Legal issues to address when negotiating exclusive agency contracts

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Legal issues to address when negotiating exclusive agency contracts

In the context of commercial activities are not merely direct sales or providing services as currently, the demand of establishing and expanding distribution systems, supply chains is increasingly getting the attention of business entities in many forms: establishing branches/locations of business, franchising, opening commercial agencies… In particular, the agency model is often prioritized due to cost-effective, advantages on time management, limited risks, and the possibility of quick expansion of the consumption of the goods, supplement service market.

In the process of providing consultancy services, reviewing agency contracts, especially exclusive agency contracts, Apolat Legal finds (realizes) that business entities often ignore small problems, however it  have a significant impact on the performance of contracts. With the context of this article, Apolat Legal points out some main legal issues that the parties need to be aware of when negotiating as well as drafting an exclusive agency contract under Vietnamese law to eliminate high-risks throughout the life of the contract.

1| The territorial range to be exclusive

As regulated in the Vietnam Commercial Law 2005, commercial agency activity means the activity whereby the principal and the agent agree that the agent, by its own name, sells/purchases goods or provides services of the principal to customers for remuneration[1]. Accordingly, the exclusive agency is a form of commercial agency whereby a sole agent is authorized by the principal to sell or purchase one or many items of goods or to provide one or many types of services within a given geographical area[2].

Therefore, the exclusive characteristic of the exclusive commercial agency can be represented and bound to the following factors:

  • The number of agents: Only one agent can obtain exclusive right in a territorial range that has been unified by the parties.
  • Exclusive territorial coverage: Exclusive territorial range can be a district, a province, an inter-province, an area, a country or even many countries, depending on the capacity of the parties.
  • Monopoly on the type of goods and services: The principals can distribute exclusively one/some or all of the products that they manufacture/are entitled to distribute.

Therefore, dependent on trading strategies of the parties, the principal and the agent should   define clearly the scope of exclusive agreement concerning the territory and the kind of products can be distributed under the exclusive agency contract to exploit the potential of the market, as well as minimize risks. This issue is especially worth paying attention by principals, as to the extent agreed in the exclusive contract; they are only allowed to provide their goods/services for a sole agent. Therefore, the favourable or unfavourable of their business in the agreed scope is entirely dependent on the agent.

Here is a typical example on the exclusive scope mentioned above: Company X (the principal) and company Y (the agent) signed the exclusive agency contract in which Company Y will distribute the whole type of products that company X trading in the region of southeast of Vietnam (including Ho Chi Minh City, Ba Ria – Vung Tau Province, Binh Duong province, Dong Nai province, Binh Phuoc Province). Thus, under this agreement, the company X is only allowed to offer its products to Company Y, the delivering products to any other third party or even selling the products by Company X itself in the southeast region shall be considered as breaching the exclusive agency contract and infringe Company Y’s interests. However, in contrast, when Company X only allows Company Y to distribute exclusively the X1 product in the above-mentioned territory of the southeast region, then Company X still have full power to exploit other product lines without affecting the interests of Company Y.

Notwithstanding, principal also needs to clarify where it is specified by law that an agent shall be allowed to enter into an agency contract with a principal for a certain type of goods or service, such provision of law must be complied with[3].

2| The price of goods/services

As regulated by the law, agency remuneration shall be paid to agents in the form of commission or price margin unless the parties otherwise agree[4].

On the principals’ aspect, they always hope their agent to sell as many products as possible because they are also beneficial after all, therefore, the principals do not interfere with the price of the goods/services that the agent sells/provides to consumers. Nonetheless, there are some instances, but rarely, where principals will set the limit on the selling price of the product through making standard price, or the retail price specified to create a consistent image and product value.

On the agents’ aspect, originated from the “exclusive rights” in distributing products within a given territorial scope, they wish to sell products at the highest possible price to profit. Consequently, the agents should also clarify whether the agency contract is binding on the cost of the product or not to have appropriately negotiating options.

3| The condition on the minimum amount for ordering goods and supplying services

Normally, along with the benefit of being exclusive to sale of goods/supply services within specific territory, the agent will also bear an absolute pressure on the revenue of selling products or providing services. Namely, the principal binds the agent to the obligation of ordering a certain number of goods or supply services or achieve minimum sales criteria. These rules are often seen as the fundamental condition that the principals set to the agents when signing an exclusive agency contract. If this condition is not achieved, depending on the severe of breaches, the agent may not be entitled for remuneration, reward or discount or even terminated the contract.

On the other hand, the agent that they aim to sell as many products as possible to be able to gain more profits, can both enjoy the discount and remuneration from the principal without violating the contract. Therefore, in the process of negotiation and signing of the exclusive agency contract, the parties should pay close attention to this issue to balance the best interests between the parties because this is one of the main reasons for the dispute of exclusive agency contracts.

In addition to the above issues, the principal and the agent should also pay attention to the clauses of the delivery, payment term, return policy, duration of the agency during the process of negotiating exclusive agency agreement. Besides, if the principal is foreign traders, the Parties also need to refer to the list of imported goods, obligations, export and import procedures from Article 50 to Article 53 Decree 69/2018/ND-CP and the general provisions of commercial agency in current commercial law.

If you have any questions or require any additional information, please contact Apolat Legal – An International Law Firm in Viet Nam.

This article is for general information only and is not a substitute for legal advice.

 

[1] Article 166 Commercial Law 2005

[2] Article 169 Commercial Law 2005

[3] Clause 7 Article 175 Commercial Law 2005

[4] Clause 1 Article 171 Commercial Law 2005