Principle contracts are one of the types of contracts that are quite popular today in commercial transactions. In the process of establishing a transaction, the parties to the transaction will base on their needs and ability to enter an appropriate type of Contract. To better understand the principal contract, TNTP sends you the article with the article “Overview and notes when drafting the principal contract”.
I. What is a principle contract?
A principal contract is a type of contract expressing an agreement between the parties that is oriented on the purchase, sale, and supply of goods/services. In the principal contract, the parties usually only stipulate general issues, so the principal contract is often considered as a type of Framework Contract or Memorandum of Understanding between the Parties. The agreements in the principal contract are often used as the basis for the parties to sign the economic contract or add annexes to the principal contract.
II. Features of the Principal Contract
The principal contract has the following outstanding features:
• Firstly, in the principal Contract, the parties only agree on general and binding matters for the parties to ensure the performance of one or more transactions will occur in the future.
• Secondly, the current law does not have a clear and specific definition of the name of the principal contract, but in fact, a principal contract is considered as a memorandum of understanding or agreement of the parties to the contract on the sale and purchase of goods or the provision of services or other civil and commercial transactions.
• Thirdly, the agreement in the Principal Contract is oriented and is the basis for signing an economic contract or supplementing the contract annex to the principal contract.
• Fourthly, the duration of the principal contract does not depend on the number of orders and transactions arising.
• Fifthly, Subjects applicable to signing principal contracts are companies that have regular, continuous trading relationships or are geographically far apart.
III. Note when drafting a principal contract
Because the principal contract possesses the characteristics mentioned above, when drafting this kind of contract, the Parties should pay attention to the following points:
• Principle contracts are, in nature, civil contracts, ordinary commercial contracts, and are governed by civil law as well as commercial law. Therefore, the content of the principal contract must ensure all the basic contents of a contract such as: information about the parties to the contract, the subject matter of the contract, rights, obligations, and responsibilities of the parties, general commitments, and duration of the contract. Also, because of its “principal” and oriented nature, some terms of principle contracts are often not as specific and detailed as other types of economic contracts. However, the principle for determining prices, payment methods, shipping, performance time… should still be regulated, avoiding cases where principal contracts have been signed but no detailed agreement on the transaction is reached later in contracts, contract annexes, or specific orders.
• The subject in the principal contract will be governed by the agreements in the contract. Therefore, even if it is principled, the subject provision should also cover the scope of work, services or goods/characteristics of the traded goods.
• Contract values and principles can be fixed in a variety of ways. Normally, in the principal contract, the parties will agree on a payment method of (1) reconciliation of debts and monthly payment or (2) definitive payment of each delivery or after completion of the service.
• The agreement of the principal contract is applied to solve the problems arising from the specific transaction. Therefore, the validity of principal contracts has a huge influence on specific transactions. Specific transactions are considered subcontracts, which are integral parts of the principal contract. Under the law, the termination of the main contract also terminates the subcontract, unless the parties have a subcontract agreement to replace the main contract. Thus, if the principal contract ceases to be valid, specific transactions are also automatically terminated if the parties do not have an agreement to continue to perform that transaction. Therefore, to limit risks, in the principal contract, the Parties should stipulate in case the Principal Contract terminates, it will not affect the attached annexes unless the Parties agree otherwise.
Above is an overview and notes when drafting a principal contract. Hope our article is useful for you and your work.
Respect.
