Franchise Agreement: “Fixed Price” provision and types of franchising

Franchise Agreement: “Fixed Price” provision and types of franchising. Each type of franchising has its own characteristics, so depending on the business purpose, budget or operational criteria, the Client should evaluate and come up with an appropriate form of franchising and types of franchise agreement which include single-unit franchise agreement, multi-unit franchise agreement, area development franchise agreement or master franchise agreement.

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Fixed price under Competition Law

Price fixing, so-called “fixed price” is listed as one of the anti-competitive agreements as defined in Article 11.1 of the Competition Law. Normally, the act of negotiating the retail price in a franchise agreement comes in the form of the franchisor and franchisee agree on a fixed resale price, or the minimum resale price, or the maximum resale price for the product.

Additionally, these fixed price agreements are not permitted in two cases under Article 12 of the Competition Law, which are the prohibition of agreements on directly or indirectly fixing goods or service prices between: (i) enterprise in the same relevant market, and (ii) enterprises doing business in different steps of the same production, distribution, supply chain for specific kinds of goods, services.

According to Article 14, however, there are some exemptions for such cases if they benefit consumers and meet one of the following conditions: (i) Promoting technical and technological advances, raising the quality of goods, services; (ii) Increasing the competitiveness of Vietnamese enterprises on international market; (ii) Promoting the single application of quality standards and technical norms of product categories; or (iv) Agreeing on conditions for contract performance, goods delivery and payment, which are not related to prices and price elements.

Nevertheless, this is not an automatic exemption; to enjoy such exemption, parties to the agreements must submit an application for exemption form prohibition on anti-competitive agreement. On the basis of the application, the competition authority is responsible for considering, evaluating and making decisions whether it is prohibited or permitted.

Fixed price under Franchise Agreements

As mentioned above, even though fixed price agreements are prohibited under the Competition Law, there are still cases where those agreements shall be granted exemption if they benefit consumers and meet one of the conditions as regulated in Article 14.

In Vietnam today, some franchise systems are easily shown that the retail prices at the franchised stores of the same franchise system are basically similar, and thus it can be called as implicit agreement express through price collusion on this case. Such agreements are often exempt from competition laws if maintaining maximum resale prices benefits the public consumers.

In conclusion, should a “Fixed Price” provision violate the Competition Law, it is not necessarily prohibited in a franchise agreement if parties engaging in such anti-competitive agreement are eligible for exemption as prescribed in Article 14.1 have obtained an exemption decision from the National Competition Commission

Types of franchising

When entering a franchise contract, based on the object of the franchise, the Client can choose one of the following franchising forms:

First is product distribution franchise. Product-driven franchises are based on supplier dealer relationships, where franchisee distributes the franchisor’s products. The franchisor licenses its trademark but usually does not provide franchisees an entire system for running their business. Product franchises deal mainly with large products, such as cars, etc.

Second is business formant franchise. This is a form of franchising that includes the transfer of business processes and methods of operation and management. Unlike product distribution franchising, the franchisor here is responsible for fully transferring techniques and business models. The standards of the business model must always be properly maintained.

Third is, management franchise. The franchisor shall transfer the franchisee the know-how, patents and process to produce a product and market it to the franchisor’s standards. This type of franchising is common in the bottled water, food and pharmaceutical sectors.

Each type of franchising has its own characteristics, so depending on the business purpose, budget or operational criteria, the Client should evaluate and come up with an appropriate form of franchising and types of franchise agreement which include single-unit franchise agreement, multi-unit franchise agreement, area development franchise agreement or master franchise agreement.

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