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Drafting international goods distribution contracts

Distribution is an intermediary sales channel from manufacturers to consumers or secondary agents. Distribution activities play an important role in expanding the consumption of goods and services by traders in the market, especially in the current context of trade between developed countries. However, besides choosing the right distributor, whether or not a suitable international goods distribution contract can be built between the two parties is another story. Viet An Law Firm hereby would like to provide advice on drafting international goods distribution contracts in Vietnam as follows.

International Goods Distribution Contracts

Legal basis

  • United Nations Convention on contracts for the international sale of goods (CISG 1980);
  • Civil Code 2015;
  • Law on Intellectual Property 2005, as amended and supplemented in 2009, 2019, 2022;
  • Law on Commercial 2005.

General overview of international goods distribution contracts

What is an international goods distribution contract?

An international goods distribution contract is an agreement between the seller (manufacturer) and the buyer (distributor), in which the seller gives the buyer the right to trade a certain type of goods within a specified territory. Thus, after importing goods from the manufacturer, the distributor will resell the goods on his behalf within the scope of the long-term contract signed between the distributor and the manufacturer. At this time, the distributor will be the owner of the goods and responsible for all risks related to those goods.

Difference between a distribution contract and an international sales contract

It can be seen that a distribution contract has the legal nature of a goods purchase and sale contract, but there are still a few differences, specifically:

  • A goods distribution contract is a long-term contract and has the nature of a framework contract, based on which the parties can sign specific goods purchase and sale contracts.
  • Distribution contracts are often exclusive, whereby the manufacturer grants the distributor the exclusive right to buy and sell its goods in a certain territory and does not grant this right to any other distributor and vice versa, the distributor will only be able to sell goods within the specified territory and commit to only buying goods from that manufacturer.

Sources of law governing international goods distribution contracts

  • International treaties. For example, the CISG on the international sale of goods, the Warsaw Convention on international air transport 1929, …
  • National law
  • International trade practices. For example: Incoterms 2020; URC 522, …
  • Case law.

Terms required in international goods distribution contracts

Information of the parties

This is the basic provision of the contract, intended to determine the subject of the contract. Therefore, the parties need to provide complete and accurate information about the name, address, and headquarters.

Terms of appointment of distributors

  • The Supplier will appoint its Distributor to sell the goods in the specified area throughout the term of the contract.
  • In this clause, the two parties will agree that the distributor is exclusive or has no rights (if the distributor is exclusive, both parties must comply with the Competition Law’s provisions).

Terms of supply of goods

This clause will describe the goods in detail as well as the requirements for those goods:

  • Name of goods: The parties need to agree to write the name of the goods in the contract in the most detailed and clear way. For example: product name with HS code;
  • Quantity of goods: the parties agree on the minimum/maximum quantity of goods, and agree on units of measurement, and tolerances, in each order;
  • Quality of goods: the parties need to stipulate the quality inspection of goods, goods should be inspected twice before and after delivery;
  • Goods quality inspection certificates need to be guaranteed to be valid in both the Supplier’s country and the Distributor’s country.

Terms of goods prices

The parties agree on the price currency, price level, and calculation method.

  • The two parties need to agree on the currency unit for calculating the price. For international goods distribution contracts, the unit is usually USD.
  • The Supplier must provide the Distributor with quotations from time to time and if there are any changes, they must notify the Distributor a reasonable period in advance (the reasonable time will be for the parties to agree upon).

Terms of payment

A few notes that parties need to pay attention to when drafting this clause include:

  • Payment currency: may or may not coincide with the pricing currency. If they do not match, it is necessary to calculate the conversion rate. Because the exchange rate can change over time, the parties should agree at what time the exchange rate will be used, for example: at the time of contract conclusion, at the time of delivery,…
  • Payment term: the parties need to agree upon the payment term. For example, payment must be made within 30 days from the date of issuance of the Supplier’s invoice
  • Payment method: can be bank transfer, cash, payment using documents such as L/C, D/P or D/A, collection, T/T wire transfer,…
  • Payment documents: clear regulations on payment made when sufficient documents are presented: bills of exchange, invoices, certificates of origin, certificates of quantity and quality of goods, etc.

Terms of delivery

  • The parties specifically agree on the delivery location, delivery, and receipt time;
  • Delivery method: waterway, road, rail or air;
  • The parties can choose delivery terms according to some common international practices in INCOTERMS such as FOB, CIF, DAP,…
  • The goods can be delivered in whole or in part, once or multiple times. If along the way it is necessary to change means of transport, both parties can stipulate to allow transshipment.
  • In case the carrier is near the port of destination but the documents are slower than the goods’ itinerary, the parties can stipulate that “late arrival bills of lading are accepted”.

Terms of intellectual property rights

The supplier grants the distributor the right to use its trademark in advertising activities and marketing products, however, the distributor is not allowed to:

  • Make adjustments to the goods or their packaging unless necessary by law.
  • Using the trademark in a way that may affect the supplier’s identity or brand value.
  • Use of a trademark as part of a distributor’s business or corporate name, etc.

Terms of penalties for violations and compensation for damages

  • Regarding penalties for violations, according to Vietnamese law, the penalty for violations is no more than 8% of the violated contractual obligations. In addition, the parties can only impose penalties for violations when there are terms agreed in the contract.
  • Compensation is applied without the agreement of both parties to the contract. However, it should be noted that the penalty level must not exceed the level of loss and lost profit that the parties anticipated when entering into the contract.

Force majeure terms – exemption for breach of contract

The parties need to stipulate the circumstances that, when occurring, make the Contract impossible to perform, but neither party is responsible. Specifically:

A case is only considered to be a force majeure situation and is exempted from liability when all three of the following factors are present at the same time:

  • Happens out of control;
  • Unpredictable;
  • Cannot be avoided or overcome it or its consequences.

For example: In 2020, when the COVID pandemic had many complicated developments, many countries issued a “Social Isolation” directive, causing many businesses to have no human resources to produce goods, causing many activities to be delayed. Import and export activities were interrupted. In this situation, if the Distributor cannot deliver the goods as stipulated in the contract, they can also be exempted from liability if they can prove that a force majeure event occurred to them.

Because the distribution contract will have many different deliveries, the parties also need to stipulate that these force majeure events will only suspend this delivery and that will there be any changes in subsequent deliveries.

Applicable law terms and dispute resolution

  • The parties need to stipulate in the contract the applicable law to implement the contract and the applicable law to resolve disputes. In case the parties do not agree when a dispute arises, the jurisdiction will decide on the law;
  • For dispute resolution, the parties stipulate in the contract the method to choose when a dispute occurs: negotiation, conciliation, arbitration, or court.
  • For small and medium-sized businesses that need quick capital turnover and want to ensure their reputation and corporate image, Viet An Law Firm recommends that you prioritize choosing non-jurisdictional methods, specifically negotiating or mediating so that disputes can be resolved quickly and cost-effectively.

If you need advice on drafting international goods distribution contracts, please contact Viet An Law Firm for the most specific and detailed advice!

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