In fact, disputes arising from contracts in general, and processing contracts in particular, are becoming increasingly common. Resolving these conflicts and disputes takes a significant amount of time and money. One of the best solutions to limit these disputes is to have clear agreements on the clauses of the contract. Therefore, special attention should be given to drafting processing contracts. In the following article, TNTP will provide readers with the risks to be avoided or mitigated when executing processing contracts.
1. Risks on the subject of the processing contracts
Subjects participating in the signing of processing contracts can be individuals or organizations. These subjects need to meet the legal personality and legal capacity under established civil transactions.
Specifically, for commercial processing contracts, the processor shall be a business entity engaged in a suitable business line relevant to the processed products. Individual entities shall meet fully the legal personality and legal capacity. For organizations, the person signing the contract shall be a legal representative or authorized representative.
In practice, there are many cases where processing contract involves organizational entities but are signed by unauthorized representatives, for example, individuals who are not legal representatives or authorized representatives, or individuals who are authorized but exceed the scope of authorization in signing and establishing contracts. Contracts signed by unauthorized individuals may be void. Depending on the specific circumstances, the contract may be entirely or partially void. A void contract will affect the rights and interests of the parties involved.
Therefore, when establishing processing contracts, the parties involved should pay attention to the subjectivity of the signing parties. Accordingly, the parties may request the other party to provide legal documents such as identification cards/passports, business registration certificates, or power of attorney in cases where authorization is required to determine whether the signing representative has the authority to sign the contract or not.
2. Risks due to delivery of processed products not in accordance with the agreed quantity, quality, method, time and place
The processor shall deliver the products to the client in accordance with the agreed quantity, quality, manner, time, and place. The processor is liable for the quality of the products unless the product does not meet the quality requirements due to the raw materials provided by the client or due to inadequate instructions from the client.
In reality, there have been numerous disputes arising out of processors failing to deliver the processed products under the agreed quantity, quality, time, and place. Therefore, in order to limit such risk, the parties should stipulate these aspects in the contract. Meanwhile, the client should include provisions stating that if the processor violates the terms regarding product delivery, such as not meeting the agreed quantity or quality, etc., penalties and compensation for damages will be required, and replacement or return of goods will be arranged for the client.
3. Risks due to delay in receiving processed products by the client
According to Article 548 of the Civil Code 2015, if the client is late in accepting the products, he/she shall bear all risks during the period of delayed acceptance, including where the products are processed from the raw materials of the processor unless otherwise agreed.
Where the client is late in accepting the products, the processor may deposit the products at a place of bailment and must notify the client immediately. The obligation to deliver the products shall be fulfilled when the agreed terms are satisfied and the client has been notified. The client must bear all costs incurred for bailment (Article 550 of the Civil Code 2015).
Thus, the law allows the parties to agree on the liability to bear the risk in case the client is late to receive the product. In order to limit future disputes, the parties should specify in the contract the liability of the client in case of delayed acceptance of the processed products.
4. Risk of unilateral termination of the contract by one party
The law provides for the parties’ right to unilaterally terminate the processing contract as follows:
– Unless otherwise agreed or otherwise provided by law, each party has the right to terminate unilaterally the performance of a processing contract if continued performance would not benefit that party but must give reasonable prior notice to the other party.
– If the client terminates unilaterally the performance of the contract, the client must pay fees for the work already performed, unless otherwise agreed. If the processor terminates unilaterally the performance of the contract, it shall not be paid fees, unless otherwise agreed.
– A party which unilaterally terminates the performance of a contract and thereby causes damage to the other party must compensate.
During the performance of the contract, if one party unilaterally terminates the contract without notifying the other party in advance within a reasonable period of time, it will cause damages to the other party. This can lead to disputes over the determination of damages, especially in the case of damages for a third party.
Therefore, the parties should agree in the contract on the cases in which unilateral contract termination is permitted. In case of violation, the breaching party shall bear penalties for the breach and compensate for damages incurred by the aggrieved party.
5. Risks due to breach of payment obligations from processing contracts
According to provisions of the Law, the client shall pay fees in full at the time of accepting the products, unless otherwise agreed. If there is no agreement on the rate of fees, the applicable rate shall be the average rate charged for the production of products of the same type at the place of processing at the time of payment.
If the products fail to meet the agreed quality due to the raw materials supplied or the unreasonable instructions provided by the client, the client does not have the right to reduce the fees.
In reality, contract disputes arising from the breach of payment obligations are extremely common. The reason is that the client fails to pay the fees in the correct payment method or payment term, or the client unilaterally reduces the fees of the processor. Therefore, in order to limit such disputes, the parties should agree in the contract on the payment term, payment method, the penalty for violation and compensation for damages caused by the breach of payment obligations, etc.
The payment term can be divided into multiple instalments based on the agreement between the parties. Meanwhile, for each instalment, the parties should specify the payment amount.
Before signing the processing contract, the parties need to estimate the risks when performing this contract, thereby stipulating preventive solutions. The above is the content of the article “Limiting disputes arising from drafting of processing contracts” that TNTP provides to readers. If you have any further questions, please do not hesitate to contact TNTP for the best support.