six months prior to expiration date” (see Spencer, above n 214, p. 292).
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the importance of relationship issues of franchising, Vietnam, as with many countries, has mandated rights and obligations of both franchisors and franchisees.
The legal rights and obligations enshrined in the Commercial Law are nevertheless rendered potentially meaningless by their being prefaced by the proviso “unless otherwise agreed”, although, as explained above in the context of disclosure, this interpretation is unlikely to be supported.
7.6.7 Registration and Reporting
Vietnam is one of only a limited number of countries imposing a registration requirement (along with Indonesia, Mexico, Spain, China, Macau, Malaysia,
Moldova, Croatia, Barbados, and 15 US states).898 While the registration is of the franchisor in China, and of the disclosure document in South Korea, Vietnam requires the registration of franchise activities (article 17 of Decree 35). The application must be accompanied by comprehensive system documentation. Similar to Malaysia’s requirement under its Franchise Act 1997 the Commercial Law requires that prior to commencing franchising “a prospective franchisor must register with the Ministry of Trade” (article 291). Unlike the approval regime of registration in Malaysia, Vietnam, like China, imposes only a “light touch” registration system which is essentially a filing and recording process. Despite the registration requirement, Ministry sources advise that “only a handful of franchising activities have been registered”.899 The failure, during the period 2006-2008, to
898 Terry, above n 259. 899 Bill Magennis, 'Update from Vietnam 2007' (Paper presented at the Conference of the International Bar Association, Singapore, 14-19 October 2007)
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promulgate registration fees (required by Circular 09) or provide sanctions for contravention, has been suggested as the most likely reason.900 These factors were presumably influential in the recent decision to remove the registration obligation of franchisors who franchise in Vietnam or who franchise from Vietnam to overseas, under Decree 120. The “light touch” registration regime has been virtually removed by this Decree, and remains only for international franchisors901 who franchise into
Vietnam. Although Decree 120 is said to be a product of the Government policy on reducing unnecessary administrative procedures for making better environment for businesses,902 failure of the administration of the franchise registration scheme may be the main reason for its removal.903 Moreover, the removal of registration obligations for only domestic franchisors raises a concern as to a unified regime for both domestic and foreign franchisors, which seems inconsistent with Vietnam’s
WTO accession commitments.904
Vietnam is also one of five “registration” states (together China, Indonesia,
Malaysia, and Spain) requiring an annual report,905 which supports data collection. The information about the status of registration of franchising is posted, and updated, on the website of the Ministry of Industry and Trade within five days of the
900 ibid. As discussed in Chapter 7.4.7 and Chapter 7.4.10 a fee regime and administrative sanctions for contravention were just introduced in 2008. 901 Including franchisors who franchise from export processing zones, non-tariff zones and other separate customs areas to Vietnam. 902 Interview with officials of Vietnam’s Ministry of Industry and Trade, 22 March 2012. 903 The Vietnam E-Commerce and Information Technology Agency of the Ministry of Industry and Trade has the duty to establish a system for online registration of franchising in order to receive application files via the internet (section V(3) of Circular 09), but an online registration has not yet been implemented. There are also complaints that although the law requires that, within five days from the date of receipt of a valid and complete application file, the registration authority shall register the franchising activity of the applicant and provide written notification to the applicant, in practice delays are common and foreign franchisors could expect to wait up to three months for a completed review of their application dossier (See generally Tilleke&Gibbins, 'Franchising in Vietnam' (2009)
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date of any registration or cancellation or change of registration, or of the date of receipt of a notice from franchisors of any change to the registered information of the franchise (Circular 09). However, the information available on the website of the Ministry of Industry and Trade is very poor and out of date. Although Decree
120 removes the registration obligations of those franchisors who franchise domestically or franchise from Vietnam to overseas, the obligation to file an annual report remains unchanged.
7.6.8 Foreign Franchisors
Although Vietnam applies a quasi-unified regulatory regime for both foreign and domestic franchisors, which is consistent with international practice there were restrictions on foreign invested enterprises engaged in franchising. These have been removed in accordance with Vietnam’s WTO accession commitments in relation to services. All restrictions on the forms of foreign invested enterprises were due to end on 1 January 2009. Until 1 January 2008 foreign invested enterprises participating in franchising were required to be in the form of a joint venture with maximum 49 percent foreign ownership. The foreign capital restriction was lifted on 1 January
2008 but the joint venture requirement remained. From 1 January 2009 foreign invested enterprise franchisors established in Vietnam can be 100 percent foreign owned. Prior to their removal Giles Cooper of Baker & McKenzie noted that “In a country where it can be difficult to locate financially-stable franchisees with sufficient capability to undertake complex business systems, this restriction may well delay the rapid growth in the franchising sector predicted after the issuance of the franchise Decree”.906
906 Cooper, above n 734.
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Uncertainty has nevertheless been introduced by Decree 23 regulating the sale and purchase of foreign invested enterprises in Vietnam, issued on 12 February 2007. This Decree was designed to implement Vietnam’s WTO commitments on involvement of foreign invested enterprises in the distribution sector. It was implemented by Circular 09/2007/TT-BTM of the then Ministry of Trade (now the Ministry of Industry and Trade) and Decision 10/2007/QD-BTM of the then Minister of Trade (currently the Minister of Industry and Trade), dated 17 July 2007 and 21 May 2007, respectively. This Circular was then amended by Circular 05/2008/TT- BCT of the Ministry of Industry and Trade, dated 14 April 2008. In these legal documents, franchising is classified as a distribution service under WTO rules and is therefore included in the definition of “distribution”. However, while Decree 23 provides detailed content for wholesale and retail activities of foreign invested enterprises it is otherwise silent on franchising. Cooper notes that a restrictive interpretation of Decree 23 would require foreign invested enterprise franchisees [or foreign invested enterprise franchisors] to obtain specific business licences to open and operate outlets. Currently a business licence is required for the establishment of retail service outlets907 and Cooper argues that this requirement “could, arguably, be applied to franchising by virtue of its inclusion in Decree 23 as a form of distribution”.908 Cooper comments that:
… such a conclusion would be contrary to the apparent intent of [the Franchise Decree] and introduce the kind of case-by-case permitting that [the Franchise Decree] deliberately avoided. .… Only time will tell how the authorities will implement and apply the regulations as a whole to franchising activities. At present, it is clear that all prospective foreign franchisors must, at least, register their intention to franchise with the Ministry of Trade… as a first step. Whether franchisees [or franchisors] will require specific franchising and/or
907 Articles 13-17, Decree 23/2007/NĐ-CP of the Government, dated 12 February 2007, Providing Regulations For Implementation of the Commercial Law Regarding Purchase and Sale of Goods and Activities Directly Related to the Purchase and Sale of Goods by Enterprises with Foreign Owned Capital in Vietnam. 908 Cooper, above n 734.
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ongoing licenses to operate the first and successive outlets remains unclear.909
However, to date, the authorities have not imposed any requirements of specific franchising and/or ongoing licences on foreign invested enterprise franchisors or franchisees.
7.7 THE ROLE OF THE MINISTRY OF INDUSTRY AND TRADE IN REGULATING, ENFORCING AND ADMINISTERING FRANCHISING
In Vietnam, franchising is controlled by high levels of government. The state administration of franchising activities is the responsibility of different authorities including the Ministry of Industry and Trade (MOIT)910 and the Ministry of Finance; ministerial equivalent bodies and Government bodies; People's Committees of provinces and cities under central authority; and Departments of Industry and Trade (article 4, Decree 35). Of these authorities, MOIT is the most important. It is responsible to the Government for the administration of franchising activities nationwide.
MOIT is one of 22 ministries and ministerial equivalent bodies of the Vietnamese Government,911 and is responsible for the administration of industry and trade.912
909 ibid. 910 Formerly the Ministry of Trade. In 2007, the Ministry of Trade and the Ministry of Industry was merged into only one Ministry - the Ministry of Trade and Industry. 911 Resolution 01/2007/NQ-QH12 of Vietnam’s National Assembly, dated 31 July 2007, on the Organisational Structure of the Government and the Number of Deputy Prime Ministers of the Government in the Twelfth Term. 912 Including the following branches and domains: mechanical engineering, metallurgy, electricity, new energy, renewable energy, oil and gas, chemicals, industrial explosives, mining and mineral processing industries, consumer industry, food industry and other processing industries, and domestic goods circulation; import and export, market management, trade promotion, e- commerce, trade services, international economic-trade integration, competition management, monopoly control, application of safeguard, anti-dumping and anti-subsidy measures and measures to protect consumer interests; and the state management of public services in the branches and domains under the Ministry's state management. See generally article 1 of Decree 189/2007/NĐ-CP, dated 27 December 2007, Defining the Functions, Tasks, Powers and Organisational Structure of the Ministry of Industry and Trade.
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The Ministry includes ministerial leaders (currently one Minister and 6 Vice- Ministers), ministerial units, professional units, foreign trade offices, and the office of the National Committee for International Economic Cooperation (NCIEC) (see Figure 16). The Departments of Industry and Trade in each province and city under central authority do not belong to MOIT but are directed by MOIT in terms of professional activities.
Figure 16: The Organisational Structure Hierarchy of the Ministry of Industry and Trade
Ministerial leaders (Minister and Vice-Ministers)
Ministerial Units Professional Foreign Trade NCIEC (30 Units including Planning Department, Units Offices Legal Department, Vietnam E-Commerce (including (Trade and Information Technology Agency) Trade Representative Review, The Office in Institute of foreign Trade countries) Research)
MOIT is granted a wide range of powers in order to implement the responsibility of state administration of franchising activities nationwide which include three primary responsibilities: (i) exercising uniform administration of professional activities, providing guidance for implementation of policies and legislation on franchising, and organising the registration of franchises (ii) coordinating with ministries, ministerial equivalent bodies, Government bodies and People's Committees of provinces and cities under central authority in relation to inspection, control, assessment of franchising and reporting on franchising activities to superior competent bodies and (iii) issuing legal documents within its own authority, and proposing to the Government legal initiatives in relation to franchising activities.913
913 Decree 35, article 4.
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The Planning Department under MOIT is responsible for undertaking the registration of franchising activities from overseas into Vietnam including those from export processing zones, non-tariff zones and other separate customs areas into Vietnamese territory in accordance with the law of Vietnam, and vice versa (section
V(1), Circular 09).914 The Planning Department is also granted the right of inspection and supervision of the registration of franchising in local provinces.915 The Departments of Industry and Trade in each local province and city under central authority receive annual reports from franchisors who do not have to register their franchise systems, and periodically send MOIT the reports on franchising within their geographic area.
MOIT played the major role in the drafting of the Franchise Law, and is the key body for proposing amendments to the law. It also issued, within its jurisdiction, legal documents to support the healthy development of franchising in Vietnam. MOIT proposed and directly drafted franchising provisions in the 2005 Commercial
Law - which created the first legal framework for franchising. The Ministry also
914 Circular 09/2006/TT-BTM of the then Ministry of Trade (now the Ministry of Industry and Trade), dated 25 May 2006, Providing Guidelines on Procedures for Registration of Franchising Activities. 915 Bo Cong Thuong [Ministry of Industry and Trade], (
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drafted Decree 35 and issued Circular 09 to implement the franchising provisions in the 2005 Commercial Law.
MOIT must nevertheless take some responsibility for the delay in drafting and promulgating implementing legal documents, in particular Decree 35 and Circular
09. The lack of synchronicity in legal documents has led to the difficulties for franchisors and franchisees in practice. Although the foundation for Vietnam’s Franchise Law was created by the 2005 Commercial Law (effective 1 January
2006), franchising could not be practised until the introduction of more specific provisions. It was a further four months before Decree 35 came into effect (on 26 April 2006) and a further two months before Circular 09 issued under the Decree to govern disclosure and registration came into effect (on 22 June 2006). A registration fee was not provided for until 2008 when Decision 106916 took effect on 15 December 2008. It took about three years after the introduction of the 2005 Commercial Law before the legal framework for franchising in Vietnam was complete. As a State organ which exercises uniform administration of professional activities, and provides guidance for implementation of policies and legislation on franchising, MOIT has rarely implemented activities to support the implementation of the Franchise Law and to guide parties in the franchise relationship, particularly franchisees. There are still franchisors and franchisees who are not aware of the introduction of this law.
MOIT has not effectively controlled the franchise registration process. Field research indicates that at the end of 2010, there were about 96 franchise systems (78 foreign and 18 domestic) in Vietnam, many of the foreign systems were not on the list of registered franchisors on the website of the Ministry. Only three domestic franchisors were recorded on the Ministry’s website as registered for franchising
916 This Decision was issued on 17 November 2008.
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overseas and there was no information on domestic franchisors franchising domestically on websites of the Ministry and the Department of Industry and Trade in the provinces.917 The information on registered franchise systems on the Ministry’s website is not always accurate and is poorly updated. Furthermore, the online registration regime, as prescribed in Circular 09, has not been implemented.
Franchisors are required to submit to MOIT or the Departments of Industry and Trade in each province, annual reports on their franchising activities, MOIT, to date, has nevertheless not published any general report on franchising to support the data collection and promote information transparency which would be of great benefit to prospective franchisees. It is uncertain for what purpose, if any, the franchisor’s annual reports have been used. In addition, MOIT has not published any report drawing attention to bad practices in franchising.
Although it is undeniable that MOIT has contributed much to the development of franchising, particularly in its role as the drafting authority for the 2005 Commercial
Law and Decree 35 - the main legal documents of Vietnam’s Franchise Law - it could play a more proactive role in the administration of the Franchise Law, and of franchising.
7.8 CHAPTER CONCLUSION
The healthy development of franchising requires an effective underlying commercial law environment which is essential infrastructure for a franchising sector.918 However, as Terry comments, “whether an effective legal environment requires a regulatory regime dedicated to the franchising sector is of course a much more
917 See generally Chapter 6.2 and Chapter 6.4. 918 Terry, above n 22.
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controversial issue”.919 Although, in some, perhaps most countries, the dedicated franchise regulation is not really welcomed, and even receives much criticism, in
Vietnam, as in China,920 the introduction of the Franchise Law was a necessary step in the development of franchising.
Although the Doi Moi reforms led to a market environment in which franchising could operate, before the appearance of Vietnam’s Franchise Law, the development of the franchise sector was constrained by the lack of a clear legal framework. Until the introduction of the new regulatory regime, franchising was not recognised as a discrete business relationship and, in a country where the general rule is that anything not specifically permitted is not allowed,921 franchise development was not practicable.
The Franchise Law has been welcomed by the local and international franchise community. Baker and McKenzie lawyer Giles Cooper comments that it is “modern and well-drafted, and balances commercial freedom and protection of franchisees”.922 In developing countries a franchise-specific law has a role beyond its regulatory content - through official recognition and, by implication, encouragement of franchising as a distinct method of business operation - and the new Vietnamese Franchise Law is undoubtedly successful at this level. It should stimulate the development of franchising by providing a specific and unified regulatory framework.923
However, concerns have been expressed that the basic protection for franchisees may be eroded by Civil Law principles of freedom of contract and by the apparent
919 Terry, above n 21. 920 See generally Andrew Halper, 'China - New Franchising Regime: Filing and Information Disclosure' (2007) 5(4) International Journal of Franchising Law 15. 921 Cooper, above n 734. 922 Vietnam Investment Review, 'Franchise Operations Face Serious Challenges'
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ability to contract out of the protection regime.924 The Commercial Law which provides the framework for the implementing Decree prefaces the general obligations set out with the words “unless otherwise agreed”.925 While there is no criticism of the introduction of Vietnam’s Franchise Law, some concerns have been emerged in terms of particular aspects of the law. Although Decree 35 and Circular 09 are prescriptive in the franchisee protection obligations imposed, this protection may be compromised by the Commercial Law itself. In Vietnam, it is nevertheless not uncommon for implementing regulations to be treated in practice as having a higher validity than the source document.926 It has also been observed that, at least in relation to registration, “industry development is ahead of the law and participants in the industry have been slow to comply with the law”.927 This was attributed to the fee and penalty regimes not being in place, but as mentioned above a fee regime and sanctions for contravention were prescribed by Decision 106/2008/QD-BTC and Decree 06/2008/NĐ-CP in 2008. Great effort by the State to reduce current existed burdens and to improve the quality of Vietnam’s Franchise Law is necessary and would support the development of the local franchising sector.
924 Magennis, above n 899. 925 The requirements of registration and that a franchise agreement be in writing are the only exceptions. 926 See generally Manh, above n 493; Thuy, above n 493; Quy, above n 493. 927 Magennis, above n 899.
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PART FOUR THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING: A MULTIPLE CASE STUDY
CHAPTER 8 CASE STUDY METHODOLOGY AND THE PROFILE OF SELECTED CASES CHAPTER 9 CASE STUDY ANALYSIS AND FINDINGS
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CHAPTER EIGHT CASE STUDY METHODOLOGY AND PROFILE OF SELECTED SUBJECTS
8.1 INTRODUCTION
This chapter discusses methodology issues in relation to the use of a case study to assess the influence of the Franchise Law on the development of franchising in
Vietnam. It first explains the rationale for using the qualitative case study methodology for this research. It then examines research design, data collection, data analysis, validity, reliability, and the limitation of using a case study for this research. Finally, this chapter reviews Vietnam’s fast food/coffee sectors - from which the subjects for the case studies were chosen - and examines the operation of the selected subjects - Lotteria, Gloria Jean’s Coffees, Trung Nguyen Coffee and Pho 24 - in Vietnam.
8.2 METHODOLOGY ISSUES IN USING A MULTIPLE CASE STUDY FOR ASSESSING THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING IN VIETNAM
8.2.1 Qualitative Case Study and Data Collection Methods
The case study is a research strategy which is increasingly used to examine a contemporary phenomenon in its real-life context.928 A case study is an empirical inquiry929 that deals with process change and development.930 It can result in new and creative insights, relatively full understanding of the phenomenon, and brings
928 Robert K. Yin, Case Study Research: Design and Methods, Applied Social Research Method Series (Sage, 2003), pp. 2, 13. 929 ibid, p. 13. 930 Carla Willig, Introducing Qualitative Research in Psychology (2001).
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high validity to practitioners.931 Many different research purposes can be achieved by conducting case studies, such as exploration, theory building, theory testing, and theory extension.932 The use of a multiple case study to assess the influence of Vietnam’s Franchise Law on the development of franchising in Vietnam is an appropriate research technique.
Using a case study to conduct empirical legal research is relatively new research technique which is widely recognised and increasingly adopted.933 Traditional legal research, which is usually called ‘doctrinal research’, has an extremely long heritage.934 Doctrinal research uses interpretative tools and legal reasoning to analyse primary and secondary sources of law to systematise, rectify and clarify the law on particular topics.935 Empirical legal research, also called the ‘law in context’ approach, first appeared as recently as the late 1960s.936 It examines law as a phenomenon in its broader social and political context, and uses a wide range of social science methods including quantitative and qualitative approaches.937 Writing of the important role of empirical legal research in comparison with traditional legal research, Roger Cotterrell has emphasised that:
All the centuries of purely doctrinal writing on law have produced less valuable knowledge about what law is, as a social phenomenon, and what
931 Chris Voss, Nikos Tsikriktsis and Mark Frohlich, 'Case Research in Operations Management' (2002) 22(2) International Journal of Operations & Production Management 195. 932 ibid. 933 Mike McConville and Wing Hong Chui, 'Introduction and Overview' in Mike McConville and Wing Hong Chui (eds), Research Methods for Law (Edinburgh University Press, 2007) , p. 1; Dame Hazel Genn, Martin Partington and Sally Wheeler, 'Law in the Real World: Improving Our Understanding of How Law Works' (The Nuffield Foundation, November 2006), p. 1. 934 It has been developed since the second century before Christ. See Mark Van Hoecke, Methodologies of Legal Research: Which Kind of Method for What Kind of Discipline? (Hart Publishing, 2011), p. 1. 935 McConville and Chui, above n 933, p. 4; Terry Hutchinson, Researching and Writing in Law (Lawbook Co., 2nd ed, 2006), p. 7. 936 McConville and Chui, above n 933, p. 1. 937 ibid, pp. 5-6.
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it does than the relatively few decades of work in sophisticated modern empirical socio-legal studies...938
The purpose of this research is to examine the role of Vietnam’s Franchise Law as a factor in relation to the development of the franchising sector. It is therefore appropriate to adopt an empirical legal approach which, in the case of Vietnam, is particularly significant as there has not yet been any empirical research addressing this topic. Previous research has discussed Vietnam’s legal framework for franchising but it has been essentially descriptive and has used a traditional legal approach.
As Yin has suggested, case studies can be conducted by using either qualitative or quantitative evidence.939 This thesis adopts the qualitative approach - an increasingly common approach in law940 - as it assists a deeper understanding of the extent to which the Franchise Law has influenced the development of franchising beyond what could be hypothesised, as in quantitative approach, in advance.
The data in qualitative case studies can be collected through many different methods.941 Two of the most commonly employed methods are interviews and documentary analysis.942 Interviews are recognised as one of the most important source of information.943 They are an essential data source for case studies as most case studies are relevant to people and their activities.944 Interviewing is the best method of access to participant’s views and their interpretations of actions and
938 Roger Cotterrell, Law's Community: Legal Theory in Sociological Perspective (Oxford University Press, 1995), p. 296. 939 Robert K. Yin, 'The Case Study Crisis: Some Answers' (1981) 26(1) Administrative Science Quarterly 58. 940 Margaret McKerchar, Design and Conduct of Research in Tax, Law and Accounting (Lawbook Co., 2010), p. 94. 941 Yin, above n 928, p. 85. 942 Sheila Stark and Harry Torrance, 'Case Study' in Bridget Somekh and Cathy Lewin (eds), Research Methods in the Social Sciences (Sage Publications, 2005) , p. 35. 943 Robert B. Burns, Introduction to Research Methods (Longman, 4th ed, 2000), p. 467; Yin, above n 928, p. 89. 944 Yin, above n 928, p. 92; Burns, above n 943, p. 467.
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events.945 Interviews are used to collect empirical data about the subjects by asking interviewees to talk about their experiences and interactions.946 The most common types of interviews are structured, semi-structured and unstructured.947 This research uses semi-structured interviews as they help the researcher obtain specific information by preparing a list of themes and questions in advance without limiting other important information which can be given.948 Moreover, the researcher has a direction, and control at all times, during semi-structured interviews. In addition to interviews, this research is also based on existing documentary sources to obtain background information about the subjects.
8.2.2 Case Study Design and Case Selection
To gain a comprehensive understanding of the influence of Vietnam’s Franchise Law on the development of franchising - including the decision to franchise and the entry mode and expansion strategy of franchisors - this research adopts a multiple case study design. As Yin suggests, multiple case designs are becoming more common and are preferred to single-case designs.949 The data gained from multiple cases is often more compelling, so the overall research is considered more robust.950
While the single-case study permits the researcher to understand only one case, the multiple case study leads to an analysis both of each case and across cases.951
945 G. Walsham, 'Interpretive Case Studies in IS Research: Nature and Method' (1995) 4 European Journal of Information Systems 74, p. 78. 946 J.A. Holstein and J.F. Gubrium, 'The Active Interview' in David Silverman (ed), Qualitative Research: Theory, Method and Practice (Sage, 2004) 140 cited in Frazer and Merrilees, above n 732. 947 Catherine Dawson, Practical Research Methods: A User-Friendly Guide to Mastering Research (Howtobooks, 2002), p. 27. 948 ibid, pp. 28-29. 949 Yin, above n 928, p. 53. 950 Robert E. Herriott and William A. Firestone, 'Multisite Qualitative Policy Research: Optimizing Descpription and Generalizability' (1983) 12(2) Educational Researcher 14 cited by Yin, above n 928, p. 46; Burns, above n 943, p. 464. 951 Pamela Baxter and Susan Jack, 'Qualitative Case Study Methodology: Study Design and Implementation for Novice Researchers' (December 2008) 13(4) The Qualitative Report 544.
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According to Stake, “an important reason for doing the multi-case study is to examine how the program or phenomenon performs in different environments”.952
This research investigates four cases953 in the fast food/coffee sectors: Lotteria, Gloria Jean’s Coffees, Trung Nguyen Coffee and Pho 24. The fast food industry is widely accepted as the pioneer of modern business format franchising as well as being the dominant sector for franchising in many countries. Franchising was first introduced to Vietnam by foreign fast food franchisors, and the fast food sector is
Vietnam’s most franchised industry sector.954 Coffee is one of the core export goods of Vietnam which is the world’s second largest exporter.955 Vietnam’s first local franchisor, Trung Nguyen Coffee, operates in the coffee sector.
To balance the size of samples, all four chosen companies are leading and pioneer franchisors in Vietnam. Large systems rather than small systems were selected as large companies in Vietnam are believed to conduct their business with greater regard to legal requirements. As Vietnam’s franchise industry comprises both foreign and domestic franchisors, two foreign franchisors (Lotteria and Gloria Jean’s Coffees) and two domestic franchisors (Trung Nguyen Coffee and Pho 24) were selected as the cases. In addition, while Lotteria was selected as a foreign franchisor entering Vietnam by establishing a subsidiary, Gloria Jean’s Coffees was chosen as a foreign franchisor using master franchising to expand into Vietnam. For the local franchisors, Trung Nguyen Coffee was selected as a system which has adopted product and trade name franchising while Pho 24 was selected as a system using the contemporary western business format model. Moreover, while Lotteria, Trung Nguyen Coffee and Pho 24 were chosen as the companies operating in
952 Robert E. Stake, Multiple Case Study Analysis (The Guilford Press, 2006), p. 23. 953 Research suggests that multiple case design should select between four and 10 cases (See ibid, p. 22; Paivi Eriksson and Anne Kovalainen, Qualitative Methods in Business Research (2008), p. 125). The limitation of studying time is also a reason that this research chooses only four cases. 954 For further discussion see Chapter 8.3.1.1. 955 For further discussion see Chapter 8.3.1.2.
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Vietnam prior to the introduction of Vietnam’s Franchise Law, Gloria Jean’s
Coffees is a company which entered Vietnam immediately after the Franchise Law becoming effective.
8.2.3 Approaching Participants and Ethical Concerns
In interviews, the informants are critical to the success of the study.956 The informants were appropriate representatives of the organisations and were able to provide a strategic view of the development of their company. They could provide not only their insights into the case, but could also suggest evidence sources useful for the research.957 Therefore, the founders and managers of the companies were selected as key persons to be interviewed for this research. However, access to such informants is not easy as such entrepreneurs often have little interest in engaging in academic research. As the key persons in their companies, they have little time for activities outside daily business operations. A further complicating factor was the reality of the characteristics of eastern culture - relationships were more important in getting the informants to agree to be interviewed. The targeted interviewees were approached both through professional and personal contacts. The author’s friends and colleagues were a great help in contacting the key persons and in obtaining their agreement to be interviewed. All the interviews were conducted in face-to-face meetings.
Ethical concerns can arise in such research. This study fully complies with the University of New South Wales Research Code of Conduct.958 This research project was approved by the Australian School of Business Human Research Ethics
956 Yin, above n 928, p. 90. 957 ibid. 958 The Research Code of Conduct was approved and effective on 27 April 2009.
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Advisory Panel at the University of New South Wales.959 Each interviewee was given a Participant Information Statement and Consent Form (Appendix X) which set out the topic and target of the study, the reason the interviewee was chosen as a participant, the interviewee’s rights, the expected length and venue of interviews, the use of data, and the participant’s privacy protection. All interviewees signed this form and were given a copy of the signed form. They also received a Revocation of Consent Form (Appendix XI) and were informed that they were free to withdraw their consent to participate in the research at any time without prejudice to their relationship with the University of New South Wales. The identification of the interviewees and their companies in this thesis and other future publications was accepted by all the interviewees and the appropriate authoritative persons, respectively, through their signing the consent form for Identifying Company and Interviewee in Future Publication (Appendix XII).
8.2.4 Data Collection
Data was collected over a 12 months period in both Australia and Vietnam and through both interviews and existing documents. This combination of data sources enabled the researcher to validate and to mutually check the findings.960 The use of multiple sources of evidence leads to highly positive level of qualitative data and makes the findings more valid and reliable.961
The documents included company profiles, public speeches of the key company personnel, and articles and information about the companies in journals and
959 Approval Number: 106074, the letter of ethics approval and the letter of ethics approval extension are attached as Appendix IX. 960 Michael Quinn Patton, Qualitative Research and Evaluation Methods (Sage, 3rd ed, 2002) cited by Owen Wright and Lorelle Frazer, 'A Multiple Case Analysis of Franchised Co-branding' (2007) 15(2) Australasian Marketing Journal 68. 961 Yin, above n 928, pp. 98-99.
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newspapers, and on their, and others, websites. These documents gave the researcher an overview of the interviewee’s company and enabled interview questions to be prepared before conducting the interview. The data collected from the existing documents is important to certify and strengthen evidence from the interviews.962
The documentary data was used to support the interview’s findings. If the documents provided information contrary to interview findings the researcher inquired further into that contradiction. The inferences from these documents also enabled the researcher to pursue further investigation where necessary.963
The interviews were conducted with founders and senior managers of the companies chosen for the study (Lotteria, Gloria Jean’s Coffees, Trung Nguyen Coffee, and Pho 24). In the case of Lotteria, Mr Lee Jang Mook and Mr Truong Ham Liem - the
Director and the Marketing Manager of Lotteria Vietnam, respectively - were interviewed at the main office of the company in Ho Chi Minh City, Vietnam on 2 April 2011. In the case of Gloria Jean’s Coffees, Ms Nguyen Phi Van, International
Marketing Manager at Gloria Jean’s Coffees International and former Director of Gloria Jean’s Coffees in Vietnam who brought Gloria Jean’s Coffees to Vietnam as its master franchisee, was interviewed in Ho Chi Minh City on 1 April 2011. In the case of Trung Nguyen Coffee, three interviews were carried out. Mr Dang Le
Nguyen Vu, the founder and chairman of Trung Nguyen Coffee, was interviewed at his main office in Ho Chi Minh City on 1 April 2011. Mr Nguyen Khanh Trung, who was the Sales Manager of Trung Nguyen Coffee from 1998 to 2006, was interviewed in Ho Chi Minh City on 31 March 2011. Mr Tran Tinh Minh Triet, a franchise advisor of Trung Nguyen Coffee, was interviewed in Ho Chi Minh City on 3 April 2011. In the case of Pho 24, Mr Ly Quy Trung, the founder and chairman of Pho 24, was interviewed at his main office in Ho Chi Minh City on 31 March 2011.
962 ibid, p. 87. 963 ibid.
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With one exception all interviewees communicated well in English. In the case of the interviewee who could not communicate fluently in English, his company’s interpreter assisted in translation from English into Vietnam and vice versa. In addition, as the researcher is Vietnamese the communication with Vietnamese interviewees was sometimes in Vietnamese in case it was difficult for interviewees to express their insights in English.
Each interview lasted for approximately two hours. All interviews started with a brief introduction to the research project. The interviews were based on an interview guideline which included crucial issues and questions prepared by the researcher in advance. However, during the interaction with the interviewees, more unprepared questions were asked and the interviewees were given time to talk about further issues that were not foreseen by the researcher but were nevertheless useful for the study. During the interviews, the researcher avoided asking sensitive or leading questions. All but two the interviews were tape recorded with the interviewees’ consent. With regards to the interviewees who did not agree to be recorded, detailed notes were taken. The recorded tapes were transcribed immediately after each interview by the researcher, so the still fresh interview memory could help to produce accurate transcripts.
8.2.5 Data Analysis
According to Bogdan and Biklen, the analysis of qualitative data is a process including a series of actions such as “working with data, organising it, breaking it down, synthesising it, searching for patterns, discovering what is important and what is to be learned, and deciding what you will tell others”.964 Although many
964 Robert C. Bogdan and Sari K. Biklen, Qualitatitve Research for Education: An Introduction to Theory and Methods (Allyn and Bacon, 1982) cited in Wang, above n 20, p. 298.
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publications have offered a wide selection of strategies and techniques for the analysis of qualitative case study data,965 there is still not yet a standard analytic approach. The data analysis of this research essentially followed Nigel King’s template analysis coupled with Yin’s approach.966 The data analysis process is summarised in the following Figure.
Figure 17: The Data Analysis Process
Interview Guideline
Initial Template
Coding the data
Modifying the template basing on the themes and issues explored in the data but not predetermined
Final Template
Applying the final Template to all transcripts
Reporting the Case Study
The data was indentified with a list of thematic codes. Each code was a specific label referring to a theme or issue in the data. Codes were attached to sections of textual data covering the themes or issues. The analysis started with an initial template including some predefined themes and issues which were corresponded with predefined codes. These themes and issues were constructed based on the
965 Eriksson and Kovalainen, above n 953, p. 130. 966 Yin, above n 928.
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interview guidelines which included crucial issues and questions. The initial template is illustrated in the following table.
Table 6: The Initial Template
- Organisational factors
- Vietnamese Legal System The Decision to Franchise in Vietnam and - Vietnam’s Franchise Law Influencing Factors - Environmental factors - Other Laws
- Other Environmental Factors
- Organisational factors - Vietnamese Legal System
The Choice of Entry Mode - Vietnam’s Franchise Law and Influencing Factors - Environmental factors - Other Laws
- Other Environmental Factors
- Organisational factors
- Vietnamese Legal System Expansion Strategy and - Vietnam’s Franchise Law Influencing Factors - Environmental factors - Other Laws
- Other Environmental Factors
This initial template was applied to the transcripts. The new codes were added to and the existing codes were revised in the template in accordance with the themes and issues which had been explored in the data. The process of applying the list of predefined codes to all the transcripts and continuously revising the list led to a final template. The final template was then applied to all transcripts to determine the sections of textual data related to the study topic.
There was not only within-case analysis for each case but also cross-case analysis.967 In each case, the analysis was conducted to express “how and why a particular
967 ibid, p. 50.
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proposition was demonstrated (or not demonstrated)”.968 Meanwhile, the cross-case analysis, which is discussed in Chapter 9.6 and Chapter 9.7, was to indicate “why certain cases were predicted to have certain results”, and why other cases “were predicted to have contrasting results”.969
8.2.6 Validity, Reliability and Limitations of the Research
As Merriam states, validity and reliability must be considered by the researcher when doing case study research.970 Internal validity is defined as “the extent to which one’s findings are congruent with reality”.971 External validity is ‘the extent to which the findings of one study can be applied to other situations’.972 Meanwhile, reliability of the research is “the extent to which one’s findings can be replicated”.973 The researcher used measures to increase the internal validity, external validity and reliability of the research.
Multiple sources of evidence were used at the stage of data collection to strengthen internal validity.974 The researcher also asked his supervisor and colleagues to review and give their evaluation of the research’s findings.975 In addition, King’s template analysis method was used to against the “selection of material”976 that was influenced by the researcher’s bias.977 A multiple case strategy was adopted to build
968 ibid. 969 ibid. 970 Sharan B. Merriam, Case Study Research in Education: A Qualitative Approach (Jossey - Bass Publishers, 1988), p. 163. 971 ibid, p. 183. 972 ibid, p. 173. 973 ibid, p. 170. 974 ibid, p. 169. 975 ibid. 976 P. Banister et al, Qualitative Methods in Psychology (Open University Press, 1994), p. 65. 977 Merriam, above n 970, p. 170.
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external validity978 while reliability was strengthened by using a case study protocol.979
Although, the researcher has used a number of measures to ensure the validity and reliability, there are still several obvious limitations of this research. The case study was conducted only in the fast food/coffee sectors and focused on only four leading franchisors.
8.3 VIETNAM’S FAST FOOD/COFFEE SECTORS AND PROFILE OF THE SELECTED CASES
8.3.1 The Fast Food/Coffee Sectors in Vietnam
8.3.1.1 Vietnam – Towards a Fast Food Nation
From a Vietnamese perspective, until the early 1990s fast food restaurants existed
“only in western magazines” rather than in the local market.980 Although western style fast food is a recent development in Vietnam, the size and growth rate of this sector is significant. A report of Euromonitor shows an impressive annual growth rate at over 13 percent of Vietnam’s fast food sector during the period 2005-2010 as outlined below:981
978 Yin, above n 928, p. 34; Merriam, above n 970, p. 174. 979 Yin, above n 928, p. 34. 980 Jeremy Laurance, 'Vietnam: Rise of the New Fast Food Nation', The Independent 27 February 2006
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Figure 18: The Revenue of Vietnam’s Fast Food Sector
8,000.00 7,126.80 7,000.00 6,297.60
6,000.00 5,561.70
5,000.00 4,695.40 3,924.10 4,000.00 3,338.00 3,000.00
2,000.00 The Revenue (Billion VND) (Billion Revenue The
1,000.00
0.00 2005 2006 2007 2008 2009 2010 Year
Although Vietnam has had a rich cuisine tradition for many years, the fast food sector has experienced robust growth because of food quality, hygiene, convenience and time-saving benefits982 coupled with the fact that Vietnamese people, especially in the cities, are leading busier lifestyles.983 Rapid social and economic change has led more Vietnamese people, especially in urban areas, to have a quick meal outside the home rather than spending too much time in cooking at home. According to a recent Fast Food Lifestyle Survey of TNS which was conducted in Ho Chi Minh City (the biggest city in Vietnam) and Hanoi (the capital of Vietnam), 60 percent of urban people eat out daily.984 Furthermore, fast food is in favour with many young
Vietnamese people due to its modern image.985 However, unlike in many other
982 Taylor Nelson Sofres, 'A Fast Food Nation?', Vietnam Investment Review (Hanoi, Vietnam), 23 April 2007, 12. 983 Euromonitor, Fast Food in Vietnam (August 2011)
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countries, fast food in Vietnam is not cheap compared with traditional Vietnamese food particularly when the average wage is taken into account.986
Worldwide, fast food is one of the earliest and most popular sectors for franchising. In Vietnam, fast food is also the earliest and most popular sector for franchising. The pioneer foreign franchisors entering Vietnam include the famous fast food chains KFC (from the US), Lotteria (from South Korea), and Jollibee (from the Philippines). Fast food restaurants account for 45 percent of Vietnam’s franchising market in terms of the number of franchise systems.987 There is a considerable number of consumers, especially in urban areas, who regularly patronise franchised fast food restaurants. According to the above TNS Survey, the rates of Vietnam’s urban consumers having visited western and local franchise fast food restaurants are
39 percent and 30 percent, respectively.988 In Vietnam, the fast food sector is dominated by foreign franchisors with over 70 percent of the sector’s revenue shared by the three pioneer foreign franchisors - KFC, Lotteria, and Jollibee.989 However, the first and prominent local business format franchise system, Pho 24, is also a fast food restaurant. This case study therefore has chosen two leading fast food systems in Vietnam, Lotteria - a representative of the foreign fast food systems - and Pho 24 - a representative of the domestic fast food systems.
8.3.1.2 Vietnam – Developing a Coffee Culture
Vietnam is the world’s second biggest exporter of coffee. Coffee cultivation was introduced to Vietnam in 1870990 under the then French colonial regime. Although
986 For example, in 2010 Vietnam’s gross national income per capita was US$ 1,160 while Australia’s gross national income per capital was US$ 46,200 (The World Bank, 'GNI per capita, Atlas method (current US$)' (2012)
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devastated by wars for a long period, since the re-unification of the country in 1975
Vietnam’s coffee industry has quickly developed and became a significant economic force. Coffee production, mainly of Robusta coffee, increased from around 5 thousand tonnes in 1975 to over a million tonnes in 2009.991 Vietnamese
Government policies in the early 1990s encouraged coffee production and coffee became Vietnam's second-highest export product after rice in 1995.992 By 1999, Vietnam was the world’s third-largest coffee exporter after Brazil and Colombia.993 Vietnam has recently overcome Colombia to be the world's second-biggest coffee exporter and the world's biggest Robusta coffee exporter.994
Coffee and tea are the most favoured drinks of Vietnamese people. However, unlike tea which is normally served at home, Vietnamese people often drink coffee in restaurants. Therefore, it is not surprising that coffee shops have also existed for many years in Vietnam.995 Local coffee shops are in every street and corner in cities and towns throughout the country. However, unlike western people, Vietnamese people prefer a different kind of coffee which is served in a so-called “Vietnamese coffee drinking style”. Vietnamese coffee is usually made from Robusta beans and is sweeter and stronger than western coffee. The Vietnamese prefer filtered coffee drinks and treat the brewing and enjoyment of coffee as an event - a culture very different to that of grabbing a coffee at a drive-in window on the way to work as in the western culture.996 With a large percentage of coffee lovers, Vietnam is an
991 Doan Trieu Nhan, 'Orientations of Vietnam Coffee Industry' (Paper presented at the International Coffee Conference, London, the UK, 17-19 May 2001)
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attractive market for both domestic and foreign coffee companies. Although facing the competitive challenges of many local coffee chains, and Vietnam’s unique coffee culture, several foreign coffee franchise systems have recently expanded into Vietnam, including Gloria Jean’s Coffees, Illy Coffee, and Hard Rock Coffee. Trung
Nguyen Coffee - a leading local coffee company - was selected to represent local coffee franchisors, and Gloria Jean’s Coffees - an international coffee brand - was selected to represent foreign coffee systems.
8.3.2 The Development of Lotteria in Vietnam
8.3.2.1 Profile of Lotteria
Lotteria is a prominent Asian fast food system with a menu including hamburgers, cheese burgers and teriyaki burgers. Although its menu resembles McDonald’s, Lotteria also offers several of its own proprietary products which have resulted from its research and development. The brand name “Lotteria” originated in its parent company - Lotte Group, which is a combination of its parent group and the word “cafeteria”. “Lotte” is the nickname of Charlotte - the heroine in the novel “The
Sorrows of Young Werther” written by the German literary figure Johann Wolfgang von Goethe.997 The Group’s brand name is used to express the desire of the company to be loved by everyone.
In 1948, Shin Kyuk-Ho, a Korean businessman, founded Lotte in Japan where he was educated. Lotte is a global group with over 50 companies in both Japan and overseas. Lotte Group’s business spreads over many industries including candy manufacturing, beverages, hotels, fast food, retail, financial services, heavy chemicals, electronics, information technology, construction, publishing, and
997 Lotte Group, 'Greetings'
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entertainment.998 Most of Lotte’s operations are in Japan and South Korea to which
Lotte expanded in 1967 just two years after the normalisation of diplomatic relation between Japan and South Korea. It has become the most successful candy/chewing gum manufacturer in both South Korea and Japan, and is also one of South Korea's largest corporations. Lotte’s products are sold in over 70 countries and it has expanded into many other countries including China, Thailand, Indonesia, Vietnam, India, the US, Russia, the Philippines, Pakistan, and Poland.999
Lotteria, a member of Lotte group, was first founded in Japan in September 1972. Despite being established in Japan, Lotteria’s reputation has been largely built outside its country of origin. It is widely believed by the general public to be brand of South Korea because of its success in that market. The number of outlets of
Lotteria in Japan has changed little over the last 30 years and is static at around 600 outlets. Lotteria South Korea on the other hand has increased its number of outlets at the rate of 10 percent annually1000 and it currently has around 920 outlets nationwide.1001 Lotteria South Korea commenced operations on 25 October 1979. It quickly became the number one fast food restaurant in South Korea, where its market share (45 percent) is much greater than that of McDonald’s (20.1 percent).1002 Although recognised as a follower of McDonald’s, Lotteria South
Korea achieved much success through adjusting its concept including adding a series of characteristic Korean products. It also imitates western franchisors in outlet design. In the words of Lankov, “The cleanness, the bright interior, the western pop music as an audio background and many other things deliberately created the
998 ibid. 999 Lotte Group, The Lotte Group is Active on the World Stage (
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impression of a ‘small piece of America in the middle of Korea’”.1003 The combination of western style and menu localisation has led to Lotteria South Korea experiencing significant development. The number of its outlets steadily increased over the period 1979-2003 and although numbers slightly declined in the period
2003-2007 its sales growth rate remains high - 10 percent in 2006 and 16 percent in 2007.1004 By 2011, the number of Lotteria’s outlets in South Korea was three times that of McDonald’s.1005 The store growth of Lotteria South Korea in its home market is outlined below:1006
Figure 19: The Growth of Lotteria in South Korea
1000 873884 900 839 793781 800 729 700 600601 600
500 466 411 382 400 316 255 Number of Outlets of Number 300 181 200 148 114 88 98 54 62 71 100 28 40 48 44 1 6 12 18 0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year
Lotteria South Korea has aggressively expanded overseas, including to Vietnam.
1003 ibid. 1004 Jane Han, 'Can Lotteria Put TGI Friday’s Back on Burner?' (2009)
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8.3.2.2 Lotteria in Vietnam
Lotteria was one of first foreign franchise systems to enter Vietnam. Lotteria Vietnam is a joint venture which was established in 1996 by Lotte South Korea, Nissho Iwai (a Japanese corporation, now called Sozitz corporation), and Thien Nhan
(a Vietnamese corporation).1007 Lotteria Vietnam opened its first outlet in Ho Chi Minh City in 19981008 at a time when its western style/fast food concept was unfamiliar to the Vietnamese. It struggled initially with few outlets which were not profitable. After a decade in Vietnam, Lotteria had only nine outlets. Vietnamese customers were used to eating traditional foods with table service and were slow to adapt to the queue concept of its fast food stores. Moreover, the local supply chain for its food products was also a big problem for Lotteria. Mr Il Sik Rho, General
Director of Lotteria Vietnam, acknowledged that:
The arrival of Lotteria in Vietnam was too early, and we encountered lots of difficulties because of the absence of material sources. Moreover, it took a long time to get the necessary ingredients. Our hamburgers had their own size and specification; hence, they took a long time to make. We even had to import wrappings from overseas in order to maintain the quality standard. Therefore production costs were very high, and the products were expensive.1009
However, its recent growth has been steady. It had to wait for only one year (from 2005 to 2006) to double its outlets. As at 2011, it has over 86 outlets in 12 provinces and is, with KFC, the leading fast food system in terms of number of outlets in
1007 Thien Nhan Company, Thien Nhan & Lotteria Venture (
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Vietnam’s fast food market. The growth of Lotteria Vietnam is summarised below:1010
Figure 20: The Growth of Lotteria in Vietnam
100 92 90 80
70 59 60 50 50 40 40
Number of Outlets of Number 30 20 20 10 10 1 0 1996 1998 2005 2006 2007 2008 2009 2011
Year
After more than a decade of operation in Vietnam, Lotteria overcame its initial challenges and has been profitable since 2009.1011 Its market share is 30 percent for fried chicken, just behind KFC, and 70 percent for hamburgers in which it is the market leader.1012 Lotteria has quickly become the first choice for numerous customers in Vietnam. In recent years, its customers have increased at a rate of around 40 percent annually, and 3.5 million customers were served in 2005.1013
Its success is attributed not only to its enduring effort but also to other factors including product localisation and adjustments in serving style to accommodate the eating culture of Vietnam. Lotteria has been making sustained efforts to adjust to Vietnam’s market. It has a research department which specialises in creating new
1010 Lotteria, Vietnam (
269
food items suitable for local tastes. Beyond its standard menu items Lotteria has adjusted its menu to fit the local cuisine style. It has added rice, a daily traditional dish of Vietnamese, to the menu. It offers four types of dishes with rice including chicken soup - a favored food of many Vietnamese - which accounts for eight percent of its annual income.1014 It has also created several other dishes having a similar taste to Vietnamese food. For example, in April 2011, it introduced soy chicken - a wetter style of chicken as Vietnamese people do not like its chicken too dry. “Lotteria focuses on developing products and services continuously to serve customers, especially fast-food rice”, said Mr Truong Ham Liem, Marketing Manager of Lotteria Vietnam.1015 This statement is totally consistent with the point of view of Mr IL Sik Rho, General Director of Lotteria Vietnam: “We always try to meet customer requirements in taste, hygiene and service. We continuously diversify fast food categories to fit the tastes of Vietnamese...”.1016
Vietnam, in the words of Mr Truong Ham Liem, Marketing Manager of Lotteria
Vietnam, has actually been one of the most successful markets of Lotteria.1017 However, although around 80 percent of Lotteria South Korea’s 920 outlets nationwide are franchised, its expansion in Vietnam has been exclusively through company owned and operated outlets. Lotteria, as suggested by Mr Lee Jang Mook,
Director of Lotteria Vietnam, has been “taking time to refine its systems before franchising successfully in Vietnam”.1018
1014 ibid. 1015 Quoc Hung and Nhan Tam, 'When Fast Food is Localized' (2009)
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8.3.3 The Development of Gloria Jean’s Coffees in Vietnam
8.3.3.1 Profile of Gloria Jean’s Coffees
Gloria Jean’s Coffees began in 1979 when Gloria Jean and Ed Kvetko, the founders of Gloria Jean’s Coffees, bought a small gift shop in a little town in North Chicago, the US, and introduced their gourmet coffees.1019 Gloria Jean’s Coffees quickly succeeded and appeared around the US.1020 Gloria Jean and Ed Kvetko first franchised their system and started expanding internationally in 1993.1021
Although originating in the US, the story of Gloria Jean’s Coffees as a globally successful coffee company really began in Australia around 16 years later. In 1995, Nabi Saleh, a businessman and coffee expert, and his business partner Peter Irvine, brought the Gloria Jean’s Coffees brand to Australia from the US. Saleh and Irvine established Jireh International Pty Ltd which acquired a master franchise from Gloria Jean’s Coffees for Australia. In 1996, Gloria Jean’s Coffees Australia opened its first and second outlets in Miranda and Eastgardens, Sydney, respectively.
In 1997, Gloria Jean’s Coffees Australia embarked on sub-franchising. Australia quickly became the fastest developing market for Gloria Jean’s Coffees internationally and by 2003 it had a presence in each state and territory. With the vision of leading Gloria Jean’s Coffees to become “the most loved and respected coffee company in the world”, Saleh and Irvine in 2004 acquired the international branding and roasting rights of Gloria Jean’s Coffees for all countries except for the
US and Puerto Rico.1022 The international franchising operations are today managed
1019 Gloria Jean's Coffees, 'Our Company' (2011) (8 May)
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by Gloria Jean’s Coffees International which is a subsidiary of Jireh International
Pty Ltd. Since June 2009, Gloria Jean’s Coffees Australia (Jireh International Pty Ltd) has held worldwide international branding and roasting rights after buying all retail and franchise operations of Gloria Jean’s Coffees US including its 102 coffee houses in 24 states.1023
Since Gloria Jean’s Coffees was brought to Australia, it has rapidly expanded in both Australia and overseas. By 2004, before acquiring international branding and roasting rights for all countries except for the US and Puerto Rico, Gloria Jean’s Coffees had more than 200 coffee stores in Australia.1024 By 2008, Gloria Jean’s Coffees has had more than 900 stores, including over 470 stores in Australia, and had signed 36 master franchise agreements with 35 countries. By 2011, it had over
1000 stores, including over 480 stores in Australia, and had signed 42 master franchise agreements with 39 countries.
8.3.3.2 Gloria Jean’s Coffees in Vietnam
Gloria Jean’s Coffees was the first foreign coffee company franchising into
Vietnam. It is also one of the first foreign franchise systems entering into Vietnam through master franchising. Vietnam is the 25th destination of Gloria Jean’s Coffees in the world. In 2006, after nearly two years of negotiation, Gloria Jean’s Coffees granted a Vietnamese company, Viet Lifestyle joint-stock company, master franchise rights for Vietnam. Viet Lifestyle was established by Ms Nguyen Phi Van who had studied in Australia (graduating in tourism and hotel management). After
1023 Gloria Jean's Coffees, above n 1019; Inc Diedrich Coffee, 'Diedrich Coffee Completes Sale of Gloria Jean's Coffees Domestic Franchise Operations' (2009)
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having seen the success of both franchising in general and Gloria Jean’s Coffees in particular during her stay in Australia, Ms Van came back to Vietnam, and established her company in Ho Chi Minh City to bring Gloria Jean’s Coffees into Vietnam. After operating Gloria Jean’s Coffees Vietnam for several years she is currently the International Marketing Manager at Gloria Jean’s Coffees International. On 26 January 2007, Gloria Jean’s Coffees opened its first store in Ho Chi Minh City. Today, it has six stores of which three are company owned and three are sub-franchised. All are located in Ho Chi Minh City.
Vietnam has a very young population - around 65 percent of Vietnam’s 86 million population are under 35 year old - and unlike customers in many other countries who pay much attention to coffee quality, almost all Vietnamese people, especially young customers, come to coffee shops to enjoy the atmosphere and chat rather simply for the coffee. Ms Van believes that Gloria Jean’s Coffees will attract many young Vietnamese people:
Our primary target segment is young middle management professionals aged 25 to 35 who are global citizens, living in the six key cities of Vietnam... Gloria Jean’s Coffees is positioned as the most fashionable, modern specialty coffee brand in Vietnam and we are well-patronized by celebrities, local and foreign opinion leaders and influencers of the target market. The brand has been perceived as the place to see and be seen and to show your social status.1025
8.3.4 The Development of Trung Nguyen Coffee in Vietnam
Vietnam was one of the world’s three biggest coffee exporters in the late 1990s. However, at that time, Vietnam mostly exported green coffee beans and processed coffee of low quality. The life of coffee-planters was very difficult. Mr Dang Le
1025 Mitchell, above n 341.
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Nguyen Vu, founder of Trung Nguyen (a coffee distribution and process corporation) who is now unofficially recognised as Vietnam’s “Coffee King”, believed that he could make a fortune for himself, for poor coffee-planters, and for Vietnam by processing and selling high-quality Vietnamese gourmet coffees. He commented that: “I always dreamt of building a well-known coffee trademark so that my country could export a large volume of processed coffee, not just green coffee beans”.1026
In 1996, while still a student at Vietnam’s Tay Nguyen Medical University, Mr Vu, with three of his friends, founded Trung Nguyen1027 and built a small coffee roasting facility in Buon Ma Thuot City, Daklak Province - the largest coffee plantation region of Vietnam which enabled Mr Vu to pursue his dream:
I put all my life in the coffee processing industry instead of working as a doctor because a poor doctor has no money to help patients who need treatment. More importantly, Vietnam needs a famous processed coffee brand for the whole world to enjoy and admire.1028
Using the best traditional recipes for producing gourmet coffee, Mr Vu’s company quickly acquired a reputation for its high quality coffee products in the areas neighbouring its main office. However, the company could not go far without an efficient distribution network. The solution to this problem was to create coffee shops which not only served coffee products but also sold Trung Nguyen’s coffee products for consuming at home.
On 20 August 1998, Trung Nguyen Coffee opened its first outlet in Ho Chi Minh City, the biggest city in Vietnam, and served its coffee free during the first 10 days. During that time, numerous customers came to taste Trung Nguyen’s coffee products
1026 Xinhua News, 'Dream of Vietnam's Coffee King' (12 September 2003)
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from early morning till late at night and assess the quality of its coffee products.
Unlike other coffee shops in Vietnam at that time which served only one kind of coffee, Trung Nguyen Coffee was the first Vietnamese company offering customers a variety of coffee types for different tastes and preferences. One of its well-known products is a weasel coffee which is produced from coffee beans that have gone through weasels’ digestive tract as weasels often choose the best coffee beans to eat.
Although the high quality coffee products of Trung Nguyen Coffee were unique, what made Trung Nguyen Coffee different from its competitors and led to it quickly becoming the leading coffee group in Vietnam was its franchise strategy. In 1998, after its first six coffee shops were operating successfully, Mr Vu decided to embrace an unsophisticated form of product and trade name franchising as its expansion strategy. Trung Nguyen Coffee was the first local company to use franchising as an expansion strategy.
Trung Nguyen Coffee conducted its franchising strategy in a very different way to the normal western model. Initially Trung Nguyen Coffee simply required “franchisees” to use its brand name on coffee stores to which it supplied its coffee products at a 10 percent discount on the listed price. The “franchisees” could imitate the image of previous coffee stores of Trung Nguyen Coffee who would, if requested, provide the “franchisees” with a professional team to help design and build outlets. Trung Nguyen Coffee did not enforce franchisee compliance with system standards in relation to aspects such as price, serving style, and menu. It did not have any regime to control the outlets. The franchisees only had to pay a once only fee and commit to buy discounted coffee products from Trung Nguyen Coffee when they joined the system.1029 It nevertheless attracted many potential franchisees because of the quick success of its previous outlets and also by a “promise” (for
1029 Mr Nguyen Khanh Trung, former Sales Manager for Trung Nguyen Coffee for Northern Vietnam, interview 31 March 2011.
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which it nevertheless did not take responsibility) that “franchisees” could be successful in only six months after joining the system. Trung Nguyen Coffee was very successful in the rapid promotion of its brand name, and in building an efficient distribution chain for its coffee products across Vietnam. Its outlets sprung up like mushrooms after the rain. By 2000 it had more than 100 outlets after only two years of franchising.1030 By 2002, it had over 400 outlets across all provinces in Vietnam.1031 In a Trung Nguyen’s 400-seat coffee shop in Hanoi (the capital of Vietnam), 600 to 800 customers were served daily, and in even greater number in weekends.1032 After becoming a leading coffee company in Vietnam, Trung Nguyen Coffee used franchising to expand overseas. In 2001, its first overseas outlet opened in Tokyo, Japan. Following Japan, it quickly expanded to many other countries including Thailand, Cambodia, Singapore, Germany, the US, Malaysia, and China.
Trung Nguyen Coffee’s success was based on building its brand name and establishing an efficient distribution chain through, in effect, a first generation product and trade name format. However, in 2008 Trung Nguyen Coffee moved to a more sophisticated model. It defined image, standards and systems for enforcing a complete business concept - in the form of a business format franchise. Since 2008 Trung Nguyen Coffee has tried to position its coffee products as representative of
Vietnam’s coffee culture, and has attempted to embed its coffee outlets with a culinary cultural space. Mr Vu, the founder and chairman of Trung Nguyen Coffee,
1030 Charmingvietnamgala.com, 'Profile of Mr Dang Le Nguyen Vu'
276
has stated that: “... we are planning to make Trung Nguyen Coffee shops with typical Vietnamese features, which reflect our culture, design and service style”.1033
Trung Nguyen Coffee has also asked a New Zealand’s franchise consultant company to help improve the consistency and identifiableness of its system. This is an effort to build a new franchise image of Trung Nguyen Coffee which is a shift from product and trade name franchise model to business format franchise. On 1 September 2008, Trung Nguyen Coffee opened the first outlet under its new franchise image at Changi Airport, Singapore. Since then many other outlets under this model have been opened in Vietnam and overseas. Trung Nguyen Coffee has also improved its current outlets to fit the new model. The Trung Nguyen Coffee strategy has been to move gradually to a full business format model.
Today, Trung Nguyen Coffee is Vietnam’s largest franchise system with over 1000 outlets across all 63 provinces in Vietnam. It has also expanded to more than 40 countries. Along with the coffee outlets, Trung Nguyen Coffee also owns several famous brands in Vietnam including G7 instant coffee and the convenience store chain G7 Mart (now being restructured under a new brand name G7 Mart-Ministop which is a partnership between Trung Nguyen Coffee and Ministop - a Japanese company). Moreover, Trung Nguyen Coffee has been the largest processed coffee exporter in Vietnam for many years. It is on the road towards becoming a “Global Trung Nguyen” - the final step of the development strategy of Trung Nguyen Coffee as stated by Mr Vu.1034 The milestones of Trung Nguyen’s expansion in Vietnam are outlined below:1035
1033 ibid. 1034 Saga Company, above n 1031. 1035 Charmingvietnamgala.com, above n 1030.
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Figure 21: Trung Nguyen Coffee’s Expansion Milestones
1200 1000
1000
800 600 600
400 Number of Outlets of Number 200 100 1 0
Year
8.3.5 The Development of Pho 24 in Vietnam
Pho 24 was the first Vietnamese franchise system to embrace business format franchising. Together with Trung Nguyen Coffee, Pho 24 is one of the most prominent local franchisors in Vietnam. It is a noodle franchise system which belongs to Nam An, one of the leading restaurant groups in Vietnam. Along with Pho 24, Nam An owns several prominent brands such as An Vien restaurant, Maxim’s, Ibox Coffee, Goody, and Bamizon.
“Pho” (noodle) is a famous, popular, and typical Vietnamese dish. “Pho” and “Ao dai” (long dress) are often recognised as cultural characteristics of Vietnamese
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cuisine and clothes, respectively. People in the North of Vietnam often have noodles for breakfast. “Pho” and rice are among the most popular national dishes of Vietnam. However, unlike rice, people normally eat “Pho” outside the home rather than cooking and eating it at home. The Vietnamese people make the interesting comparison that wife is rice while mistress is “Pho”. “Pho”, which is usually served in a bowl with rice noodles, slim cuts of beef or chicken and various vegetables in beef or chicken broth, has been the most common street dish in Vietnam for years. In 2003 Mr Ly Quy Trung, who was operating his family’s Nam An Group, thought “Why not build a “Pho” restaurant which not only serves delicious noodles but also complies with hygienic regulation”.1036 This led to the founding of Pho 24. “It is basically a street food dish with a modern representation”,1037 said Mr Trung, the founder and chairman of Pho 24. The brand name Pho 24 implies that its noodle is made from 24 different ingredients.
Unlike Trung Nguyen Coffee, Pho 24 was built on the vision of conducting franchising from the date of its establishment. This is consistent with its target to be “a worldwide brand”.1038 “My goal is to expand the brand to international markets over the next five years”,1039 said Mr Trung. It is also different to Trung Nguyen Coffee which conducted a less sophisticated form of product and trade name franchising. Pho 24 is the first Vietnam’s franchisor embracing business format franchising. It not only grants franchisees the right to use its brand name but also provides them with its menu and training service related to organising and operating a Pho 24 restaurant. It pays much attention on the stability and consistency of the system. Franchisees have to invest an average US$ 80,000 to set up a Pho 24 restaurant. A franchisee has to pay an opening fee of between US$ 20,000 and US$
1036 Minh Nguyen, 'Pho 24 Va Hinh Thuc Franchise [Pho 24 and Franchising]' (27 November 2007)
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25,000, and then 2 percent to 3 percent of its gross revenue by way of continuing monthly royalties.
In June 2003, Pho 24 opened its first outlet in Ho Chi Minh City. Two years after setting up the model and proving its model’s success, Pho 24 franchised its first domestic outlet in January 2005. In July 2005, it opened its first franchised outlet in Jakarta, Indonesia. By 2010, Pho 24 had 71 outlets in both domestic and overseas markets. Pho 24 has been recognised as a successful business format franchise model for domestic companies to follow. It has won several awards in Vietnam and overseas including the “International Franchisor of the Year” award of the Franchising and Licensing Association of Singapore in 2008. Mr Trung has published several books on franchising in Vietnam and has regularly taught in franchise training courses in Vietnam. However, he asserted that “the future of Pho 24 is overseas". To date, Pho 24 has expanded to seven countries - Indonesia, the Philippines, South Korea, Australia, Cambodia, Hong Kong, and Japan. Pho 24’s growth is outlined as follows:
Figure 22: The Expansion of Pho 24 in Vietnam and Overseas
100 87 89 90 80 74
70 66 60 54 50 40 36 30 Number of Outletsof Number 20 14 10 2 5 0 2003 2004 2005 2006 2007 2008 2009 2010 Feb-11 Year
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8.4 CHAPTER CONCLUSION
This chapter has discussed general matters relating to the conduct of the qualitative case study which is used to assess the influence of Vietnam’s Franchise Law on the development of franchising in Vietnam. A multiple case design was adopted, and four leading franchisors, both foreign and domestic, in the fast food/coffee sectors were selected as the subjects. The researcher identified key persons in the chosen companies as interviewees to obtain a deep understanding of the companies and their operation. All ethical issues were addressed in compliance with the University of New South Wales’s Research Code of Conduct. The data was collected through two sources - existing documents and interviews, while King’s template analysis method was adopted for data analysis. The measures to ensure and increase the validity and reliability have been also explained and possible limitations of the research have been noted. Finally, a detailed review was provided on the development of Lotteria, Gloria Jean’s Coffees, Trung Nguyen Coffee and Pho 24 - the franchise systems chosen for this case study.
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CHAPTER NINE CASE STUDY ANALYSIS AND FINDINGS
9.1 INTRODUCTION
In recent years the high and stable growth rate of Vietnam’s economy, its deep international integration, and the improvement of the legal framework for business pursuant to WTO’s accession commitments have provided real opportunities for the development of franchising in Vietnam. The number of franchise systems and the number of outlets per system has steadily increased since the introduction of Vietnam’s Franchise Law in 2006. The development of franchising in Vietnam, as in many other developing countries, has followed the entry of foreign franchise systems. Since the mid-1990s, pioneer foreign franchisors including KFC (the US), Lotteria (South Korea), and Jollibee (the Philippines) have entered Vietnam. The arrival of these systems introduced franchising to domestic entrepreneurs and has led to their embracing franchising. Up to now, foreign franchise systems have contributed more to the development of franchising in Vietnam than domestic systems in terms of the number of systems, the number of outlets, and turnover.
However, foreign franchisors mostly operate in Vietnam through company owned and managed outlets rather than through franchised outlets which is their expansion model in their home countries and other international markets.
Worldwide the fast food/coffee sectors are usually the first to embrace franchising and are generally among the most franchising industry sectors. This is no different in Vietnam. The fast food/coffee sectors account for about a half of the franchising market in Vietnam and include several leading international franchisors as well as new and established domestic franchisors. Two of the most famous foreign systems in Vietnam are Lotteria and Gloria Jean’s Coffees. Lotteria is a prominent South
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Korean fast food system which commenced operation in Vietnam prior to the introduction of the Franchise Law. Unlike Lotteria, Gloria Jean’s Coffees entered Vietnam after the introduction of the Franchise Law. These companies used different entry modes: the joint venture for Lotteria and master franchising for
Gloria Jean’s Coffees. Trung Nguyen Coffee and Pho 24 are prominent Vietnamese franchise systems both of which were established after the entry of the first foreign franchise systems. They have used different types of franchising. While Pho 24 has embraced business format franchising closely based on the familiar contemporary western model, Trung Nguyen Coffee has adopted the earlier and less sophisticated product and trade name model.
This chapter assesses the impact of Vietnam’s Franchise Law on the development of these systems in respect of their decisions relating to franchising in Vietnam, in particular in relation to their entry modes and expansion models. This chapter also considers the viability of traditional western franchise models in the Vietnamese context.
PART 1: THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FOREIGN FRANCHISE SYSTEMS
9.2 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF LOTTERIA IN VIETNAM
9.2.1 Decision to Enter Vietnam and Entry Mode the decision to enter Vietnam
Lotteria was one of the earliest franchise systems to enter Vietnam. It expanded to
Vietnam in 1996 - a decade after the introduction of the Doi Moi reforms. Its decision to enter to Vietnam was influenced by the same factors that frequently lead
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franchisors to expand overseas - increasing competition and market saturation in its home country.1040 Vietnam was chosen due to its large (about 80 million people at that time) and young (65 percent of Vietnam’s population are under 35) population.1041 Vietnam was recognised as a potential market for Lotteria at an early stage. Mr IL Sik Rho, General Director of Lotteria Vietnam, commented that:
Vietnam has joined the WTO, and the Vietnamese economy grows continuously, Vietnamese living standards are consistently improving, the goods and service market is diversified, more urban zones are built and people have less time for rest and cooking. Thus, fast food will be the choice of many people. Vietnam is a very exciting potential market.1042
Lotteria’s decision to enter Vietnam is obviously consistent with theory and practice of expanding overseas of franchisors as reviewed in Chapter 2.
Vietnam also offered Lotteria first mover advantages as an early entrant in a rapidly developing market. Although Vietnam introduced its Doi Moi reforms in 1986, the reforms were strengthened from the late 1980s when Vietnam passed a series of laws for the new economic model (see Chapter 5). These developments attracted many foreign companies looking to exploit the potential of Vietnam’s growing markets. The successful steps in Vietnam’s international integration in the early
1990s, especially the ending of the US trade embargo in 1995, continued to open the door wider for foreign investors. There was a foreign investment wave in Vietnam in the mid-1990s and Lotteria’s Vietnam entry was in the wake of that movement.
Although Lotteria could not franchise at that time as there was no specific law on franchising (see Chapter 7.2) the then Law on Foreign Investment facilitated Lotteria’s entry through a foreign investment vehicle and enabled it to develop company owned outlets. The advantage of early entry helped it to better compete
1040 See generally Chapter 2. 1041 Mr Lee Jang Mook, Director of Lotteria in Vietnam, interview 1 April 2011. 1042 Thanh, above n 1016.
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with other fast food chains coming to Vietnam. As Mr Lee Jang Mook, Director of
Lotteria Vietnam, explained:
McDonald’s is not yet available in Vietnam, but we [Lotteria] worry that in the near future McDonald’s will come to Vietnam, so we have to prepare a good system to compete with it when it comes.1043 the entry mode
Lotteria entered Vietnam through a foreign investment vehicle by establishing a joint venture with a Vietnamese company. Under the then regulatory framework, Lotteria could not enter Vietnam through franchising. The direct franchising entry modes such as master franchising and area development franchising were not then available to it. Although a wholly foreign owned enterprise (WFOE) could give
Lotteria more control, it initially chose to establish a joint venture in order to help it overcome the difficulties arising from cultural, political and commercial differences between its home market and the Vietnamese market through its local partner’s experience and understanding of the local environment. After Lotteria stabilised its position in Vietnam, it sought greater control of the joint venture by increasing its share in the joint venture. It currently owns about 98 percent of the capital of the joint venture and a shift to a WFOE is only a matter of time. Mr Lee, Director of
Lotteria in Vietnam, explained that even if Lotteria was first entering Vietnam today in an environment in which Vietnam’s Franchise Law makes entry via franchising possible, it would still use a joint venture as the most suitable initial strategy because in the current local market it is not easy to find a suitable master franchisee or area developer. He explained that:
Under the then regulations we of course could not access Vietnam through franchising. However, the most important reason for choosing
1043 Mr Lee Jang Mook, interview 1 April 2011.
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joint venture rather than other types of entry mode as it could help us better understanding Vietnamese market at the starting point.1044
9.2.2 Expansion Strategy
The expansion strategy choice between company owned and operated outlets and franchised outlets
Unlike the traditional strategy of Lotteria in South Korea where its expansion is mainly through franchising - 80 percent of its outlets are franchised - Lotteria
Vietnam currently owns and operates all of its 92 outlets. This is despite Vietnam having introduced the Franchise Law in 2006 which legalises franchising expansion and despite Lotteria having registered its system with the Ministry of Industry and
Trade of Vietnam (in 2007) which permits it to conduct franchising operations.
The introduction of Vietnam’s Franchise Law has created the legal environment in which franchising is a legally available option for Lotteria, but commercial and cultural factors have to date provided challenges which have prevented Lotteria from adopting a franchise strategy. Mr Lee, Director of Lotteria Vietnam, explained that:
Potential franchisees in Vietnam do not know the franchise concept. They do not know why they have to buy material from Lotteria, be controlled by Lotteria and pay royalties to Lotteria. These are the essence of franchising. At the present time it is easier to build a successful brand image and reputation for good service, and food quality if all outlets are owned by Lotteria.1045
1044 Mr Lee Jang Mook, interview 1 April 2011. 1045 Mr Lee Jang Mook, interview 1 April 2011.
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However, Mr Lee accepted that conducting franchising in Vietnam was only a matter of time:
We have to franchise as it is an easy way to expand our system. For example, in Ho Chi Minh City and Hanoi’s downtown the rental of location is very high. We cannot rent all locations we want, although we would like to open many stores in these areas. Therefore, if Vietnamese companies which had or can rent buildings in good places, we can franchise to them. Even in other areas, if the building owners would like to get franchise from Lotteria, we are happy to do that.1046
While continuing to expand its system through company owned and managed outlets Lotteria is therefore preparing for franchising. When the local people’s perception of the franchise concept is better, and the commercial environment improves, Lotteria will commence a franchising strategy.
9.3 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE
DEVELOPMENT OF GLORIA JEAN’S COFEES IN VIETNAM
9.3.1 Decision to Enter Vietnam and Entry Mode the decision to enter
Vietnam’s commercial and cultural contexts were strong motivators in Gloria Jean’s
Coffees entering Vietnam. Like Lotteria, Gloria Jean’s Coffees rated highly the potential success of this market having regard to its high and stable economic growth rate, and its huge and young population. GDP growth rates were over eight percent in the decade preceding its entry. Ms Nguyen Phi Van, International
1046 Mr Lee Jang Mook, interview 1 April 2011.
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Marketing Manager at Gloria Jean’s Coffees International and former Director of
Gloria Jean’s Coffees in Vietnam, emphasised that:
Vietnam is one of the fastest growing economies in Asia, with a population of 80 million and GDP growth at 7-8 percent per annum... More importantly, it is a very young consumer market with around 60 percent of the population under 35 years old. With such a young consumer market comes a desire for international brands and products, global concepts and inspiration, especially in the retail and entertainment industries.1047
Moreover, Gloria Jean’s Coffees entered Vietnam when Vietnam was about to become a WTO’s member which would make it an even more attractive market for foreign investors. Gloria Jean’s Coffees entered Vietnam in 2006 and all Vietnam’s
WTO accession documents were approved by the WTO’s General Assembly on 7 November 2006. On 25 January 2007, only two weeks after Vietnam officially became a WTO member, Gloria Jean’s Coffees opened its first outlet. Mr Billy Sin,
Regional Operations Manager-Asia for Gloria Jean’s Coffees, was attracted by the potential of Vietnam’s developing market:
Before entering into Vietnam, we had investigated carefully Vietnam market. We know that coffee is the export strength of Vietnam. Nevertheless, luckily, this does not influence much on our coffee products. Perhaps, Vietnam is good at Robusta coffee and Gloria is excellent in Arabica coffee that is the product we desire to develop... On the other hand, Vietnam is developing and is a potential market for investors. We researched many market in the Asia South-East region including Thailand, Malaysia... and realised that these markets were similar and had a development potentiality. This is a suitable time to
1047 Mitchell, above n 341.
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penetrate into Vietnamese market. For me, time has a decisive significance for the success of the trademark like Gloria Jean.1048
Although Vietnam was one of the world’s biggest producers Robusta coffee, Gloria Jean’s Coffees firmly believed that it could be successful in this market with its
Arabica coffee providing an alternative for Vietnamese consumers. Furthermore, as noted by Mr Sin, Gloria Jean’s Coffees’ strategy in Vietnam was not only to sell coffee but also to introduce a western coffee style concept and attract many young customers in a country with the world’s youngest population:
We target Vietnam’s younger generation, not older people. There are many reasons for this choice. Firstly, young consumers often like the latest things, and are happy to try them while older ones just want to have the usual things. Secondly, Gloria Jean’s Coffees goes to Vietnam not only to sell coffee but also to introduce a coffee drinking style. That is atmosphere and the art of enjoying coffee. That is the taste and the serving style of coffee, and so on. They are what the younger people care about while the older people mainly pay attention to the quality of the coffee. Research on several European markets shows that 80 to 90 percent of customers come to Gloria Jean’s Coffees for its product quality while only 10 to 20 percent come to enjoy the drinking style. However, in some markets in Asia including Vietnam, there are also two separate customer groups but while 80 percent of them come to Gloria Jean’s Coffees to enjoy the drinking style only 20 percent come because of the coffee quality.1049
However, the expansion of Gloria Jean’s Coffees into Vietnam would have not happened if there was not a franchise-specific law which legally recognised franchising as a discrete business method as Gloria Jean’s Coffees’ international entry mode is always through master franchising.
1048 Hoang Ngan, 'Franchising Wave after Integration' (2007)
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entry mode
The only strategy for international expansion of Gloria Jean’s Coffees, to date, has been master franchising. Therefore, it is not surprising that this entry mode was chosen for its expansion into Vietnam. Despite the attraction of the Vietnamese market and its undoubted potential, Gloria Jean’s Coffees would not have entered to Vietnam without laws enabling it to enter through master franchising.1050A franchise-specific law which set up a legal framework for master franchising and which regulated franchise relationships was a necessary precondition for its entry.
9.3.2 Expansion Strategy
As noted in Chapter 8.3.3.2, Gloria Jean’s Coffees Vietnam is a master franchisee of Gloria Jean’s Coffees Australia. The master franchise rights belong to a Vietnamese company, Viet Lifestyle. To date, Gloria Jean’s Coffees has only six outlets in Vietnam - three of which are owned by Gloria Jean’s Coffees Vietnam and three of which are sub-franchised. Gloria Jean’s Coffees Vietnam has made great efforts to open stores in Vietnam, especially through sub-franchising. In January 2007 Gloria Jean’s Coffees opened its first store in Ho Chi Minh City, Vietnam’s biggest city located in the South of Vietnam. It took only about two months for Gloria Jean’s Coffees to expand to Hanoi. It planned to increase the number of its outlets to 15 by the end of 2008 but this target was not achieved. It had to close an outlet in Hanoi operated as a joint venture with a local company after a short time.
Gloria Jean’s Coffees is facing a number of cultural and commercial challenges which constrain its expansion in general and its franchise strategy in particular. Vietnam is a small country with a big coffee culture. It is the world’s second largest coffee exporter and there are many coffee restaurants serving coffee in the Vietnamese traditional manner. The expansion of Gloria Jean’s Coffees into
1050 Ms Nguyen Phi Van, interview 31 March 2011.
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Vietnam was built on a strategy of introducing a new way for Vietnamese consumers to enjoy coffee. As Ms Van observed:
Actually I faced difficulties when deciding to replace a very traditional coffee restaurant which had been familiar to many Saigon people with Gloria Jean’s Coffees’ outlet. Initially many customers came and saw a new serving atmosphere, and they immediately went out.1051
She also recognised that:
In the beginning, 70 percent of the customers of Gloria Jean’s Coffees in Vietnam were foreigners.1052
Furthermore, the franchise concept is not properly understood by Vietnamese people, and it is not easy to recruit good potential franchisees. Though highly supportive of the Franchise Law, Ms Van emphasised that “the enforcement of this law, and of commercial laws generally, is still weak”.1053 She added that “if there is a conflict related to its system, Gloria Jean’s Coffees cannot rely on the law to deal with it”.1054
PART 2: THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF DOMESTIC FRANCHISE SYSTEMS
9.4 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF TRUNG NGUYEN COFFEE IN VIETNAM
9.4.1 Decision to Franchise
Trung Nguyen Coffee initially embraced a strategy to quickly popularise its brand name and set up a wide and efficient distribution network for Trung Nguyen’s coffee
1051 Mai Phop, 'Co Gai Mang Ca Phe Ve Vietnam [The Lady Bringing Coffee to Vietnam]' (2007)
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products. Although Mr Dang Le Nguyen Vu, the founder and chairman of Trung
Nguyen Coffee, and his associates did not know anything about franchising, they, in effect, put into place a primitive form of product and trade name franchising. Although franchising had been popular in other parts of the world for a long time, few local companies knew of this business model, and Trung Nguyen Coffee was no different. As a very small company, the sole initial motivation for Trung Nguyen Coffee was to extend its distribution system and to advertise its brand name. That motivation unintentionally led Trung Nguyen Coffee to so-called product and trade name franchising - the original franchise model which has almost universally been replaced by business format franchising which is the contemporary model (see Chapter 2). Mr Vu explained that:
At that time Trung Nguyen had no access to any theories on franchising. I did not know of franchising but I had a need and a vision that we needed to take advantage of the ability of other people - of their capital, human resources, management ability - to quickly popularise my company’s brand name and to sell our coffee products. Therefore I only required our partners - I now realise were franchisees in a way - to use our signboard and to buy our coffee products.1055
Similarly, Mr Nguyen Khanh Trung,1056 who was the sales manager of Trung
Nguyen Coffee from 1998 to 2006, recognised that:
I knew that what Trung Nguyen had conducted was franchising sometime in 2004 when I read a Vietnamese newspaper article talking about this business model during the time Vietnam was drafting the Franchise Law.1057
Franchising is obviously a very practical strategy for Trung Nguyen Coffee. Its experience supports Mendelsohn’s observation that franchising “did not derive from
1055 Mr Dang Le Nguyen Vu, interview 2 April 2011. 1056 Mr Nguyen Khanh Trung has contributed to building and implementing the product and trade name franchising strategy of Trung Nguyen Coffee. 1057 Mr Nguyen Khanh Trung, interview 31 March 2011.
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one moment of inventiveness by an imaginative individual” but “evolved from the solutions developed by businessmen in response to the problems with which they were confronted in their business operations”.1058
9.4.2 Expansion Strategy
The expansion of Trung Nguyen Coffee prior to the introduction of Vietnam’s Franchise Law
As noted above, Trung Nguyen Coffee’s management was aware sometime in 2004 that they were utilising a primitive form of franchising. Although the Franchise Law which legitimised franchising as a discrete business model was not then in existence - which meant that Trung Nguyen Coffee could not implement a comprehensive franchise system at that time - this had no impact on its distribution strategy. Trung Nguyen Coffee’s contracts were essentially distribution contracts under which “franchisees” only had to use Trung Nguyen’s signboard and to buy its coffee products. Trung Nguyen Coffee paid little attention to standardisation issues. This “franchise” strategy of Trung Nguyen Coffee could be used within the then legal framework. As noted above, at that time franchising was not legally recognised as a discrete business organisation. From a legal perspective, Trung Nguyen Coffee could not impose franchising contracts requiring the system standardisation from its “franchisees”. However from a commercial perspective it did not seek such standardisation. Its strategy was simply product distribution and branding.
The expansion strategy choice between company owned and operated outlets and franchised outlets
For a long period - the decade 1998 to 2008 - Trung Nguyen Coffee conducted a form of product and trade name franchising to take advantage of franchisees’ capital
1058 Mendelsohn, above n 10, pp. 19-20.
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and human resources to popularise its brand name and to sell its coffee products.
During that time, Trung Nguyen’s outlets were “franchised” through agent contracts.
However since 2008, Trung Nguyen Coffee has introduced a new franchise model to coexist with its original model. It has re-engineered its system to introduce standards and uniformity on a business format franchise model. Trung Nguyen Coffee has standardised all aspects of its new coffee outlets from menu to outlet design. This is a preparatory step to conducting business format franchising now that Vietnam’s
Franchise Law facilitates franchising. However, all of the new domestic outlets have been company owned and operated outlets rather than franchised.
Trung Nguyen’s development strategy has been based not only on the existence of the legal framework but also on cultural, commercial and economic contexts. In the initial period, Trung Nguyen Coffee was simply a new and very small company lacking capital, human resources and management ability with a focus of popularising its brand name and selling its products. This strategy was also compatible with the then legal framework which only permitted Trung Nguyen
Coffee to sign agent contracts with its “franchisees”. Today, although Vietnam’s
Franchise Law has paved a way for Trung Nguyen Coffee to conduct franchising as a discrete business method, its new franchise strategy requires a high level of standardisation which is currently easier to control if the outlets are owned and managed by Trung Nguyen Coffee itself. Although Vietnamese consumers’ awareness of brand names and franchising is much better than before, the recruitment of suitable potential franchisees remains a very significant challenge.
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9.5 THE INFLUENCE OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF PHO 24 IN VIETNAM
9.5.1 Decision to Franchise
Unlike Trung Nguyen Coffee which began a form of franchising within two years of its establishment, franchising was the vision of Pho 24 from its establishment. While Trung Nguyen Coffee embraces product and trade name franchising Pho 24’s franchising strategy has been built from the start on the sophisticated and contemporary business format franchising model. However, like Trung Nguyen Coffee, Pho 24’s decision to franchise was mainly motivated by commercial reasons. Mr Ly Quy Trung, the founder and chairman of Pho 24, adopted franchising to share the burden of capital, human resources and management ability.1059 For Mr Trung constraints on management ability are a strong motivation:
I make more profit and earn more money if I open a company store, but of course they have to balance with the capacity of management. If all 60 stores belonged to the company then I don’t think I could maintain the system.1060
In 2005, Pho 24 introduced a business format franchise model under which the standardisation of its system was a necessary requirement, prior to the introduction of the Franchise Law. Under the then legal framework Pho 24’s franchising could not be legally recognised as a discrete business activity. At that time Pho 24 simply franchised in its own way without legal recognition. Unlike Trung Nguyen Coffee’s leaders, Mr Trung already knew much about franchising, in both theory and practice, before establishing his company in Vietnam. He had graduated from Australia in the field of hospitality management and was familiar with the operation of business format franchising in the Australia context. However, as no one in Vietnam, not
1059 Nguyen, above n 1036. 1060 Frazer and Merrilees, above n 732.
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even lawyers or consultants, had knowledge of franchising to help Mr Trung, he himself built Pho 24 system from his theoretical knowledge and from what he had seen of many franchise systems during his time in Australia.1061 Of course Mr Trung knew that if there were conflicts between his company and franchisees the conflicts would not be recognised by the law as franchising conflicts. If the conflicts went to the courts the agreement would be treated in law as a licence contract or a sale contract or as a combination of them rather than as a franchise relationship as such. However, legal enforcement in Vietnam was weak at that time and commercial conflicts were often solved not by courts but by other dispute resolution processes such as negotiation. Therefore, Mr Trung took the decision to franchise in the knowledge that his franchise agreements would not be recognised under the then legal framework.
9.5.2 Expansion Strategy
The expansion of Pho 24 prior to the introduction of Vietnam’s Franchise Law
As Pho 24 franchised its system before the introduction of Vietnam’s Franchise Law, the then legal framework did not facilitate the development of franchising as a discrete business model. Therefore, Pho 24 could not legally implement franchising as its essence. However, as noted above, Pho 24 nevertheless carried out business format franchising in its own way. Pho 24 franchised its system through a so-called
“franchise agreement” with franchisor disclosure which imitated the US UFOC disclosure protocol (see Chapter 2.5.3). Mr Trung was aware that, as his agreements were not recognised by the then laws, neither his company nor his franchisees were protected by the legal framework. To some extent this may have helped the development of Pho 24 system. A franchising relationship had to be built that was
1061 Mr Ly Quy Trung, interview 31 March 2011.
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commercially viable given that enforcement of contractual provisions could not be relied on.
The expansion strategy choice between company owned and operated outlets and franchised outlets
Pho 24 currently has 89 outlets about one third of which are franchised. Although a franchising strategy was commenced before the introduction of the Franchise Law, the introduction of this law has given Pho 24 more confidence in conducting franchising as it is now legally protected as a discrete method of carrying on business. However, Mr Trung comments that the enforcement of Vietnam laws in general, and the Franchise Law in particular, is still weak and that he still cannot rely on laws to solve problems that arise. For example, rather than using the courts he has had to directly negotiate or seek third party intervention to close several outlets which have illegally copied his concept.1062
PART 3: CROSS-CASE FINDINGS
9.6 THE IMPACT OF VIETNAM’S FRANCHISE LAW ON THE DEVELOPMENT OF FRANCHISING: THE EXPERIENCE OF LOTTERIA, GLORIA JEAN’S COFFEES, TRUNG NGUYEN COFFEE AND PHO 24
The Franchise Law is necessary for the development of franchising
The introduction of Vietnam’s Franchise Law has paved the way for the adoption of a franchising strategy by Lotteria, Gloria Jean’s Coffees, Trung Nguyen Coffee, and Pho 24. It makes franchising, as a discrete business model, practicable. Because of the Franchise Law, Gloria Jean’s Coffees could enter Vietnam through its traditional entry mode - master franchising - an impossible mission under the
1062 Mr Ly Quy Trung, interview 31 March 2011.
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previous legal regime. The legal regime for franchising was one of Gloria Jean’s
Coffees’ main concerns when it decided to expand into Vietnam and soon after the introduction of Vietnam’s Franchise Law, Gloria Jean’s Coffees International asked a law firm in Vietnam to find an appropriate master franchisee and also to advise it on related legal issues.1063 After Vietnam introduced the Franchise Law, Lotteria quickly registered its system with the Ministry of Industry and Trade and commenced preparations for franchising. Lotteria expressly acknowledges that without the Franchise Law it could not franchise its system.1064 Trung Nguyen
Coffee is currently standardising its operations in order to upgrade its system from product and trade name franchising to business format franchising which is now possible under the Franchise Law. As explained by Mr Dang Le Nguyen Vu, its founder and chairman, Trung Nguyen Coffee initially had to “franchise” its outlets through agent contracts without system standard requirements because, in part, it could not rely on laws for protection. The introduction of the Franchise Law was a necessary prerequisite for Trung Nguyen standardising its outlets to strengthen the development of its brand and to successfully expand overseas. Mr Vu emphasised that:
The Franchise Law is really necessary for not only the current and big systems like Trung Nguyen, but also potential franchisors in Vietnam. The Franchise Law makes Trung Nguyen’s operations more favorable.1065
Similarly, Mr Ly Quy Trung, the founder and chairman of Pho 24, stated that:
The Franchise Law gives us more confidence to conduct franchising in Vietnam. It paves a way to easily franchise today and in the future.1066
1063 Ms Nguyen Phi Van, interview 31 March 2011. 1064 Mr Lee Jang Mook, interview 1 April 2011. 1065 Mr Dang Le Nguyen Vu, interview 2 April 2011. 1066 Mr Ly Quy Trung, interview 31 March 2011.
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He further emphasised that the Franchise Law is transparent, easy to understand, and reasonable. Trung Nguyen Coffee and Pho 24 are the first domestic franchise systems to have registered with the Vietnamese authorities as required by the Franchise Law.
The Franchise Law is not an exclusive factor for the development of franchising
Although all the case study interviewees recognise, and acknowledge, and welcome the introduction of the Franchise Law, all agreed that social-cultural, commercial and economic factors are more important considerations in the development of their systems in Vietnam. The major motivation for the foreign franchisors to enter Vietnam, and for the domestic franchisors to franchise their systems, was economic and commercial issues. Gloria Jean’s Coffees chose master franchising as its entry mode not because the Franchise Law recognised this mode, but simply because this was its standard entry mode. Similarly, Lotteria came to Vietnam through a joint venture not only because the lack of a Franchise Law compelled this but because this entry mode helped it better understand Vietnamese culture and economy through its local partner. The development and expansion strategy of the franchisors also depends much on social-cultural and commercial features. Lotteria has made great efforts to adjust its system to fit Vietnamese demands and culture. However, its expansion in Vietnam is still through company owned and managed outlets rather than through franchised outlets. Although Gloria Jean’s Coffee has sub-franchised some outlets in Vietnam, it has faced many challenges arising from the coffee drinking style of the Vietnamese. While Trung Nguyen Coffees is successful in conducting a less sophisticated mode of franchising - product and trade name franchising - Pho 24 has invested in its franchised outlets to better control the uniformity of the system. Franchising is not an easy strategy in a situation in which
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business awareness of intellectual property and of the franchise concept is low and few suitable potential franchisees are available.
Furthermore, the interviewees asserted that the Franchise Law is still young, and that legal enforcement, although improving, is still weak. Mr Vu emphasised that although his company has had a registered trademark for a long time he still could not rely on the law to combat the counterfeit shops. According to the recent statistics of Trung Nguyen Coffee, there have been hundreds of counterfeit coffee shops of
Trung Nguyen Coffee that were beyond its control.1067 Similarly, although having registered its trademark and franchise system with the Vietnamese authorities, Pho 24 has never relied on laws to protect its system. Mr Trung explained that legal enforcement is so weak that he had to use unofficial methods of dispute resolution to close counterfeit shops rather than seeking protection from the court. Ms Van commented that the Vietnamese authorities responsible for franchising have had little influence on the enforcement of the law.
9.7 BUILDING A VIABLE MODEL FOR FRANCHISING IN VIETNAM
9.7.1 The Experience of Foreign and Domestic Franchisors in Vietnam
A viable and healthy franchise sector requires adequate and appropriate infrastructure - political, legal, economic, commercial and social-cultural. In a developing country like Vietnam, these infrastructure factors are quite different to those in developed countries. Each of these infrastructure prerequisites poses particular challenges for both foreign and domestic franchise systems in Vietnam.
1067 Ngan, above n 1048.
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Lotteria Vietnam opened its first outlet in Ho Chi Minh City in 19981068 when its western style/fast food concept was unfamiliar to the Vietnamese. It struggled initially with few outlets which were not profitable. After a decade of Vietnam operation Lotteria had only nine outlets. Vietnamese customers were used to eating traditional foods with table service rather than the queue concept of fast food stores. Although around 80 percent of Lotteria South Korea’s 920 outlets nationwide are franchised, its operation in Vietnam has been only through company owned and managed outlets. The introduction of Vietnam’s Franchise Law in 2006 has created the legal framework in which franchising is a legally available option for Lotteria, but commercial and cultural factors have to date provided challenges which have prevented Lotteria from adopting a franchise strategy. The sophisticated business format franchise model it wants to introduce is currently not a commercially viable option.
Gloria Jean’s Coffees entered Vietnam after the introduction of the Franchise Law and immediately pursued a business format franchise strategy. However Gloria Jean’s Coffees faced difficulties which arose from differences in cultural and social norms. Gloria Jean’s Coffees initially applied its system in Vietnam as the same manner as in Australia. This led to difficulties in the Vietnamese market. Ms. Van confirmed that:
Franchisees at that time feared that they were applying the franchise system incorrectly so they simply applied in totality the Gloria Jean’s Coffees’ system as it operated in Australia. We did the same.1069
Since 2009, Gloria Jean’s Coffees has adjusted its system for the local market, although the adjustments are not as substantial as those introduced by Lotteria.
1068 Phu My Hung Company, above n 1008. 1069 Le Dung, 'Gloria Jean's Nan Giai Voi Cua Ai Viet Nam [Gloria Jean's Coffees Meets with Difficulties in Vietnam]' (14 May 2012) Nhip Cau Dau Tu [Investment Bridge]
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Almost all aspects of Gloria Jean’s Coffees Vietnam are the same as Gloria Jean’s
Coffees in Australia - the home country - from menu to serving style. It offers Arabica coffees which are different to popular local coffees using Robusta beans. Gloria Jean’s Coffees Vietnam also continues to use a self service system as in
Australia which is not readily accepted by Vietnamese consumers. The only major change is in its menu: "We did launch a local version of hot and cold coffee to cater to local needs",1070 said Ms Van.
Although Gloria Jean’s Coffees operates successfully in many countries the closure of several outlets, and the very small number of current outlets, suggest that its expansion in Vietnam through franchising is more problematic. After six years of operation in Vietnam, Gloria Jean’s Coffees still has not yet recouped its investment, and the point of time for its breaking even and becoming profitable is acknowledged by Ms Van to be “unknown”.1071 The full business format franchise model relocated from Australia seems not to have operated well in Vietnam’s social- cultural, commercial, economic and legal environment.
Pho 24 embraced a full business format franchise model from the beginning and is recognised as one of Vietnam’s most prominent domestic franchisors. The relationship between this company and its franchisees nevertheless resembles one of partners in a joint venture rather than a pure business format franchise relationship. Pho 24 has invested in each of its franchised outlets in Vietnam and is a part owner of each franchised outlet. The legal, social-cultural, commercial and economic context of Vietnam has influenced this choice of model. Despite the introduction of Vietnam’s Franchise Law legal enforcement is still weak and Mr Trung is firmly of the opinion that he cannot rely on the law for protection of his system and
1070 Mitchell, above n 341. 1071 Dung, above n 1069.
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enforcement of his rights. Being a partner with his franchisees in their outlets is the compromise that the owner of Pho 24 has adopted to control his system.
In addition to regulatory issues, cultural, commercial and economic factors have had a significant influence on the expansion strategy of Pho 24. Unlike the traditional model of franchising for relatively small and unsophisticated concepts in Australia - so-called “mom and pop” model comprising a husband and wife partnership - in
Vietnam almost all franchisees of Pho 24 are established and successful businessmen. In Vietnam, there are many “mom and pop” restaurants but they are rarely franchised outlets. Pho 24 does not have any “mom and pop” franchisees in
Vietnam. When asked why he did not franchise to individuals entering business for the first time Mr Trung said that it was not easy to find such franchisees under the current cultural, commercial and economic context of Vietnam even among his own employees.1072
Unlike the position in developed countries where franchisees in small systems and unsophisticated concepts are often owner-operators who are usually required to dedicate all their time to their franchised outlets, Pho 24 franchisees are owner- investors. Running a franchised outlet is usually only a part of the franchisee’s multiple business lines and the franchisee can spend only a limited time in the franchised outlets. The franchised outlets are operated by a manager who is employed and directed by the franchisees. However, the franchisees and their managers rarely have day-to-day contact. For example, a Korean franchisee of Pho
24 with five outlets in Vietnam visits only two outlets to look around and talk with the managers every week.1073 Moreover, Pho 24 franchisees tend to reduce costs1074
1072 Mr Ly Quy Trung, interview 31 March 2011. 1073 Frazer and Merrilees, above n 732. 1074 ibid.
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which eventually results in lower quality of products and service than that demanded by system standards. Mr Trung has acknowledged that:
The negative thing about franchised stores is the quality of the food. I am concerned most of the complaints from the customers are with the franchised stores.1075
The relationship between Pho 24 and its franchisees is also less personal and quite different to the franchisor-franchisee relationship in western countries where franchising is often described as a “commercial marriage”.1076 Despite trying to regularly keep personal contact with the franchisees, Mr Trung commented that he knew little about the families of the franchisees as this could harm his business. He has emphasised that:
In Vietnam it is quite sensitive. If you go to too much into the relationship then you cannot manage. You can’t be good friends or they don’t listen to you. Work relationship but not friends; if it becomes like friends then I cannot work. 1077
Pho 24 invests in its franchise units and becomes a part owner to be in a position to better control system standard and uniformity among its franchised outlets. Mr
Trung has stated that:
I adjusted (the system) quite a lot to match the Vietnam context. For example, when I started to franchise I didn’t want to just sell the franchise but (I wanted) to sell the franchise plus my shares as a shareholder. The concept was at least 30 percent of investment from Pho 24 to any franchisee store….. that way I feel safer, I feel I have better control of the franchisee. 1078
1075 ibid. 1076 Greg Nathan, Profitable Relationships (2008); Frazer and Merrilees, above n 732. 1077 Frazer and Merrilees, above n 732. 1078 ibid.
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This strategy has been confirmed by Pho 24’s Human Resource Manager:
We need control and so that is why we have the voice of the franchisee and the voice of the partner. That is why [Mr Ly Quy Trung] wants to control the company. 1079
Trung Nguyen Coffee, unlike Gloria Jean’s Coffees and Pho 24, has chosen an unsophisticated product and trade name franchise model to expand its system. Through applying this strategy, Trung Nguyen Coffee has successfully expanded its system throughout Vietnam. The Trung Nguyen Coffee model, discussed in detail in the next section, is a good fit with Vietnam’s environmental conditions - social- cultural, commercial, economic, and legal.
9.7.2 Adapting the Franchise Model for Vietnam
The experience of both the domestic and foreign franchise systems suggests that the strategy of western style full business format franchising is not necessarily appropriate in Vietnam’s current state of development. Vietnam may not be ready for the sophisticated full business format franchising concept. As noted by Mr Lee Jang Mook, Director of Lotteria Vietnam, potential franchisees in Vietnam still do not understand the essence of franchising and this is a key factor in expansion through company owned and operated outlets currently being the appropriate strategy for Lotteria. Mr Lee nevertheless suggested that successful franchising in Vietnam is only a matter of time and that Lotteria is preparing for franchising1080 and will begin franchising when Vietnamese business awareness of the franchise concept is better. This experience is not dissimilar to that in other developing countries such as China where the Chinese Franchise Law accommodates
1079 ibid. 1080 Mr Lee Jang Mook, interview 1 April 2011.
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franchising but commercial and social-cultural factors make this expansion strategy fraught with difficulty at the present time.1081
Through the case study, the experience of Trung Nguyen Coffee is instructive in considering a viable model for franchising in Vietnam. It is a progression to full business format franchising based on a series of levels beginning with simple product and trade name franchising in the nature of an unsophisticated distribution arrangement. To fit Vietnam’s context and Trung Nguyen Coffee’s development, Mr Dang Le Nguyen Vu built a six-phase strategy for his company:
Phase 1 - “from zero to something”
At this phase Trung Nguyen Coffee moved from a startup company with virtually nothing - little capital and only four employees (Mr Vu and three friends) - to a company having a strong capital base and a large workforce.
Phase 2 - “from small to large”
At this phase Trung Nguyen Coffee developed from a small startup operation through its strategy of rapid brand and product promotion and awareness driven by an unsophisticated product distribution and branding strategy (which could be described as product and trade name franchising).
Phase 3 - “from highland to plain”
At this phase Trung Nguyen Coffee, which was initially located and operated in highland areas, expanded its influence geographically into different regions.
1081 Two of the best known foreign franchise systems in China, KFC and McDonald’s, are now firmly entrenched across the country with KFC having over 1,500 outlets and McDonald’s over 700. Ironically these high profile systems which have been so influential in the development of franchising in China have developed their networks primarily through company owned and managed outlets rather than through traditional franchising. Currently KFC has only 60 franchised outlets and McDonald’s only one. In 2002, the President of McDonald’s Chinese Operations stated that “McDonald’s will begin franchising only after relevant regulations and laws are defined in China”. The introduction of the 2007 State Council’s Franchise Regulation prescribes a comprehensive regulatory regime on the western model. That there has not been a significant increase in the number of franchised outlets suggests the real influence of commercial and social-cultural factors (see generally Zhiqiong June Wang and Andrew Terry, 'Franchising Law in China' in Patricia Blazey and Kay-Wah Chan (eds), The Chinese Commercial Legal System (Thomson Lawbook Co., 2008) 335).
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Phase 4 - “from rural to city”
At this phase Trung Nguyen Coffee which initially operated only in rural areas expanded to the big cities of Vietnam.
Phase 5 - “from width to depth”
At this phase Trung Nguyen Coffee, which to date had focused only on expanding its distribution outlets and promoting its brand, began to focus on the standardisation of its system.
Phase 6 - “from Vietnam to global”
At this phase the aspiration of Trung Nguyen Coffee is to move from being a leading Vietnamese coffee company to a global brand name through implementing a business format franchise strategy.
During Phases 1 to 4, it was not feasible for Trung Nguyen Coffee to impose comprehensive system standards because of the low awareness of the Vietnamese in relation to the need for standards, specifications and controls. To impose system standards from the outset based on the western franchise model on business partners who were not aware of franchising and its essential business drivers would have been unsuccessful and unwise for Trung Nguyen Coffee. When talking about his adjusted franchising strategy in Vietnam, Mr Vu humorously compared franchising to Ferrari cars:
Conducting franchising must be customised to fit Vietnam’s context. It could not be a totally copy of the Western’s model which is good for developed countries but not totally suitable with developing countries like Vietnam. It looks like a Ferrari which is wonderful choice for driving in a big city but impossible to drive on such the rough mountainous roads as in the highland area of Vietnam.1082
1082 Mr Dang Le Nguyen Vu, interview 2 April 2011.
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At Phase 5, Mr Vu is introducing system standards and moving to a business format franchise model. The appropriate time for this system evolution is when the environmental factors are conducive to franchising, and the perception of Vietnamese people about intellectual property and franchising is better. In addition to building the six-phase schedule for Trung Nguyen Coffee’s development, Mr Vu has developed four different coffee shop levels so that Trung Nguyen Coffee can accommodate the changing cultural, social, commercial and economic environments of different regions at different times:
Level 1 (‘Grade C’ or ‘Trung Nguyen family coffee shops’)
The outlets at this level are part of the Trung Nguyen “family”. It is easy to be accepted as an outlet of Trung Nguyen Coffee at this level and they exist in different areas of Vietnam. At these outlets, Trung Nguyen Coffee simply distributes its coffee products, and the outlets’ owner only has to use Trung Nguyen Coffee’s signboard.
Level 2 (‘Grade B’)
Trung Nguyen Coffee accepts outlets for this level based only on the revenue criteria of the outlets. As at Level 1, the outlets’ owner only has to sell Trung Nguyen Coffee’s products and to operate the outlets under Trung Nguyen Coffee’s signboard.
However, at Level 2, basic service level requirements in relation to customer service are introduced.
Level 3 (‘Grade A’)
Within Level 3 there is Grade A and Grade A- depending on the revenue and consumer profile of the outlets, and the vision of the outlets’ owner. Trung Nguyen Coffee chooses the outlets for this level based on the management ability, location, outlet space, and consumer profile. They are granted only to those who can satisfy
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Trung Nguyen’s image and standards criteria and demonstrate commitment to the system.
Top Level (‘Ambassador’ Level)
As the name of this level suggests, the outlets at this level are the ambassadors for the Trung Nguyen Coffee brand. They exhibit the highest standards of customer service across all aspects of the operation and represent international best practice in all respects. The small number of outlets at this level are currently owned and managed by Trung Nguyen. Franchises will be granted only to those who can satisfy rigorous and comprehensive eligibility criteria and only in those locations capable of supporting an outlet of this sophistication.
It is clear that Trung Nguyen Coffee uses product and trade name franchising for outlets in the first and second levels and then uses business format franchising in the third and “Ambassador” levels. There is nevertheless a substantial difference in the comprehensiveness of the business format imposed at the third and “Ambassador” levels. Eligibility criteria for the “Ambassador” level are also significantly more rigorous. In terms of upgrading to the higher levels, Trung Nguyen Coffee inspects and provides training service for the outlet owners. The transition from Level 1 to
Level 2 is not immediate. Trung Nguyen Coffee does not upgrade outlets too soon as they would lose many of their customers who still want to be served inexpensive coffee products with simple service. Therefore, it takes considerable time - normally over three years - to upgrade to Level 2 from Level 1. If the outlet owners at Level 2 want to upgrade to Level 3 they need to invest more capital and dedicate more time to the management of the outlets as well as satisfy other necessary things as required from Trung Nguyen Coffee. If an outlet owner is accepted for upgrading to Level 3,
Trung Nguyen Coffee will send a training team for a month to advise on, and assist in, the upgrading of the outlet.
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Having regard to the experience of the foreign franchisors in Vietnam as well as to the domestic franchisors applying business format franchising, there seems to be much merit in the business strategy of Trung Nguyen Coffee. This strategy could not be recommended in a developed and mature franchising sector but seems to be suitable and intelligent strategy for franchising in a developing country like Vietnam. The strategy is based not only on the legal framework for franchising but also on the cultural, commercial and economic context and Trung Nguyen Coffee’s own business development. In 1998, Trung Nguyen Coffee was a very small company which lacked capital, human resources and management ability. It had a need to quickly popularise its brand name as well as to create an efficient distribution network for coffee products, but it did not have the resources or ability to standardise its system. Moreover, standardisation of its system was neither necessary nor suitable having regard to Vietnam’s environment at that time. The Doi Moi economic reforms - which moved Vietnam from a centrally planning economy to a socialist oriented market economy - were then very new and intellectual property and franchising were not well understood by the general public or by prospective entrepreneurs. The legal framework did not consider franchising as a discrete economic organisation and, under that legal framework, Trung Nguyen
Coffee had to expand its system through agent contracts rather than through franchise agreements. Requiring standardisation of the system under that context was impracticable. In Mr Vu’s words:
It is impractical to require the system’s standard when there was not any standard concept in the mind of people. Therefore, during that time, I only needed the same signboard appearing in all outlets of Trung Nguyen Coffee.1083
1083 Mr Dang Le Nguyen Vu, interview 2 April 2011.
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In the first decade of franchising, Trung Nguyen Coffee therefore focused only on expanding its outlets without standardising its system. It did not copy the familiar western model but adapted it to fit Vietnam’s context. Its outlets have been developed in four levels, and franchising is conducted in a different way at each level with different standards, different formats and different franchisee and franchisor obligations. At the first two levels, Trung Nguyen Coffee utilises only product and trade name franchising, and begins using the business format franchising at Level 3. The legal, cultural, commercial and economic context of
Vietnam has influenced this franchise strategy adjustment: awareness of intellectual property and franchising is still low and franchising standards and compliance requirements are not yet highly recognised or appreciated by local businesses. Since
2006, there has been a franchise-specific law, but legal implementation is still weak and it is difficult to rely on the law for the protection of Trung Nguyen Coffee’s franchise system. The flexibility of Trung Nguyen Coffee’s franchising strategy helps it to overcome such difficulties.
The difficulties that Pho 24, Lotteria, Gloria Jean’s Coffees, as well as Trung Nguyen Coffee itself, have faced suggest a flexible franchise model may be most suitable for franchisors in Vietnam and possibly in other developing countries. In
Vietnam the social-cultural, commercial, economic and legal context poses real challenges for franchising under the business format franchise model. The business format franchise model offers real and significant advantages in the provision of entire business and management systems, training and ongoing support but this sophisticated franchise model is clearly difficult to implement in an environment in which businesses lack knowledge and skills of management, in which people’s perception of the value of the standard of product and services is still low, and in which franchisors cannot rely on the law to protect their system. In such circumstances, franchisors face problems in maintaining system uniformity and
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standards. The simplicity of product and trade name franchising makes this type of franchise work better in such an environment. The main objective of franchisors under the product and trade name franchising is simply to sell their products under their brand name to franchisees. Their systems are not so affected by weak awareness of intellectual property by both consumers and businesses or by the weak perception of consumers as to the quality standard of product and services or by the weak enforcement of the legal system.
In developing countries such as Vietnam, the impact of the environmental context in relation to social-cultural, commercial, economic and legal factors suggests that a western comprehensive business format franchise model is not necessarily the most appropriate starting point for a developing franchise sector. Domestic franchisors may find it advantageous to develop franchise systems under the product and trade name model in the first stage and then move step by step to the business format model where and when appropriate. For international franchisors with business format franchise models, system expansion through company owned and operated outlets to accommodate the social-cultural, commercial and economic context is the appropriate strategy. As social-cultural, commercial, economic and legal environment develop a franchising strategy may become appropriate.
9.8 CHAPTER CONCLUSION
The case study has been conducted with both leading foreign and domestic franchisors with different entry modes and expansion strategies. Of the foreign franchisors, Lotteria expanded to Vietnam through a foreign investment vehicle before the introduction of the Franchise Law but has not yet franchised its outlets while Gloria Jean’s Coffees entered Vietnam immediately after the introduction of the Franchise Law through master franchising and has a combination of sub-
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franchised and master franchisee owned outlets. Of the domestic franchisors, Trung
Nguyen Coffee has used a less comprehensive product and trade name franchising while Pho 24 has embraced the modern western franchise model of business format franchising.
This chapter has analysed the role and influence of Vietnam’s Franchise Law on the development of these franchise systems. All the franchisors were in agreement as to the significance of Vietnam’s Franchise Law on the decision to franchise, and on entry mode and expansion strategies. They understood that they could not franchise in Vietnam without a franchise-specific law to recognise franchising as a discrete business mode. Each nevertheless acknowledged that the Franchise Law is not an exclusive factor. The development of these leading franchise systems is heavily dependent on cultural, social, commercial and economic factors. Each system has had to adjust its system to some extent to fit Vietnam’s contemporary situation.
Although business format franchising is the contemporary form of franchising which is invariably adopted in developed countries, it may not to be the most appropriate starting choice for franchising in Vietnam. The metamorphosis of franchising from product and trade name franchising to business format franchising over the last half century is explained not only by the benefits of proven business and management system but by the training provided by the franchisor and the continuing support, guidance and assistance of the franchisor. These characteristics of business format franchising are as important in developing countries as in developed countries - indeed they are probably more significant. Malaysia is perhaps the best known example of a government embracing franchising as a strategy to promote sustainable business units.1084 However this case study suggests that environmental factors - social-cultural, commercial, economic, and legal - may frustrate attempts to conduct
1084 Terry, above n 21; Binh and Terry, above n 12.
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franchising through sophisticated business format franchise models. International franchisors increasingly understand the need to localise or customise their system’s offerings for local markets but the Vietnam case study suggests that franchisors - both international and domestic - also need to localise or customise the underlying system itself to accommodate the realities of a developing country. In developing countries such as Vietnam a flexible franchising model which accommodates progress through various franchising levels may be more suitable for franchising. For the international franchisors who own business format franchise systems it may be more appropriate to expand their system through owned and operated outlets and to wait for the changes in social-cultural, commercial, economic and legal environment which will make a franchise strategy practicable.
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PART FIVE CONCLUSION
CHAPTER 10 CONCLUSION
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CHAPTER TEN CONCLUSION
10.1 CONCLUSIONS ON RESEARCH QUESTIONS
10.1.1 Research Question 1: What is the Rationale for the Introduction of a Dedicated Franchise Law in Vietnam?
The world’s first franchise-specific legal regime was introduced in California over 40 years ago. Today over 30 countries have introduced franchise-specific laws of greater or lesser sophistication to address issues flowing from the information and power imbalance in the franchisor-franchisee relationship.1085
In Vietnam, the introduction of a dedicated Franchise Law arose from a much more urgent requirement. The Franchise Law paves the way for, and encourages, the development of franchising. Unlike in developed countries, where franchising is a product of business, in Vietnam franchising is as much a product of the law. In Vietnam where activities which are not expressly authorised are, by implication, prohibited,1086 the promulgation of a franchise-specific law was a necessary prerequisite for the development of franchising. In addition to addressing information and power imbalances the Franchise Law is a strong expression of the Government’s recognition of, and support for, franchising.
The Doi Moi (‘Renovation’) reforms in 1986 included legal reforms which led to a socialist oriented market economy in accordance with free market principles under
1085 See Chapter 2.5.2. 1086 By law, under the 1999 Law on Enterprises and then the 2005 Civil Code (article 4), there is a principal that companies and individual can freely undertake or agree on the establishment of civil rights and obligations if such undertaking or agreement is not banned by law and not contrary to social ethics since. However, State officials have to do activities clearly stipulated by laws, so it is still difficult for businesses or individuals to conduct any activities which are not yet clearly prescribed by laws.
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which franchising could develop. The Doi Moi reforms provided the foundation for foreign investment1087 and for the emergence of the private sector and entrepreneurship.1088 The law reform program required for WTO accession, along with series of laws promulgated or modified to be consistent with international practice, have created a more transparent and certain legal environment for business. These are significant preparatory steps in the development of franchising for, as stated by UNIDROIT, a healthy commercial law environment is of “paramount importance for franchising” and “without it franchising is not able to function”.1089
Franchising first appeared in Vietnam in 1996 with the entry of pioneer foreign franchisors from the Philippines and the US. However, the lack of a clear legal framework for franchising resulted in a constrained franchise sector. Franchising was recognised in 1999 as a type of technology transfer regulated under technology transfer regulations1090 but it was also subject to separate regulations as both a trademark licence and a service contract. Therefore, an intending franchisor had to enter a franchise relationship through one or several different contracts rather than through a discrete and self-contained franchise agreement. This complex regulatory regime was not appropriate for the development of franchising and, in the words of a foreign lawyer in Vietnam, doing franchising at that time was like “hammering a square peg into a round hole”.1091 Conducting franchising was, in practical terms, impossible. The introduction of the Franchise Law in 2006 was a response to the urgent need to encourage the development of franchising in Vietnam. The legal reforms required for WTO accession had raised the Government’s awareness of
1087 The 1987 Foreign Investment Law. 1088 Gillespie, above n 639, notes that “since reforms could not wait the decades required to distil normative standards from local commercial practices, lawmakers turned to western laws for inspiration”. 1089 UNIDROIT, above n 184, p. 265. 1090 Circular 1254/1999/TT-BKHCNMT, dated 12 July 1999, of the then Ministry of Science, Technology and Environment (now the Ministry of Science and Technology) which guided Decree 45/1998/NĐ-CP on Technology Transfer; and then Decree 11/2005/NĐ-CP making detailed provisions on technology transfer, dated 2 February 2005, which replaced Decree 45. 1091 Cooper, above n 734.
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franchising and the need for a law to encourage its development. Vietnam’s
Franchise Law has been one of few Vietnamese regulations that have received a high consensus from both law-makers and the business community. While the introduction of a dedicated franchise law is a controversial matter in many domestic franchise sectors worldwide1092 the introduction of the Franchise Law in Vietnam has wide public support. Despite the contribution of the Franchise Law to the regulation of the franchisor-franchisee relationship perhaps its greatest contribution is to recognise franchising as a discrete business model and thereby to both legitimise and encourage its development. The case study supports this conclusion.
10.1.2 Research Question 2: To What Extent Does Vietnam’s Franchise Law Provide an Appropriate Legal Regime for Franchising?
Vietnam’s Franchise Law provides a clear and dedicated legal framework for franchising in Vietnam. It comprises four components - the 2005 Commercial Law providing a framework for regulating the franchise relationship; the 2006 Decree Making Detailed Provisions for the Implementation of the Commercial Law with Respect to Franchising Activities which was amended by the 2011 Decree 120; a
Ministry of Industry and Trade Circular Providing Guidelines on Procedures for Registration of Franchising Activities; and a Minister of Finance Decision Providing the Regime for the Collection and Payment, Management and Use of Charges for
Commercial Franchising Registration addressing registration and prior disclosure which are key features of the regulatory regime.
Vietnam is one of over 30 countries which have introduced a franchise-specific law to supplement the underlying commercial laws. The Franchise Law adopts an increasingly familiar regulatory model. It stipulates comprehensive franchisor prior
1092 See Chapter 2.5.2.
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disclosure with moderate relationship obligations.1093 A “light touch” registration regime which was included in the Franchise Law was virtually removed in 2012, being retained only for international franchisors franchising into Vietnam.1094
Prior disclosure - which addresses the information imbalance inherent in the typical franchise relationship - is generally considered as the key to franchise regulation. 1095 Consistent with international best practice, Vietnam also uses prior disclosure as its central regulatory tool. The prior disclosure provisions are broadly similar to the requirements of those countries which adopt a comprehensive disclosure regime including the US, Australia, China, Malaysia, and also UNIDROIT’s Model Franchise Disclosure Law.1096
Relationship/conduct issues arising from the power imbalance are also addressed in Vietnam’s Franchise Law, particularly through imposing moderate restrictions on the rights and obligations of the parties in the franchise relationship.1097 Vietnam, like many regulated countries, provides restrictions on unilateral termination by the franchisor and follows the common formula of allowing termination only on prescribed termination events and the giving of a default notice and the opportunity for the franchisee to remedy its breach. Vietnam also mandates several rights and obligations of both franchisors and franchisees.1098
Vietnam’s Franchise Law generally subjects both foreign and domestic franchisors to the same regulatory regime1099 which is consistent with, and indeed required by,1100 international best practice. Previous restrictions as to business forms and the
1093 See Chapter 7.6. 1094 However, the annual report of franchisors is still required to support data collection; see Chapter 7.6.7. 1095 See Chapter 2.5.3. 1096 See Chapter 7.6.4. 1097 See Chapter 2.5.3. 1098 See Chapter 7.4.6. 1099 However, under Decree 120 (in 2011) the registration obligation remains only for foreign franchisors which raises a concern as to a unified regime for both domestic and foreign franchisors and seems inconsistent with Vietnam’s WTO accession commitment. 1100 Vietnam’s WTO accession commitments.
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extent of foreign capital ownership in foreign invested enterprises involving franchising have been lifted as consequence of Vietnam’s WTO accession commitments.1101
Vietnam’s regulatory regime for franchising is broadly consistent with international best practice. It is, in the words of Baker and McKenzie lawyer Giles Cooper, “modern and well-drafted, and balances commercial freedom and protection of franchisees”.1102 Cooper further states that “new specific domestic legislation and recent WTO commitments on franchising have laid the groundwork for a likely explosion in activity in this dynamic sector”.1103 However, the gaps in the protection provided for franchisees, and the ambiguity of several provisions, are issues of concern for both franchisors and franchisees.1104 The lack of unification and synchronicity of provisions between the Franchise Law and underlying commercial regulations is a particular concern. The governing Commercial Law unfortunately makes certain of the franchisor’s obligations subject to the proviso “unless otherwise agreed” (article 287) which contradicts the mandatory regime of Decree 35 and Circular 09. Although in practice implementing regulations are treated as having higher validity than the source document, this approach is not consistent with Vietnam’s transition to a law-based State.
10.1.3 Research Question 3: To What Extent Has Vietnam’s Franchise Law Influenced the Development of Franchising in Vietnam?
Although franchising in its original product and trade name mode first developed in the US in the 1850s, franchising in its contemporary business format franchise mode is a much more recent phenomenon which dates from the US a century later. From
1101 See Chapter 7.6.8. 1102 Vietnam Investment Review, above n 922. 1103 ibid. 1104 See Chapter 7.6 and Chapter 5.
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the 1970s there has been a rapid growth of business format franchising through international expansion of US franchisors providing the catalyst for the development of domestic franchise sector. The history of franchising in Vietnam is much more recent. Vietnam was a country with a closed agricultural economy over a long period under a feudal regime which lasted until 1945. It was then plunged into 30 years of wars from 1945 to 1975. These circumstances, and the centrally planned economy which lasted until 1986, provided no opportunity for franchising to develop. The Doi Moi reforms in 1986 led to economic development in accordance with free market principles and provided the foundation for foreign investment1105 and for the emergence of the private sector and entrepreneurship. In the mid-1990s, a decade after the Doi Moi reforms, the franchising concept was introduced to
Vietnam through the international expansion of foreign fast food franchisors but, for legal and commercial reasons, they expanded through company owned and managed outlets.
As noted at 10.1.1 in relation to Research Question 1 the development of franchising in Vietnam was not possible until the introduction of the Franchise Law in 2006 which provided the first legal framework to recognise franchising as a discrete business activity rather than as a type of technology transfer as in previous regulations. This has facilitated and encouraged the development of franchising. In the five years following the introduction of the Franchise Law, the number of franchise systems increased more than fourfold, from 23 to 96. The role of the
Franchise Law in the development of franchising is supported by the findings of the case study.1106 It is evident from the case study that, without a franchise-specific law, intending franchisors had to “divide” a franchise agreement into different contracts which were regulated by different regulations. This discouraged both
1105 The 1987 Foreign Investment Law. 1106 See Chapter 9.
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potential domestic and foreign franchisors, and would have prevented the case study companies from contemplating franchising in Vietnam. In the words of Trung Nguyen Coffee chairman, the Franchise Law “has made Trung Nguyen operations more favourable”.1107
However, Vietnam’s Franchise Law is not an exclusive factor for the development of franchising. The case study makes it clear that weak legal enforcement, and social-cultural, commercial and economic factors, also have a significant influence on the entry mode and expansion strategies of franchisors in addition to the fundamental question of their decision to franchise. Although Vietnam’s Franchise Law has paved a way for the development of franchising, weak legal enforcement, and the social-cultural, commercial and economic context of developing/transitional countries like Vietnam, still presents many obstacles for conducting franchising. Although entering Vietnam at an early stage, Lotteria is still expanding its system through company owned and managed outlets. Gloria Jean’s Coffees has few outlets in Vietnam after six years in Vietnam and has faced many difficulties arising from the coffee drinking style of the Vietnamese. Although embracing a full business format franchising strategy Pho 24 has had to invest in its franchised outlets in Vietnam and the relationship between Pho 24 and its franchisees resembles a joint venture rather than a pure franchise relationship. While Trung Nguyen Coffee has been successful through embracing a less sophisticated form of franchising - product and trade name franchising - the operations of franchisors in Vietnam have been almost through owned and operated outlets by themselves rather than through franchised outlets.1108
1107 Mr Dang Le Nguyen Vu, interview 2 April 2011. 1108 See Chapter 9.
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10.1.4 Research Question 4: To What Extent is It Necessary to Adapt the
Contemporary Western Franchise Model for Vietnam?
Business format franchising drives the relentless development of franchising. It was the realisation in the US in the 1950s that the real potential of franchising as a business expansion strategy lay not in relatively unsophisticated branded distribution arrangements (product and trade name franchising) but in sophisticated branded distribution arrangements incorporating complete operational and managerial formats for proven business concepts (business format franchising) which has led to the inexorable rise of franchising internationally.
Conventional wisdom is that the first generation product distribution franchise is an outdated business form of little contemporary significance beyond a number of key industry sectors - soft drink bottling, and motor vehicle and petroleum distribution - in which it is entrenched. Franchisees in these sectors are invariably substantial enterprises in their own right and, at least in the petroleum sector, the
“McDonaldisation” of retail outlets is well advanced. Today business format franchising is the preferred model for franchise development because it offers a complete business format - initial training, operational and managerial systems, and ongoing assistance and support - resulting in a cloned network.
While business format franchising is the industry standard for developed countries it remains an aspiration for many developing countries. Despite the attraction for developing countries of system, training and support, and despite the economic and regulatory infrastructure being in place for the development of business format franchising, a range of commercial and socio-cultural factors conspire to prevent its full expression.
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The Vietnamese experience outlined in this research suggests that comprehensive business format franchise systems are not necessarily the most appropriate starting point for franchise development in Vietnam. While the characteristic of business format franchising - proven brand, systems, training, and support - are effective and significant features they require a level of commercial and social-cultural maturity and a legal regime to support a sophisticated and intricate business relationship. While customisation of system offerings is an acknowledged challenge for international franchisors customisation of the underlying system to accommodate local reality is also necessary. The case study suggests that the product and trade name model may be an appropriate starting point with a move to business format franchising when, and in places where, the social-cultural, commercial and economic factors and legal environment can accommodate more sophisticated arrangements. The appropriate strategy for international franchisors who currently have business format franchise systems is to expand their system through franchisor owned and operated outlets and to franchise their outlets only when social-cultural, commercial, economic and legal features are sufficiently developed to support their business format franchise system expansion.1109
10.2 CONTRIBUTIONS AND IMPLICATIONS OF THIS RESEARCH
As discussed in Chapters One and Two, although there is an ongoing debate as to whether a franchise-specific law is needed to support a healthy development of franchising, there is a little literature on the impact of franchise-specific regulation on franchising development. Although Vietnam introduced a dedicated franchise law in 2006, there has not yet been any empirical research on the role of this law on
1109 See Chapter 9.
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the growth of franchising. This thesis, therefore, makes the following contributions to the literature:
Firstly, this thesis provides an in-depth analysis of franchise regulation in Vietnam. It has reviewed the regulations prior to the introduction of Vietnam’s Franchise Law and concludes that prior to the law franchising was regulated by complex, unsuitable and overlapping provisions on intellectual property and technology transfer coupled with general contractual rules. The thesis has also clarified the rationale for the introduction of the Franchise Law and provides a critical assessment of this law having regard to international benchmarks and the Vietnam situation.
Secondly, this research reviews the development of franchising in Vietnam. It finds that franchising was constrained during the first decade of its existence in Vietnam when it was not legally recognised as a discrete business activity. The steady growth of franchising commenced with the introduction of the Franchise Law in 2006.
Thirdly, through conducting a qualitative case study, this research provides evidence to assess the impact of Vietnam’s Franchise Law on the development of franchising. It finds that the Franchise Law is a necessary prerequisite for the healthy development of franchising but is not an executive factor. Social-cultural, commercial and economic factors and legal enforcement also play a significant role. This research suggests that franchise-specific laws may have a similar influence on the development of franchising in other developing/transitional countries as in
Vietnam.
The major implication for practice is that the case study suggests that a sophisticated western business format model is not necessarily most appropriate starting point for franchising in Vietnam. The characteristics of business format franchising - proven brand, systems, training, and support - are important in small and medium business
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development for developing countries. However social-cultural, commercial and economic factors, and legal enforcement, in Vietnam pose challenges for those enterprises expanding through a business format franchise strategy. The localisation and customisation of the underlying franchise system is necessary to accommodate local realities. Franchisors may find it advantageous to develop franchise systems under a product and trade name model in the first stage and then move step by step to a business format model where and when appropriate. For international franchisors who have business format franchise models, system expansion through company owned and operated outlets to accommodate the social-cultural, commercial and economic context is the appropriate strategy. As social-cultural, commercial, economic and legal factors change a franchising strategy may become appropriate. This finding also has implications for franchising in other developing/transitional countries which have similar environmental features as Vietnam.
10.3 LIMITATIONS AND FUTURE RESEARCH
This thesis focuses on franchising in Vietnam and the impact of the Franchise Law on the development of franchising in Vietnam. There are several limitations on the scope of the research, in particular the case study, which could be investigated in future studies.
In this research, a qualitative case study was conducted with four leading companies in fast food/coffee sectors in Vietnam. However the experiences of smaller franchisors in this sector, and those of franchisors in other industry sectors, have not been analysed.
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Power and information imbalances are inherent in the typical franchise relationship.
Franchisees are invariably in the weaker position compared to franchisors and is increasingly accepted that the dedicated franchise regulation is necessary to address this reality in order to protect franchisees. This research has assessed the role of
Vietnam’s Franchise Law on encouraging the development of franchising, but has focussed on the role of this law from a franchisor perspective. An interesting research project would be to assess the efficacy of the law in encouraging prospective franchisees to enter business through franchising.
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APPENDIX I: THE REGULATED FRANCHISE SECTORS INTERNATIONALLY1110
Jurisdictions Year of first franchise regulation
Albania 1994
Australia 1998
Barbados 1975
Belarus 1998
Belgium 2006
Brazil 1994
Canada
Model Law 2005
Alberta 1980
Ontario 2001
New Brunswick 2007
Prince Edward Island 2007
China 1997
Croatia 2003
Estonia 2002
France 1991
Georgia 1997
Indonesia 1997
Italy 2004
Japan 1983
Kazakhstan 2002
Kyrgyzstan 1998
Lithuania 2000
Macau 2000
1110 Terry, above n 253; Zhang, above n 20, pp. 470-471.
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Jurisdictions Year of first franchise regulation
Malaysia 1998
Mexico 2001
Moldova 1997
Romania 1997
Russia 1996
South Korea 1997
Saudi Arabia 1992
South Africa 2008
Spain 1996
Sweden 2006
Ukraine 2004
Taiwan 1999
The US
federal 1979
state 1970
Venezuela 1992
Vietnam 2006
UNIDROIT Model Law 2002
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APPENDIX II: FOREIGN FRANCHISE SYSTEMS IN VIETNAM
Registration Year of Industry Number of Franchise System Origin with the Vietnam Entry Mode Sectors outlets authority Entry
Master Cartridge World Australia √ 2007 Computer 5 Franchising
LJ Hooker Australia Not yet 2007 Not available Real Estate 1
Jetstar Airways Australia √ 2008 Joint Venture Air Transport 1
Master Gloria Jean’s Coffee Australia √ 2009 Restaurant 6 Franchising
Master Chocolate Graphics Australia Not yet 2009 Restaurant 1 Franchising Global Designer Brands Proprietary Australia √ 2011 Not available Retail Store Not available Limited Company Business Termicam Australia √ 2012 Not available Not available Service
Oxyplast Belgium Belgium √ 2009 Not available Manufacture Not available
GR Vietnam BVI √ 2009 Not available Retail Store Not available International
La Senza Canada √ 2008 Not available Retail Store Not available International
WSI Emerging Internet Canada √ 2009 Not available Not available Markets Service
La Vie en Rose Canada √ 2011 Not available Retail Store Not available International Inc
Architectural BoConCept Denmark Not yet 2010 Not available Not available Service
Délifrance France Not yet 2006 Not available Restaurant Not available
Galien Pharma France √ 2007 Not available Pharmacy Not available
Tous Les Jours France √ 2007 Subsidiary Restaurant 4
Master Dream Cones France Not yet 2009 Restaurant 5 Franchising
Ixina France France √ 2011 Not available Retail Store Not available
Vogelsitze Germany √ 2008 Not available Retail Store Not available
Escada Germany √ 2008 Not available Retail Store Not available Aktiengesellschaft
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Registration Year of Industry Number of Franchise System Origin with the Vietnam Entry Mode Sectors outlets authority Entry
Whole Sale Metro AG Germany √ 2011 Not available Not available Services
Karrox India √ 2009 Not available Education Not available Technologies
Sergio Rossi Italy √ 2008 Not available Retail Store Not available
IllyCaffe Italy √ 2009 Not available Restaurant Not available
Moschino S.P.A Italy √ 2010 Not available Retail Store Not available
Ministop Japan √ 2009 Not available Retail Store Not available
Best Denki Japan Not yet 2006 Joint Venture Retail Store 3
Master Daiso Japan Not yet 2008 Retail Store 7 Franchising
Master Hachi Hachi Japan Not yet 2007 Retail Store 3 Franchising
Master Sarku Japan Not yet 2010 Restaurant Not available Franchising
South Genesis √ 2007 Not available Restaurant Not available Korea
South BBQ Chicken Not yet 2006 Subsidiary Restaurant 12 Korea
South Burger Khan Not yet 1996 Not available Restaurant Not available Korea
South Lotteria √ 1997 Subsidiary Restaurant 80 Korea
Angel-in-us (belongs South Not yet 2008 Subsidiary Restaurant 2 to Lotteria) Korea
England Optical Malaysia √ 2008 Not available Retail Store Not available Group
International Malaysia √ 2010 Not available Restaurant Not available Franchise Holding
Parkson Malaysia Not yet 2005 Not available Retail Store Not available
MRI Network Employment Malaysia Not yet 2008 Not available Not available Worldwide Activities
Sun Rider In’t Malaysia √ 2011 Not available Retail Store Not available
The Jollibee Not yet 1996 Subsidiary Restaurant 10 Philippines
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Registration Year of Industry Number of Franchise System Origin with the Vietnam Entry Mode Sectors outlets authority Entry
World of Sports Singapore Not yet 2006 Not available Retail Store 6
Spinelli Singapore √ 2008 Not available Restaurant Not available
Cherie Hearts Child Singapore √ 2008 Subsidiary Education 1
Colliers Singapore √ 2008 Not available Real Estate 1 International Kinderland Educare Singapore √ 2008 Not available Education Not available Services
Sirva Singapore √ 2009 Not available Logistics Not available
Thai Village Singapore √ 2009 Not available Restaurant Not available
Heatwave Shoes Singapore √ 2009 Not available Retail Store 2
Starpino’s World Pte Singapore √ 2010 Not available Restaurant Not available Ltd
SFBI (Asia-Pacific) Singapore √ 2011 Not available Restaurant Not available Pte Ltd
Jel corp Pte Ltd Singapore √ 2011 Not available Retail Store Not available
Dilmah Srilanka Not yet Before 2005 Not available Restaurant Not available
Qualitea Srilanka Not yet Before 2005 Not available Restaurant Not available
Aldo Group Switzerland √ 2009 Not available Retail Store Not available International
Direct Big C (Bourbon) Thailand Not yet 1997 Retail Store 10 Franchising
MK Restaurant Thailand √ 2009 Subsidiary Restaurant 1
Avis Asia The UK √ 2009 Not available Car Service Not available
Moonsoon The UK √ 2009 Not available Retail Store Not available Accessorize
Beauty & The Body Shop The UK √ 2009 Subsidiary 1 Fitness
Direct Debenhams The UK √ 2010 Retail Store 1 Franchising
Hamleys The UK √ 2011 Not available Retail Store Not available
Five Star Chicken The US Not yet 1996 Not available Restaurant Not available
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Registration Year of Industry Number of Franchise System Origin with the Vietnam Entry Mode Sectors outlets authority Entry
Texas Chicken The US Not yet 1996 Not available Restaurant Not available
Carvel The US Not yet 1996 Not available Restaurant Not available
Baskin Robbins The US Not yet 1996 Not available Restaurant Not available
KFC The US √ 1997 Subsidiary Restaurant 80
New Horisons IT The US Not yet 2002 Not available Education Not available Center
Pizza Hut The US √ 2006 Subsidiary Restaurant 12
Cold Stone Master The US Not yet 2006 Restaurant Not available Creamery Franchising
Budget rent a car The US √ 2007 Subsidiary Car Service Not available system
Master Sandler Systems The US √ 2007 Education 1 Franchising
Master Bud’s Ice Cream The US Not yet 2007 Restaurant 10 Franchising
Beauty & Curves The US Not yet 2007 Subsidiary 3 Fitness
Cleverlearn The US √ 2008 Subsidiary Education 2
Master Hard Rock The US √ 2008 Restaurant 1 Franchising
Master CBTL Franchising The US √ 2008 Restaurant 4 Franchising
Dale Carnegie & The US √ 2008 Not available Education 1 Associates
Gymboree Play The US √ 2008 Not available Education 1 Programs
Coldwell Banker The US √ 2008 Not available Real Estate 5
Sotheby's International Realty The US Not yet 2008 Not available Real Estate 1 Affiliates
Lee’s Sandwiches The US Not yet 2008 Joint Venture Restaurant Not available
Subway The US √ 2009 Not available Restaurant Not available
Beauty & V. W. F. G The US √ 2009 Not available Not available Fitness
Shoe Box The US √ 2009 Not available Retail Store Not available Franchising
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Registration Year of Industry Number of Franchise System Origin with the Vietnam Entry Mode Sectors outlets authority Entry
General Nutrition Beauty & The US √ 2009 Not available Not available International Fitness
FastracKids The US √ 2009 Not available Education Not available
Crestcom The US √ 2009 Not available Education Not available International
Master Tutti Fruiti The US Not yet 2009 Restaurant 7 Franchising
Outback Steakhouse The US √ 2010 Not available Restaurant Not available Int’ L.P
Zpizza International The US √ 2010 Not available Restaurant Not available Inc
Round Table The US √ 2010 Not available Restaurant Not available Franchise Corp
Master Carl Karcher The US √ 2010 Restaurant 1 Franchising Haagen - Dazs International Shoppe The US √ 2011 Not available Restaurant Not available Company
Beauty & Litle Gym The US √ 2011 Not available Not available Fitness
Beauty & Gym Consulting Inc The US √ 2011 Not available Not available Fitness
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APPENDIX III: DOMESTIC FRANCHISE SYSTEMS
Year Registration with the Franchise System Franchising Industry Sector Number of outlets authority commenced
Trung Nguyen Coffee 1998 Restaurant √ Around 1000
Ninomaxx 1998 Retail Store Not available 50
Foci 1999 Retail Store Not available 33
AQ Silk 2002 Retail Store Not available Not available
Highland Coffee 2002 Restaurant Not available Over 40
Pho 24 2003 Restaurant √ 72
The gioi di dong 2003 Retail Store Not available 56 (The World of Mobiles)
Kinh Do Bakery 2005 Restaurant Not available 32
24-Seven 2005 Retail Store Not available Not available
Hoa huong duong 2005 Restaurant Not available 40 (Sunny Flowers) Nuoc mia sieu sach (Super-healthy Cane- 2006 Restaurant Not available 28 Juice)
G7 Mart 2006 Retail Store Not available Over 500
Nha Vui 2006 Architectural Service Not available 20 (Cheerful House)
T&T Fashion Shoes 2007 Retail Store √ Not available
Cafe Bobby Brewers 2007 Restaurant √ Not available
Bucamita 2007 Restaurant Not available Not available
Phuong Nam 2007 Retail Store Not available Over 10 Trademark
Com Tam Thuan Kieu 2009 Restaurant Not available Not available
Pho Hung (Hung 2009 Restaurant Not available Not available Noodle)
Wrap&Roll 2011 Restaurant Not available Not available
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APPENDIX IV: SECTION 8, CHAPTER VI, THE 2005 COMMERCIAL LAW
THE NATIONAL ASSEMBLY SOCIALIST REPUBLIC OF VIET NAM No: 36/2005/QH11 Independence - Freedom - Happiness Ha Noi, 14 June 2005
COMMERCIAL LAW
Pursuant to Article 103 and Article 106 of the 1992 Constitution of the Socialist Republic of Vietnam, which was amended and supplemented under Resolution No.51/2001/QH10 of 25 December, 2001, of the X th National Assembly, the 10th session;
This Law provides for commercial activities.
...
Section 8: COMMERCIAL FRANCHISE1
Article 284 Commercial franchise
Commercial franchise means a commercial activity whereby franchisors permit and require franchisees to undertake by themselves to purchase or sell goods or provide services on the following conditions:
1. The purchase or sale of goods or provision of services shall be conducted in accordance with methods of business organisation prescribed by franchisors and associated with the franchisors' trademarks, trade names, business knows-how, business slogans, business logos and advertisements.
2. Franchisors shall be entitled to supervise and assist franchisees in conducting their business activities.
Article 285 Commercial franchise contracts
Commercial franchise contracts must be made in writing or in other forms of equivalent legal validity.
1 Published on the website of Vietnam’s Ministry of Justice, http://vbqppl.moj.gov.vn/vbpq/en/Lists/Vn%20bn%20php%20lut/View_Detail.aspx?ItemID=54 97, last accessed 5 July 2012. The only authoritative text of the 2005 Commercial Law is the Vietnamese version.
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Article 286 Rights of franchisors
Unless otherwise agreed, franchisors shall have the following rights:
1. To receive franchise sums.
2. To organise advertising for the commercial franchise system and the commercial franchise network.
3. To conduct periodical or extraordinary inspections of activities of franchisees in order to ensure the uniformity of the commercial franchise system and the stability of quality of goods and services.
Article 287 Obligations of franchisors
Unless otherwise agreed, franchisors shall have the following obligations:
1. To supply documents guiding the commercial franchise system to franchisees;
2. To provide initial training and regular technical assistance to franchisees for managing the latter's activities in accordance with the commercial franchise system;
3. To design and arrange places of sale of goods or provision of services at the expenses of franchisees;
4. To guarantee the intellectual property rights over objects stated in franchise contracts;
5. To equally treat all franchisees in the commercial franchise system.
Article 288 Rights of franchisees
Unless otherwise agreed, franchisees shall have the following rights:
1. To request franchisors to provide fully technical assistance related to the commercial franchise system;
2. To request franchisors to equally treat all franchisees in the commercial franchise system.
Article 289 Obligations of franchisees
Unless otherwise agreed, franchisees shall have the following obligations:
1. To pay franchise sums and other amounts under commercial franchise contracts;
2. To invest adequate material facilities, financial sources and human resources to take over business rights and know-how transferred by franchisors;
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3. To submit to the control, supervision and instruction by franchisors; to comply with all requirements set forth by franchisors on designing and arrangement of places of sale of goods or provision of services;
4. To keep secret the franchised business know-how even after the expiration or termination of commercial franchise contracts;
5. To stop using trademarks, trade names, business slogans, logos and other intellectual property rights (if any) or systems of franchisors upon the expiration or termination of commercial franchise contracts;
6. To manage their activities in accordance with the commercial franchise system;
7. Not to sub-franchise without permissions of franchisors.
Article 290 Sub-franchise to a third party
1. A franchisee shall be entitled to sub-franchise to a third party (referred to as sub- franchisee) if it is so consented by the franchisor.
2. Sub-franchisees shall have the rights and obligations of franchisees provided for in Articles 288 and 289 of this Law.
Article 291 Registration of commercial franchises
1. Before granting commercial franchises, intended franchisors must register them with the Trade Ministry.
2. The Government shall specify the conditions for conducting business under commercial franchise and the order and procedures for registering commercial franchises.
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APPENDIX V: THE 2006 DECREE ON FRANCHISING
GOVERNMENT SOCIALIST REPUBLIC OF VIETNAM No. 35/2006/NĐ-CP Independence - Freedom - Happiness Hanoi, 31 March 2006
DECREE
MAKING DETAILED PROVISIONS
FOR IMPLEMENTATION OF THE COMMERCIAL LAW
WITH RESPECT TO FRANCHISING ACTIVITIES1
The Government
Pursuant to the Law on Organisation of the Government dated 25 December 2001;
Pursuant to the Commercial Law dated 14 June 2005;
On the proposal of the Minister of Trade;
Decrees:
CHAPTER I
General Provisions
Article 1 Governing scope
This Decree makes detailed provisions for implementation of the Commercial Law with respect to franchising activities in the territory of the Socialist Republic of Vietnam.
1 Translated by Allens Arthur Robinson. The only authoritative text of the 2006 Decree on Franchising is the Vietnamese version.
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Article 2 Applicable entities
1. This Decree applies to Vietnamese business entities and foreign business entities participating in franchising activities.
2. An enterprise with foreign owned capital specialising in the purchase and sale of goods and activities directly related to the purchase and sale of goods, in addition to complying with the provisions in article 7 of this Decree, may only conduct franchising in lines of goods in which such enterprise is permitted to provide distribution services pursuant to international undertakings of Vietnam.
Article 3 Interpretation of terms
In this Decree, the following terms shall be construed as follows:
1. Franchisor means the business entity which grants a franchise and includes a secondary franchisor in the relationship with secondary franchisees.
2. Franchisee means the business entity which is granted a franchise and includes secondary franchisees in the relationship with a secondary franchisor.
3. Secondary franchisor means the business entity with the right to sub-franchise to secondary franchisees the franchise granted to such secondary franchisor by the initial franchisor.
4. Primary franchisee means the business entity which is granted the franchise by the initial franchisor.
The primary franchisee is the secondary franchisor within the meaning of clause 3 of this article in the relationship with secondary franchisees.
5. Secondary franchisee means the business entity which is granted the franchise by the secondary franchisor.
6. Franchise comprises one, some or all of the following rights:
(a) Right whereby the franchisor permits and requires the franchisee to conduct on its own behalf the purchase and sale of goods or provision of services according to the system specified by the franchisor, and to be associated with the trademark, trade name, business mission statement, business logo and advertising of the franchisor;
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(b) Right whereby the franchisor grants to the primary franchisee the master franchise;
(c) Right granted by the secondary franchisor to a secondary franchisee under the master franchising contract;
(d) Right whereby the franchisor grants a franchise to the franchisee under a development contract.
7. Franchise business means a business conducted by a franchisee under a franchising contract.
8. Franchise development contract means a franchise contract under which the franchisor grants the franchisee the right to set up more than one establishment to conduct the franchise business within a specific geographical area.
9. Master franchise means the right that is granted by a franchisor to a secondary franchisor to sub-franchise to secondary franchisees. Secondary franchisees shall not be permitted to further sub-franchise such master franchise.
10. Secondary franchising contract means a franchising contract entered into between a secondary franchisor and a secondary franchisee pursuant to a master franchise.
Article 4 Authorities responsible for State administration of franchising activities
1. The Ministry of Trade shall be responsible to the Government for the exercise of State administration of franchising activities nationwide, and shall have the following powers and duties:
(a) To exercise uniform administration of professional activities, to provide guidelines for the implementation of polices and regulations on franchising activities, and to organise the registration of franchising activities;
(b) To co-ordinate with ministries, ministerial equivalent bodies, Government bodies and people's committees of provinces and cities under central authority to inspect, control, assess and report on franchising activities to superior competent bodies;
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(c) To issue within its own authority, or to propose that the Government issue, new legal instruments and to propose amendments of and additions to legal instruments on franchising activities.
2. The Ministry of Finance shall, within the scope of its duties and powers, be responsible for providing guidelines on tax regimes and registration fees applicable to franchising activities.
3. Ministries, ministerial equivalent bodies and Government bodies shall, within the scope of their respective duties and powers, be responsible to exercise State administration of franchising activities.
4. People's committees of provinces and cities under central authority shall perform the following tasks:
(a) Undertake State administration of franchising activities within their localities;
(b) Direct Departments of Trade or Departments of Trade and Tourism, within the scope of their authority, to organise registration, inspections and control of franchising activities within their localities and to forward periodical reports on such franchising activities to the Ministry of Trade.
CHAPTER II
Franchising Activities
SECTION 1
Conditions for Franchising Operations
Article 5 Conditions applicable to franchisors
A business entity may grant a franchise when the business entity satisfies all of the following conditions:
1. The business system to be franchised has been operating for at least one year. In a case where a foreign franchisor grants a franchise to a primary franchisee being a Vietnamese business entity, such Vietnamese business entity must operate the franchise business for at least one year in Vietnam before sub-franchising.
2. The business entity has registered the franchising activity with the competent body stipulated in article 18 of this Decree.
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3. The goods and services the subject of the franchise do not breach the provisions of article 7 of this Decree.
Article 6 Conditions applicable to franchisees
A business entity shall be entitled to receive a franchise when it has business registration appropriate to the subject of the franchise.
Article 7 Goods and services eligible for franchising
1. Goods and services eligible for franchising means goods and services not on the list of goods and services in which business is prohibited.
2. An enterprise may only conduct business in goods and services on the list of goods and services in which business is restricted or on the list of goods and services subject to conditions after such business entity has been issued with a business licence or equivalent document by the body administering the branch or after the enterprise satisfies the conditions for such business.
SECTION 2
Information Disclosure and Franchise Contracts
Article 8 Responsibility of franchisors to disclose information
1. A franchisor shall be responsible to provide a copy of the franchise contract form and the franchise description document to the proposed franchisee at least fifteen (15) business days prior to the date of entry into the franchise contract if the parties do not have some other agreement. The Ministry of Trade shall provide regulations on and announce the compulsory items which must be included in the franchise description document.
2. A franchisor shall be responsible to immediately notify all franchisees of any important change to the franchise system which affects the franchise business of a franchisee.
3. If the franchise is a master franchise, in addition to providing the information stipulated in clause 1 of this article, the secondary franchisor must also provide a proposed franchisee with the following information in writing:
(a) Information about the franchisor which has granted the franchise;
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(b) Contents of the master franchise contract;
(c) The manner in which secondary franchise contracts will be dealt with in the event of termination of the master franchise contract.
Article 9 Responsibility of proposed franchisees to disclose information
A proposed franchisee must provide the franchisor with all information reasonably requested by the franchisor in order to make a decision on grant of the franchise to such proposed franchisee.
Article 10 Objects of industrial property in franchising
1. If the franchisor grants the franchisee the right to use objects of industrial property and contents of franchising2, then the transfer of the right to use such objects of industrial property may be provided for in a separate section of the franchise contract.
2. The transfer of the right to use objects of industrial property in a franchise contract shall be governed by the law on industrial property.
Article 11 Contents of franchise contracts
If the parties select application of the law of Vietnam, the franchise contract may contain the following main items:
1. Contents of franchising.
2. Rights and obligations of the franchisor.
3. Rights and obligations of the franchisee.
4. Price and periodic franchising fee, and payment method.
5. Term of the contract.
6. Extension and termination of the contract, and dispute resolution.
2 Allens Arthur Robinson Note: "and contents of franchising" is the literal translation.
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Article 12 Language of franchise contracts
A franchise contract must be made in Vietnamese. In the case of a franchise from Vietnam to overseas, the parties shall agree on the language of the franchise contract.
Article 13 Term of franchise contracts
1. The term of a franchise contract shall be as agreed by the parties.
2. A franchise contract may be terminated prior to the expiry of the agreed term pursuant to article 16 of this Decree.
Article 14 Time when franchise contracts takes effect
1. A franchise contract shall take effect as from the date of its signing except where the parties agree otherwise.
2. If a franchise contract contains a section on transfer of the right to use objects of intellectual property, such section shall take effect in accordance with the law on intellectual property.
Article 15 Assignment of franchises
1. A franchisee may assign the franchise to another proposed franchisee when the following conditions are satisfied:
(a) The proposed assignee satisfies the condition stipulated in article 6 of this Decree;
(b) The original franchisor (hereinafter referred to as the direct franchisor) provides approval.
2. The franchisee must provide the direct franchisor with a written request to assign the franchise.
Within fifteen (15) days from the receipt of such written request, the direct franchisor must provide a written response:
(a) Approving assignment of the franchise by the franchisee; or
(b) Not approving assignment of the franchise by the franchisee for a reason stipulated in clause 3 of this article.
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If the direct franchisor fails to provide a written response within the above fifteen (15) day period, it shall be deemed to have approved assignment of the franchise by the franchisee.
3. The direct franchisor may only refuse to approve assignment of the franchise by the franchisee when one of the following grounds exists:
(a) The proposed assignee is unable to satisfy the financial obligations which it would have to discharge under the franchise contract;
(b) The proposed assignee has not satisfied the selection criteria of the direct franchisor;
(c) The assignment will have a significantly adverse effect on the existing franchise system;
(d) The proposed assignee does not agree in writing to comply with the obligations of the franchisee under the franchise contract;
(dd) The franchisee has not fully discharged obligations to the direct franchisor, except where the proposed assignee provides a written undertaking to discharge such obligations in lieu of the franchisee.
4. The assignor shall lose the franchise once it is assigned. All rights and obligations relating to the franchise of the assignor shall transfer to the assignee, unless there is some other agreement.
Article 16 Unilateral termination of franchise contracts
1. A franchisee shall have the right to unilaterally terminate the franchise contract if the franchisor breaches the obligations stipulated in article 287 of the Commercial Law.
2. The franchisor shall have the right to unilaterally terminate the franchise contract in the following cases:
(a) The franchisee no longer possesses the licence or equivalent document required by law in order to carry out the franchise business;
(b) The franchisee becomes bankrupt or is dissolved in accordance with the law of Vietnam;
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(c) The franchisee commits a serious breach of law which may significantly damage the reputation of the franchise system;
(d) The franchisee fails to remedy a non-fundamental breach of the franchise contract within a reasonable time after the franchisee has received written notice from the franchisor to remedy such breach.
SECTION 3
Registration of Franchising Activities
Article 17 Registration of franchising activities
1. Before carrying out franchising activities, any Vietnamese business entity or foreign business entity intending to grant a franchise must register its franchising activities with the competent body stipulated in this Decree.
2. The body competent to register franchising activities shall be responsible to register the franchising activities of a business entity into the Register of franchising activities and to provide written notification of such registration to the business entity.
Article 18 Delegation of authority to register franchising activities
1. The Ministry of Trade shall register the following franchising activities:
(a) Franchising activities from overseas into Vietnam including those from export processing zones, non-tariff zones and other separate customs areas into Vietnamese territory in accordance with the law of Vietnam;
(b) Franchising activities from Vietnam to overseas including those from Vietnamese territory into export processing zones, non-tariff zones or separate customs areas in accordance with the law of Vietnam.
2. The Department of Trade or Department of Trade and Tourism of the province or city under central authority where the proposed franchisor registers its operations shall carry out registration of domestic franchising activities, except those transferred across the borders of export processing zones, non-tariff zones or separate customs areas in accordance with the law of Vietnam.
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Article 19 Application files for registration of franchising activities
An application file for registration of franchising activities shall comprise:
1. Application for registration of franchising activities on the form stipulated by the Ministry of Trade.
2. Franchise description document prepared on the form stipulated by the Ministry of Trade.
3. Documents confirming:
(a) The legal status of the proposed franchisor;
(b) [Documents being] Certificates of protection in respect of industrial property rights in Vietnam and overseas when a contract involves a transfer of any protected objects of industrial property.
4. If a document stipulated in clause 2 or 3 of this article is in a foreign language, it must be translated into Vietnamese and certified by a Vietnamese notary office or consularised by a Vietnamese diplomatic body overseas in accordance with the law of Vietnam.
Article 20 Procedures for registration of franchising activities
1. A proposed franchisor shall be responsible to register franchising activities in accordance with the following provisions:
(a) By sending the application file for registration of franchising activities to the competent State administrative body stipulated in article 18 of this Decree;
(b) Within five business days from the date of receipt of a complete and valid application file, the competent State body shall register the franchising activities into the Register of franchising activities and shall provide written notification of such registration to the business entity;
(c) Within two business days from the date of receipt of an incomplete or invalid application file, the competent State body shall provide written notice to the proposed franchisor to supplement and complete such file;
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(d) The time-limits stipulated in this clause shall exclude any time taken by the proposed franchisor to supplement or complete the application file for registration of franchising activities;
(dd) If registration is refused at the expiry of the time-limit stipulated in this clause, the competent State body shall provide written notice to the proposed franchisor stating the reasons for the refusal.
2. Procedures for registration of a contract transferring the use of objects of industrial property shall be implemented in accordance with the law on industrial property.
Article 21 Notification of changes to registered information in franchising activities
In a case of a change to the registered information [in the documents] stipulated in clauses 2 and 3 of article 19 of this Decree, the franchisor shall be responsible to notify the competent State body where the franchising activities were registered within thirty (30) days from the date of such change.
Article 22 Cancellation of registration of franchising activities
1. Registration of franchising activities of a business entity shall be cancelled in the following cases:
(a) The business entity conducting the franchise ceases business or changes its business line or trade;
(b) The business entity has its business registration certificate or investment certificate withdrawn.
2. The body which registered franchising activities shall be responsible to provide public notification of any cancellation of such registration.
Article 23 Fees for registration of franchises
The proposed franchisor must pay a fee for registration of franchising activities. The amount of the fee and the management and use of such fee shall be regulated in guidelines of the Ministry of Finance.
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SECTION 4
Breaches of Law in Franchising Activities,
Authority to Deal with Breaches
Article 24 Breaches of law in franchising activities
1. Any business entity engaged in franchising activities which commits one of the following breaches shall, depending on the nature and seriousness of the breach, be subject to an administrative penalty pursuant to the law on dealing with administrative breaches:
(a) Conducting a franchise without having satisfied all the conditions stipulated;
(b) Conducting a franchise involving goods and services in which business is prohibited;
(c) Breaching the obligation to supply information during franchising activities as stipulated in this Decree;
(d) Providing untruthful information in the franchise description document;
(dd) Breaching the provisions on registration of franchising activities;
(e) Breaching the provisions on notices in franchising activities;
(g) Failing to pay taxes in accordance with law where such failure does not warrant criminal prosecution;
(h) Failing to comply with requests from competent State bodies during an examination and inspection;
(i) Breaching other provisions of this Decree.
2. A business entity conducting a franchise which commits a breach causing loss and damage to the material interests of any organisation or individual concerned must pay compensation for such loss and damage in accordance with law.
Article 25 Authority and procedures for dealing with administrative breaches
The authority and procedures for dealing with administrative breaches as stipulated in article 24 of this Decree shall be implemented in accordance with the law on dealing with administrative breaches.
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Article 26 Complaints and denunciations
1. Organisations and individuals shall have the right to complain about the registration of franchising activities, payment of taxes and fees, examinations and inspections, and dealing with breaches in franchising activities in accordance with the law on complaints.
2. Individuals shall have the right to denounce any conduct in breach of law during franchising activities in accordance with the law on denunciations.
CHAPTER III
Implementing Provisions
Article 27 Transitional provision
Any franchising activities which were carried out before the effective date of this Decree must be registered in accordance with the procedures stipulated in this Decree within three months after the effective date of this Decree.
Article 28 Effectiveness
1. This Decree shall be of full force and effect fifteen (15) days after the date of its publication in the Official Gazette. Any previous provisions relating to franchising activities which are contrary to the provisions in this Decree are hereby repealed.
2. Minister, heads of ministerial equivalent bodies and Government bodies, and chairmen of people's committees of provinces and cities under central authority shall be responsible for providing guidelines and for implementation of this Decree.
For the Government The Prime Minister PHAN VAN KHAI
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APPENDIX VI: THE 2011 AMENDMENTS TO THE 2006 DECREE ON FRANCHISING
GOVERNMENT SOCIALIST REPUBLIC OF VIETNAM No. 120/2011/NĐ-CP Independence - Freedom - Happiness Hanoi, 16 December 2011
DECREE
AMENDING AND SUPPLEMENTING ADMINISTRATIVE PROCEDURES STIPULATED IN A NUMBER OF DECREES OF THE GOVERNMENT DETAILING THE IMPLEMENTATION OF THE COMMERCIAL LAW1
The Government
Pursuant to the Law on Organisation of the Government dated 25 December 2001;
On the proposal of the Minister of Trade,
Decrees:
...
Article 3 Amending and Supplementing several provisions of Decree 35/2006/NĐ- CP dated 31 March 2006 of the Government detailing the implementation of the Commercial Law on franchising.
1. Amending Article 4.4 as follows:
“4. People’s Committees of Provinces and Cities under central authority shall be responsible: a) To implement State administration of franchising activities within their localities;
1 Translated by the author. The only authoritative text of the 2006 Decree on Franchising is the Vietnamese version.
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b) To direct Departments of Industry and Trade to periodically report to the Ministry of Industry and Trade on franchising within their localities.”
2. Supplementing Article 17a afterward Article 17 with the details as follows:
“Article 17a. Circumstances in which franchising activities do not have to be registered
1. Franchising activities do not have to be registered in the following circumstances: a) Franchising activities within Vietnam; b) Franchising activities from Vietnam to overseas.
2. Franchising activities which are not required registration are still subject to the report regime to Departments of Industry and Trade.”
3. Repealing Article 18.1.b and Article 18.2.
4. Amending Article 19.4 as follows:
“4. The documents stipulated in clauses 2 and 3 of this article must be consularised in accordance with the law of Vietnam.”
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APPENDIX VII: THE 2006 CIRCULAR ON FRANCHISING
MINISTRY OF TRADE SOCIALIST REPUBLIC OF VIETNAM No. 09/2006/TT-BTM Independence - Freedom - Happiness Hanoi, 25 May 2006
CIRCULAR
PROVIDING GUIDELINES ON
PROCEDURES FOR REGISTRATION OF
FRANCHISING ACTIVITIES1
Pursuant to Decree 29-2004-ND-CP of the Government dated 16 January 2004 stipulating the functions, duties, powers and organisational structure of the Ministry of Trade;
Pursuant to Decree 35-2006-ND-CP of the Government dated 31 March 2006 making detailed provisions for implementation of the Commercial Law with respect to franchising activities;
The Ministry of Trade hereby provides guidelines on procedures for registration of franchising activities stipulated in Decree 35-2006-ND-CP as follows:
I. Bodies Competent to Register Franchising Activities
1. The Ministry of Trade shall be the body competent to register franchising activities (hereafter referred to as the registration body) in the cases stipulated in article 18.1 of Decree 35-2006-ND-CP.
2. The Department of Trade, or Department of Trade and Tourism or Department of Tourism and Trade (hereinafter all referred to as the Department of Trade) of the province or city under central authority where the proposed franchisor has business
1 Translated by Allens Arthur Robinson. The only authoritative text of the 2006 Circular on Franchising is the Vietnamese version.
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registration shall be the body competent to register franchising activities (hereafter referred to as the registration body) in the cases stipulated in article 18.2 of Decree 35-2006-ND-CP.
Business entities stipulated in article 18.2 of Decree 35-2006-ND-CP which propose to conduct domestic franchising activities shall carry out registration of franchising activities at the Department of Trade in the place where such business entity has its head office.
3. Responsibilities of the registration body:
(a) To publicly list at its working headquarters guidelines on the conditions, order, time-limits and administrative procedures for registration of franchising activities;
(b) To register the franchising activity of any business entity whose application file satisfies the conditions stipulated in article 19 of Decree 35-2006-ND-CP and in this Circular;
(c) To ensure compliance with the time-limits for registration stipulated in article 20 of Decree 35-2006-ND-CP and in this Circular;
(d) To collect, pay, manage and use fees for registration of franchising activities in accordance with guidelines of the Ministry of Finance;
(dd) To put information about the status of registration of franchising activities by business entities onto the website of the Ministry of Trade, and to update such information, within five business days of the date of any registration or cancellation or change of registration, or of the date of receipt of a notice from a business entity of any change to the registered information of a franchising activity;
(e) To fully implement the regime on archiving of application files for registration of franchising activities in accordance with the provisions of the law on archiving;
(g) To inspect and control franchising activities in accordance with authority and to cancel the registration of a franchising activity in the cases stipulated in article 22 of Decree 35-2006-ND-CP;
(h) Other responsibilities stipulated by law.
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II. Procedures for Registration of Franchising Activities
1. Before carrying out any franchising activity, a business entity intending to grant a franchise (including both the primary franchisor and any secondary franchisor) must register the franchising activity with the competent body authorized by Decree 35- 2006-ND-CP in accordance with the guidelines in this Circular.
2. An application file for registration of a franchising activity with the Ministry of Trade shall contain:
(a) Application for registration of the franchising activity (on sample form MD-1 in
Appendix II issued with this Circular).
(b) Franchise Description Document (on the sample form in Appendix III issued with this Circular).
(c) Notarized copy of the business registration certificate or investment certificate (in the case of a franchise from Vietnam to overseas), or of the business registration certificate or document of equivalent value of the foreign business entity certified by the competent body of the place where such foreign business entity was established (in the case of a franchise from overseas into Vietnam).
(d) Notarized copies of certificates of protection of industrial property rights in Vietnam or overseas in a case involving the transfer of any protected objects of industrial property.
(dd) Document proving approval by the primary franchisor to the sub-franchise if the applicant for registration is a secondary franchisor.
3. An application file for registration of a franchising activity with the Department of Trade shall contain:
(a) Application for registration of the franchising activity (on sample form MD-2 in
Appendix II issued with this Circular).
(b) Franchise Description Document (on the sample form in Appendix III issued with this Circular).
(c) Notarized copy of the business registration certificate or investment certificate.
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(d) Notarized copies of certificates of protection of industrial property rights in Vietnam or overseas in a case involving the transfer of any protected objects of industrial property.
(dd) Document proving approval by the primary franchisor to the sub-franchise if the applicant for registration is a secondary franchisor.
4. If a document stipulated in sub-clauses (b), (d) or (dd) of clauses 2 and 3 is in a foreign language, it must be translated into Vietnamese and certified by a domestic notary office.
If the copy business registration certificate or document of equivalent value of the foreign business entity is in a foreign language, it must be translated into Vietnamese and certified by a Vietnamese notary office overseas and consularised by a Vietnamese diplomatic body overseas in accordance with the law of Vietnam.
5. Receipt of an application file for registration of a franchising activity:
(a) When the body competent to register franchising activities (hereafter referred to as the registration body) receives an application file for registration of a franchising activity, it shall write out three copies of a receipt (on sample forms TB-1A and TB- 1B in Appendix II issued with this Circular) and hand two copies to the applicant for registration and retain the other copy at the registration body.
(b) Within two business days from the date of receipt of an incomplete or invalid application file, the registration body shall provide written notice to the applicant for registration to supplement and complete such file. The time-limit stipulated for processing an application file shall be calculated from the time when an applicant for registration has supplemented and completed the application file.
(c) Any business entity registering a franchising activity shall have the right to request the registration body to clarify the latter's request to supplement and complete the application file, and the registration body shall be responsible to reply to such request.
6. Registration of franchising activities into the Register of franchising activities:
(a) Within a time-limit of five working days from the date of receipt of a valid and complete file, the registration body shall be responsible to register the franchising
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activity of the business entity into the Register of franchising activities (on sample form S1 or S2 in Appendix II issued with this Circular) and to provide written notification to the business entity (on sample form TB-3A or TB-3B in Appendix II issued with this Circular).
(b) If registration is refused, then within a time-limit of five working days from the date of receipt of a valid and complete file, the registration body shall be responsible to provide written notice, stating the reasons for the refusal (on sample form TB-4A or TB-4B in Appendix II issued with this Circular).
(c) The registration body shall record a registered number in the Register of franchising activities as follows:
- Code of the franchising form: NQR for a franchise from Vietnam to overseas, NQV for a franchise from overseas into Vietnam, and NQTT for a domestic franchise;
- Provincial code: Two characters (in accordance with Appendix I issued with this Circular);
- Sequential number of the enterprise: Six characters from 000001 to 999,999.
- Each code shall be separated by a dash.
For example:
If Company A with business registration in Hanoi is the third business entity to register a domestic franchise, its registered code number shall be NQTT-01-000003.
If Company B with business registration in Binh Duong province is the first business entity to register a franchise from Vietnam to overseas, its registered code number shall be NQR-01-000001.
7. Collection of fees for registration of franchising activities:
When the registration body receives an application file from a business entity for registration of a franchising activity, it shall collect a fee for registration of the franchising activity in accordance with guidelines of the Ministry of Finance.
8. Re-registration of franchising activities:
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If a business entity which has registered a domestic franchising activity pursuant to clause 2 of section I of this Circular transfers its head office address to another province, such business entity shall be responsible to re-register with the registration body in the new location in accordance with the procedures stipulated in clauses 3 to 7 inclusive of this section. The file shall include the approval for the prior registration from the registration body where the franchising activity was previously registered. Within five business days of the date of completion of procedures for registration in the new locality, the business entity shall be responsible to provide written notice to the registration body where the franchising activity was previously registered for the latter to issue a Notice of Transfer of Registration (on sample form TB-6C in Appendix II issued with this Circular).
III. Notification of Change of Registered Information about Franchising Activities
1. In a case of a change to the registered information in Part A of the Franchise Description Document (in Appendix II issued with this Circular) and to information stipulated in clause 3 of article 19 of Decree 35-2006-ND-CP, the business entity shall, within thirty (30) days from the date of such change, be responsible to notify the registration body where the franchising activity was registered of the change (on sample form TB-5 in Appendix II issued with this Circular) and to enclose data relevant to such change.
2. The registration body shall register the additional information into the registered file on the franchising activities of the business entity.
IV. Cancellation of Registration of Franchising Activities
Registration of the franchising activity of a business entity shall be cancelled in the cases stipulated in article 22 of Decree 35-2006-ND-CP. Within five working days from the date the registration body cancels the registration of any business entity, such registration body shall be responsible to provide public notification of the cancellation at the headquarters of such body (on sample form TB-6A or TB-6B in Appendix II issued with this Circular) and at the same time update the information on the website of the Ministry of Trade.
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V. Organisation of Implementation
1. The Department for Planning and Investment (of the Ministry of Trade) shall undertake registration of franchising activities where pursuant to this Circular the Ministry of Trade is the body competent to register franchising activities.
2. Departments of Trade shall rely on the law and this Circular to undertake registration of franchising activities within their localities.
3. The Department for E-Commerce (of the Ministry of Trade) shall establish a website page and software for management of information on the status of registration of franchising activities, and a system for on-line registration of franchising activities in order to receive application files via the internet, and at the same time guide implementation by Departments of Trade and by business entities.
4. This Circular shall be of full force and effect after fifteen (15) days from the date of its publication in the Official Gazette. Any problems during implementation of this Circular should be reported to the Ministry of Trade for resolution.
For the Minister of Trade Deputy Minister LE DANH VINH
Appendix I
[Not translated: List of 64 Code Numbers of Provinces]
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Appendix II
Sample Forms For Use in Registration of Franchising Activities
[Issued with Circular No. 09-2006-TT-BTM of the Ministry of Trade dated 25 May 2006]
Form MD-1
SOCIALIST REPUBLIC OF VIETNAM Independence - Freedom - Happiness Date:…………..
Application for Registration of Franchising Activity
To: The Ministry of Trade
Name of business entity: (Print in capital letters) ......
Name of the business entity in a foreign language (if any): ......
Abbreviated name of the business entity (if any): ......
[Business registration certificate/Investment certificate]2 No: ......
Issued by:……………………...... Date issued:......
Nationality of business entity: ......
Charter capital: ......
Business line: ......
Proposed franchising sector: ......
Form of the franchise3: ......
Head office address: ......
Telephone:………………………………Fax: ......
Email (if any): ......
2 Select and write the appropriate item. 3 Write “primary franchise or secondary franchise”.
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Request registration of a franchising activity from [Vietnam to overseas/overseas into Vietnam]4
[Location of the franchise:...... ]5
The business entity hereby undertakes to be totally liable for the truthfulness and accuracy of the contents of this Application and of the attached documents.
Legal Representative of the business entity (Signed and sealed) Attached documents: -…………………………………….; -……………………………………..
4 Select and write the appropriate item. 5 Write the location (country or territory) of the franchise if it is a case of franchising from Vietnam to overseas.
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Form MD-2 SOCIALIST REPUBLIC OF VIETNAM Independence - Freedom - Happiness Date:…………..
Application for Registration of Franchising Activity To: The Department of Trade6 Name of business entity: (Print in capital letters) ...... Name of the business entity in a foreign language (if any): ...... Abbreviated name of the business entity (if any): ...... [Business registration certificate/Investment certificate]7 No: ...... Issued by:…………………………………………Date issued: ...... Charter capital: ...... Business line: ...... Proposed franchising sector: ...... Form of the franchise:8 ...... Head office address: ...... Telephone:……………………………………Fax: ...... Email (if any): ...... Request registration of a domestic franchising activity. The business entity hereby undertakes to be totally liable for the truthfulness and accuracy of the contents of this Application and of the attached documents. Legal Representative of the business entity (Signed and sealed) Attached documents: -…………………………………….; -……………………………………..
6 Select and write the appropriate body. 7 Select and write the appropriate item. 8 Write "primary franchise or secondary franchise".
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Not translated:
Form S1: Register of Franchising Activities (of the Ministry of Trade).
Form S2: Register of Franchising Activities (of provincial people's committees, and of Departments of Trade).
Form TB-1A&B: Receipt for Application File for Registration.
Form TB-2A&B: Request to Applicant to Supplement Application File for Registration.
Form TB-3A&B: Notice of Confirmation of Registration.
Form TB-4A&B: Notice of Refusal to Register.
Form TB-5: Notice of Change of Registered Information [completed by the business entity].
Form TB-6A&B: Notice of Cancellation of Registration.
Form TB-6C: Notice of Transfer of Registration [from one province to another].
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Appendix III
Franchise Description Document
[Issued with Circular No. 09-2006-TT-BTM of the Ministry of Trade dated 25 May 2006]
This franchise description document contains some information necessary for the prospective franchisee to study carefully before entering into the franchising contract. A prospective franchisee needs to note:
- Unless the parties agree otherwise, a prospective franchisee has at least 15 days to study this document and other relevant information before entering into a franchising contract.
- Study the Commercial Law, Decree 35-2006-ND-CP and this document carefully. Discuss with other franchisees who have conducted or are conducting franchise businesses; assess your finance and ability in meeting the requirements for this form of business.
- A prospective franchisee should seek independent legal, accounting and business advice before entering into a franchising contract.
- A prospective franchisee should attend training courses, especially if the prospective franchisee has no prior business experience.
Part A9
Information to be Notified if it Changes
I. General Information about the Franchisor
1. Trade name of the franchisor.
2. Head office address of the franchisor.
3. Telephone and fax number (if any).
4. Date of establishment of the franchisor.
5. Information about whether or not it is a primary or secondary franchisor.
9 If a business entity changes the information in this Part, it must notify the registration body in accordance with the guidelines in section III of this Circular.
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6. Form of business of the franchisor.
7. Franchising sector.
8. Information regarding the registration of the franchising activity with the competent authority10.
II. Trade Mark on Goods/Services and Intellectual Property Rights
1. Rights of the franchisee to use trade marks on goods/services and any intellectual property objects.
2. Details of the trade marks on goods/services and any rights to intellectual property objects which have been registered in accordance with law.
Part B11
I. Information about Franchisor
1. Organisational chart.
2. Names, duties and working experience of members of the Board of Directors of the franchisor.
3. Information about the division in charge of franchising of the franchisor.
4. Experience of the franchisor in the franchising sector.
5. Information regarding litigation related to franchising activities of the franchisor in the last year.
II. Initial Costs Payable by Franchisee
1. Types and rates of initial fees payable by the franchisee.
2. Time of payment.
3. Cases where fees are refundable.
10 Business entities should supplement this information after completing procedures for registration with the competent authority. 11 Business entities should annually report the information in this Part to the registration body at the latest by 15 January.
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III. Other Financial Obligations
With regard to each of the following types of fees, please specify the fixed rates, time of fee payment and cases where fees shall be refunded:
1. Periodic fees.
2. Fee for advertising.
3. Fee for training.
4. Service fee.
5. Payment of rental.
6. Other fees.
IV. Initial Investment by Franchisee
Initial investment includes the following main information:
1. Business location.
2. Equipment.
3. Decoration expenses.
4. Initial goods that must be procured.
5. Security expenses.
6. Other expenses payable in advance.
V. Obligations of the Franchisee to Buy or Lease Equipment for Compatibility with Business System as Designated by Franchisor
1. Is the franchisee liable to buy things or to buy/lease equipment or use certain services for compatibility with the franchisor’s business system?
2. Is it possible to make adjustments to the regulations of the franchising business system?
3. If it is possible to adjust the franchising business system, please specify the applicable procedures.
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VI. Obligations of the Franchisor
1. Obligations of the franchisor before signing of the contract.
2. Obligations of the franchisor during the entire duration of operations.
3. Obligations of the franchisor in making a decision on the business premises.
4. Training.
(a) Initial training;
(b) Additional training courses.
VII. Description of the Market of the Goods/Services to be Franchised
1. A description of the general market of the goods/services the subject of the franchising contract.
2. A description of the market of the goods/services the subject of the franchising contract within the territory where the franchisee is permitted to operate.
3. Prospects for the development of the above market.
VIII. Franchising Contract
1. Titles of articles of the franchising contract.
2. Term of the contract.
3. Conditions for extension of contract.
4. Conditions for termination of contract by the franchisee.
5. Conditions for termination of contract by the franchisor.
6. Obligations of the franchisor/franchisee arising from the termination of the contract.
7. Amendment of the contract at the request of the franchisor/franchisee.
8. Conditions for assignment of contract by the franchisee to another business entity.
9. In case of death, declaration of non-eligibility of the franchisor/franchisee.
IX. Information about the Franchise System
1. Number of business establishments of the franchisor currently operating.
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2. Number of business establishments of the franchisor that have ceased operating.
3. Number of franchising contracts already entered into with franchisees.
4. Number of franchising contracts that have been assigned by franchisees to third parties.
5. Number of business establishments of franchisees assigned to the franchisor.
6. Number of franchising contracts terminated by the franchisor.
7. Number of franchising contracts terminated by the franchisees.
8. Number of franchising contracts that are/are not extended.
X. Financial Statements of Franchisor
The audited financial statements for the most recent year.
XI. Rewards, Acknowledgements to be Received and Organisations to Participate
We hereby undertake that the business system it is proposed to franchise has been operating for at least one year; and that all the information provided in this document and any additional information and all the appendices hereto are accurate and truthful. We fully understand that any provision of untruthful information in this document shall be regarded as a breach of law.
Representative of the franchisor (Signed and sealed)
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APPENDIX VIII: THE 2008 DECISION ON FRANCHISING
MINISTRY OF FINANCE SOCIALIST REPUBLIC OF VIETNAM No. 106/2008/QD-BTC Independence - Freedom - Happiness Hanoi, 17 November 2008
DECISION ON COLLECTION, MANAGEMENT AND USE OF FEES FOR REGISTRATION OF FRANCHISING ACTIVITIES1
The Minister of Finance Pursuant to Decree 35-2006-ND-CP of the Government dated 31 March 2006 making detailed provisions for implementation of the Commercial Law with respect to franchising activities; Pursuant to Decree 57-2002-ND-CP of the Government dated 3 June 2002 implementing the Ordinance on Fees and Charges; Pursuant to Decree 24-2006-ND-CP of the Government dated 6 March 2006 amending Decree 57 above; Pursuant to Decree 77-2003-ND-CP of the Government dated 1 July 2003 on functions, duties, powers and organisational structure of the Ministry of Finance; On receipt of the opinion of the Ministry of Industry and Trade in Official Letter 7514-BCT-KH dated 25 August 2008; Having considered the proposal of the Director of the Department for Monetary Policy,
Decides:
Article 1
To promulgate the amount of fees payable for registration of franchising activities when a Notice of satisfaction of conditions for conducting franchising activities is issued2, as follows:
1 Translated by Allens Arthur Robinson. The only authoritative text of the 2008 Decision on Franchising is the Vietnamese version.
370
1. A foreign business entity granting a franchise in Vietnam:
- Issuance of new notice, sixteen million five hundred thousand (16,500,000) dong.
- Amendment or addition to the notice, six (6) million dong.
- Re-issuance of the notice, five hundred thousand (500,000) dong.
2. A Vietnamese business entity granting a franchise overseas:
- Issuance of new notice, four million (4,000,000) dong.
- Amendment, addition or re-issuance of the notice, five hundred thousand (500,000) dong.
3. A business entity granting a franchise within Vietnam:
- Issuance of new notice, four million (4,000,000) dong.
- Amendment, addition or re-issuance of the notice, five hundred thousand (500,000) dong.
Article 2
Fee-payers as stipulated in article 1 of this Decision means both Vietnamese and foreign business entities to whom the State authority (Ministry of Industry and Trade and its subsidiary entities) issues Notices of satisfaction of conditions for conducting franchising activities in accordance with law.
Article 3
Fees for registration of franchising activities shall be revenue of the State budget and shall be managed and used as follows
1. The authority collecting the fees stipulated in clauses 1 and 2 of article 1 shall retain all (100 percent) of such fees to cover the costs of issuing Notices and collection of fees in accordance with the stipulated regime.
2 Allens Arthur Robinson footnote: Article 19 of Decree 35 sets out the required contents of an application file for registration of franchising activities; and Form TB-3A (or TB-3B) issued with Circular 09-2006-TT-BTM of the Ministry of Industry and Trade, dated 25 May 2006, is the notice confirming registration sent by the Ministry of Industry and Trade to a successful applicant, and referred to here as the Notice of satisfaction of conditions for conducting franchising activities.
371
2. The authority collecting the fees stipulated in clause 3 of article 1 shall pay all (100 percent) of such fees into the State Budget in accordance with the stipulated regime.
Article 4
This Decision shall be of full force and effect fifteen (15) days after the date on which it is published in the Official Gazette.
Article 5
Other matters relating to the collection, payment, management, use, receipt, and public notification of fees payable for registration of franchising activities and which are not regulated in this Decision shall be implemented in accordance with the following Circulars of the Ministry of Finance:
- Circular 63-2002-TT-BTC dated 24 July 2002 guiding fees and charges;
- Circular 45-2006-TT-BTC dated 25 May 2006 amending Circular 63 above;
- Circular 60-2007-TT-BTC dated 14 June 2007 guiding implementation of the Law on Tax Management.
Article 6
Fee-payers paying fees for registration of franchising activities and other bodies concerned shall be responsible for implementation of this Decision.
For the Minister of Finance Deputy Minister DO HOANG ANH TUAN
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APPENDIX IX: UNSW ETHICS APPROVAL
373
APPENDIX X: PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM
Approval No: 106074
The Role and Influence of Vietnam’s Franchise Law on the Development of Franchising
PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM
You are invited to participate in a study of the Role and Influence of Vietnam’s Franchise Law on the Development of Franchising. We hope to learn how Vietnam’s Franchise Law influences the development of franchising. You were selected as a possible participant in this study because you are major franchise company in Vietnam. Your support is crucial to our research and we greatly appreciate your cooperation.
If you decide to participate, please suggest the most convenient time and venue. It will take approximately 30 minutes to an hour to complete the interview. Any information that is obtained in connection with this study and that can be identified with you will remain confidential and will be disclosed only with your permission, except as required by law. Recording With your consent, the interview will be tape-recorded. If you agree to the interview being recorded by signing the attached Consent Form, the recording will not be released to anyone other than the interviewer and Prof. Andrew Terry, except as required by law. Identification In any publication, information will be provided in such a way that you cannot be identified unless you give us your written permission by signing the attached Consent Form.
Complaints may be directed to the Ethics Secretariat, The University of New South Wales, SYDNEY 2052 AUSTRALIA (phone 9385 4234, fax 9385 6648, email [email protected]). Any complaint you make will be investigated promptly and you will be informed out the outcome.
We appreciate your participation in this research and we will send you a report of the major findings on the completion of the research by post. We believe our research will help franchise companies in the decision making in the future. If you do not wish to receive our report, please indicate by tick the appropriate box on the next page.
374
Your decision whether or not to participate will not prejudice your future relations with the University of New South Wales. If you decide to participate, you are free to withdraw your consent and to discontinue participation at any time without prejudice.
If you have any questions, Mr Binh Nguyen Ba (Mailing address: School of Business Law & Taxation, Australian School of Business, UNSW, NSW 2052, AUSTRALIA; Tel: +61 (2) 9385 7717; Mobile: +61 4 3096 2022; Fax: +61 (2) 9313 6658; Email: [email protected]) and Prof Andrew Terry (Mailing address: Discipline of Business Law, Faculty of Economics and Business, The University of Sydney, NSW 2006, AUSTRALIA; Tel: +61 (2) 9114 0619; Mobile: +61 4 0844 7372; Fax: +61 (2) 9351 7471; Email: [email protected]) will be happy to answer them.
You will be given a copy of this form to keep.
375
THE UNIVERSITY OF NEW SOUTH WALES
The Role and Influence of Vietnam’s Franchise Law on the Development of Franchising
PARTICIPANT INFORMATION STATEMENT AND CONSENT FORM (continued)
I, ______, of ______consent to an interview with Mr. Binh Nguyen Ba of UNSW, Australia.
I, ______, of ______□consent/□do not consent, to my interview with Mr. Binh Nguyen Ba of UNSW, Australia, being tape recorded.
I, ______, of ______□consent/□do not consent to my identity and/or that of ______being identified in any future publication.
You are making a decision whether or not to participate. Your signature indicates that, having read the information provided above, you have decided to participate.
...... Signature of Research Participant Signature of Witness
...... (Please PRINT name) (Please PRINT name)
...... Date Nature of Witness
Would you like to receive a report of our findings? □ No □ Yes, please provide mailing information here: ……………………………………………………. …………………………………………………….
Mr Binh Nguyen Ba (Mailing address: School of Business Law & Taxation, Australian School of Business, UNSW, NSW 2052, AUSTRALIA; Tel: +61 (2) 9385 7717; Mobile: +61 4 3096 2022; Fax: +61 (2) 9313 6658; Email: [email protected]).
Prof Andrew Terry (Mailing address: Discipline of Business Law, Faculty of Economics and Business, The University of Sydney, NSW 2006, AUSTRALIA; Tel: +61 (2) 9114 0619; Mobile: +61 4 0844 7372; Fax: +61 (2) 9351 7471; Email: [email protected]).
376
APPENDIX XI: REVOCATION OF CONSENT FORM
The Role and Influence of Vietnam’s Franchise Law on the Development of Franchising
REVOCATION OF CONSENT
I hereby wish to WITHDRAW my consent to participate in the research proposal described above and understand that such withdrawal WILL NOT jeopardise any treatment or my relationship with The University of New South Wales.
...... Signature Date
...... (Please PRINT name)
The section for Revocation of Consent should be forwarded to Mr Binh Nguyen Ba (Mailing address: School of Business Law & Taxation, Australian School of Business, UNSW, NSW 2052, AUSTRALIA; Tel: +61 (2) 9385 7717; Mobile: +61 4 3096 2022; Fax: +61 (2) 9313 6658; Email: [email protected]) or/and Prof Andrew Terry (Mailing address: Discipline of Business Law, Faculty of Economics and Business, The University of Sydney, NSW 2006, AUSTRALIA; Tel: +61 (2) 9114 0619; Mobile: +61 4 0844 7372; Fax: +61 (2) 9351 7471; Email: [email protected]).
377
APPENDIX XII: CONSENT FOR IDENTIFYING COMPANY AND INTERVIEWEE IN FUTURE PUBLICATION
Approval No: 106074
The Role and Influence of Vietnam’s Franchise Law on the Development of Franchising
CONSENT FOR IDENTIFYING COMPANY AND INTERVIEWEE IN FUTURE PUBLICATION
I, ______
...... Signature of Research Participant Signature of Witness
...... (Please PRINT name) (Please PRINT name)
...... Date Nature of Witness
Mr Binh Nguyen Ba (Mailing address: School of Business Law & Taxation, Australian School of Business, UNSW, NSW 2052, AUSTRALIA; Tel: +61 (2) 9385 7717; Mobile: +61 4 3096 2022; Fax: +61 (2) 9313 6658; Email: [email protected]). Prof Andrew Terry (Mailing address: Discipline of Business Law, Faculty of Economics and Business, The University of Sydney, NSW 2006, AUSTRALIA; Tel: +61 (2) 9114 0619; Mobile: +61 4 0844 7372; Fax: +61 (2) 9351 7471; Email: [email protected]).
378
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