OVERVIEW OF CONTRACT DRAFTING

OVERVIEW OF CONTRACT DRAFTING

DRAFTING BATTLE-TESTED CONTRACTS

CHAPTER 1

OVERVIEW OF CONTRACT DRAFTING

I. ROLE OF THE CONTRACT DRAFTER

When parties negotiate a sales contract, it is essential to reflect the negotiated content and intentions into a written agreement. This can be relatively straightforward and can be done even by someone without legal training by referencing available contract templates. However, transforming a drafted contract into a “guide” that directs the parties to perform as agreed is not simple. Therefore, the role of the contract drafter is very important. The drafter must have a certain understanding of contract law and drafting skills to accurately embody the parties’ agreement in the contract. The drafter’s role and duties include: Recording the parties’ agreements, managing the contract, and risk management.

Specifically, the contract drafter needs to:

– Accurately record the intentions and agreements of the parties during contract negotiations. This is crucial because once a contract is established, it becomes the “law” binding the parties. Therefore, the drafter must convert all the parties’ intentions and desires into specific terms without altering the original intent.

– Ensure that the contract terms comply with legal requirements in both content and form. A contract must first be valid to be enforceable, so the drafter must ensure that the basic terms meet the conditions for the contract’s validity, such as the contracting parties’ capacity, contract form, content, and security measures. Additionally, well-drafted contract terms play a significant role in risk control and achieving legal safety.

– Protect the interests of the parties (typically the party the drafter represents). The drafter must be flexible in drafting binding terms and preventive clauses against the other party’s actions, which may affect or harm the interests of the represented party. These terms might be needed during negotiation, execution, and even termination of the contract. This helps to minimize or avoid potential damages to the represented party or at least balance the parties’ interests.

– Guide the parties to execute the contract optimally. In businesses, those negotiating, drafting, and signing contracts may not be the same as those directly executing the contract. Post-signing, the contract might be handed over to other departments (e.g., sales, import-export, production). Not all departments have legally knowledgeable personnel to fully understand and correctly implement the contract’s terms. Therefore, the drafter’s role includes writing clear, detailed contracts that guide relevant parties and contract signatories, ensuring smooth and successful contract execution.

– Anticipate potential risks and propose handling methods. This demonstrates the drafter’s ability to foresee possible legal risks. Besides forecasting risks, the drafter should also guide handling methods to avoid disputes and adjust contract terms to safeguard the parties’ interests effectively.

II. METHOD OF RECORDING A TRANSACTION INTO A CONTRACT

To record a transaction in a contract, we first need to grasp the basic requirements for drafting a contract:

– The language used in the contract must be accurate, specific, clear, and complete. The use of ambiguous terms should be minimized.

– Ensure that the information and requirements of the parties comply with legal regulations. This is crucial as we often have the “mindset” that a contract must be lengthy to be “quality,” but in reality, the contract should be concise and ensure the content required by the parties.

– Correctly and accurately identify the parties’ requirements; only then will the drafted contract fully reflect the parties’ intentions and desires.

Additionally, the requirements for each clause will be detailed in the subsequent chapters of the book.

From these requirements, we need to understand how to record a transaction into a contract. Regardless of the method applied, the first thing the drafter must always remember is: What are the requirements of the party needing the contract? Which party is the contract being drafted to protect? Typically, two methods can be applied:

Method 1: First, determine the nature of the contract, the type of contract, and the subject matter of the contract, and from there, identify the applicable legal regulations. Then, identify the basic terms and the necessary content for the contract. Note: Always compare the terms with legal regulations to ensure legal accuracy. Anticipate risks and obstacles that may arise during the contract’s performance and propose solutions. Collect complete and clear information about the parties to always adhere to the initial intentions and agreements of the parties.

Method 2: This method is usually applied to more complex contracts (contracts involving technical products, large contract values, sales of goods through multiple implementation stages) or contract types not previously encountered. In this case, it is necessary to reference the opinions of the relevant parties. Specifically, it is advisable to ask relevant departments or clients to “tell the story” to help understand how the contract begins, is performed, and is terminated. It is essential to understand what each party desires in the contract and what the requirements are at each stage of the contract. From there, the drafter will draft related clauses, detailing the parties’ desires in the clauses, stage by stage.

III. THREE QUESTIONS TO ASK BEFORE DRAFTING A CONTRACT

Regardless of the style or standard used in drafting, a contract must clearly record the terms for the parties to execute. Often, parties start with good intentions, but unclear contract provisions can lead to disputes. To ensure a clear and effective contract, remember these three questions when beginning to draft:

– How does this provision affect the operation?

– How does this provision impact costs?

– Who benefits from this provision?

1. How does this provision affect the operation?

Briefly, when reading the contract’s provisions, will the relevant parties easily understand their obligations or rights?

Example 1: The contract stipulates the payment terms as follows:

Payment is divided into 3 (three) installments:

– Installment 1: Party A pays Party B 30% of the contract value, equivalent to [*] within 5 (five) working days from the signing date of the contract.

– Installment 2: Party A pays Party B an additional 60% of the contract value, equivalent to [*] within 10 (ten) working days from the date Party A receives all payment documents as per Clause [*] of the contract after the project is completed.

– Installment 3: After the warranty period as specified in Clause 5 of this contract, Party A pays Party B the remaining 10% of the contract value, equivalent to [*] within [*] working days from the date the parties sign the contract termination minutes and Party A receives all payment documents as per Clause [*] of the contract after the project is completed.

This is a well-drafted agreement. Reading this provision, it is clear who must pay, how much, and when.

Example 2: The contract stipulates the dispute resolution clause as follows:

In case of a dispute, the parties must negotiate to resolve it reasonably and satisfactorily. If negotiation fails, they can propose to invite a relevant unit to mediate. If mediation fails, the dispute will be submitted to the Economic Arbitration body. The arbitration award is final and binding on both parties, and the losing party bears the arbitration fees. The undisputed part shall continue to be implemented.

Contrary to Example 1 above, this clause is inadequate because it lacks clear and sufficient provisions for the parties to enforce. Specifically:

Firstly, this agreement proposes three methods of dispute resolution: negotiation, mediation, and arbitration. The issue is when is negotiation considered unsuccessful? Logically, only when negotiation fails can the parties invite a third party to mediate.

In this case, to ensure enforceability, the contract could be amended as follows: In case of a dispute, the parties must first negotiate to resolve it reasonably and satisfactorily. If after 30 days from the date one party requests negotiation, and the parties cannot reach an agreement, it is considered unsuccessful negotiation. Immediately after, either party may propose inviting a relevant unit to mediate.

Secondly, enforcing this will be difficult for the relevant parties, especially when a dispute has already occurred. How do you determine the relevant unit? If the mediating authority is not identified or agreed upon, resolving the dispute will require additional time to handle this issue. To overcome this, clearly specify one or more authorized mediation agencies, or if not explicitly identified, limit the selection scope or establish principles for selecting the mediation agency.

In summary, to answer the question “How does this provision affect the operation?” consider answering detailed questions such as: Who does it? What is done? When is it done? How is it done? (For example: The buyer may terminate this agreement at any time by notifying the supplier of the contract termination, provided that all outstanding accounts are paid immediately thereafter).

2. How does this provision impact costs?

Costs are one of the most crucial factors in any transaction. Recording all types of costs fully not only helps the parties achieve their goals but also avoids unnecessary disputes.

Example: Delivery and related cost provisions between a manufacturing company and distributors:

(i) Delivery Location: Goods are delivered at Party A’s warehouse: [……]. This warehouse may be changed per Party A’s notification at any time, without the distributor’s opinion or consent, and without any additional obligations or responsibilities for Party A. All agreements related to price, fees, cost sharing, taxes, etc., remain unchanged or unaffected by this change of warehouse location.

(ii) Delivery and Handling Costs: Party A bears the loading costs at Party A’s warehouse. The distributor bears all other transportation costs, including transporting the goods to the distributor’s warehouse, unloading the products into their storage, and distributing them to all sales points within the distributor’s territory.

(iii) Inspection of Goods Upon Receipt: The distributor must inspect the goods and notify Party A of any loss or damage (if any) immediately upon receipt at Party A’s warehouse. If Party A does not receive any notification or feedback at the time of delivery at Party A’s warehouse, it is considered that the distributor has received the goods fully and without defects. The distributor will indemnify Party A for any loss or costs incurred due to the distributor’s failure to fulfill this notification obligation.

(iv) Delivery Documentation: The delivery and receipt of products must be documented in a delivery receipt signed by duly authorized representatives of both parties at the time of delivery (“Delivery Documentation”).

(v) Incidental Costs: The distributor must bear any other incidental costs related to the products after they have been delivered to the distributor as stipulated above (including costs that may arise from any inspection activities related to the products (if any) required by any relevant authorities).

3. Who benefits from this provision?

When entering into a contract, each party aims for a specific benefit. It is often challenging to draft a contract that balances the interests of both parties because their benefits can be difficult to reconcile. Typically, the seller wants to sell at a high price, while the buyer wishes to purchase at a lower price. Therefore, it is crucial to identify for whom the contract is drafted—buyer or seller—and the interests that need protection to adjust and supplement provisions accordingly.

For example, in protecting the buyer, the primary concern is usually that the received goods do not meet expectations (the seller delivers incorrect goods or fails to meet quality standards). Therefore, the goods description section should detail the characteristics and standards of the goods or require sample goods to be included in the contract. Additionally, agreements on price, payment, returns, and warranty are essential areas that need attention.

IV. STRUCTURE OF THE CONTRACT/AGREEMENT

Let’s start with the following scenario: Suppose it’s your first day at a company, and you’re assigned to review a contract, what are you supposed to do then? Broadly speaking, whether working at a company or a law firm, contracts are one of the most frequently handled tasks, either drafting or reviewing contracts. Typically, new employees are assigned contract review tasks in their early days.

It is important to emphasize that contract drafting and review are two inseparable activities. Someone who knows how to draft a contract will know how to review it and vice versa. Therefore, if you don’t know how to draft a contract and start reviewing one, it is a very “dangerous” action. Moreover, without knowing how to draft a contract, reviewing one will only reveal disjointed points prepared by the other party.

So, what are the constituent elements of a contract structure? You can refer to the following structure:

However, this is not a standard structure to apply to all types of contracts. Depending on the type and complexity of each contract, additional clauses may be included. These are the most basic clauses that a sales contract should have.

SUMMARY OF CHAPTER 1

1. Role of the contract drafter: Record the parties’ agreements, manage the contract, and manage risks.
2. Method of recording a transaction in a contract: There are two basic methods:

   – Method 1: Identify the nature, type, and subject matter of the contract, and from there determine the applicable legal regulations. Then identify the basic terms, ensuring legal accuracy.

   – Method 2: Ask relevant departments/clients to “tell the story,” and then identify related clauses.

3. Three questions before drafting a contract:

   – How does this provision affect the operation?

   – How does this provision impact costs?

   – Who benefits from this provision?

4. Structure of the contract: The basic structure a contract should have includes: Introduction, transaction structure, other important commercial agreements, breach of contract and remedies, general agreements. Depending on the type of contract, additional clauses may arise.

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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”

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