Legal risks that businesses should be aware of before entering into a Business Cooperation Contract (BCC)
Entering into a Business Cooperation Contract (“BCC contract”) is an optimal way for businesses to expand their opportunities for operation, cooperation, and development without having to establish a new legal entity. However, this flexibility carries many potential risks if the business does not have a clear control mechanism during operation. Therefore, before signing, businesses need to fully identify the possible legal risks to avoid disputes, protect the legitimate interests of investors, and increase opportunities for long-term cooperation.
1.What is a BCC contract?
According to Article 504 of the 2015 Civil Code, a cooperation contract is an agreement between individuals or legal entities to contribute assets and labor to perform certain tasks, share profits, and bear joint responsibility.
At the same time, Clause 3, Article 14 of the 2020 Investment Law also stipulates that a business cooperation contract is a contract signed between investors for the purpose of business cooperation, profit sharing, and product sharing in accordance with the law without establishing an economic organization.
From the above two concepts, it can be understood that a BCC contract is an agreement between entities (individuals, domestic or foreign legal entities) to jointly contribute assets and efforts to perform certain tasks as agreed, share profits, and bear risks without the need to establish a new economic organization.
2.Common risks in BCC contracts
Although BCC contracts offer flexibility to investors, in practice, not establishing an economic organization also carries many legal risks. Some common risks include:
a.First, operational risks: Since the parties do not establish a new legal entity, there is no unified management mechanism. This can easily lead to conflicts over management methods, operations, delegation of authority, and decision-making, especially when the parties have different corporate governance models.
b.Second, joint liability risks: According to Article 509 of the 2015 Civil Code, cooperative members are jointly and severally liable with their shared assets. If the shared assets are insufficient to fulfill obligations, the members must bear responsibility with their own assets. This provision increases the level of risk that investors must bear compared to investing through a limited liability economic organization.
c.Third, risks in profit sharing: According to the provisions of Point 1.2, Clause 1, Article 44 of Circular 200/2014/TT-BTC, the parties may agree to share revenue, products, or post-tax profits. However, if the agreement is unclear or unspecific, the distribution of benefits is highly prone to disputes, especially when there is no transparent control mechanism for determining costs, revenue, or profits.
3.Causes and solutions to overcome legal risks in BCC Contracts
Clearly identifying the causes of each type of risk will be an important basis for businesses to develop appropriate control measures, thereby proactively establishing mechanisms to ensure legal safety throughout the implementation of BCC Contracts. Specifically:
a.For risks during operation: Failure to establish a common organizational structure makes management activities entirely dependent on coordination between investors. Meanwhile, each investor has different management systems, operational standards, and internal management processes, leading to difficulties in achieving consensus during implementation. Therefore, the BCC contract must clearly stipulate the coordination management mechanism, including but not limited to: decision-making principles, the scope of authority of each party, and procedures for handling conflicts.
b.For joint liability risks: Since there is no independent legal entity to assume responsibility, all obligations arising are allocated directly to the members. When the joint assets are insufficient to meet debt obligations, investors must bear responsibility with their own assets, which significantly increases the level of financial risk. Therefore, before signing a BCC Agreement, investors need to specifically agree on the principles of obligation allocation, limits on the scope of responsibility, and risk compensation mechanisms.
c.For risks in profit sharing: Due to the lack of a unified accounting system and common accounting methods, determining revenue and expenses among investors is quite difficult. If the contract does not fully or uniformly specify the method of profit sharing, it can easily lead to disputes. The contract needs to establish a unified accounting method and financial recognition mechanism, clearly stipulating how to determine revenue, expenses, the settlement date, and the profit distribution procedure. In addition, investors may agree to use an independent auditing firm to ensure transparency and create an objective basis for profit distribution.
The above are analyses of the legal risks that may arise for businesses before entering into a BCC Contract, as well as necessary precautions for businesses to proactively prevent and control such risks. Carefully evaluating the terms of the contract plays a crucial role in reviewing and assessing the capabilities of partners, clearly defining the scope of cooperation, and determining the mechanism for sharing benefits and responsibilities. In addition, preparing all legal documents before signing will help businesses minimize disputes and protect their legitimate rights and interests throughout the cooperation process.
If you need further discussion on legal solutions during the negotiation, drafting, or review of the BCC Contract, please contact TNTP for timely consultation and support.
Sincerely,
