Update day: March 1 , 2024

Skills in checking, evaluating, and collecting information when establishing a contract

During the process of negotiating and drafting contracts, to minimize risks that may occur in practice, the parties need to clearly understand the legal information of the parties as well as other issues related to contract content to ensure the validity and enforceability of the contract, creating maximum efficiency for the transaction.

Table of contents:

1. Check the legal information as well as the content of work to be performed in the contract

Does the content of the contract violate the prohibitions of the law or violate social ethics? Are transactions between parties considered sham transactions? Is the person signing the contract a legal representative of the enterprise? If it is an authorized representative, one of the parties also needs to review the scope of authorization and authorization terms to ultimately determine the legal status of the enterprise representative participating in the transaction…

Determining the ability to perform under the Contract, accordingly, it is necessary to consider whether the current transaction complies with the formality regulations or not. Is the subject of the contract in a situation where trading is not allowed or cannot be performed? In case you are the buyer of goods or services, one of the things you need to determine is whether the service provider/seller is allowed to provide services/sell goods to you or not. This will be determined based on factors such as information about the registered business sector, specific conditions that that sector needs to meet (sub-license), etc.

The above content is often forgotten by the parties in the transaction, instead, the parties will often focus on the scope of work, contract value, and payment period. However, the parties also need to understand that the factors listed above are prerequisites to determining whether the transaction is legal, invalid, or not. Depending on each specific case and level, the actual transaction processing when a dispute occurs will be different.

2. Assessment of the other party’s ability to perform the contract

If one party is unable to perform part or all of its contractual obligations, the other party’s preparations will become meaningless, the contract will not be performed in part or in whole, and the desire of the parties will not be achieved. At that time, one option is to terminate the transaction and obligations in the contract, the other option is to terminate the transaction and the violated party must find a third party to continue performing the obligation but must have the consent of the other party. The contract processing when one of the parties cannot continue the actual contract will take a lot of time, even if the parties’ contract includes sanctions such as fines for violations or compensation for damages, forcing the violating party to comply is not simple. Processing will take a lot of time and cost for the business as well as push the business into a situation where it cannot release current transactions to establish new transactions with new partners in some specific transactions.

Therefore, before signing a contract, it is necessary to carefully evaluate the other party’s capabilities.

3. It is necessary to anticipate legal risks that may lead to the inability to apply sanctions for breach of contract

According to the provisions of Article 418 of the Civil Code, the violating party is only required to pay a fine for violations if the parties have an agreement, the amount of fine for violations will also depend on the agreement. In case there is no agreement on fines for violations but only provisions on compensation for damages, one party can only request compensation for damages. For commercial transactions, the regulations on fines for violations are almost the same as civil law, whereby fines for violations will only be applied if the parties have agreed on the contract. However, the fine for violation will not exceed 8% of the violated obligation.

The fine for a violation is to overcome the damage when there is a violation. Sometimes the parties are afraid to establish too many constraints so they do not write the fines for violations clause in the contract. However, if it is a contract governed by civil law, the lack of provisions in the contract has resulted in the parties being unable to impose sanctions for violations on the other party. Likewise, for contracts governed by commercial law, the implementation and compliance with decisions of competent authorities such as policy changes… by one party in some cases will lead to great damage, or even failure to perform the contract. Therefore, predicting policies is also a very important skill in negotiating and drafting contracts.

4. Estimate the extent of damage to take preventive measures as well as measures to overcome damage

Depending on each transaction and subject of the contract, the parties will determine the level of damage that can occur to the business if one party violates the contract. Because the damage to one party in some cases will not only stop at the loss of profit from the contract itself, but also the business will have to face fines and compensation from other third parties, or the reputation of the business itself in the market, is the decline in stock price (if any). Meanwhile, reality shows that the terms of fines for violations, compensation for damages, and payment of interest for late performance of obligations… are sometimes not enough to make one party afraid to comply with the agreement in the contract. If it is a civil transaction, the parties can agree on the fine for violation, but if it is a commercial transaction, in any case, the penalty for violation will not be allowed to exceed 8% calculated on the value of the violated obligation. Therefore, in addition to the provisions of penalties for violations, compensation for damages, and other remedies, enterprises will need to structure payment terms or add a deposit mechanism, or other form of guarantee to tightly bind the responsibilities of the other party in the contract.

In today’s business and commercial activities, types of contracts are increasingly diverse and complex, the risks arising during the contract implementation process are very large and the damages cannot be measured. Therefore, the role of the contract negotiator and drafter is very important. In case an enterprise uses a model contract, the enterprise also needs to note that the participating entities, contract content, and time and place of contract performance will not be the same. Therefore, enterprises need to develop contract terms strictly and anticipate risks to have appropriate terms.

Time of writing: 28/02/2024

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer at info@cdlaf.vn

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