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Ensuring rights of distributors

Vietnam News Agency

Ensuring rights of distributors

by Tran Anh Duc and Jesse Lieberman, lawyers of VILAF - Hong Duc

30 November 2005

Exclusive rights to distribute particular products in Viet Nam will be addressed in a new decree being drafted by the Ministry of Trade.

The draft Decree on Trading Enterprises promises to be the first of several regulations addressing the concerns of foreign-invested enterprises seeking guarantee of distribution rights in Viet Nam.

While the existing foreign investment law does little to guarantee these, the new draft decree would grant rights already reserved in international trade treaties to which Viet Nam is a party, while continuing to shy away from granting rights not guaranteed in treaties.

Existing law, treaties

The current law governing distribution rights of foreign investors is Decree 24 detailing the Law on Foreign Investments. Decree 24 states, "Investment projects in import services and domestic distribution services . . . shall be implemented in accordance with separate provisions of the Prime Minister of the Government." Since the Prime Minister has never issued provisions detailing entrance of foreign-invested enterprises into distribution services, there are no established criteria guiding what a foreign-invested enterprise must do to gain distribution rights.

In practice, only a couple of European supermarkets have been formally granted exclusive distribution rights in Viet Nam. Under current Vietnamese law and practice, otherwise, foreign-invested enterprises are largely barred from import and domestic distribution services.

The Bilateral Trade Agreement (BTA) between Viet Nam and the US grants American manufacturers the right to engage in trading activities (i.e., importation and distribution of goods), subject to a series of restrictions on products.

American investors may also create joint ventures with domestic partners for the purpose of distribution, with a current cap of 49 per cent ownership of the joint venture, a cap that will be lifted to 51 per cent in December 2007 and that will be lifted entirely in December 2008, pursuant to the BTA.

The BTA’s national treatment provisions guarantee that an American enterprise does not need to follow any additional licensing steps to carry out importation and distribution activities, rights that have been granted by the BTA. Nevertheless, it is not clear how American enterprises may enjoy importation and enterprises may enjoy importation and distribution rights in the absence of guidelines from Vietnamese authorities.

Viet Nam signed an Agreement for the Liberalisation, Promotion and Protection of Investments with Japan in November 2003. While the agreement does not specify distribution rights, it does have a Most Favoured Nation (MFN) clause that states, "Each Contracting Party shall in its Area accord to investors of the other Contracting Party and to their investments treatment no less favorable than the treatment it accords in like circumstances to investors of any third country and to their investments with respect to investment activities." In short, Japanese investors are entitled to the same distribution rights granted in a treaty with another country, including the benefits the US enjoys under the BTA as well as benefits enjoyed by the EU in its agreement on market access.

The MFN clause of the EU market access agreement states that Viet Nam will "grant to European Community investors treatment no less favourable than that accorded to Japanese investors as provided for in the Bilateral Investment Agreement (BIA) between the Socialist Republic of Viet Nam and Japan, upon the entry into force of the said Agreement." This MFN clause grants the same treatment granted to the Japanese, which includes the MFN clause granting Japanese investors the same distribution rights found in any other bilateral treaty, including the BTA. Therefore, the EU piggybacks on the rights granted under both the BTA and any other trade treaty.

Draft decree

The purpose of the Trade Ministry’s draft decree will be to fill in many holes in the existing law regarding importation and distribution rights, but it is not yet known when the decree will be officially issued.

A carry over in the draft decree from existing law is the amount of discretion granted to the Prime Minister.

The draft decree stipulates that a foreign-invested enterprise seeking a distribution license will be subject to either (i) the terms and schedules provided by international treaties, or (ii) current Vietnamese law. For all practical purposes, this will mean that only a foreign enterprise subject to a treaty (i.e., an American, Japanese or EU enterprise) would be eligible for a distribution license granted by the Ministry of Trade. Enterprises from countries without these treaty privileges are governed by existing Vietnamese law, which will require the enterprise to obtain a distribution license from the Prime Minister.

As there is no criteria for issuing such a license to a country without a trade agreement with Viet Nam, this provision gives the Government the power to issue such licenses without obliging it to issue them. This allows the Government to preserve distribution rights to domestic Vietnamese enterprises, in its discretion.

Excluded goods

Foreign enterprises are excluded under Vietnamese law from importing and distributing petroleum, petroleum products, gas, fertiliser, insecticides, beer and spirits, cigarettes, medicines, precious stones metals, explosives, and rice and wheat flour. The prohibition on the distribution of these goods is consistent with trade treaties into which Viet Nam has entered.

In sum, the draft decree will act as more of an enabler of existing trade treaties than anything else. While states party to treaties with Viet Nam will enjoy the provisions of their respective treaties under the draft decree, the decree will do little to grant rights to enterprises from countries without such treaties with Viet Nam.