Disputes in Franchise Agreements with Foreign Elements in Vietnam

1. Identifying Foreign Elements – Why It Matters

A civil or commercial contract dispute in Vietnam is considered to involve foreign elements if it meets at least one of the following criteria:

• A foreign individual or legal entity participates in the contract.

• The contract is established, amended, performed, or terminated abroad.

• The subject matter of the contract (goods, services, etc.) originates outside of Vietnam.

Accurately identifying foreign elements helps businesses choose the appropriate applicable law, dispute resolution method, and jurisdiction, avoiding passive or unfavorable positions in litigation.

2. Key Causes of Disputes

a) Subjective reasons:

• Misunderstanding the nature of the franchise model—viewing the franchisor as having total control, which leads to operational conflicts.

• Lack of knowledge in international commercial law, leading to poorly drafted contracts that omit clear terms regarding applicable law and jurisdiction.

b) Objective reasons:

• Exchange rate fluctuations, market volatility, force majeure events (pandemics, natural disasters...) affecting contract execution.

• Conflicts between legal systems and the absence of bilateral treaties between Vietnam and the partner’s country, making it difficult to determine the governing law and jurisdiction.

3. Common Legal Issues

– Contract language:
Vietnamese law requires franchise contracts (especially from foreign parties into Vietnam) to be written in Vietnamese.

– Governing law:
Vietnamese Commercial Law (2005) and relevant regulations apply, unless otherwise agreed. However, even with a foreign law clause, Vietnamese courts may still have jurisdiction in the absence of international treaties.

– Jurisdiction for dispute resolution:
According to Article 317 of the Commercial Law 2005, parties can choose: negotiation – mediation – commercial arbitration – courts.
If the foreign party is involved and no agreement or treaty applies, Vietnamese courts still have jurisdiction.

4. Solutions – When Disputes Occur

Negotiation and Mediation:
Best for maintaining long-term relationships and saving time and costs. If required in the contract, these steps must be followed seriously.

Arbitration:
Pros: Fast, confidential, and often preferred by foreign parties, especially via international arbitration centers.
Cons: High cost, dependent on arbitration agreement and chosen law.

Court litigation:
Legally enforceable with binding decisions, but time-consuming, expensive, and may damage the franchise relationship permanently.

5. Prevention is Better than Cure

Important notes when negotiating and drafting international franchise contracts:

• Use clear language; prioritize Vietnamese for enforceability in Vietnam.

• Specify applicable law and jurisdiction to avoid legal ambiguity.

• Register the contract with the Ministry of Industry and Trade if it's a foreign-to-Vietnam franchise (Decree 35/2006, amended by Decree 08/2018).

• Clearly define territory, exclusivity, knowledge transfer, and training to avoid market division disputes.

• Include non-compete clauses to prevent the franchisee from setting up a parallel system post-termination.

FAQ – Quick Summary

1. What is international franchising?
Franchising from abroad into Vietnam. It must be registered under Decree 35/2006 (as amended by Decree 08/2018), and the franchise system must have operated for at least one year.

2. How to determine the presence of foreign elements?
Check the parties involved, the location of contract formation/performance, or the contract’s subject matter.

3. What is the most effective dispute resolution method?
Prioritize negotiation/mediation to maintain relationships. If unsuccessful, opt for arbitration or court depending on the context.

Conclusion

Disputes in franchise agreements with foreign elements in Vietnam are complex and require careful preparation from the drafting and negotiation stages. Identifying foreign elements and clearly stating applicable laws, jurisdiction, language, territory, and non-compete terms are critical to resolving disputes effectively and maintaining brand integrity.

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