You signed a 5-year exclusive distribution agreement expecting nationwide coverage. Two years in, sales reach only 30% of target, competitors’ products flood the shelves while yours gather dust in a warehouse. You want to cut ties early and find a hungrier distributor — but counsel warns: terminate the wrong way, and you could end up compensating the very underperformer you want rid of.
It sounds absurd, but it’s solid law. This article maps the 4 compensation risks of early termination — and a lawful, safe exit strategy.
Legal framework (in force as of 17 October 2026)
- Civil Code 91/2015/QH13:
- Article 422 (contract termination): a contract terminates in the cases prescribed by law — performance completed, agreement, cancellation, or unilateral termination of performance.
- Articles 423–425 (contract cancellation): Article 423 — on fundamental breach, the other party may cancel; Article 424 (cancellation for delayed performance), Article 425 (cancellation for inability to perform); cancellation doesn’t extinguish damages liability.
- Article 428 (unilateral termination of contract performance): a party may unilaterally terminate performance of the contract when the other party commits a fundamental breach or the parties have so agreed.
- Articles 418–419: penalties and damages.
- Commercial Law 36/2005/QH11: commercial sanctions (Articles 292–298: specific performance, penalties, damages, suspension, cessation, cancellation); Article 301 (8% penalty cap).
The central legal question: does “poor sales” amount to “fundamental breach” justifying unilateral termination? The answer decides whether you’re a lawful terminator or a breaching party owing compensation.
Risk 1: Being deemed to have unlawfully terminated
The biggest risk. If your contract merely states “the distributor commits to annual sales of X billion” without stating that missing the target entitles you to unilaterally terminate, your “cut” may be deemed an unlawful unilateral termination — making YOU the breaching party, liable for the distributor’s losses (profits lost over the remaining exclusivity period, stranded investments…).
Drafting lesson: KPI clauses must carry specific sanctions — e.g.: “If 70% of target is missed for 02 consecutive years, Party A may unilaterally terminate with 90 days’ written notice.” Without that sentence, KPIs are decorative numbers.
If the current contract lacks it, you still have a path: proving poor sales constitutes fundamental breach (depriving you of the contract’s purpose). But that’s an argument to prove before a court/tribunal, not an automatic right — high dispute risk.
Risk 2: Compensating the distributor’s investments
Exclusive distributors typically invest heavily on the back of a 5-year exclusivity promise: warehouses, sales teams, marketing spend, large inventory. On early termination — lawful or not — they’ll claim unrecovered, stranded investments.
The law protects this to a degree: if termination was unlawful (your fault), you owe their full actual losses including unamortized investments. Even on lawful termination (their breach), they can still demand buy-back of unsold inventory (you usually must repurchase per contract terms) and settlement of accounts.
Mitigation: before terminating, review the buy-back clause. If absent, negotiate it into the termination agreement — repurchasing inventory at a reasonable discount is far cheaper than litigating investment-compensation claims.
Risk 3: Notice periods and the “soft landing” duty
Many distribution contracts require termination notice (30/60/90 days). Breaching the notice period — e.g., cutting ties instantly in anger — is an independent breach making you liable for losses during the notice you should have given (90 days’ profits, rushed staff severance costs…).
Beyond that, abrupt termination may breach the good-faith duty in contract performance. Best practice: give proper notice, keep supplying normally during the notice period, cooperate on handover (customer lists, supporting the new distributor through transition). This “decent” conduct is both lawful and evidence of good faith if disputes arise.
Risk 4: The ex-distributor “wrecking” your market post-termination
This isn’t compensation you pay but damage you suffer: the ex-distributor dumping inventory at fire-sale prices, wrecking the new distributor’s market; or continuing to use your brand and customer relationships to sell competing products.
Prevent with 3 clauses in the termination agreement:
– No fire-sale of inventory: minimum resale prices for remaining stock, or you buy it all back.
– Non-compete of reasonable duration (e.g., 12–24 months) within the distributed territory — note: overbroad clauses risk being struck as unreasonable restraints of competition.
– Confidentiality: no use of customer lists, cost prices, or business strategy post-termination.
Auditing the distributor’s investment claim: 3 filters
When the ex-distributor presents a compensation demand — “VND 8 billion invested, unamortized” — don’t negotiate against their number. Audit it through three filters first:
Filter 1 — Unamortized only. Investments already recovered through profits earned during the distributorship are not “loss.” If the warehouse cost VND 4 billion and the distributor made VND 6 billion in margin over two years, the warehouse paid for itself — strike it from the claim. Demand their profit data for the period (this is also leverage: weak sales help your position).
Filter 2 — Exclusive-purpose only. Only investments made because of this exclusive distributorship count. Their general office rent, the CEO’s company car, marketing for other brands they carry — none of it qualifies. Require invoices showing the investment served your brand specifically.
Filter 3 — Salvage value. Stranded inventory and assets retain residual value: inventory can be sold (even at discount), warehouses sublet, staff redeployed. True loss is net loss after reasonable resale — and the duty to mitigate (Article 362 of the Civil Code) means they must actually try to resell, not just claim the gross figure.
Run these three filters and most “VND 8 billion” demands collapse to a negotiable fraction — the amount you can then fold into a consensual termination package with a mutual release.
Safe exit strategy: 5 steps
- Audit the current contract: termination clause, KPI + sanctions, notice period, buy-back, dispute resolution. This “map” drives everything after.
- Collect breach evidence: actual vs. committed sales per period, market reports showing poor coverage, reminder emails sent. If you must prove “fundamental breach,” this is ammunition.
- Negotiate a consensual termination first: always the cheapest option. Offer a “clean break” package: inventory buy-back, 60–90 day transition support, clear account settlement, mutual release of claims. Most underperforming distributors want out too, not a lawsuit.
- Send a procedurally correct termination notice (if negotiation fails): cite the exact contract clause, give full notice, deliver with proof.
- Prepare for disputes: if the distributor threatens suit, you already hold the breach file + a lawful termination process — a solid defensive position.
FAQ
1. The distributor missed KPI two years running. Can I unilaterally terminate?
Only if the contract expressly makes missing KPI a termination ground (with notice). If it states KPIs without sanctions, you have no automatic termination right — you must prove fundamental breach or negotiate a consensual exit. That’s why KPI clauses must always pair with termination clauses.
2. After lawful termination, must I buy back their inventory?
Only if the contract has a buy-back clause or the termination agreement provides for it. The law doesn’t mandate inventory repurchase in all cases. But negotiated buy-back (even at a discount) is usually the practical solution: it stops fire-sales and avoids disputes.
3. Can I sign the new distributor during the notice period?
Careful. During the notice period the old contract — and its exclusivity — remains in force; signing a new distributor immediately may breach the exclusivity commitment and hand the old distributor fresh compensation grounds. Wait out the notice period, or get their written consent to an early transition.
4. Is a post-termination non-compete enforceable?
Yes, if reasonable in duration, territory, and scope. A 12–24 month non-compete within the distributed territory is commonly accepted. Overbroad terms (perpetual, nationwide when they only covered one province) risk being deemed unreasonable restraints and cut down or partially voided by courts.
5. The distributor threatens to sue for investment compensation. What now?
Don’t panic. Demand an itemized list with supporting documents. Much “investment” is ordinary business cost already offset by profits earned during the distributorship — not loss. If your termination was lawful and procedural, their claim is weak. This is also where a termination agreement with a mutual release shines: trade reasonable transition support for a waiver of all claims.
References
- Civil Code No. 91/2015/QH13: Arts. 418–419 (penalties, damages), Art. 422 (termination), Arts. 423–425 (cancellation), Art. 428 (unilateral termination of performance) — in force as of 17/10/2026.
- Commercial Law No. 36/2005/QH11: Arts. 292–298 (commercial sanctions), Art. 301 (8% cap) — in force as of 17/10/2026.
This article was drafted by the AI Legal Council and has not been reviewed by a licensed human lawyer. It is for reference only and does not constitute legal advice for any specific matter.
This article has been quality-reviewed by the FLAW AI Legal Council