Contract for the Sale of Goods: Common Risks in Contractual Agreements

A sales contract is an agreement to establish, amend or terminate the rights and obligations in the sales relationship. To ensure economic safety, each transaction is generally drafted and signed by both parties with the terms of the sales contract specified, thereby anticipating possible risks. The common risks encountered in drafting a sales contract include:

- Contract signatories;- The subject matter of the Contract;- Price and payment methods;- Contract guarantees;- Penalty clauses for breaches;- Force majeure clauses;- Compensation for damages.

Contract Signatories

- The person signing the contract lacks authority (Not the legal representative, not authorized, or the legal representative but lacks signing authority): In practice, many contracts are signed by unauthorized persons, and when a conflict arises, companies often cite the signatory's lack of authority to evade responsibility. This causes significant damage to the partner, particularly for high-value contracts. Companies claim no obligation to compensate the partner as the signatory did not act on behalf of the company, while the individual who signed either evades responsibility or lacks capability to cover the partner's extensive damages.- The signer is not the legal representative of the company, has legal authorization but signs beyond their authorized scope.

Contracts signed by unauthorized persons are generally null and void. Depending on specific cases, the contract may be partially or wholly void. To prevent unnecessary damages, it's essential to verify the legal representative's identity and authority on the business registration certificate prior to signing a contract. Demand written authorization for employees when transactions are conducted or when the signatory is not the legal representative, and inspect the scope of authorization in the authorization document (authorization conditions, rights of the authorized person).

Subject Matter of the Contract

The subject matter of a sales contract is the goods. Disputes often arise over incorrect goods, substandard quality, failure to meet standards, inaccuracies in unit measures, and unclear contract terms leading to misunderstandings or one party exploiting loopholes to avoid obligations.

Therefore, when participating in a contract, businesses must carefully read and specify the subject matter of the contract, quality, quantity, weight, technical criteria, applicable standards, units of measure (meters, kilograms), and agree on the interpretation of contract terms to avoid misunderstandings.

Price and Payment Methods

In goods transactions, determining and agreeing on prices is critical. Parties should establish and document the price in the contract. Nonetheless, risks such as market price fluctuations, the currency used for payment, disputes over loading/unloading costs, transportation, storage fees, payment receipt methods, and contract guarantees can arise. Parties should draft detailed, specific, and flexible terms suitable to each transaction.

Risks in Penalty Clauses for Breaches

Penalties are only applicable if parties have a clear agreement in the contract. Penalty enforcement for contract breaches is based on mutual agreement and one party cannot unilaterally demand penalties if no prior agreement exists.

According to Commercial Law 2005 (Article 301), the right to agree on penalty levels is limited: “The penalty for contractual breaches or the total penalty for multiple breaches may be agreed upon but shall not exceed 8% of the value of the breached obligation.” Thus, penalty agreements must align with commercial law, selecting a penalty rate within 8%, as any excess (e.g., 12%) is deemed a legal violation and invalid.

Force Majeure Events

A force majeure event is an unforeseeable, unavoidable, and insurmountable event. If an obligated party cannot perform a civil obligation due to a force majeure event, they are not liable, except otherwise agreed upon or regulated (Article 302, Civil Code 2005). Article 294 of the Commercial Law exempts liability for contract breaches due to force majeure events. The force majeure clause helps anticipate liability exemptions for breaches when force majeure conditions occur during contract execution.

Contracts must clearly specify force majeure events (natural or social phenomena). Parties may also identify personal events as force majeure to exempt liability.

Compensation for Damages

Unlike penalty issues, the obligation to compensate for contract breaches arises irrespective of mutual agreement. Article 302 of the Commercial Law 2005 states: “Damages compensation is when the violating party compensates for the losses caused by the contract breach to the aggrieved party.” Three conditions for commercial contract compensation liability (Article 303, Commercial Law) are:

- Contract breach;- Actual damage occurrence;- Causal relationship between the breach and the damage.

Compensation levels depend on the parties' fault and actual damages incurred.

Therefore, parties must consider potential risks before forming contracts to avoid damages in goods transactions.

>> CLICK HERE TO READ THIS ARTICLE IN VIETNAMESE