The Franchise Started Before the Contract Was Ready

The parties had not signed a final franchise agreement.

But the franchise had already begun.

Money had been transferred. Recipes and operating methods had been shared. The premises had been prepared. The brand was displayed. The store opened to customers.

Less than one month later, the relationship collapsed.

A Vietnamese appellate judgment arising from this transaction shows why the critical risk in an early-stage franchise is often not the wording of the final contract.

It is the sequence in which the transaction is allowed to become real.

The transaction moved faster than its legal structure

The parties discussed a milk tea and bakery franchise.

A draft agreement was sent by email. It referred to a franchise fee of VND150 million and contemplated further profit sharing.

No final agreement was signed.

Despite this, the prospective franchisee transferred VND100 million. The parties proceeded with the use of recipes, labour management methods, store decoration and brand promotion.

The store opened on 30 June 2019.

On 29 July 2019, the franchisee stopped using the brand and removed the signage.

The franchisor later sought VND158.5 million, including the remaining fee and claimed profits. The franchisee counterclaimed for the return of the VND100 million already paid and approximately VND47.7 million in alleged losses.

The absence of a signed final document did not prevent the court from identifying the commercial relationship as a franchise.

The parties’ conduct had already established its substance.

Brand use, operational control, business methods and payment mattered more than the unfinished title page of the agreement.

Invalidity did not make either party commercially whole

The court concluded that the franchisor’s business system had not been operating for the legally required minimum period.

The franchise arrangement was declared invalid, and the franchisor was ordered to return the VND100 million received.

That did not resolve every commercial loss.

The franchisor’s claims for the unpaid fee and profits were rejected.

The franchisee’s claim for approximately VND47.7 million in damages was also rejected because the alleged losses were not sufficiently proved.

The outcome is important.

When a transaction is declared invalid, the law may require the return of identifiable money or property. It does not automatically reconstruct the commercial position that the parties expected.

Time spent preparing the store, internal labour, lost opportunities, brand damage, anticipated profits and informal support may be difficult to recover unless they were clearly documented and legally attributable to the other party.

Both sides therefore entered the dispute with a narrative of loss.

Neither side had built an adequate evidentiary record for most of that loss.

A current-law caution

The judgment should not be converted mechanically into a current franchise checklist.

In addition to the one-year requirement applicable to a franchisor’s business system, the court referred to a former condition concerning the franchisee’s registered business lines.

That recipient-side condition had already been repealed by Decree No. 08/2018.

The one-year operating requirement for the franchisor’s system remains relevant. Franchise registration and reporting obligations must also be determined according to the direction and structure of the transaction.

A foreign-to-Vietnam franchise is not reviewed in the same way as a purely domestic franchise.

The broader lesson is that the legal rules must be checked as they stand when the transaction is executed—not copied from an earlier agreement, an old checklist or even an individual judgment without verification.

The real risk is sequencing

A franchise can become operational before it becomes legally ready.

This happens when the parties treat the final agreement as an administrative step rather than a condition to launch.

The fee is paid first. Fit-out begins. Manuals and recipes are transferred. The brand appears publicly. Staff are hired and customers arrive.

At that point, the parties have already created dependency, sunk costs and potential liability.

The transaction should instead be structured around controlled release conditions.

Before capital is committed or the store is launched, the parties should know:

• whether the franchise system satisfies the applicable legal conditions;
• who owns or controls the brand and other intellectual property;
• whether registration, reporting or other regulatory action is required;
• exactly what operational support will be delivered;
• when the franchise fee becomes earned or refundable;
• what must occur before the franchisee is authorised to open;
• how performance, training, approvals and expenses will be recorded; and
• what happens if the opening conditions are not satisfied.

These are not merely drafting points.

They determine whether the transaction should proceed, proceed only after specified conditions, be restructured or be stopped.

Calling the arrangement a licence, cooperation agreement or brand partnership will not remove franchise risk if its substance gives one party the right to operate under another party’s business system, brand and continuing control.

The label is not the control.

Before launch, the legal structure, fund flow, operating obligations and evidence should tell the same story.

If they do not, the store may open before either party understands what it has legally acquired—or what it can recover when the relationship ends.

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Case basis: Appellate Judgment No. 03/2022/KDTM-PT dated 21 February 2022, High People’s Court in Da Nang. Party names and selected operational details have been simplified for readability.