Franchise agreements in the healthcare sector are becoming increasingly prevalent, particularly among chains of clinics, pharmacies, and private medical facilities. However, franchising in healthcare also presents numerous challenges concerning compliance with legal regulations and the protection of consumer rights. So, what does the law provide on this matter? Let’s explore the issue with NPLaw in the article below.

I. The current situation of franchise agreements in the healthcare sector

In recent years, the franchise business model in healthcare, particularly in dentistry, aesthetics, general clinics, and pharmacy chains, has grown rapidly in Vietnam. This model is regarded as a means for healthcare businesses and facilities to expand their operations, leverage brand reputation to attract patients, and enhance competitiveness.

Nevertheless, in practice, many healthcare franchise agreements still contain several shortcomings. A significant number of enterprises enter into franchise agreements without fully complying with the legal provisions on commercial franchising as well as the specialized regulations applicable to the healthcare sector.

Some contracts primarily focus on commercial benefits while neglecting to impose adequate obligations regarding professional responsibilities, technical standards, or quality management processes for healthcare services. This poses potential risks to the brand’s reputation and patients’ rights.

In general, franchise activities in Vietnam’s healthcare sector possess substantial development potential. However, to ensure transparency, safety, and effectiveness, the formulation and execution of such agreements must receive greater attention, with strict adherence to current legal regulations.

II. What is a franchise agreement in the healthcare sector?

1. Definition of a franchise agreement in the healthcare sector

The current legislation does not explicitly define a franchise agreement in the healthcare sector. However, the concept can be derived from relevant provisions as follows:

Pursuant to Article 284 of the Law on Commerce 2005, a commercial franchise is a commercial activity whereby the franchisor permits and requires the franchisee to conduct the purchase and sale of goods or the provision of services under the following conditions:

  • The purchase and sale of goods or provision of services shall be carried out in accordance with the business organization method determined by the franchisor and associated with the franchisor’s trademark, trade name, business know-how, business slogan, business symbol, and advertising;
  • The franchisor has the right to control and provide assistance to the franchisee in operating the business.

Based on the above provisions, a franchise agreement in the healthcare sector may be understood as a contractual document concluded between the franchisor (usually a company, healthcare organization, or medical facility) and the franchisee (an individual or organization intending to operate in the healthcare field under the franchisor’s brand) for the use of the franchisor’s brand, products, or healthcare services within a specified period.

2. Is it difficult to implement a franchise agreement in the healthcare sector?

Implementing a franchise agreement in the healthcare sector can present various difficulties.

First, regarding legal compliance, the healthcare industry is subject to numerous strict regulations and standards concerning service quality, patient safety, and requirements for facilities and medical equipment. Ensuring full compliance with these regulations during franchising is a major challenge.

Second, regarding the maintenance of service quality and brand reputation, the franchisee must ensure that the quality of healthcare services is equivalent to that of the original brand. This necessitates rigorous training, supervision, and quality control. Franchising may adversely affect the franchisor’s reputation if the franchisee fails to maintain the promised service standards. This is especially critical in the healthcare sector, where reputation and patient trust are paramount.

Third, difficulties may arise in staff training and technology transfer, particularly since the healthcare sector demands high levels of professional expertise and practical skills.

Additionally, other challenges may include operational management, brand control, and dispute prevention mechanisms to minimize legal and commercial risks throughout the franchising process.

3. Essential contents of a franchise agreement in the healthcare sector – which clause is the most important and why?

Pursuant to Article 11 of Decree No. 35/2006/NĐ-CP, the principal contents of a franchise agreement may include the following:

  • Information of the contracting parties: Names, addresses, and contact details of the franchisor (licensor) and the franchisee (licensee), as well as personal information of their legal representatives (in case of legal entities);
  • Content and scope of the franchise right: A detailed description of the healthcare field in which the franchisee is permitted to operate; a list of specific services allowed to be provided under the franchised brand; the geographical territory of operation, etc.;
  • Rights and obligations of the franchisor and the franchisee;
  • Price, franchise fees, and payment methods;
  • Term of validity of the agreement;
  • Extension, termination, and dispute resolution mechanisms;
  • Other contractual provisions depending on the particular circumstances of the parties.

The most important content of a franchise agreement is the clause on the rights and obligations of the parties. This is because the parties must clearly define and agree upon their respective responsibilities and entitlements throughout the performance of the contract to ensure consistency, protect the brand’s reputation, and prevent potential disputes.

III. Legal provisions governing franchise agreements in the healthcare sector

1. Legal regulations to be noted in franchise agreements in the healthcare sector

When executing a franchise agreement in the healthcare sector, the parties must pay particular attention to the following legal provisions:

  • Contracting parties: Franchising is a specialized commercial activity; therefore, the parties to a franchise contract must be traders as prescribed in Article 6 of the Law on Commerce 2005. Accordingly, the contracting entities must satisfy the following conditions:
  • Be legally established;
  • Engage in commercial activities independently and regularly;
  • Have a valid business registration;
  • Conduct commercial activities in sectors, localities, forms, and by methods not prohibited by law.
  • Form of the franchise agreement: Under Article 285 of the Law on Commerce 2005, a franchise contract must be made in writing or in another form having equivalent legal validity.

The franchise agreement must be in Vietnamese. In the case of franchising from Vietnam to a foreign country, the language of the agreement shall be as mutually agreed by the parties in accordance with Article 12 of Decree No. 35/2006/NĐ-CP.

  • Registration of the franchise: Before conducting franchise activities, the prospective franchisor must register with the Ministry of Industry and Trade, as required by Article 291 of the Law on Commerce 2005. However, pursuant to Clause 2, Article 3 of Decree No. 120/2011/NĐ-CP, registration is not required for domestic franchises and for franchises conducted from Vietnam to foreign countries.

2. Procedures for implementing a franchise agreement in the healthcare sector

The implementation of a healthcare franchise agreement involves the preparation of documentation, submission of the application, and registration of the franchise activity.

  • Preparation of documentation: The dossier for franchise registration shall include:
  • Franchise registration application (Form MĐ-1, Appendix II attached to Circular No. 09/2006/TT-BTM);
  • Franchise description document as prescribed in Appendix III attached to the same Circular;
  • Certified copy of the Business Registration Certificate;
  • Certified copy of industrial property protection titles in Vietnam or abroad;
  • Application form as guided by the Ministry of Industry and Trade;
  • Certified copy of the license for the use or transfer of industrial property rights if applicable;
  • Written approval from the original franchisor allowing sub-franchising (if the applicant is a sub-franchisor);
  • Other documents may be required by the competent authority, such as financial statements, business plans, etc.
  • Submission of application: The dossier shall be submitted to the competent State authority either in person, by post, or online, depending on the submission procedures prescribed in Article 20 of Decree No. 35/2006/NĐ-CP.
  • Results: Within five (05) working days, the competent authority shall issue a notification of the registration result to the franchisor.

3. Main considerations to avoid violations in healthcare franchise agreements

When executing a healthcare franchise agreement, the parties should carefully consider the following issues:

  • Due diligence on the brand: Conduct thorough research on the franchise brand, ensuring it has a solid reputation, market recognition, and a transparent operational history.
  • Verification of contract legality: The franchise agreement must comply fully with the applicable laws. It is advisable to seek consultation from lawyers or legal experts to ensure that the agreement meets all legal requirements.
  • Clarity on rights and obligations: The contract should clearly define the rights and duties of both franchisor and franchisee to prevent future disputes, particularly concerning product or service quality and operational procedures.
  • Franchise fee clause: Parties should have a clear understanding of all applicable fees, including initial franchise fees, periodic payments, and any other related costs, ensuring transparency and accurate calculation.
  • Term and termination conditions: The agreement should specify the duration of the franchise and the conditions for termination, ensuring that both parties’ rights and obligations are protected in the event of contract cessation.

IV. Clarifications on legal issues related to franchise agreements in the healthcare sector

1. Rights and obligations of the parties in a franchise agreement in the healthcare sector

Pursuant to Articles 286 and 287 of the Law on Commerce 2005, the rights and obligations of the franchisor in the healthcare sector are as follows:

  • Unless otherwise agreed, the franchisor shall have the following rights:
  • To receive franchise fees;
  • To organize advertising for the franchise system and the franchise network;
  • To conduct regular or ad hoc inspections of the franchisee’s business operations in order to ensure the uniformity of the franchise system and the stability of the quality of goods and services.
  • Unless otherwise agreed, the franchisor shall have the following obligations:
  • To provide the franchisee with an operations manual for the franchise system;
  • To provide initial training and continuous technical assistance to the franchisee so that the latter may operate in accordance with the franchise system;
  • To design and arrange the business location or service facility at the expense of the franchisee;
  • To ensure the protection of intellectual property rights with respect to the subjects recorded in the franchise agreement;
  • To treat all franchisees within the system on an equal basis.

Pursuant to Articles 288 and 289 of the Law on Commerce 2005, the rights and obligations of the franchisee in the healthcare sector are as follows:

  • Unless otherwise agreed, the franchisee shall have the following rights:
  • To request the franchisor to provide adequate technical assistance related to the operation of the franchise system;
  • To request the franchisor to treat it equally with other franchisees in the same franchise network.
  • Unless otherwise agreed, the franchisee shall have the following obligations:
  • To pay franchise fees and other payments as agreed in the franchise contract;
  • To invest sufficient facilities, financial resources, and human resources to receive and operate the rights and business know-how transferred by the franchisor;
  • To accept the franchisor’s inspection, supervision, and instructions and comply with the franchisor’s requirements on the design and layout of the business premises or service facility;
  • To maintain confidentiality of the business know-how received under the franchise, even after the expiration or termination of the franchise agreement;
  • To cease using the franchisor’s trademarks, trade names, business slogans, commercial symbols, and other intellectual property rights (if any) or systems upon termination or expiration of the franchise agreement;
  • To conduct its operations in accordance with the franchise system;
  • Not to sub-franchise without the franchisor’s prior consent.

2. Possibility and procedure for extending a franchise agreement in the healthcare sector

Pursuant to Clause 6, Article 11 of Decree No. 35/2006/NĐ-CP, the parties may agree on the extension of the franchise contract as part of the contractual terms.

The law does not provide a specific procedure for the extension of a franchise agreement in the healthcare sector. However, when seeking an extension, the parties must notify and obtain mutual consent from each other. The extension agreement must be made in writing and signed by both parties before the original contract expires.

In cases where the original franchise contract already contains a clause on extension, such clause shall automatically take effect upon the expiration of the contract, and the parties shall comply with the terms previously agreed upon.

3. Existence of special legal provisions governing franchise agreements in the healthcare sector in Vietnam

There are no specific legal instruments governing franchise agreements in the healthcare sector in Vietnam.

However, such agreements remain subject to the general provisions of the Law on Commerce regarding franchising, as well as to relevant regulations under healthcare law and other related legal instruments.

4. Dispute resolution process in franchise agreements in the healthcare sector

The resolution of disputes arising from franchise agreements must comply with the law and the provisions of the contract to ensure the protection of the legitimate rights and interests of the parties involved.

Typically, the process of resolving disputes over franchise agreements includes the following stages:

  • Identification of the breach: Clearly determine the nature of the breach of contract, review the contractual provisions, relevant legal regulations, and evidence related to the breach.
  • Notification to the breaching party: After identifying the violation, the aggrieved party must formally notify the breaching party of the violation, its consequences, and the required remedial measures within a specified period.
  • Negotiation: The parties may negotiate or mediate to resolve the dispute amicably and on the basis of mutual benefit. If such efforts fail, the aggrieved party may resort to the contractual remedies or legal sanctions such as penalty for breach or compensation for damages.
  • Legal proceedings: If the dispute cannot be resolved through negotiation or mediation, the parties may submit the dispute to a court or commercial arbitration for resolution in accordance with applicable law.

Under Article 317 of the Law on Commerce 2005, disputes arising from franchise contracts may be resolved by the following methods:

  • Negotiation between the parties;
  • Mediation by an agency, organization, or individual mutually chosen by the parties as an intermediary;
  • Settlement by Arbitration or Court.

The procedures for dispute resolution in commercial matters at Arbitration or Court shall be conducted in accordance with the procedural laws governing such bodies.
5. Procedures for termination of franchise agreements in the healthcare sector

The termination of a franchise agreement may occur by mutual consent of the parties, upon the expiration of the contract term, or due to a contractual breach leading to unilateral termination by one party.

  • Review of the Franchise Agreement: The franchise agreement typically stipulates specific provisions governing termination. The parties must comply with the clauses regarding duration, breach, and the conditions under which termination is permissible in order to fully understand their respective rights and obligations.
  • Common types of termination clauses:
  • Voluntary termination: A party wishing to end the agreement before its expiration must provide prior written notice within the period specified in the contract.
  • Termination for breach: The non-breaching party may terminate the contract after issuing a warning, if the breaching party fails to remedy the breach within the given timeframe.
  • Termination upon expiration: The agreement ends upon the expiration of its term or in accordance with any extension mutually agreed upon by the parties.
  • Notice of termination: The notice of termination must be made in writing, duly signed, and issued in accordance with the prescribed form (e.g., registered mail, email with digital signature, etc.). The notification period must comply with the contract to avoid potential disputes.
  • Determination of financial obligations upon termination: Upon termination of a healthcare franchise agreement, the parties must determine and settle any outstanding financial obligations, including:
  • Unpaid franchise fees;
  • Management fees and royalty payments as agreed;
  • Penalties for breach of contract, if applicable.
  • Compliance with Franchise and Intellectual Property regulations: The franchisee must cease using all assets associated with the franchised brand, including logos, trade names, slogans, business know-how, and marketing materials of the franchisor. The franchisee must also comply with confidentiality obligations concerning business information even after the termination of the agreement. Furthermore, all intellectual property assets, materials, products, software, or technologies owned by the franchisor must be returned or destroyed in accordance with the terms of the agreement.
  • Negotiation and liquidation of the agreement: The parties should negotiate the terms of termination, including financial obligations, transfer of assets, and outstanding responsibilities. All negotiated terms must be clearly documented in writing and signed by both parties to prevent future disputes.

After reaching an agreement, the parties shall proceed with the liquidation of the franchise contract, which involves the following steps: inventory of assets, confirmation of financial settlement, delivery of relevant documents and property, and termination of the right to use the franchised brand. The liquidation process must be recorded in a detailed written statement signed by both parties to serve as legal evidence.

V. Why should you seek legal counsel for franchise agreements in the healthcare sector?

Engaging a lawyer for consultation on healthcare franchise agreements is essential to safeguard the rights and interests of both the franchisor and the franchisee, while minimizing potential legal risks.

To help enterprises better understand and comply with legal requirements concerning healthcare franchise agreements, NPLaw provides professional and comprehensive legal consulting services, including:

  • Legal advice on contractual clauses in franchise agreements;
  • Consultation on the rights and obligations of the parties;
  • Drafting of contracts and contractual appendices;
  • Legal updates and advice on current regulations applicable to healthcare franchising.

Contact NPLaw today for expert legal consultation and support regarding franchise agreements in the healthcare sector. We are committed to assisting enterprises in drafting legally compliant and effective contracts, thereby preventing potential legal risks.