In commercial practice, commercial agencies and distributors are two commonly adopted business models for bringing goods to market. In practice, however, these concepts are often confused because both involve the sale of goods to end customers.
Distinguishing between a commercial agency and a distributor is important not only for selecting an appropriate business model but also for determining the parties’ rights, obligations, legal responsibilities, and the contractual framework governing their relationship.
This article analyzes the key distinctions between commercial agencies and distributors under the Law on Commerce 2005 and other relevant Vietnamese legislation.
1. What Is a Commercial Agency?
The concept of a commercial agency is provided in Article 166 of the Law on Commerce 2005.
Under this provision, a commercial agency is a commercial activity whereby the principal and the agent agree that the agent shall, in its own name, purchase or sell goods on behalf of the principal, or provide the principal’s services to customers, in return for agency remuneration.
Accordingly, the essential characteristics of a commercial agency include:
- The agent purchases or sells goods, or provides services, under the authorization granted by the principal.
- As a general rule, ownership of the goods remains with the principal until the goods are sold to customers, unless otherwise provided by law or agreed by the parties.
- The agent receives agency remuneration, rather than earning profits from the difference between the purchase price and the resale price as in a distribution arrangement.
A commercial agency is a distinct commercial institution expressly governed by the Law on Commerce 2005.
2. What Is a Distributor?
Unlike commercial agencies, the Law on Commerce 2005 does not provide a statutory definition of a “distributor.”
In commercial practice, a distributor is generally understood to be a trader who purchases goods from a manufacturer or supplier for resale, generating profits from the margin between the purchase price and the resale price.
Under this business model:
- The distributor purchases goods using its own capital.
- Upon delivery and in accordance with the contractual agreement, ownership of the goods is transferred to the distributor.
- The distributor is generally free to resell the goods to customers or downstream dealers, unless the distribution agreement imposes restrictions regarding resale prices or distribution territories.
Because distribution is not recognized as an independent commercial activity under the Law on Commerce 2005, the legal relationship between the supplier and the distributor is principally governed by the provisions relating to contracts for the sale and purchase of goods under the Law on Commerce 2005 and the Civil Code 2015.
3. What Are the Differences Between a Commercial Agency and a Distributor?
Although both serve as intermediaries in the distribution of goods, commercial agencies and distributors differ in several fundamental respects.
3.1. Legal Nature
A commercial agency is a commercial activity expressly regulated under Chapter V of the Law on Commerce 2005.
By contrast, a distributor is not a separate legal institution but rather a commercial arrangement established through a contract for the sale and purchase of goods.
This constitutes the most significant legal distinction between the two models.
3.2. Ownership of Goods
In a commercial agency relationship, ownership of the goods generally remains vested in the principal until the goods are sold to customers.
In contrast, under a distribution arrangement, ownership is transferred to the distributor upon completion of the sale in accordance with the parties’ agreement and applicable law.
Consequently, once ownership has passed, the distributor assumes the commercial risks associated with the goods.
3.3. Source of Income
Pursuant to Article 171 of the Law on Commerce 2005, an agent is entitled to receive agency remuneration, as agreed by the parties or prescribed by law.
A distributor, on the other hand, does not receive remuneration from the manufacturer or supplier. Instead, the distributor earns profits from the difference between the purchase price and the resale price.
This distinction is one of the defining characteristics differentiating the two business models.
3.4. Pricing Authority
In a commercial agency relationship, the purchase price, selling price, or service charges are generally determined by the principal or agreed upon by the parties in the agency agreement.
Conversely, a distributor generally has the discretion to determine the resale price of goods it owns, unless otherwise provided by law or restricted by the distribution agreement.
3.5. Degree of Business Independence
A commercial agent is subject to a certain degree of supervision and control by the principal regarding matters such as sales methods, pricing, distribution territory, or other contractual requirements.
By contrast, a distributor operates with greater commercial independence because it owns the goods and bears responsibility for the commercial success or failure of its business operations.
4. Should a Business Choose a Commercial Agency or a Distribution Model?
The choice between these models depends largely on a company’s commercial objectives and distribution strategy.
A commercial agency may be preferable where a business seeks to:
- Maintain strict control over resale prices;
- Preserve brand image and market positioning;
- Operate a consistent and centrally managed sales network.
Conversely, a distribution model may be more suitable where the business intends to:
- Expand market coverage rapidly;
- Reduce inventory-related burdens;
- Transfer a substantial portion of commercial risk to business partners.
In practice, many enterprises employ both models simultaneously to optimize their distribution networks.
5. May the Parties Execute a “Distribution Agreement” Instead of an “Agency Agreement”?
Yes.
Vietnamese law does not require a contract to be titled either an “Agency Agreement” or a “Distribution Agreement.”
However, the substance of the agreement, rather than its title, determines its legal nature.
If the contractual terms satisfy the statutory characteristics of a commercial agency as prescribed in Article 166 of the Law on Commerce 2005, a competent authority may determine, in the event of a dispute, that the agreement constitutes a commercial agency relationship, notwithstanding its designation as a “Distribution Agreement.” In such circumstances, the corresponding provisions of the Law on Commerce governing commercial agencies will apply.
Conversely, where the contractual relationship is, in substance, a sale and purchase of goods, the agreement will be governed by the legal provisions applicable to contracts for the sale and purchase of goods.
Accordingly, businesses should ensure that contractual provisions accurately reflect the true nature of the commercial relationship rather than relying solely on the title of the agreement.
6. Key Considerations When Entering into an Agency or Distribution Agreement
To minimize legal risks and potential disputes, businesses should clearly address the following matters in their contracts:
- Clearly define whether the legal relationship constitutes a commercial agency or a sale and purchase arrangement;
- Specify ownership of the goods throughout the transaction;
- Establish payment mechanisms and the method of calculating remuneration or profit;
- Clearly allocate pricing authority;
- Define responsibilities relating to warranties, product returns, and after-sales services;
- Specify the distribution territory, scope of business operations, and grounds for contract termination;
- Provide an effective dispute resolution mechanism.
A carefully drafted agreement will significantly reduce legal uncertainty and better protect the legitimate interests of all contracting parties.
7. Conclusion
Although both commercial agencies and distributors function as intermediaries in the supply chain, they are fundamentally different in terms of their legal nature.
A commercial agency is expressly regulated under the Law on Commerce 2005, under which the agent sells goods or provides services on behalf of the principal in exchange for agency remuneration. By contrast, a distributor operates under a contractual sale and purchase relationship, acquires ownership of the goods, and generates profits from the difference between the purchase price and the resale price.
Accordingly, before selecting either model, businesses should carefully evaluate their commercial objectives, desired level of market control, and risk allocation strategy. They should also ensure that their contractual arrangements accurately reflect the true legal nature of the transaction in order to minimize legal risks and facilitate effective commercial cooperation.
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Nguyen Thuy Duong