SIGNING PRINCIPAL CONTRACT IN COMMERCIAL BUSINESS TRANSACTIONS

In the process of establishing civil transactions in general and commercial business transactions in particular, participants will base on their needs and abilities to select an appropriate type of contract and conduct the transaction. One of the types of contracts that often appear in commercial business transactions is the Principle Contract (“Principle Contract”).  In this article, TNTP will analyze the nature and characteristics of Principle Contract as well as compare and contrast it with other types of Economic Contract (“Economic Contract “) in order to help readers have an overview of this type of contract.

1. What is a Principle Contract?

Based on the name, it can be understood that a Principle Contract is a contract established between the participants in order to uniformly stipulate the general principles that are applied to bind the parties to ensure the process of carrying out one or more transactions in the future.

The current law does not have specific provisions on the concept of Principle Contract, but in fact, Principle Contract acts as a memorandum of understanding or agreement between entities participating in contracts for sale and purchase of goods, provision of services or other civil and commercial transactions. Thus, Principle Contract is considered a framework contract containing basic terms as well as a premise for the parties to conduct transactions arising later.

2. Characteristics of the Principle Contract

Disambiguation

Principle Contract are often used in cases where the parties first approach, learn each other’s abilities and needs but have agreed on some contents for the signing and implementation of transactions. This is considered the first agreement of the parties in the cooperation process as well as contributing to the dominance and orientation of the parties’s obligations when establishing the next transaction.

Generality

Principle Contract is general because not all the terms of Principle Contract are expressed in detail, but it can be referred to Economic Contract, a purchase agreement, or other orders.

Priority validity applies

Principle Contract is a “guideline” that paves the way for other contracts to be established next for parties conducting commercial business transactions with each other for the first time. Moreover, it should be especially noted that contracts established under the framework of Principle Contract must not be contrary to the content of Principle Contract. Accordingly, if the contract exists a clause contrary to Principle Contract, that clause will be considered invalid, unless the parties agree otherwise. Thus, normally Principle Contract will be preferred to apply in case of a conflict of contents in the same terms of Principle Contract and subsequent contracts until the parties agree otherwise on the application of the Contract or the interpretation of this conflicting clause.

3. Fundamental differences between Principle Contract and Economic Contract

Principle Contract

Purpose of making a contract: Framework contracts or memorandums of understanding, minutes of agreement between the parties to stipulate common issues.

Subjects of application of the contract: Participants have a long geographical distance or have regular and continuous trading relationships.

Contents of the contract: The signing is of a directional nature and other detailed issues will be agreed upon by the parties later. Accordingly, the contract is the basis for signing the official contract, the appendix of the contract or the purchase order. However, the contract is still valid and legally valid for the parties.

Time to sign: Fixed at the beginning of each year and the parties will sign the annex if there is a change over the years. The Principle Contract is valid over time, so it does not depend on the number of deals/orders arising during the term of the contract.

Economic Contract

Purpose of making a contract: Concretize and detail the provisions of the relevant issue.

Subjects of application of the contract: Participants rarely conduct transactions with each other; Transactions of great value; Specific transactions require details of the responsibilities of the parties, unexpected orders.

Contents of the contract: The binding as well as the provisions on the rights and interests of the participating subjects are clearly and more specific.

Time to sign: Economic Contract will terminate in accordance with each deal/application/transaction after the parties fulfill their obligations and/or sign a memorandum of liquidation of the contract.

Understanding the nature and the characteristics of each type of contract not only helps the parties make the right choice decision but also better ensures the rights and benefits involved. Understanding that importance, TNTP has researched and synthesized general information on Principle Contract based on current legal regulations and practices. Hopefully, this article will contribute to supporting you to be more confident when using this type of contract to carry out the process of signing and carrying out commercial business transactions in the future.

Best regards.

TNTP & Associates International Law Firm