TRANSACTION STRUCTURE OF THE CONTRACT

TRANSACTION STRUCTURE OF THE CONTRACT

DRAFTING BATTLE-TESTED CONTRACTS

CHAPTER 3

TRANSACTION STRUCTURE OF THE CONTRACT

(PART I)

When entering into a contract, the parties have specific desires. For example, in a share purchase transaction, the buyer is interested in owning the shares, while the seller is concerned with receiving the money. This exchange helps the parties achieve their goals. Therefore, some have said that a contract is a tool for parties to pursue their happiness.

Interestingly, in many cases, even without studying contract law or being a lawyer, people can draft contracts that are applicable to one another. This can be done because, more than anyone else, the people involved know exactly what they want and what they must exchange to achieve that desire.

Therefore, the task of the contract drafter is first to answer the following questions: What will the parties in the transaction do with each other? What are the parties buying or selling? What will the parties do for each other? In professional terms, this is known as the transaction structure. While other parts of the contract may be very similar and even allow for “copying” and “pasting,” the transaction structure part is what creates the transaction’s uniqueness, making it highly varied and difficult to replicate. The transaction structure is the most “dynamic” part of a contract.

For example, the transaction structure of a sales contract, regardless of who drafts it, must answer the following questions: What is being bought or sold? What is the purchase price? When is the payment due? How is delivery carried out? What is the warranty policy (if any)? However, if it is a service contract, the transaction structure is no longer about what is being bought or sold, but it is determined by questions such as: Who does what for whom? Where and how is it done? How much is the payment?

Therefore, if a contract is drafted in such a way that the parties or a related third party (e.g., an arbitration board) cannot determine what the parties are doing with each other, meaning the transaction structure is not clear, then it is a failure.

Commercial contracts are often bilateral contracts. Common types of commercial contracts include: sales contracts, service contracts, cooperation contracts, loan contracts, etc. This means that in these types of contracts, the rights of “one party” are the obligations of “the other party” and vice versa (correlative rights and obligations).

There are two considerations:

1. Always remember the principle of bilateral contracts is that the rights of one party are the obligations of the other party. Therefore, before starting to draft, the drafter should put themselves in the shoes of one party in the transaction and think about what they would do if they were a party to this transaction. For example, when selling a used car to someone else, what would you do? Would you deliver the car, receive the payment, and offer any warranty?
2. Use the Civil Code as a safe guide for drafting. Specifically, the 2015 Civil Code provides regulations on common types of contracts. This is a reliable source for determining the transaction structure.

To make it easier to follow and visualize the transaction structure part of the contract, the structure of this chapter will be presented by guiding the drafting of the most common type of commercial contract on the market today – the Sales Contract. The end of the chapter provides principled guidelines for other types of contracts. Accordingly, the transaction structure in a sales contract will include the following clauses:

– Subject matter of the contract;

– Price and payment;

– Delivery;

– Warranty.

I. SUBJECT MATTER OF THE CONTRACT

The subject matter of the contract is the most crucial clause, impacting most other agreements such as price, payment, delivery, etc. The subject matter is what the buyer desires/aims for, through which they voluntarily enter into the sales contract with the seller. Logically, when the parties have different expectations about the subject matter, their goals may not be achieved. This discrepancy can be a source of disputes.

For example, in a cashew sale contract, Grade 1 cashews must meet the standard of around 200 nuts/kg. The price of Grade 1 and Grade 2 cashews is different. The buyer expects that with an amount of [*] VND, they should get Grade 1 cashews, while the seller expects that with [*] VND, they are selling Grade 2 cashews.

When drafting a contract, the drafter needs to describe the subject matter in detail and accurately because the parties will rely on this description to perform the delivery, ensuring that they are transacting what they desire. There are two ways to describe the subject matter of a contract:

– First method: Directly describe the type of goods in the contract’s subject matter section.

– Second method: Only state the type of goods the parties wish to trade. Detailed information should be included in an appendix.

Note that there is no right or wrong way to choose. The important thing is that each method will be suitable for a specific type of goods, making it easier for the parties to read the contract. If the goods are simple and do not require much description, it should be stated directly in the subject matter section. For example: Subject matter: 50 taels of SJC 9999 gold (3.75 grams/tael).

But if the goods require complex technical descriptions, directly describing them in the subject matter clause will make it too long and unbalanced compared to other clauses. In such cases, it is better to use an appendix. For example: Subject matter: 70 Lenovo ThinkPad laptops with detailed descriptions in Appendix 1 attached to this contract.

Different types of goods will have different descriptive techniques. Therefore, classifying assets in general and goods in particular is necessary, not only in legislative activities but also in the practical drafting of sales contracts [In the scope of this chapter, the term “goods” will be used to mean “objects” and vice versa.]. According to Article 113 of the 2015 Civil Code, goods can be divided into fungible goods and specific goods.

– Fungible goods: Items with the same shape, properties, and use, identifiable by measurement units such as kilograms, liters (e.g., fuel, rice, coffee, other agricultural products, etc.).

– Specific goods: Items distinguishable from others by unique characteristics such as symbols, shape, color, material, properties, location (e.g., houses, apartments, etc.).

To describe goods, the following criteria can be used:

1. Description of Physical Characteristics

The principle of describing goods is to start from the outside and move inwards, beginning with what can be observed with the naked eye and progressing to characteristics requiring detailed analysis. When describing physical characteristics, the following sub-criteria can be used: weight, shape, size, and color.

Example 1: During the Tet holiday, the parties agree to purchase Grade 1 grapefruits in large quantities for decoration. The contract drafter’s responsibility is to know and detail the standards of Grade 1 grapefruits, as this description relates to delivery and pricing. The drafter needs to detail parameters for identification such as: Grade 1 green-skinned, pink-fleshed grapefruits, weighing 1.5-2 kg each; diameter 15-20 cm; peel thickness 14-18 mm; the stem must be firmly attached and fresh. Based on this description, if the seller delivers incorrect goods, the buyer may refuse to accept them, or accept them with a revised price, depending on the parties’ agreement.

Example 2: For goods like water-based paint, the parties only need to describe the physical characteristics to identify the required product.

Product name: Heat-resistant paint; Brand: …; Volume: 5 liters; Type: clear paint, water-based paint; Color: orange; Color code […] matching the factory’s color chart.

2. Description of Chemical and Biological Properties

Example 1: If the subject matter of the contract is rice, the goods can be described as follows:

In practice, many disputes have arisen from unclear descriptions of goods. If the parties do not clearly specify the goods being bought and sold, and how to identify the correct type upon receipt, disputes are inevitable.

Example 2: In the case where Company A signs a goods sale contract (tapioca starch) with Company B, a dispute arose regarding the type of goods. During the offer stage, the seller provided the following offer information:

– Offer letter dated September 4: Product name is “Tapioca Starch”.

– Offer letter dated September 10: Product name is “Tapioca Starch Powder, Industrial grade”.

In the acceptance letter from the buyer, the buyer agreed to the product name as “Raw tapioca starch, not oxidized” and the seller accepted this order.

However, in the signed sales contract, the parties agreed on the product name as “Raw tapioca powder, not oxidized, industrial grade”. Thus, the product name in the contract differed from the product name during the negotiation stage. The parties disputed the exact product name because it directly affected the product’s use. This dispute was brought to commercial arbitration for resolution. According to the Arbitration Board, changing the terminology from “tapioca starch” to “tapioca powder” altered the product from a high-quality grade used in the paper industry to a lower quality grade suitable only for glue or animal feed.

3. Description Combining Physical and Chemical/Biological Characteristics

In some cases, combining physical and chemical/biological characteristics is necessary for a thorough description.

Example 1: If the goods are chili peppers (purchased for making chili sauce), the product name should be specific: Siamese chili, bird’s eye chili, etc. Avoid vague terms like “high-quality chili” or “guaranteed quality chili” as they do not help accurately identify the goods upon receipt. A proper description could be:

– Name: Grade 1 bird’s eye chili

– Color: Bright red, uniform

– Length: 4-5 cm

– Weight: 4-4.2 g per chili

– Spiciness (heat level): between 100,000 – 250,000 Scoville Heat Units (SHU).

Example 2: When the goods being sold are cashew nuts, besides physical descriptions, the origin and chemical/biological factors are also crucial as they relate to the quality of the goods. Cashews grown in different regions of Vietnam have varying flavors due to soil, climate, and cultivation methods. To meet the growing global demand, many Vietnamese cashew companies import raw cashew nuts from other countries like Indonesia and Cambodia. So how can you identify quality Vietnamese cashews in a market flooded with imports? The goods description can be suggested as follows:

– Type of cashew: Grade 1 processed cashew nuts with skin.

– Origin: Grown in Binh Phuoc province (simply stating “origin Binh Phuoc” may still include imported cashews processed in Binh Phuoc).

– Number of nuts/kg: 395-465 nuts/kg. This detail is crucial because size variations change the cashew grade and price (Grade 1 cashews have the highest price, around 320,000 – 350,000 VND/kg, but if there are more than 465 nuts/kg, they are Grade 2, priced at 290,000 – 320,000 VND/kg).

– Color: Uniform ivory color with no black or brown spots.

– Moisture content: Maximum 5%.

– Blemishes: Maximum 1%.

– Scratches: Maximum 4%.

– Harvest year: 2021, 2022.

4. Description of Technical Characteristics

Some types of goods have complex technical specifications, and at the time of delivery, the parties may not be able to assess the goods’ quality because the delivery is based on the specifications and standards described in the contract.

Example 1: When purchasing a Honda Wave Alpha motorcycle, the contract needs to specify technical details such as design specifications, light specifications, screen specifications, engine specifications, and wheel specifications. For instance:

DESIGN SPECIFICATIONS

– Seat height: 769 mm

– Wheelbase: 1224 mm

– Ground clearance: 138 mm

– Weight: 97 kg

– Dimensions: 191.4 × 68.8 × 107.5 cm

– Colors: White Silver, Matte Black, Red Silver, Blue Silver

– Release year: 2022

– Brand origin: Japan

ENGINE SPECIFICATIONS

– Engine: Gasoline, 1 cylinder, 4-stroke

– Cooling system: Air

– Transmission: 4-speed

– Cylinder capacity: 110 cc

– Piston diameter: 50 mm

– Piston stroke: 55.6 mm

– Compression ratio: 9.0:1

– Maximum power: 6.12 kW at 7500 rpm

– Maximum torque: 8.44 Nm at 5500 rpm

– Starting system: Electric

– Engine oil capacity: 1 L

– Fuel tank capacity: 3.7 L

– Fuel consumption: 1.9 L/100 km

Example 2: In construction projects, when presenting prices and products to the investor, suppliers must provide a description of the technical characteristics or quality certificates of the product. For a waterproofing product, to describe “waterproofing,” technical standards must be used. Specifically:

Waterproofing Product A, technical specifications:

Note: 1 MPa = 1 N/mm² = 10 bar ~ 145 psi

5. Description Combined with Samples or Images

This is also an excellent method for describing goods, especially those related to color or future assets, as detailed descriptions alone may still pose identification challenges.

Example 1: When purchasing an apartment that is a future asset, buyers often rely on drawings, promotional materials, or model homes provided by the developer. In many cases, the actual delivered home does not match the description in the contract or the developer’s advertisements, leading to disputes.

As a buyer, it is essential to clearly specify the apartment’s features and the basis for identifying the agreed-upon property upon delivery. Thus, the model home information or promotional materials (brochure) provided by the developer should be an integral part of the apartment sales contract.

To identify the apartment to be purchased, consider the following factors:

– Building location: Describe from large to small; which project does the apartment belong to? Which building within the project?

– Floor and apartment number: Which floor is the apartment on? Is it a corner unit? What is the apartment’s orientation?

– Floor area: Specify in square meters. According to current regulations, the certificate for homeowners must indicate the type and grade of housing. For apartments, it must specify both the construction floor area and the usable area. If the house is built under a project, it must correctly name the housing project approved by the competent authority. The buyer should note whether the apartment area is the usable area or the gross floor area.

  – Gross floor area (construction floor area) is calculated from the center of the walls within the apartment.

    Gross floor area = Usable area + Area of surrounding walls + Area of columns and technical boxes.

  – Usable area (carpet area) includes the area of interior walls, balconies, and loggias (if any) attached to the apartment. This area is different from the gross floor area, as it does not include the surrounding walls, walls between apartments, floor area with columns, and technical boxes inside the apartment.

    Usable area = Living area + Balcony area + Interior wall area.

– Completion and handover time.

– List of interior and exterior building materials.

Example 2: For some goods with color as a distinguishing feature, it is advisable to include a product sample in the contract after the description. For example, for textile goods, the description should include: Fabric material (100% cotton, 70% cotton 30% polyester…), raw material origin (jute, hemp, animal fur, etc.), yarn size, weaving style, color, and attach a sample product as per the contract.

6. Description by National or Industry Technical Standards

To ensure that a product or service meets quality or quantity standards, there must be a benchmark standard. For commercial purposes and to assert product quality in the market, businesses need to declare their products based on certain standards.

National technical standards are a reliable source. Parties can refer to these technical specifications and use them as benchmarks to classify and assess the quality of goods.

Example 1: Parties can use the parboiled rice standards of Vietnam as assessed by the Directorate for Standards, Metrology, and Quality to describe the subject matter of a rice sales contract, specifically:

For machinery, at the time of delivery, the parties often cannot assess the quality of the goods or accurately check the specifications by eye. Only during use will the quality issues arise, leading to disputes.

Example 2: In the case of asset disputes according to Judgment No. 39/2022/KDTM-PT dated March 25, 2022, of the Hanoi People’s Court on “Disputes over sale of goods contract.”

VT Limited Liability Company (hereinafter referred to as VT Company – plaintiff) and B International Beauty Business Household (hereinafter referred to as B Beauty Clinic – defendant) signed a sale of goods contract No. 2018/VVN-04/HĐMB on February 10, 2018. The subject matter of the contract was: A 3-in-1 CT Scanner (for use in B’s dental office), Model: PHT-65 LHS, Brand name: Green 16; Origin: VT K; quantity: 01 machine; Price: 1,704,750,000 VND (including 5% VAT and transportation, warranty costs).

During use, B Beauty Clinic’s specialized dentist discovered that VT Company had not delivered the exact product agreed upon in the sales contract when inspecting the 3-in-1 CT Scanner; Model PHT-65 LHS for operation. Specifically: The head of the machine was labeled Product name: X-RAY GENERATOR MODEL DG 07-07 E 22 T2 Date: 2017-10; The body of the machine was labeled Green 16; Origin: VT – South Korea. Product: Computed Tomography X-ray System.

The appellate court ruled:

– Dismiss the claim of VT Company requiring B International Beauty Business Household to pay the outstanding amount under the sales contract.

– Annul the entire sales contract No. 2018/VVN-04/HĐMB dated February 10, 2018, between VT Company and B International Beauty Business Household due to VT Company’s fundamental breach of contract obligations.

– Require VT Company to return the paid amount and compensate for damages to B International Beauty Business Household.

Thus, having a clear agreement on the subject matter in the sales contract helps the parties accurately check the goods. Each type of goods has different technical standards; hence, the contract drafter should consult related departments to obtain the most detailed information about the goods’ specifications and technical details.

Here are some important notes for the drafter in the goods description section:

Note 1: Name of Goods

Goods have generic and specific names. To facilitate receiving and inspecting goods, prioritize using specific names for description. For example: a coffee, rice sales contract (generic name); broken rice, Arabica coffee sales contract (specific name). The parties can choose one or more of the following methods to identify the goods’ name: Name + origin; Name + manufacturer; Name + appendix or catalog; Trade name; Scientific name; Name along with usage and characteristics; Name according to the goods label or packaging.

Note 2: Certificate of Origin and Certificate of Quality

Certificates of origin (CO) and certificates of quality (CQ) are essential documents if the sales contract involves imported or exported goods.

CO (Certificate of Origin): This certifies the origin of the goods, indicating the country or region where the goods were produced. The purpose of a CO is to confirm that the goods have a clear, legal origin. Moreover, a CO proves that the goods are imported directly from countries complying with Vietnam’s import and export regulations. For example, to import used machinery and equipment into Vietnam, the following criteria must be met:

  – The equipment’s age must not exceed 10 years. For machinery and equipment in specific fields, the equipment age is detailed in Appendix I attached to this Decision.

  – Manufactured according to standards:

    – Complying with the National Technical Regulations (QCVN) on safety, energy saving, and environmental protection;

    – If there are no relevant QCVNs for imported machinery and equipment, the imported machinery and equipment must be manufactured according to the technical criteria of Vietnam’s National Standards (TCVN) or the national standards of one of the G7 countries or South Korea on safety, energy saving, and environmental protection.

Additionally, knowing the origin of goods helps importers determine if the goods are eligible for special preferences. Common CO forms used in Vietnam include:

– Form A: Goods exported from countries granting Vietnam GSP tax preferences.

– Form B: Goods exported/imported to/from all countries without any preferences.

– Form D: Goods exported to ASEAN countries eligible for preferences under the CEPT Agreement.

– Form E: Goods exported to China and vice versa, eligible for tariff preferences under the ASEAN-China Agreement (ASEAN + 1).

– Form S: Goods exported to Laos, eligible for tariff preferences under the Vietnam-Laos Agreement.

– Form AK: Goods exported to Korea under the ASEAN-Korea Agreement (ASEAN + 2).

– Form AJ: Goods exported to Japan under the ASEAN-Japan Agreement (ASEAN + 3).

– Form GSTP: Goods under the global trade system eligible for GSTP preferences.

– Form ICO: Issued for coffee agricultural products harvested in Vietnam for export to countries as per the International Coffee Organization (ICO) regulations.

CQ (Certificate of Quality): This document confirms that goods meet the manufacturer’s or international standards. Quality certificates typically come in two forms:

– Standard Compliance Certificate (Voluntary Certificate): Certifies that the product quality meets corresponding domestic or international standards. This certificate is voluntary but becomes mandatory if requested by customers. The method of assessing standard compliance depends on certifying organizations or individuals, but it must be accurate for each product.

– Technical Regulation Compliance Certificate (Mandatory Certificate): Certifies that product quality meets technical regulations required by central or local state management agencies, usually related to safety, hygiene, or environmental issues (regulatory compliance). The method for assessing technical regulation compliance is specified in the corresponding technical regulation.

Quality certificates are crucial in import-export activities:

– CQ helps prove that goods or products are manufactured according to the published standards accompanying the goods. Most quality certifying agencies are internationally recognized under ISO/IEC Guide 65:1996.

– CQ is vital for both manufacturers and customers. It confirms whether the product quality meets the published technical specifications. CQ is not mandatory in customs declarations (except for some items that require mandatory registration).

Note 3: Goods Weight Clause

For similar goods, the contract should include a clause about weight. The content that needs to be clarified in the contract includes: unit of measurement (quantity or weight) of the goods, method for determining the quantity, weight determination method, and supporting documents.

For international goods sales contracts, it is necessary to specify how to determine the quantity and measurement unit, as measurement systems vary by country. For goods with large quantities or those affected by weather conditions, which can cause quantity fluctuations, it is essential to stipulate an acceptable tolerance level (deviation ratio) for the total quantity.

When describing goods, always pay attention to the concept of tolerance. Tolerance refers to the permissible discrepancies in bulk density, volume, or quantity during the delivery and receipt process. Tolerance is the acceptable range of quantity deviations (either lower or higher than the contract specifies) allowed for the seller when delivering the goods. The parties can agree to a certain tolerance range or follow market practices, depending on the type of goods.

To draft contracts effectively and be appreciated for professionalism, the drafter should prepare in advance and thoroughly understand market practices for each type of goods in the contract. As the implications of tolerance affect the pricing of goods, it is an essential element to be noted in the contract.

Example 1: Cashew Nut Tolerance Regulations

Quality and size deviations must be permissible for each package for products that do not meet the specified grade requirements.

(1) Quality Tolerance:

– Special Grade: 5% by weight of cashew nuts that do not meet the grade requirements but fall within the tolerance of Grade I.

– Grade I: 10% by weight of cashew nuts that do not meet the Grade I requirements but fall within the tolerance of Grade II.

– Grade II: 15% by weight of cashew nuts that do not meet the Grade II requirements but fall within the tolerance of Grade III.

(2) Size Tolerance:

– For all grades, a tolerance of 10% by weight of cashew nuts corresponding to the size directly above or below the size indicated on the package is allowed.

Example 2: Tolerance in Dimensions, Shape, and Weight of Hot Rolled Wide Strip Steel, Alloy, and Non-Alloy (excluding Stainless Steel)

(1) Dimension Tolerance:

– Width: The width tolerance must be ± 2% of the nominal width but not exceeding 10 mm.

– Thickness: The thickness tolerance for nominal thickness up to 100 mm must conform to the values specified in Table 1. Depending on the order requirements, wide strip steel can be supplied:

  + With negative tolerance, dependent on the nominal thickness (Grade A);

  + Or with a constant negative tolerance of 0.3 mm (Grade B).

– For nominal thicknesses above 100 mm, allowable deviations are as agreed upon when ordering.

It’s crucial to distinguish between tolerance and natural loss of goods. For tolerance, as long as the delivered quantity is within the allowed tolerance range specified in the contract, it is valid. The parties’ payment will be based on the actual delivered quantity. For natural loss, some goods naturally lose weight or quantity during delivery. Buyers and sellers can agree on an exemption ratio. The exemption ratio is the allowable loss percentage, where the seller is exempt if the delivered goods fall within this ratio. Common goods with exemption ratios include consumables like fuel and fresh produce.

Note 4: Packaging Clause

Packaging must meet the following requirements: suitable for the nature of the goods; compatible with the means of transportation (able to be loaded and transported).

Packaging styles include boxes, bags, sacks, containers, etc., in shapes like round, square, rectangular… suitable for the type of goods. Packaging materials can vary, including wood, plastic, bamboo, glass…

Goods are usually packed in two types of packaging: transport packaging and retail packaging. Packaging is not only used to protect goods during transportation but, in many cases (especially retail packaging), also a legal requirement. When agreeing on the packaging clause, consider the following factors:

– Material of the packaging;

– Specifications of the packaging (size, dimensions);

– Packing method;

– Gross weight;

– Information on the packaging.

Note 5: Presentation of Goods Description

Goods are diverse; some can be described by physical characteristics alone, while others require more complex descriptions with multiple technical parameters. How should this be presented for easy follow-up?

If the contract includes many goods or those with complex descriptions and multiple criteria, the parties can create an appendix for goods description to balance the contract and make it easier to follow other clauses. For example: “Party A agrees to sell, and Party B agrees to buy goods according to Appendix 1 attached to this contract”, and then describe each type of goods in the appendix. This way, when looking at the contract, the parties can easily follow other clauses without getting “lost”, balancing the contract’s content.

Note 6: Consulting Related Parties

The above examples highlight the importance of goods descriptions and why detailed descriptions are necessary. However, even with knowledge of contract drafting techniques and relevant legal regulations, describing “special” goods can still be challenging. Some goods have quality standards determined by the production process, including manual steps, where quality is reflected in craftsmanship and skill, making them hard to describe verbally (e.g., handicrafts, textiles); some goods are difficult to standardize and describe in detail (e.g., agricultural products); or goods are technical machinery.

Therefore, the drafter should consult related parties for accurate information. The drafter can prepare a “framework” for goods descriptions (shape, size, color, physical and chemical characteristics, if any), then consult related departments (purchasing, technical, quality management) to detail the parameters in the “framework”. For example, when drafting a contract to buy chili peppers, questions to the related parties could include: What type of chili is needed? What length qualifies as Grade 1? What is the approximate weight per chili? What spiciness level meets the requirements? Are there any additional special considerations? Gathering this information will help make the goods description more accurate.

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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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