10 legal issues businesses should check when negotiating a commercial contract

Negotiating a commercial contract is not only about price, delivery time or payment method. At its core, it is a process of allocating risk: who bears the risk if information is inaccurate, the signatory lacks authority, input prices change, payment is late, the goods are defective, or the contract has to end earlier than expected.

A contract can be very detailed and still create risk if the business focuses only on the main rights and obligations and ignores how they will be enforced.

Before signing an important commercial contract, a business should check at least the 10 issues below.

1. NDAs, MOUs, LOIs and liability from the pre-contract stage

Where is the risk?

Before the formal contract is signed, the parties have often already exchanged:

• financial data;
• customer information;
• technology;
• quotations;
• business plans;
• technical documents;
• or signed an NDA, MOU, LOI or term sheet.

A business may think this is only a stage of “preliminary discussion”, so no legal liability has arisen yet.

This view can create risk.

The law and what to understand correctly

Article 387 of the Civil Code 2015 sets out the duty to provide information when entering into a contract. Under this article, if one party has information that affects the other party’s acceptance of the contract, it must inform the other party.

This provision also creates a duty to keep confidential the confidential information received while entering into the contract.

So legal liability can arise already at the pre-contract stage, even if the main contract is never signed.

What should the business do?

• Consider signing an NDA before opening a data room or providing sensitive data.
• Define clearly the purpose and the permitted scope of use of the information.
• For an MOU, LOI or term sheet, state clearly which clauses are binding and which are not.
• Do not assume that just because a document is called an “MOU”, nothing in it is binding.

2. Check the signatory and the authority to approve the transaction

Where is the risk?

A contract that was negotiated very well can still lead to a dispute if the business does not check who actually has the right to represent the partner.

This is especially important when the person negotiating or signing is:

• a Deputy General Director;
• a Branch Director;
• a Project Director;
• the Head of Purchasing;
• a sales employee;
• or a person signing under a power of attorney.

The law and what to understand correctly

For arbitration agreements, Clause 2, Article 18 of the Law on Commercial Arbitration 2010 provides that an arbitration agreement made by a person without authority under the law is one of the cases where the arbitration agreement is invalid.

However, you should not conclude from this that every contract signed by a person without the proper authority is automatically void in full.

The validity of the transaction must also be assessed under the rules on representation, the scope of representation, ratification of the transaction and the specific facts.

What should the business do?

Check along this chain:

• Signatory
• Basis of representation
• Scope of representation
• Value limit
• Internal approval
• Conditions for entry into effect

For important transactions, the business should also review:

• the enterprise registration certificate;
• the charter;
• the power of attorney;
• internal approval resolutions or decisions, where needed.

The contract can also require each party to warrant that it has full authority and all necessary approvals to enter into and perform the contract.

3. Contract price and price adjustment mechanism

Where is the risk?

In long-term contracts, the price can be affected by:

• raw materials;
• energy;
• labour;
• logistics;
• exchange rates;
• taxes;
• changes in the law;
• supply chain disruption.

If the contract only sets a fixed price without saying who bears these changes, the risk usually only appears when the market moves sharply.

How to design a price adjustment mechanism

Instead of only providing:

“The parties will renegotiate if market prices change.”

the business can design a specific mechanism:

• Base price
• Reference index
• Trigger threshold
• Adjustment formula
• Frequency
• Cap/floor
• Notice procedure

This helps reduce arguments about when a party really has the right to ask for a price adjustment.

Special note on foreign exchange

Pricing, quoting or paying in foreign currency in Vietnam is governed by the law on foreign exchange control.

So you should not assume that the parties are free to choose a foreign currency.

On the other hand, you should not apply an absolute conclusion that every domestic transaction must use VND without checking the exceptions.

The business needs to identify:

• The parties
• Type of transaction
• Pricing currency
• Payment currency
• Exceptions
• Rules in force at the time of the transaction

4. Payment method and control of documents

The payment method is in fact an allocation of risk

For example:

• T/T in advance usually increases the risk for the buyer.
• T/T after delivery usually increases the credit risk for the seller.
• D/P depends heavily on the document control process.
• L/C creates a payment mechanism based largely on documents, but it also requires the business to understand the principle that a documentary credit is independent.

Lessons from Precedent No. 13/2017/AL

Precedent No. 13/2017/AL concerns the payment effect of a letter of credit (L/C) where the international sale of goods contract underlying the L/C is rescinded.

The key point for businesses is to distinguish between:

the relationship under the sale contract and how the documentary credit works.

Do not assume that a dispute over the goods will automatically stop the payment obligation under the L/C.

What the business should check

• Payment method
• Payment trigger
• Documents
• Presentation
• Bank
• Discrepancy
• Payment
• Recourse

If you use an L/C or a bank guarantee, read the actual terms of the bank instrument and the international rules it refers to, instead of relying only on the label “L/C” or “guarantee”.

5. Claim period and inspection mechanism

Where is the risk?

This clause is very easy to overlook in negotiations.

Article 318 of the Commercial Law 2005 gives priority to the parties’ agreement on the claim period.

If the parties have not agreed, the law sets different default periods for:

• claims about the quantity of goods;
• claims about the quality of goods;
• and other breaches.

So a business should not leave the claim period blank and only deal with it once a dispute has arisen.

Distinguish the claim period from the limitation period for bringing a lawsuit

These are two different concepts.

Claim period ≠ limitation period for bringing a lawsuit.

Article 319 of the Commercial Law sets out separately the limitation period for bringing a lawsuit that applies to commercial disputes within the scope of the Law.

So do not generalise that once the claim period has expired, the business automatically loses all its rights in every case.

What should the business do?

Design a process:

• Defect found
• Notice
• Inspection
• Remedy
• Dispute over inspection results
• Remedies

If there is a warranty, align the claim period with the warranty period and procedure.

If an independent inspection body is used, the contract should also state clearly the value of the inspection certificate and what happens when a party disagrees with the result.

6. Contractual penalties and damages: do not mix the two

Where is the risk?

Businesses often want to set a high penalty to increase the deterrent effect.

However, for relationships governed by the Commercial Law, Article 301 provides that the penalty, or the total penalty for several breaches, may not exceed 8% of the value of the breached part of the contractual obligation, unless otherwise provided by law.

Compensation for damage is a different mechanism

Articles 302 and 303 of the Commercial Law govern compensation for damage and the grounds for liability to pay damages.

So businesses need to distinguish between:

contractual penalty (phạt vi phạm) and compensation for damage (bồi thường thiệt hại).

The two mechanisms have different grounds, conditions and methods of calculation.

Note on Precedent No. 09/2016/AL

Precedent No. 09/2016/AL is a source to consider when looking at a claim for interest on contractual penalties and damages.

In the facts of the precedent, the party obliged to pay the contractual penalty and damages did not have to pay interest on those amounts themselves.

What about liquidated damages?

Businesses should be especially careful before copying the liquidated damages (LD) mechanism from common law contracts.

Do not assume that simply calling an amount “pre-estimated damages” will automatically release the claimant from the duty to prove its loss.

This must be assessed according to:

• Governing law
• Nature of the amount
• How the clause is drafted
• Type of transaction
• Specific facts

7. Force majeure and hardship are not the same mechanism

These two concepts are often mixed up in contract negotiations.

Force majeure

Article 156 of the Civil Code 2015 sets out the elements of a force majeure event.

The appearance of:

• an epidemic;
• war;
• price rises;
• shortage of raw materials;
• port congestion;
• policy changes;

does not automatically make it a force majeure event.

You need to check:

• The event
• The obligation affected
• Foreseeability
• Ability to overcome
• Causation
• Legal consequences

Fundamental change of circumstances (hardship)

Article 420 of the Civil Code 2015 governs performance of a contract when circumstances change fundamentally.

This is a different mechanism from force majeure.

An event that makes the contract harder or more expensive to perform does not automatically mean that the obligation has become impossible to perform.

What should the business do?

Draft separately:

a force majeure clause and a hardship / change of circumstances clause.

Each mechanism should make clear:

• Trigger
• Notice
• Evidence
• Mitigation
• Consequence
• Renegotiation
• Long-stop
• Termination

Do not assume that a notice period such as 48 hours, or confirmation by a particular organisation, is a mandatory legal requirement in every case.

8. Cure period and contract exit strategy

A contract needs both a “way in” and a “way out”

Businesses often spend a lot of time negotiating how a contract starts, but very little time designing how it ends.

A good termination clause needs to answer:

• Which event?
• How is notice given?
• Is there a cure period?
• How long?
• When does the contract end?
• Which obligations survive?
• How are money and assets dealt with?

Under the Commercial Law, rescission of a contract can be linked to rescission conditions agreed by the parties, or to a fundamental breach under the conditions set by law.

So do not write in absolute terms that a contract can only be rescinded when there is a “fundamental breach”.

Cure period

A business can design:

• Notice
• Cure period
• Failure to cure
• Termination

However, 15 days, 30 days or any other period is not a standard number for every contract.

The period must suit:

• the nature of the breach;
• how serious it is;
• whether it can be remedied;
• the impact on business operations.

After termination, the contract also needs to deal clearly with the remaining issues, such as payment, return of assets, data, confidentiality, intellectual property and the obligations that continue in effect.

9. Intellectual property, confidentiality and non-compete

The risk may lie in intangible assets

In contracts for:

• processing;
• technology;
• distribution;
• franchising;
• software;
• R&D;
• joint ventures;

the most important asset is sometimes not the goods but data, technology, know-how and intellectual property rights.

At a minimum, the business needs to identify:

• Background IP
• New IP
• Improvements
• Data
• Confidential information
• Licence
• Ownership
• Survival

Note on applying Precedent No. 69/2023/AL

Precedent No. 69/2023/AL concerns the jurisdiction of commercial arbitration over a dispute about a confidentiality and non-compete agreement between an employee and an employer, in a specific situation.

This precedent should not be read as a principle that every confidentiality and non-compete agreement in every relationship is absolutely valid.

The validity and scope of each commitment must still be assessed based on:

• the parties;
• the content;
• the scope of the restriction;
• the duration;
• the governing law;
• and the specific circumstances.

What should the business do?

• Identify clearly the intellectual property that existed before, and the intellectual property created during the cooperation.
• Set out the rights to use, transfer and exploit the IP.
• Identify the rights to any improvements that arise.
• Set out the scope of use of data and trade secrets.
• Identify which obligations continue after the contract ends.
• Do not mechanically apply the same confidentiality or non-compete period to every transaction.

10. Do not leave the dispute resolution clause to the last minute

A short clause can decide the whole dispute process

The dispute resolution clause is usually negotiated at the end of the negotiations.

Yet this clause can decide:

• where the dispute is resolved;
• whether by court or by arbitration;
• which law applies;
• which language is used;
• the cost of the proceedings;
• confidentiality;
• and whether the decision can be enforced.

If the business chooses arbitration, it should at least specify:

• the arbitration institution or arbitration mechanism;
• the procedural rules;
• the legal place of arbitration (seat of arbitration);
• the number of arbitrators;
• the language of the proceedings;
• the law governing the contract.

Independence of the arbitration agreement

Article 19 of the Law on Commercial Arbitration 2010 sets out the independence of the arbitration agreement.

Under this article, the amendment, extension, rescission, invalidity or impossibility of performance of the contract does not by itself make the arbitration agreement invalid.

For international contracts

The business should also consider:

Does the CISG apply, or is it excluded?

And it is not enough to look only at where the arbitration takes place. The business also needs to assess where the partner has assets, and whether the award can later be recognised and enforced.

10-point checklist before closing contract negotiations

Before signing, a business should be able to answer these 10 questions:

• What information was exchanged before the contract, and is the NDA sufficient?
• Does the signatory have the proper authority, and have all internal approvals been obtained?
• Does the price need an adjustment mechanism for market changes?
• Which party do the payment method and the flow of documents place the risk on?
• Are the claim, inspection and testing periods clear enough?
• Have contractual penalties and damages been separated into the correct mechanisms?
• Have force majeure and hardship been distinguished?
• Is there a clear cure period and exit strategy?
• Who owns the IP, data and trade secrets, and what obligations continue after termination?
• Are the governing law and the dispute resolution mechanism clear and workable?

Contract negotiation is really negotiation of how risk is allocated

A good contract is not the longest contract.

Nor is it a contract that tries to shift all the risk to the partner.

A good contract should help the business identify:

• Which risks may occur
• Which party controls them best
• Who bears the risk
• What evidence is needed
• What to do when the event occurs
• How to exit the contract if it cannot be resolved

So instead of negotiating only:

• Price
• Delivery
• Payment

the business should look at the whole life cycle:

• Information
• Authority
• Price
• Payment
• Performance
• Claims
• Remedies
• Change
• Exit
• Dispute

This is the approach of managing a contract across its life cycle, instead of only dealing with individual clauses one by one.

Main legal sources

• Civil Code 2015.
• Commercial Law 2005.
• Law on Commercial Arbitration 2010.
• Current regulations on foreign exchange control.
• Precedent No. 09/2016/AL.
• Precedent No. 13/2017/AL.
• Precedent No. 42/2021/AL.
• Precedent No. 69/2023/AL.
• Related regulations and practices depending on the type of transaction.