Common Risks In Goods Purchase Contracts

Trading in goods is a common form in doing business. To ensure economic security, each transaction is usually drafted and signed by two parties with the terms of the sale and purchase contract. Contract is an agreement between the two parties to buy and sell, but in many specific cases, the contract still faces risks when signing, to avoid the risks in signing goods sale and purchase contracts, the enterprises need to equip themselves with necessary legal knowledge.

When drafting a contract, subjects should pay attention to the risks involved in entering into a goods sale and purchase contract, including

• Subject to sign the Contract
• Risks of the Contract object
• Risks of price, payment method- Risk of contract guarantee
• Risk of contract guarantee
• Risks of the provision on fines against violations
• Risks of force majeure
• Risks in damage compensation

Risks of the contract subject

Status

• The signer is not authorized to sign (not thea legal representative or a signer who is not authorized ).
• The signer exceeds the authorized scope.

Prevention

• Check in the business registration certificate for the entity involved in the transaction as a juridical person to check who has the right to sign the contract and the legal status of the juridical person
• Request to provide authorization documents when making transactions or the signer is not the legal representative
• Check in the power of attorney if the signer falls under the scope of authorization (authorization conditions, the authorization of the authorized person).

Risks of the contract object

Status

• Dispute over goods not to the right subject agreed.
• Dispute over incorrect quality of goods or not meeting standards.
• Dispute over unit.
• When drafting a contract, the two parties do not provide specific and detailed regulations leading to misunderstanding or because one party takes advantage of loopholes to not perform the obligations

Prevention

• When drafting, it is necessary to specify and detail the subjects of the contract, the quality of goods, quantity and weight of wages. Technical criteria, applicable standards, units calculated (m, kg) to avoid disputes.

Risks of price and payment methods:

Status

• Price risks when the market fluctuates.
• Currency risks as payment methods.
• Disputes over the cost of loading and unloading and transporting warehousing.
• Risks of money delivery.
• Risks in the method of securing contracts by guarantee method.
• Do not specify the rights and obligations of each party.

Prevention

It is necessary to provide detailed, specific, flexible terms suitable for each transaction.

Risk of letter of guarantee

Status

• Forging the guarantee certificate.
• The risk that the person signing the guarantee deed is not under the authority or is beyond the authority.
• Conditions of guarantee: The bank issues a letter of guarantee which requires the beneficiary to prove the obligor’s violation, then the bank will make payment.
• The risk of refusing the guarantee is still in the way of writing the guarantee period, for example, the guarantee period is 360 days, leading to different interpretations as normal days or working days.
• The guarantor can make excuses to refuse payment or delay payment to the guarantee.

Prevention

• Need to apply the form of letter of guarantee with instructions. It is best not to apply a conditional guarantee.
• To strictly comply with the terms signed in the contract (especially the related documents must be accurate, correct and suitable with time.
• Do not amend the contract, add an appendix to the contract with the guarantee certificate without the consent of the guarantor. In case, the two parties modify the contract or make an appendix to the contract, they must request the guarantor to re-establish the guarantee according to the amended content

Risks of penalty terms for violations

Status

• According to Article 301 of the Commercial Law, the right to agree on the penalty level of violations of the parties is limited, specifically: ” The fine level for a breach of a contractual obligation or the aggregate fine level for more than one breach shall be agreed upon in the contract by the parties but must not exceed 8% of the value of the breached contractual obligation portion, except for cases specified in Article 266 of this Law.
• Therefore, when agreeing on the fine level, the parties must base themselves on the provisions of the Commercial Law to choose the fine level in the range of 8% or less, if the parties agree to a larger fine (e.g 12%). the excess (4%) is considered a violation of the law and void.
• According to the Civil Code, if late payment, the parties can agree on a fine but not exceeding 150% of the basic interest rate.
• The interest rate of late payment is based on the average interest rate of overdue debts in the market at the time of payment corresponding to the late payment time.

Prevention

• This is a normal clause, when negotiating a contract with the customer, it can be included in the contract or not because it is prescribed by law. Sales officers need to be flexible when using this term.

Risks related to event of force majeure clause events

Events of force majeure

• An event of force majeure is an event which occurs in an objective manner which is not able to be foreseen and which is not able to be remedied by all possible necessary and admissible measures being taken.
• Where an obligor is not able to perform a civil obligation due to an event of force majeure, it shall not have civil liability, unless otherwise agreed or otherwise provided by law (Article 302 Civil Code 2015).
• According to Article 294 of the Trade Law 2005, A party that breaches a contract shall be exempted from liability in cases a force majeure event occurs.
• Thus, the most important value of the drafting of the force majeure clause is to help the parties anticipate the cases of liability exemption if the contractual obligation is violated when an event of force majeure occurs in the contract performance process

Prevention

• When drafting the contract, there should be a clear agreement on the Force majeure clause. Force majeure clause can be caused by natural phenomena: floods, floods, fires, earthquakes, tsunamis. Force majeure clause can be caused by social phenomena: War, riots, coups, strikes, embargoes, changes of the government or can give events of themselves such as: power outages, machine failures … the supplier of the material delivery delay is the event of force majeure to exempt the liability.

The above is some of the common risks encountered in the process of entering and implementing goods sale and purchase contracts. In case readers need information about goods sale and purchase contracts, international goods sale and purchase contracts or need advice on the settlement of international sale and purchase contracts, disputes on sale and purchase. If you need information about a lawyer to advise on dispute resolution in this area, you can contact Lac Duy & Associates to get the best advice.

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