Distributor Disputes in Vietnam

How distribution differs from agency — and why this confusion is costly

In practice, many companies confuse the concepts of “agent” and “distributor”, even signing contracts titled “agency contract” whose content is distribution — or vice versa. This confusion is not just about names: the two relationships are governed by entirely different legal regimes.

Under Article 166 of the 2005 Commercial Law, a commercial agent is an activity in which the agent buys and sells goods in its own name for the principal for remuneration — the goods and money delivered to the agent remain the principal’s property (Article 170), and on termination the agent may be compensated under Article 177. A distributor, by contrast, buys outright: it purchases goods from the manufacturer, becomes the owner, then resells to its own customers for the price margin — the profit belongs to the distributor itself, and so does the inventory risk.

The practical consequences of this distinction are significant: if the relationship is substantively distribution but the contract follows an agency template, on termination the distributor may invoke agency provisions (e.g., the right to compensation on termination under Article 177) to claim benefits the manufacturer never anticipated. Conversely, if it is substantively agency but labeled distribution, the principal may lose the control rights the law reserves for agency relationships. See the detailed analysis in the article on commercial agency disputes.

Exclusive and non-exclusive distribution: every commitment has a price

Exclusive distribution is the manufacturer’s commitment to appoint only one distributor within a defined geographic area (or distribution channel) for one or more products. In return, the distributor typically commits to sales targets and invests in warehousing systems, sales teams, and marketing activities.

Typical exclusivity disputes:

• The manufacturer “breaks the fence”: appointing additional distributors, selling directly to large customers in the exclusive territory, or selling through e-commerce channels without excluding the exclusive territory — all of which may constitute a breach of the exclusivity commitment unless the contract provides exceptions;
• The distributor “serves two masters”: distributing directly competing products despite a contractual prohibition — a breach of the non-compete obligation during the contract term;
• Vague exclusivity scope: the contract merely states “exclusive in the South” without defining geographic boundaries, sales channels, or whether nationwide online sales are included.

Non-exclusive distribution is less restrictive but generates its own disputes: the distributor complains the manufacturer favors other distributors on pricing, discounts, and marketing support — while the manufacturer believes it has commercial freedom. To avoid disputes, non-exclusive distribution contracts should clearly state the treatment principle (whether or not there is an equal-treatment obligation among distributors) instead of leaving it open.

A competition law note: exclusive distribution commitments with too broad a scope or too long a period may be examined as competition-restricting agreements under the 2018 Competition Law. When designing exclusivity clauses, companies should have a lawyer assess them.

Sales targets: a double-edged sword for both sides

Sales targets are the “backbone” clause of most distribution contracts — but also the most contentious, because they directly attach to termination rights and exclusivity rights.

Common problems:

• Unfeasible targets from the start: the manufacturer sets targets based on growth expectations without regard to market reality or the distributor’s capacity. When the distributor persistently misses them, the relationship inevitably breaks down;
• Unclear consequences of missing targets: the contract states “target of VND 50 billion/year” without saying what happens if missed — loss of exclusivity, penalties, or termination? In disputes, each side interprets in its own favor;
• Objective factors affecting targets: the manufacturer delivers late, runs out of stock, raises prices suddenly, or cuts marketing support — making the target unattainable through the manufacturer’s own fault.

Designing target clauses to limit disputes: targets on a gradually increasing roadmap over the years rather than a hard number; a mechanism to review and adjust targets on major market fluctuations; clearly graduated consequences (missing 80% → warning and corrective plan; missing 60% in 2 consecutive periods → loss of exclusivity; missing 50% → termination right); and carve-outs for misses caused by the manufacturer’s fault. Also, include over-target incentives (additional discounts, cash bonuses) to create motivation rather than only “sticks” without “carrots”.

Core rights and obligations of both parties in a distribution contract

Vietnamese law has no dedicated regime for “distribution contracts” as it does for commercial agency — distribution relationships are governed by the general provisions on sale of goods in the 2005 Commercial Law, the 2015 Civil Code, and most importantly the agreement in the contract. The quality of the distribution contract therefore directly determines the ability to protect rights in disputes. Core obligation groups to specify:

• The manufacturer side: supplying goods in correct quantity, quality, and schedule; ensuring stable supply; pricing and discount policies (whether unilateral changes are allowed, how much advance notice); marketing support, training, sales materials; product warranty; not competing directly in the exclusive territory (if any);
• The distributor side: meeting sales targets; paying on time; maintaining warehousing systems and sales teams to standard; conducting marketing and market development; periodic sales and inventory reporting; confidentiality; not distributing competing products (if committed); complying with the recommended retail price policy (within competition law limits).

A point needing special attention is pricing policy: the manufacturer imposing a rigid resale price on the distributor (resale price maintenance) may be deemed a competition-restricting agreement. Instead of fixing resale prices, the manufacturer should use a recommended retail price mechanism combined with volume discounts — and it should be carefully legally reviewed before application.

Terminating the distribution contract: termination rights and the cost of haste

A distribution contract terminates in these cases: expiry without renewal; mutual agreement to terminate; or unilateral termination by one party when the other breaches. Because the law has no dedicated notice-period rule for distribution (unlike commercial agency, which has a 60-day rule in Article 177), the notice period depends entirely on the contract’s agreement — a clause many distribution contracts in Vietnam omit.

Termination disputes usually revolve around:

• Whether termination has sufficient grounds: the terminating party cites “missing targets” but the targets were unfeasible, or the miss resulted from the terminating party’s own fault (late delivery, price increases);
• The notice period: abrupt termination without notice (or with too short notice) leaving the other party unable to handle inventory and personnel in time — which may be deemed a breach of obligation requiring damages;
• Demands for investment compensation: the distributor demands compensation for invested costs (warehousing, personnel, marketing) on the ground of “investing as required by the manufacturer”. This demand has a basis only if the contract commits to a minimum cooperation period, reciprocal investment commitments, or the termination is unlawful — it is not an automatic right.

The lesson: the distribution contract should specify the notice period for unilateral termination (typically 60–90 days, or longer for exclusive relationships), the termination procedure, and a mechanism for handling outstanding issues — instead of letting each side fend for itself when the relationship breaks down.

Handling inventory on termination: the VND 8 billion problem nobody wants

When a distribution contract terminates, the distributor usually still holds significant inventory purchased outright from the manufacturer. Because the distributor owns these goods (outright purchase), the manufacturer has in principle no obligation to buy them back — unless the contract so agrees. This is the fundamental difference from agency relationships, where goods belong to the principal.

Inventory handling options on termination, to be agreed in advance in the contract:

• Manufacturer buyback: clearly specify buyback conditions (goods intact, minimum remaining shelf life), the buyback price (original price, original price less discount, or market price at buyback), and the implementation timeline;
• The distributor may continue selling during a transition period: allowing sell-off of inventory within a defined period after termination (e.g., 3–6 months), on condition of no new intake and compliance with the pricing policy;
• Clearance sale: agreeing on a clearance mechanism and sharing of any difference;
• Return of goods to the manufacturer: where the goods are defective or the manufacturer breached its obligations.

If the contract has no inventory clause, the parties must negotiate after termination — in the context of a broken relationship, a surefire recipe for disputes. For goods with short shelf lives or bearing the manufacturer’s brand, lacking an inventory plan may also lead to counterfeit or substandard goods bearing the brand floating on the market.

Handling debts and warranty obligations after termination

Alongside inventory, two financial-technical issues after termination also need definitive resolution:

Debts: reconcile all two-way debts — the distributor’s outstanding payables, unpaid discounts/bonuses, penalties, damages. The parties should prepare reconciliation and debt-settlement minutes with specific payment deadlines. Note: one party’s unilateral “set-off” of debts without a set-off agreement or clear legal basis may constitute a breach of the payment obligation, triggering late payment interest under Article 306 of the 2005 Commercial Law (the average overdue debt interest rate on the market at the time of payment).

Warranty: products already sold to the market through the distributor still need warranty service after the contract terminates — end customers do not care about the internal dispute between manufacturer and distributor. The contract should specify: which party handles post-termination warranty, the spare parts supply mechanism, and how warranty costs are allocated. In practice, the manufacturer usually must take over warranty responsibility (directly or through the new distributor) to protect the brand.

Post-termination non-compete obligations: how far they go

Manufacturers usually want the former distributor not to distribute competing products for a period after termination — because the former distributor holds the entire customer system and knows the products and market well. This is a legally sensitive clause, however:

• Must be clearly agreed: post-termination non-compete is not an implied obligation — if the contract does not provide for it, the former distributor is in principle free to do business;
• Reasonable scope: limits on duration (typically 1–2 years), geographic/channel scope, and the specific competing product group. A non-compete clause of indefinite duration or nationwide scope risks being deemed unreasonable;
• Compensation for the non-compete period: in practice and as a general trend, a post-termination non-compete clause is more persuasive when accompanied by commensurate compensation for the restrained party. Without compensation, the clause is easily challenged on fairness grounds;
• Competition law limits: non-compete agreements also need assessment under competition law, especially where the parties hold large market shares.

Given this complexity, post-termination non-compete clauses should be drafted or carefully reviewed by a lawyer before signing.

The distribution dispute resolution roadmap

Article 317 of the 2005 Commercial Law provides three forms: negotiation, mediation, and resolution before arbitration or courts. For distribution disputes — where the parties often remain tied through inventory, debts, and warranty — a reasonable escalation roadmap is:

Negotiation: always the first step, especially where disputes involve issues requiring continued post-termination cooperation (selling off inventory, warranty handover). Agreements reached should be put in writing — see the article on settlement agreements in commercial disputes.

Mediation: suitable where the parties still want to preserve the relationship or need a neutral third party to untangle technical knots (inventory valuation, warranty cost allocation).

Arbitration or courts: when negotiation and mediation fail. For distribution disputes with foreign elements (a foreign manufacturer), arbitration is usually preferred for confidentiality and cross-border enforceability of awards. Note the current legal framework: the 2010 Law on Commercial Arbitration (No. 54/2010/QH12) has been amended and supplemented by Law No. 81/2025/QH15 dated 24/06/2025, effective from 01/07/2025 — to be distinguished from Resolution No. 81/2025/UBTVQH15 (also effective from 01/07/2025), which concerns court organization, concentrating jurisdiction over requests to set aside arbitral awards in the People’s Courts of three cities: Hanoi, Da Nang, and Ho Chi Minh City.

During disputes, where urgent measures are needed to protect assets, evidence, or prevent continuing breaches, see the article on urgent measures in commercial disputes. And in all cases, note the 2-year limitation period under Article 319.

An overview of resolution methods: commercial disputes and arbitration.

When to contact a lawyer

• Preparing to sign a distribution contract (exclusive or non-exclusive) and needing to review clauses on targets, termination, inventory, and non-compete;
• Discovering the other party breaching exclusivity commitments, missing targets, or showing signs of unfair competition;
• Wanting to terminate a distribution contract and needing to assess grounds, notice periods, and inventory-debt handling plans;
• Disputes over inventory, debts, and warranty obligations after termination;
• Needing to draft or review a post-termination non-compete clause;
• Negotiations have collapsed and suit must be filed before arbitration or courts within the limitation period.

How FLAT LAW FIRM helps

FLAT LAW FIRM advises both manufacturers and distributors in distribution relationships in Vietnam:

• Drafting and reviewing exclusive/non-exclusive distribution contracts with clause systems on sales targets, termination, inventory, debts, confidentiality, and non-compete;
• Advising on handling breaches by one party: assessing breaches, choosing sanctions, drafting legal documents;
• Advising on distribution contract termination strategy: grounds, procedures, inventory and debt handling;
• Representing clients in negotiation and mediation; calculating and proving losses;
• Representing clients in filing and pursuing cases before commercial arbitration or competent courts.

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