Business cooperation contract disputes: Causes and types of disputes

In the context of the development of the market economy, in order to meet the demand for capital and expand business activities, cooperation and capital contribution relationships between individuals and between individuals and enterprises are increasingly growing and developing. Business cooperation is a common economic activity. However, business cooperation relationships are legally complex, governed by various legal regulations, which pose significant legal risks and may lead to disputes arising during the contract performance. This article aims to analyze the causes and identify the types of disputes of business cooperation contracts.

1.The concept of business cooperation contract disputes

Clause 14, Article 3 of the Law on Investment 2020 stipulates that a business cooperation contract (“BCC contract”) is a contract signed between investors for business cooperation, profit sharing, and product division in accordance with the law without establishing an economic organization.

BCC contract disputes refer to conflicts arising from the performance or non-performance of the agreed rights, obligations, and responsibilities of the parties as outlined in the signed BCC contract.

2.Causes of business cooperation contract disputes

BCC contract disputes often stem from some of the following basic reasons:

a.Non-compliance with applicable laws and regulations by the parties

Cooperation activities under BCC contracts are governed by specialized laws such as investment, construction, commerce, finance, taxation, and land laws. The parties’ failure to study, update, or comply with these specialized legal regulations during the negotiation and performance of the contract may easily lead to breaches of legal obligations, administrative sanctions, or even suspension of operations, thereby giving rise to disputes between the cooperating parties.

With respect to certain forms of cooperation, specialized laws impose limits and conditions that the parties must comply with when agreeing on the distribution of profits. Disputes may arise when the parties agree to terms that exceed or contradict the limits set by specialized laws, and the contract may be deemed invalid. A typical example is business cooperation contracts entered into for the purpose of mobilizing capital for housing development, under which the project developer undertakes to distribute profits in the form of real estate to be formed in the future.  However, point e, clause 1, Article 116 of the Housing Law 2023 provides that parties participating in business cooperation as specified in point a, clause 1, Article 114 of this Law are only entitled to profit distribution in cash or shares, based on the capital contribution ratio agreed in the contract. The investor of a housing construction investment project is not permitted to apply this form of capital mobilization or any other form of capital mobilization to distribute housing products, grant priority rights to register, place deposits, or enjoy the right to purchase housing, or to distribute land use rights within the project to the capital-contributing party, except where capital is contributed to establish a new legal entity that is assigned by the State as the investor of the housing construction investment project in accordance with the law.

b.Lack of rigor in the process of drafting, reviewing and signing contracts

• The contract terms lack clarity and are incompletely stipulated, especially provisions on the scope of cooperation, profit distribution, management and operation rights, resulting in different understandings and applications among the parties and thereby giving rise to disputes.
• The contract does not provide, or provides inadequately, for sanctions against breaches, includingpenalties for breach, compensation for damages, or the legal consequences of unilateral termination of the contract. As a result, it becomes difficult for the aggrieved party to protect its rights and interests when a dispute arises.
• The contract does not provide, or provides inadequately, mechanisms for addressing events and risks arising during the performance of the contract, particularly force majeure events and cases of fundamental change of circumstances. This increases legal risks, making these issues common causes of disputes.

3.Types of business cooperation contract disputes

a.Disputes regarding the right to decide, manage, and operate the business cooperation activities

In many business cooperation models, the parties jointly participate in management or assign one party to act as the operating representative. Where there is no specific agreement on the responsibilities of the parties, especially management and decision-making rights, disputes commonly arise when one party unilaterally decides on important matters such as business direction, entering into high-value contracts with third parties, or using shared finances or common assets without the consent of the other party.

Disputes regarding the right to decide are also reflected in conflicts between decision-making authority and capital contribution ratios, where one party has a large capital contribution but is not granted corresponding rights, or where one party is granted the right to decide without it being associated with corresponding legal responsibilities and arising risks. This increases conflicts of interests and responsibilities in the course of cooperation.

b.Disputes related to capital contributions of the parties

Such disputes arise where one party fails to make its capital contribution on time, thereby affecting the progress of the cooperation; contributes capital of insufficient value or of a type different from that committed; or makes a contribution but does not complete the procedures for transfer of ownership or use rights over the contributed assets, resulting in the capital contribution not being recognized in practice. In addition, disputes may also arise in relation to the valuation of contributed assets, rights to use assets, or the value of labor contributions. Unclear valuation, lack of a proper basis, or significant discrepancies between the parties may alter management rights, decision-making rights, and profit-sharing ratios during the course of cooperation.

c.Disputes regarding issues arising in the distribution of profits and risks

Such disputes arise when the parties fail to reach agreement on the ratio, timing, or method of profit distribution, or on which expenses may or may not be deducted prior to distribution. Disputes also commonly relate to the determination of revenue, legitimate costs, and financial obligations to the State, thereby directly affecting the interests of the parties.

In addition to profits, disputes also commonly relate to the allocation of risks and the bearing of losses where the cooperation activities are ineffective. The parties may give rise to disputes over the scope of risks to be borne and the loss-sharing ratios corresponding to capital contributions or labor contributions, particularly where the contract does not clearly stipulate a risk allocation mechanism.

d.Disputes arising when one party seeks to withdraw its contributed capital or unilaterally terminate the contract

Such disputes arise when a party to a business cooperation contract requests the withdrawal of its contributed capital or unilaterally terminates the contract without complying with the contractual provisions. These disputes often relate to the determination of the right to withdraw capital, the timing of withdrawal, the method of refund, and the value of the contributed capital at the time of termination of the cooperation, particularly where the cooperation activities are ongoing or obligations to third parties have arisen. Conflicts may also arise when the withdrawal of capital or termination of the contract disrupts operations and causes damage to the remaining parties. This leads to disputes over compensation, handling of shared assets, liabilities, and the distribution of profits and risks before and after the termination.

The above is the article titled “Business cooperation contract disputes: Causes and types of disputes” that TNTP would like to present to our valued readers. We hope that this article will provide useful information to our valued readers regarding this matter.

Respectfully,