Drafting goods processing contracts

Society is increasingly developing, increasing the need to produce and process goods to optimize its supply chain. When it is necessary to order the processing of goods, the parties involved need to establish a goods processing contract. So what is a goods processing contract? Viet An Law Firm offers the following article about drafting goods processing contracts to answer clients’ questions.

Legal basis

• Civil Code 2015.
• Law on Commercial 2015.

What is a processing contract?

Pursuant to the provisions of Article 542 of the Civil Code 2015, a processing contract is an agreement between the parties, accordingly, the processing party performs its work to create the product according to the request of the ordering party, from which the ordering party receives the product and pays the processing contractor.

In addition, according to the provisions of Commercial Law, a processing contract is an agreement between the parties. Accordingly, the processing party will use part or all of the raw materials and materials of the ordering party to carry out one or more stages in the production process of goods at the ordering party’s request to receive remuneration, the ordering party will receive the product and pay remuneration according to the agreement.

Form of processing contract

Under the provisions of civil law, goods processing contracts must be made in writing or other forms with equivalent legal value.

Content of drafting goods processing contract

Pursuant to the provisions of the Civil Code 2015, the parties to a processing contract have the right to agree on the content of the contract, accordingly, the contract can have the following contents:

The object of the contract

The subject matter of the processing contract is the processed goods, the name of the processed product, and the quality and quantity of the product.

According to Article 180 of the Commercial Law 2005, the types of goods that can be processed are as follows:

• All types of goods can be processed, except for goods banned from business.
• In the case of processing goods for foreign investors for consumption outside the territory of Vietnam and products banned from business, import, or export can be processed if permitted by a competent state agency.

Payment method

According to the provisions of Article 183 of the Commercial Law 2005, the processing price and payment method must meet the following conditions:

• The processing contract must clearly state the processing remuneration.
• The processing party can receive processing remuneration in money or processed products, machinery, and equipment used for processing.
• In case of receiving processing remuneration in the form of processed products, machinery, or equipment, the processing party must ensure that it meets the import conditions for those machinery and equipment products.
• In cases where the parties do not have an agreement on the wage level, the average wage rate for creating products of the same type at the processing location and at the time of payment will be applied.

In addition, the processing contract needs to clarify payment regulations, including:

• Amount or percent of contract value.
• Time of payment.
• Payment methods.
• The ordering party must pay the full fee at the time of receiving the product unless otherwise agreed.
• In case the product does not meet the required quality due to the ordering party’s raw materials or incorrect instructions from the ordering party, the ordering party must still pay as stipulated in the contract.

Note:

• The contract should stipulate penalties for late payment.
• Regulations on payment currency: In case the parties to the contract are Vietnamese individuals or organizations, the payment currency in the contract must be in Vietnam Dong. Otherwise, the contract will be declared invalid.

Rights and obligations of the parties

Rights and obligations of the processing party

The processing party has the following rights:

• Require the ordering party to deliver raw materials in accordance with the agreed quality, quantity, deadline, and location.
• If you find that the ordering party’s instructions or instructions are unreasonable and may affect product quality, you can request the ordering party to amend and handle them.
• Require the ordering party to pay the full remuneration according to the agreed deadline and method.

Obligations of the processing party:

• The processing party must preserve the raw materials provided by the processing party. In case the raw materials do not meet quality standards, the ordering party must be notified.
• Products must be delivered in accordance with the agreed quantity, quality, time, and location. Keep information about the processing process and products created confidential.
• Responsible for product quality, except in cases where the product’s quality is not guaranteed due to the raw materials provided by the ordering party.
• Return the remaining raw materials to the ordering party after completing the contract.

Rights and obligations of the ordering party

Rights of the ordering party:

• Receive processed products in accordance with the agreed quantity, quality, method, deadline, and location.
• It is possible to unilaterally terminate the performance of the contract and request compensation for damages in case the processing party seriously violates the contract.

Obligations of the ordering party:

• Provide raw materials according to the agreement to the processing party, and provide necessary documents related to the processing.
• Instruct the processing party to perform the contract.
• Pay wages according to agreement.

Responsibility for violation of contract

Either party will be responsible for serious violation of the contract in the following cases:

• Violation of quality of processed goods.
• Violation of the quantity of goods signed in the contract.
• Violation of payment obligations.
• Violation of other obligations while performing the contract.

Term of the processing contract

The terms of the processing contract can be mutually agreed upon by the two parties to implement the contract.

Dispute resolution clause

Clauses on applicable law and dispute resolution methods are standard clauses in contracts. During drafting and negotiating contracts, the parties will often not pay attention to this clause. If the contract does not regulate clearly, the potential arsing dispute can lead to adverse legal consequences for one or more parties in the contract.

Accordingly, when a dispute occurs, the two parties need to proactively notify each other of the progress of contract implementation. In case an unfavorable problem arises, the parties promptly notify each other and proactively discuss and resolve it based on negotiation to ensure mutual benefit for both parties.

It is possible to stipulate terms for resolving processing contract disputes in Vietnamese courts and arbitration, foreign courts, and arbitration. Especially for processing contracts with foreign elements. For example, if the ordering party is a foreign company or has foreign capital… the parties can choose foreign law to govern the contract and a foreign dispute resolution agency.

Accordingly, in cases where there is a dispute that cannot be negotiated on its own, the two parties agree to refer the case to the court, which has the authority to resolve these disputes.

In addition, the costs of inspection or verification and other fees are usually borne by the at-fault party.

Termination of processing contract

The processing contract will be terminated in the following cases:

• According to the agreement between the parties in the contract.
• When the contract term ends.
• In case one party seriously violates the obligations and commitments under the contract, the other party has the right to cancel or unilaterally terminate the contract and request the violating party to compensate for damages.

Clients need advice on drafting goods processing contracts, please contact Viet An Law Firm for our best support!