The trend of supermarkets and retail systems organizing the production of private label goods is becoming increasingly common in Vietnam. It is not uncommon for customers to encounter products with unique labels from different supermarkets. However, the organization of production and distribution of these private labels is also related to some legal issues concerning commercial processing that supermarkets and retail systems need to be aware of during the implementation process.
It is acknowledged that the organization of production and business of private labels is a trend for supermarkets and retail systems due to the outstanding advantages of this business method, including the availability of a distribution system, low advertising costs, and product marketing. This can help reduce costs and enhance competitiveness in the market compared to brands of other companies. However, most of these supermarkets cannot afford the conditions and capacity to produce goods themselves. Therefore, to produce private labels, supermarkets, and retail systems have chosen the option of outsourcing the production of goods to processing facilities. This option is also known as commercial processing.
1. What is commercial processing?
According to the regulations in Article 178 of the Law on Commercial 2005, “Commercial processing is a commercial activity where the processing party uses a part or all of the raw materials provided by the ordering party to perform one or more stages in the production process according to the requirements of the ordering party to receive remuneration.”
Thus, in the processing relationship, the ordering party (in this case, the supermarket) is the party with the demand for products according to its proper standards. Therefore, the supermarket will be responsible for providing raw materials, machinery, and equipment, unless otherwise agreed between the parties. The processing party will then proceed with the production to manufacture products according to the supermarket’s requirements.
2. Rights and obligations of parties in the commercial processing relationship
2.1 For the ordering party (in this case, the supermarket)
- Provide a part or all the raw materials for processing according to the processing contract or provide money to purchase raw materials under the agreed-upon quantity, quality, and prices.
- Receive all processed products, leased or borrowed machinery, equipment, raw materials, supplies, and scrap after the termination of the processing contract, except in cases of other agreements.
- Sell, dispose of, or give away on-site processed products, leased or borrowed machinery, equipment, raw materials, supplies, and excess scrap, in accordance with the agreement and compliance with legal regulations.
- Appoint a representative to inspect and supervise the processing at the processing location, appoint expert(s) to provide technical guidance for production, and inspect the quality of processed products as agreed in the processing contract.
- Be responsible for the legality of intellectual property ownership of processed goods, raw materials, machinery, and equipment used for processing transferred to the processing party.
2.2 For the processing party
- Supply a part or all the raw materials for processing according to the agreement with the ordering party regarding quantity, quality, technical standards, and prices.
- Receive remuneration for processing and other reasonable costs.
- In case of processing for foreign organizations or individuals, the processing party is entitled to on-site export of the processed products, leased or borrowed machinery, equipment, raw materials, supplies, excess materials, waste, and scrap under the delegation of the ordering party.
- In case of processing for foreign organizations or individuals, the processing party is exempt from import taxes for temporary import of machinery, equipment, raw materials, and supplies as per quotas to fulfill the processing contract under tax laws.
- Be responsible for the legality of the processing activities of goods in cases processed goods fall into prohibited business, export, or import categories.
3. Related regulations regarding processing contracts
The commercial processing relationship is legally represented in the form of a processing contract. According to the regulations on the form of processing contracts, Article 179 of the Law on Commercial 2005 stipulates that a processing contract must be made in writing or other forms with legal equivalent value.
Regarding the content, a processing contract is comparable to other economic contracts and must have basic content appropriate to the object of the contract.
Accordingly, a typical processing contract must stipulate some basic provisions, including:
- Information about the parties in the processing contract;
- Content and specific requirements for processing between parties;
- Methods and time for delivering raw materials for processing;
- Quantity, quality, cost standards;
- Rights and obligations of the parties in the contract;
- Remuneration for processing, payment methods and terms;
- Validity period of the processing contract, etc.
In addition, it is essential to consider:
- The legal responsibilities outlined in the contract;
- Unilateral termination rights of each party according to the contract and legal regulations;
- Processing remuneration is also regulated by the Law on Commercial 2005 in Article 183 as follows:
- The processing party can receive processing remuneration in money or the form of processed products, machinery, equipment used for processing.
- In the case of processing goods for foreign organizations or individuals, if the processing party receives processing remuneration in the form of processed products, machinery, equipment used for processing, it must comply with the regulations on imports for those products, machinery, and equipment.
From the analyses presented above, supermarkets that are currently or intend to engage in commercial processing activities with their own brands need to pay attention to relevant legal regulations to minimize potential risks during the commercial processing process. By doing so, they can establish their own brand image, gain trust from partners and customers, and enhance their competitive position in the market compared to other competitors.
