What are the processing contracts? 4 need-to-knows on this type of contract

With the economic development and market openness, processing activities of goods are more and more important. And the processing activities of goods are implemented via processing contracts. In the below post, LuatVietnam shall introduce a number of contents relating to processing contracts.

1. What are the processing contracts? Examples of processing contracts

In accordance with the regulations prescribed in the Article 542 of the Civil Code 2015, A processing contract is an agreement between the parties under which the processor performs tasks to make products at the request of the ordering party. The ordering party receives the products and pays remuneration.

The objects of a processing contract, in accordance with the Article 543, Civil Code 2015, are those which are pre-determined according to the specimens and standards agreed upon by the parties or prescribed by law.

Some popular processing contracts:

- Processing contract of mechanic;

- Processing contract of goods;

- Processing contract of garment;

- Processing contract of software...

2. Rights and obligations of parties in processing contracts

2.1 Ordering party

In accordance with the regulations prescribed in Article 544 and Article 545, Civil Code 2015, rights and obligations of ordering party as follows:

- Obligations of the ordering party:

+ To supply raw materials and materials with the quantity and quality, within the time limit and at the place as agreed upon;

+ To provide necessary documents relating to the processing work;

+ To instruct the processor in performing the contract;

+ To pay remuneration as agreed upon.

- Rights of the ordering party:

+ To receive the processed products in the quantity, of the quality and by the method and at the time and place as agreed upon.

+ To unilaterally terminate the performance of the contract and claim compensation for damage when the processor commits a serious breach of contract.

+ In case the ordering party agrees to accept products which fail to meet the quality requirements and requests repair but the processor cannot repair the products within the agreed time limit, the ordering party has the right to cancel the contract and claim compensation for damage.

2.2 Processor

- Obligations of the processor:

+ To preserve the raw materials and materials supplied by the ordering party.

+ To notify the ordering party to replace the raw materials and materials that fail to meet the quality requirements; to refuse to perform the processing if he/she/it knows or should have known that the use of such raw materials and materials may create products harmful to the society.

+ To deliver the products to the ordering party in the quantity, of the quality and by the method and at the time and place as agreed upon.

+ To keep secret information on the processing process and the products made.

+ To take responsibility for the products’ quality, unless the products’ poor quality is due to the raw materials and materials supplied by the ordering party or due to the unreasonable instructions of the ordering party.

To return to the ordering party any unused raw materials and materials after the contract is completely performed.

- Rights of the processor:

+ To request the ordering party to supply raw materials and materials in the quantity, of the quality and at the time and place as agreed upon.

+ To refuse to follow unreasonable instructions if finding that following such instructions may reduce the products’ quality, but to immediately notify such to the ordering party.

+ To request the ordering party to fully pay the remuneration at the time and by the method as agreed upon.

3. Liability to bear risks in processing contracts

Risks are unavoidable in the process of implementing the processing contracts for various reasons, accordingly, liabilities to bear risks also arise. Article 548, Civil Code 2015 also prescribes liabilities to bear risks in processing contracts. Accordingly:

- Owners of raw materials and materials shall bear all risks to their raw materials and materials or products made therefrom until the products are delivered to the ordering party, unless otherwise agreed upon.

- When the processor delays the delivery of products, resulting in risks occurring to the processed products, he/she/it shall compensate for any damage caused to the ordering party.

- When the ordering party delays the receipt of products, he/she/it shall bear all risks during the delay period, even in case, such products are made from the processor’s raw materials and materials.
 

4. Cases of unilateral termination of performance of processing contracts

In accordance with the regulations prescribed in the Article 551, Civil Code 2015, unilateral termination of performance of processing contracts is prescribed as follows:

- Either party has the right to unilaterally terminate the performance of a processing contract if he/she/it will not benefit from the continued performance of the contract, unless otherwise agreed upon or prescribed by law, but shall give the other party a reasonable advance notice thereof.

- If the ordering party unilaterally terminates the performance of the contract, he/she/it shall pay remuneration corresponding to the performed work, unless otherwise agreed upon.

- If the processor unilaterally terminates the performance of the contract, he/she/it may not be paid any remuneration, unless otherwise agreed upon.

- The party that unilaterally terminates the performance of the contract, causing damage to the other party, shall compensate for such damage.