TRANSACTION STRUCTURE OF THE CONTRACT (PART II): PRICE & PAYMENT
DRAFTING BATTLE-TESTED CONTRACTS
CHAPTER 3
TRANSACTION STRUCTURE OF THE CONTRACT
(PART II)
II. PRICE AND PAYMENT
- Price Clause
Price is one of the most crucial clauses in a sales contract and bilateral contracts in general. It is what the seller aims for and what the buyer must exchange in the transaction. Therefore, drafting the price clause not only helps the parties avoid unnecessary disputes but also helps them achieve their goals when entering into the contract.
Drafting the price clause, in essence, answers the question: “What is the price?” However, in practice, the drafting technique is much more complex. Based on real contract drafting scenarios, when answering the question of how much an item costs, there are two important considerations:
– Identify the factors that can influence or affect the price of goods.
– Always leave room for adjustments.
The selling price of a product plays a vital role in the survival and development of a business because high or low selling prices impact the revenue and profit of the business. However, product prices are usually not fixed for a long time and are subject to changes due to internal and external market factors.
Many factors can cause price changes, such as market fluctuations, changing contract conditions, and fluctuating raw material costs affecting production costs. In such cases, there needs to be a method to determine a specific price that is fair and does not affect the interests of the parties when price changes occur. Ultimately, one of the key factors influencing price is “time” or the contract term. Goods prices remain relatively stable for short periods, so if the contract term is long (typically from 12 months or more), the price factor may be affected, especially for high-value contracts where the risk is higher.
Therefore, price is not a “constant” factor once the contract terms are agreed upon. Always remember that one of the fundamental principles of contracts is agreement; thus, the parties can still allow for changes (of course, these changes must be within the scope of the agreement and permitted by law). When contract performance conditions change significantly, leading to an inability to maintain the initially agreed price, this may cause harm to either the seller or the buyer. In such cases, the parties can agree on a principle contract, and the price clauses can be expressed in an appendix to the contract.
To draft this clause, pay attention to the following details:
– Whether the agreed price is fixed or mixed.
– Anticipate scenarios that could lead to price changes.
– Whether the agreed price includes value-added tax (VAT) and other costs.
– Ensure the price clause is linked to the contract’s subject matter clause.
When recording the price of goods, goods can be divided into two groups: (i) goods with relatively stable prices and (ii) goods with potentially variable prices. When drafting the contract, consider the goods’ characteristics to reflect the accurate price, avoiding harm to one party and potential contract disputes. There are two ways to record the price of goods: fixed price and mixed price.
Fixed Price: A price agreed upon at the time of the contract, remaining unchanged throughout the contract term under normal conditions, except for specific cases stated in the contract.
Fixed prices are suitable for goods with relatively stable prices. These goods have little price fluctuation despite changes in related factors, or the seller has anticipated potential price influences and locked in this fixed price with the buyer in the contract.
Various factors influence goods prices, such as production costs, the company’s financial resources, pricing strategy, and market supply-demand. Production costs are a significant factor directly affecting the pricing of any product. If production costs change without substantially affecting the product price, these goods have relatively stable prices, allowing parties to agree on a fixed price in the contract.
Example 1: The parties agree in April 2023, the price of a Samsung Galaxy Z Flip 4 5G Flex phone is 20,000,000 VND; the price of an Acer Aspire A514 54 511G i5 laptop is 19,990,000 VND. These prices do not change once the purchase agreement is finalized.
Additionally, fixed prices in the contract apply when the buyer and seller can agree on a reasonable price in advance, less affected by market fluctuations and anticipated factors. In this contract, the buyer agrees to pay a fixed price for the goods or services specified. The price cannot change regardless of changing conditions, market, or other factors. For example, some companies, to ensure a steady supply from farmers (sugarcane, corn, coffee…),
sign agricultural purchase contracts with fixed prices, such as 8,000 VND/kg for corn, 900,000 VND/ton for sugarcane, and these prices remain unchanged from the start to the end of the harvest season. This benefits both parties because the agreed price is fair, reasonable, and stable throughout the contract term. As a result, the buyer ensures a continuous supply, while the seller gets the expected price without worrying about seasonal fluctuations.
It is also important to note that fixed-price contracts are typically used to allow parties to estimate related costs with a certain degree of certainty. However, if costs suddenly increase, one or more parties in the contract may face difficulties in fulfilling contractual obligations. Therefore, this type of contract also carries potential risks. To ensure safety, parties can agree on a fixed price in the contract, accompanied by a specific period for which the fixed price applies (duration for the fixed price).
A sample clause could be: “The seller agrees to sell, and the buyer agrees to purchase the motorcycle as described for the price of 20,000,000 VND (Twenty million VND). This price will remain unchanged for 1 year from the date the parties sign the contract and the buyer completes the down payment.” This way, the buyer can be assured that the purchase price will not change for a period of 1 year after completing the down payment.
Mixed Price: A price determined along with other conditions, which may change if these conditions change. This method is suitable when (i) applied to goods with prices that may continuously fluctuate (due to direct impact factors); (ii) the contract performance conditions undergo significant changes. In this case, there needs to be a method to determine a specific price that is fair and does not affect the parties’ interests when changes occur.
(i) As analyzed, goods are very diverse, and some have unstable prices that fluctuate according to market changes. For such goods, a fixed price determination is not suitable.
Example 2: A transportation company agrees with a customer on a fixed transportation fee of 400,000 VND/ton for a fixed 160 km route. This can be disadvantageous for the transporter because one of the factors contributing to transportation costs is fuel – a resource with highly fluctuating prices. For example, in the first half of 2022, fuel prices were adjusted upward 7 consecutive times, directly impacting the transportation industry and many other businesses. Some transportation companies had to adjust their fees to cover costs. Conversely, if fuel prices decrease, the customer suffers. In this case, the parties should opt for a mixed price agreement in the contract. Specifically:
– For a fixed 160 km route, the transportation fee is 400,000 VND/ton.
– However, if fuel prices fluctuate by 15% – 25% continuously for one month or more, the transportation fee is adjusted as follows:
– If fuel prices increase by 15% to 25%, the transportation fee is 450,000 VND/ton.
– If fuel prices decrease by 15% to 25%, the transportation fee is 350,000 VND/ton.
Accordingly, the price is stipulated in the contract but can be reconsidered if certain fluctuations occur, as forecasted and agreed upon by the parties.
Example 3: The price is calculated based on the initial price set when the contract is executed but later changes due to cost fluctuations during the contract term.
Party A, an industrial meal provider, agreed with the buyer (Party B) as follows: The price for one meal is 25,000 VND (with specified nutritional components and the number of dishes). Due to the large number of meals, to ensure quality, Party A will build a central kitchen in Party B’s factory. The contract term is three years. However, due to market fluctuations, the prices of raw materials have increased, and maintaining the agreed price would result in a loss for Party A. Therefore, when signing the agreement, the parties need to anticipate potential price-impacting scenarios and adjust the meal price accordingly to ensure fairness.
When drafting the price clause, the drafter can refer to cost components that make up the price of a meal, including:
– Cost of building the kitchen (depreciation): non-fluctuating cost.
– Labor cost: minimal fluctuations.
– Raw material cost: high fluctuations.
Based on the fluctuations in various costs (especially raw material costs), the parties will calculate price adjustments. However, it is essential to determine whether the price increase is for a primary ingredient and how much it constitutes the meal price to calculate reasonable price adjustments.
The parties can specifically agree on price adjustments in the contract as follows: When raw material costs [list main ingredients] increase by more than 15%, the meal price will be calculated using the formula: Current meal price x Ingredient price increase rate x Proportion of that ingredient in the total cost.
(ii) Mixed prices can also be applied when contract performance conditions undergo significant changes.
Once the parties have negotiated and agreed on the price, this clause binds the parties to perform. However, unforeseen events may occur that, although not rendering the contract impossible to perform, significantly increase the cost of performing obligations, causing substantial harm to one party if the contract continues.
For example, in 2022, construction material stores faced difficulties due to a simultaneous increase in cement prices. Cement is an essential construction material, but there were periods when cement prices increased by 50,000-80,000 VND/ton, and some types even increased by 140,000 VND/ton. This made contract performance more difficult and costly, causing store owners to incur losses. The increase in cement prices also affected construction contractors when supplying building materials.
Besides cement prices, steel prices increased by about 4-6 million VND/ton, a 25-45% increase. Although steel is produced in Vietnam, steel billets are imported, causing continuous price fluctuations for raw materials, impacting finished steel prices. Fixed construction prices were set, but continuously rising material prices caused distress among contractors, and many investors had to abandon projects due to losses. Therefore, when circumstances change fundamentally, the parties need to amend contract clauses to balance the parties’ interests and suit current conditions.
For mixed-price contracts, the presentation of the price on the contract is crucial for effective and convenient adjustments when necessary. Here are some solutions: Draft a principle contract, with the price clause detailed in an appendix. Alternatively, for goods with frequently fluctuating prices, parties can set an initial fixed price for a specific period, after which it will follow the market’s floating price (potentially via regularly updated price lists).
Examples of drafting this clause:
– The agreed price at the time and place of delivery, with any price changes communicated via fax or email by Party A. The periodic price quotes are an inseparable part of this principle contract.
– The prices of products provided by the seller to distributor customers are wholesale prices, valid for 3 months from the contract signing date. These prices may be changed by the seller at any time. In case of a price change, the seller will notify the customer in writing 30 (thirty) days in advance; The periodic price notices are an inseparable part of this principle contract.
In summary, the price will directly affect the parties’ interests. Thus, if the price clause is not well drafted or does not anticipate scenarios that may lead to price changes, it will directly impact one party’s interests. To ensure fairness and reasonable risk-sharing when contract performance conditions change, the parties should renegotiate the price within a reasonable period.
Additional notes for the price clause when linked with other contract clauses:
Note 1: Price and related costs
The goods price is not independent but is associated with other factors such as costs, taxes, etc. Therefore, determine whether the agreed price includes all costs and taxes and if it is the final price the buyer must pay.
Goods in a sales contract may incur various additional costs, including handling fees, transportation fees, toll charges, warehouse storage fees, and more.
Note 2: Price and product quality clause
Contract clauses must be closely connected. When the subject matter and quality clauses specify the type, quantity, size, weight, and quality of goods, the agreed price will correspond to the described subject matter. If the price is calculated by weight, clarify: gross weight, net weight, or gross weight considered as net; or clearly agree whether packaging costs are included in the goods price.
For instance, if the seller mistakenly delivers the wrong type of goods, always remember that the parties can still change the price, and if the buyer accepts the wrong goods, the unit price will change.
Example: The parties agree to buy finished Arabica roasted coffee at 295,000 VND/kg. However, the seller delivers Robusta coffee, changing the contract’s subject matter. Whether to accept these goods or at what unit price depends on the buyer’s right. If the buyer accepts Robusta coffee, the initially agreed unit price will change accordingly.
Note 3: Floating Price Based on Results
This is a special way to determine prices, uncommon in goods sales contracts but often found in M&A (Merger and Acquisition) contracts in the service sector. The price is determined based on business results. In an M&A contract, a small “trick” to determine the price is to check whether there is cash remaining in the acquired company’s account. This means the agreed price includes or does not include the company’s cash balance.
The service sector differs from the manufacturing sector. In manufacturing, machinery holds significant weight, but in services, the company’s operation method is crucial, and the founder’s role is particularly significant in the company’s success.
Example: When parties agree to purchase a language center, the agreed price must include additional binding conditions to ensure the buyer’s benefits after payment. When buying a language center, the buyer needs the founder to continue working and transfer the operation method gradually so the buyer can take over without causing disruption and abrupt business performance impacts. In this case, it must be agreed that after the business sale, the company’s founder will continue to work for 1-3 years to transfer the operation methods, ensuring the buyer’s benefits and reducing risks for service companies.
Additionally, parties can agree on conditions where the seller guarantees annual revenue growth of 10%. If the first year’s revenue does not increase, the initial amount A will decrease by 10%; if the second year the company still incurs losses, the payment will decrease by 15%, and if the company continues not to grow in the third year, it will be considered a contract breach, terminating the contract. When parties agree on a price change clause, use installment payments rather than a lump sum. For example:
– First year: if revenue increases by 10%, the buyer will pay 30% of the contract value.
– Second year: if growth continues by 10%, the buyer will pay 40% of the contract value.
– Third year: if growth conditions are met, pay the remaining 30%.
- Payment Clause
After determining the price of goods, the parties will proceed to negotiate the payment clause. The payment clause is an intriguing aspect of the contract structure. There are various ways to present this clause, but by answering the following questions, the drafter can effectively cover all necessary content: Who pays what to whom? When to pay? Why to pay? How to pay?
Basic content needed when drafting the payment clause includes:
– Amount to be paid;
– Who pays whom;
– Calculation of any amounts to be determined before signing, instead of including a mathematical formula;
– Payment deadline (when to pay);
– Payment method;
– If payment is based on a formula, provide the exact formula.
Amount to be paid: Specify the exact amount the buyer must pay. For example, the sale price for 100 bags of Ha Tien cement is 7,400,000 VND (Seven million four hundred thousand VND). For contracts with fluctuating unit prices depending on timing, the price can be included in an appendix or separate price quotes at the time of order (the appendix and periodic price quotes are inseparable parts of the contract). Moreover, the parties should note that the currency for specifying the price must be Vietnamese Dong. Listing prices in foreign currency without legal permission can result in administrative penalties.
Here is an example of a clause for an agency contract where the contract price is not fixed:
Clause 2. Price and Payment Method
– Price: The product prices for orders are specified in Appendix 1 attached, which is the base price the distributor receives from the manufacturer, including all associated costs to facilitate the agent in distributing the products. The final payment amount will be notified to the agent at the time the agent places the order (order form as per Appendix 1 attached).
– Price Changes: The distributor has the right to change the product price. The price change will be notified in writing to the agent at least 30 days before the new price is applied. However, this price change will not apply to orders already placed and confirmed by the distributor before the new price takes effect.
Who pays whom: Clearly identify who is responsible for the payment. For example: “Party A is obliged to pay Party B a fee of 5,000,000 VND.” This sentence clearly defines the payment obligation of Party A and the amount to be paid. Avoid using complicated sentences like: “Party B has the right to request Party A to pay a fee of 5,000,000 VND.” This can be confusing and imply that Party B must prove their right to request payment.
When to pay (payment deadline): The payment deadline is a crucial clause to clarify the buyer’s payment responsibility and the seller’s right to receive payment within a specified period. For example: “Rent is payable no later than the 5th of each month”; “Payment for goods is due within 5 working days from the date the buyer receives the valid payment documents.”
If a specific payment time is not mentioned, it can be linked with the delivery clause to define the payment terms. For example: payment before delivery, payment at the time of ordering, payment upon receipt of goods, payment 3 days after receipt of goods, etc.
How to pay: This section confirms the payment method and form.
– Payment method: the manner in which the buyer pays the seller. Currently, the popular payment methods include two basic forms: cash payment or non-cash payment (QR-code, domestic card transfer, international card, credit card).
Cash payment is suitable if the buyer and seller are geographically close or if the payment amount is under 20 million VND. For payments of 20 million VND or more, non-cash payment documentation is required. This regulation pertains to the deductibility of expenses when determining corporate income tax và and the conditions for enterprises to deduct input value-added tax.
Payment Method: The parties can agree to make a one-time payment or multiple payments.
Examples of payment-related clauses:
Example 1: Payment is made as follows:
– From the 21st to the 25th of each month, the seller will compile all the debts incurred in the previous month, and the customer is responsible for paying 100% of the debts incurred in the month once the seller provides the VAT invoice. The latest payment deadline is before the 30th of each month.
– Payment will be made via bank transfer to the seller’s bank account mentioned in the preamble of this contract, in Vietnamese Dong.
– If the payment date falls on a Saturday, Sunday, or holiday, the payment deadline for the customer is extended to the next working day.
Example 2: Payment is divided into 3 (three) installments:
– Installment 1: Party A pays Party B 30% of the contract value, equivalent to [*] VND ([*] dong) within 5 (five) working days from the contract signing date.
– Installment 2: Party A continues to pay Party B 60% of the contract value, equivalent to [*] VND ([*] dong) within 10 (ten) working days from the date Party A receives the complete payment documents under Article [*] of the contract after the project completion.
– Installment 3: After the warranty period as specified in Article 5 of this contract, Party A pays Party B the remaining 10% of the contract value, equivalent to [*] VND ([*] dong) within [*] working days from the date the parties sign the contract liquidation minutes and Party A receives the complete payment documents under Article [*] of the contract after the project completion.
Example 3: Payment Terms in a Share Purchase Agreement
- Transfer Money
2.1. Subject to the terms and conditions of this agreement, the seller agrees to transfer as the beneficial and lawful owner, and the buyer agrees to pay the transfer money to acquire the seller’s shares free from any liens and with all rights, entitlements, and entitlements deriving from or accompanying the shares as of the completion date.
2.2. The transfer money for purchasing the shares will be paid in cash by the buyer to the seller according to the method specified in Article 5.
…
- Method of Payment of Transfer Money to the Seller
5.1. When the conditions stated in Article [*] are met, 20% of the transfer money will be disbursed from the escrow account immediately and without delay to the account designated by the seller, with details as follows:
[provide bank account details]
The seller will promptly block this amount, and it will only be disbursed for the seller’s full use after the conditions and terms specified in Article [*] and Article 5.2 of this agreement are met.
5.2. When the conditions stated in Article [*] are met, 80% of the transfer money will be disbursed to the company’s bank account.
The remaining amount (if any) in the escrow account after the above disbursement will be returned to the buyer according to the method specified by the buyer.
Simultaneously, the 20% transfer money mentioned in Article [*] above will be fully released to the seller.
5.3. Within 3 working days after the company receives the project funding approval letter from a commercial bank authorized to operate in Vietnam, 80% of the transfer money will be disbursed from the company’s bank account to the seller’s bank account without any rejection, obstruction, or objection from the buyer.
5.4. After disbursing the money from the escrow account as stated in Articles 5.1, 5.2, and 5.3 above, the buyer will be deemed to have fully paid the transfer money and will be considered to have completed all the buyer’s obligations under this agreement.
5.5. For the purpose of Article 5.2, the seller hereby irrevocably authorizes the buyer to transfer the money to the company’s bank account. The disbursement to the company under Article 5.2 will be considered a shareholder loan from the seller, and the terms and conditions of the shareholder loan will be specified in the loan agreement. This shareholder loan will be considered immediately due and payable unconditionally upon the company receiving the project funding approval letter as stipulated in Article 5.3 above.
* Additional Notes for Drafting Payment Clauses:
Note 1: Payment Guarantee Issues
To ensure the payment process adheres to the commitments and avoid unexpected risks, the parties may use payment guarantees. If one party fails to fulfill their obligations, the guarantor will step in and fulfill the obligations for the other party. The guarantor is usually a credit institution, and the buyer’s debts will be paid when exceeding the guarantee limit.
Example of a Payment Clause:
“Subject to the final approval of the seller, the customer will enjoy a credit limit of 2,000,000,000 VND (Two billion VND) for product purchases (‘Credit Limit’). If the customer decides to use this credit limit, it must be repaid according to the seller’s overdue debt policy.
This limit will apply to all debts incurred before December 25 each year, and the customer must make corresponding payments to the seller before December 31 each year. The customer is obligated to renew the bank guarantee letter annually for the seller. The deadline for providing the guarantee letter is December 15 each year (the guarantee letter must be valid for at least one year and valid until February 28 of the following year)
for the customer to continue to benefit from the payment terms specified in Article [*]. If the seller does not receive a new guarantee letter by December 15 each year, debts incurred after December 25 will apply a credit limit of 0 (zero) days unless the parties agree otherwise in writing.”
Note 2: Late Payment Penalties
The clause on late payment penalties is often overlooked, but it is crucial to prevent the seller from suffering losses due to the buyer’s delayed payment. This clause ensures that parties fulfill their obligations seriously, prevents disputes, and provides a remedy for late payment breaches.
When drafting this clause, refer to Article 306 of the 2005 Commercial Law (amended in 2017, 2019), specifically: “In case the party in breach of the contract delays in paying for goods or services and other reasonable costs, the aggrieved party has the right to request interest on the overdue amount at the average overdue debt interest rate on the market at the time of payment for the delayed period, unless otherwise agreed or regulated by law.”
Example: “If the customer fails to pay the seller the due amount by the specified payment deadline, the seller will temporarily suspend supply until the overdue debt is fully paid. Additionally, the overdue unpaid amount will incur an overdue interest rate for each day of delayed payment. The overdue debt interest rate is 0.3% per day on the overdue amount.”
Note 3: Sales Invoice Issues Related to Payment
A Value-Added Tax (VAT) invoice is a type of document created by the seller to record information on the sale of goods and the provision of services to the buyer, according to legal regulations. This process is often referred to as “issuing an invoice.”
A VAT invoice is prepared using a template issued and guided by the Ministry of Finance, applicable to organizations and individuals declaring and calculating tax using the deduction method. Issuing invoices is a regular and crucial task that helps businesses control their operations and record transactions. This is an obligation of the seller of goods and services, who must issue invoices to the buyer. Issuing invoices is closely related to payment for goods.
Issuing invoices will be based on the payment price recorded in the contract (before tax or after tax), facilitating the accounting department in issuing invoices more conveniently. A small tip is that it may not be necessary to specify the VAT rate, as there are cases where the tax rate changes during the contract term, requiring the parties to draft additional contract appendices. Therefore, it is sufficient to indicate whether the price includes or excludes VAT (depending on the item and the regulatory period, the accounting department will refer to relevant documents to determine the exact tax rate).
Issuing invoices before or after payment (timing of invoice issuance) is also something that drafters should consider when drafting contracts. According to Article 9 of Decree No. 123/2020/ND-CP dated October 19, 2020, by the Government on invoices and documents, the time of issuing invoices for the sale of goods (including the sale of state assets, confiscated assets, assets transferred to state funds, and the sale of national reserve goods) is the time of transferring ownership or the right to use goods to the buyer, regardless of whether payment has been received. This invoicing practice can be a tool to tie into the payment conditions between the parties if applied skillfully.
For familiar customers in whom the seller has “confidence” in the buyer’s ability to pay, invoice issuance can be mutually agreed upon. The buyer may receive the invoice (as part of the payment documentation) and then pay, or the buyer may pay first and receive the invoice afterward. However, for new customers with no prior transactions or unknown payment habits, the seller may require payment before issuing the invoice. This practice is legally permitted. Article 55 of the 2005 Commercial Law (amended in 2017, 2019) stipulates the payment time as follows:
“Unless otherwise agreed, the payment time is stipulated as follows:
- The buyer must pay the seller at the time the seller delivers the goods or related documents.”
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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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