Nowadays, Principal Contract (“PC“) is one of the most common types of contracts in commercial business transactions. In establishing a transaction, the parties will base on their needs and abilities to sign an appropriate type of contract. To understand the PC better and especially in comparison with other types of Economic Contract (“EC“), kindly find the information below with us.

1. Nature of Principal Contract

As its name, PC is a contract entered into and between the participating subjects in order to uniformly stipulate the general principles that are imposed and binding on those parties for the purpose of ensuring the performance of one or many transactions that will occur in the near future.

Currently, although there is no specific definition of PC in the law but in practice, PC is considered as a memorandum of understanding (“MOU”) or an agreement between the participating parties on the purchase and sale of products or supply of services, or other civil and commercial transactions. In general, PC is a framework contract that specifies basic terms and serves as a foundation for the parties to carry out subsequent transactions.

2. Features of Principal Contract

PC is directive

PC is often used when the parties have just initially approached to learn about each other’s abilities and needs and have agreed on some collaboration content. PC can be considered as the first agreement on the transaction of the parties; it governs and directs the obligations of the parties in all subsequent transactions.

PC is general

The generality of the PC is shown in that, not all of the terms of the PC are detailed but may be referred to an EC, Sales Contract, or Purchase Orders (“PO”).

PC has precedence to apply

In the first business and commercial transaction between the parties, the PC is signed, paving the way for other contracts to be established in the future. Normally, the contracts established under the framework of the PC can not be inconsistent with the PC, if there is a provision that is contrary to the PC, that provision will be deemed invalid, unless the parties agree otherwise. Thus, the PC shall precedence to apply if there is a conflict in the same provision of the PC and subsequent contracts until the parties agree otherwise on the application of the contract or interpretation of this conflicting provision.

3. Main differences between Principal Contract and Economic Contract

CriteriaPrincipal ContractEconomic Contract
PurposeIt only stipulates general issues, so it is often considered as a framework contract or a MOU or an Agreement between the parties.It stipulates issues in more specific and detailed.
NamePrinciple Agreement; Contract of Sale Principle; Contract of Agent Principle…Real Estate Purchase and Sale Agreement, Sales and Purchase Agreement, Services Agreement, Loan Agreement, …
Agreement in the contractThe signing of the PC is directional, other detailed issues will be agreed by the parties later. Therefore, PC is the basis for the signing of an official EC or an Appendix or a PO. However, PC is still valid and enforceable.The signing of an EC is mandatory, binding. The interests of the parties are also clearer.
Signing timeUsually fixed at the beginning of each year. Over the years, if there is a change, the parties only need to sign an Appendix. PC is valid over time, so it does not depend on the number of deals/orders arising during the validity period of the PC.The EC will terminate for each transaction/order after the parties fulfill their responsibilities and/or sign a Contract Liquidation Minute.
Subjects of applicationEnterprises are geographically located far from each other; enterprises who have regular and continuous trading relationships.Enterprises who do not trade with each other regularly; Large value transactions; Specific transactions need detailed requirements on the responsibilities of the parties, Unexpected Orders.

The above is our overview knowledge of Principle Contract that we have synthesized in the study of the law and based on current practice. We do hope that the article is useful for you and your work.

Best regards,

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