UNIT 10 CONTRACTS |
Disclaimer:
Contracts may have legal, financial, or other implications, and you should seek professional advice before completing or signing any such documents. All text included in this unit has been used for illustrative purposes only. Neither the writer nor the Center for Continuing Education
PART 1: Heads of Agreement, Letter of Intent and Memorandum of Understanding
PART 2: Contract clauses
In the previous unit we looked at some examples of the content of contracts. We will now examine some of the more common clauses in greater depth, and we will also look at documents that are often issued prior to signing a formal contract. These are the documents referred to as Heads of Agreement (sometimes Heads of Terms), Letter of Intent and Memorandum of Understanding.
PART 1
Heads of Agreement, Letter of Intent and Memorandum of Understanding
Heads of Agreement, Letter of Intent and Memorandum of Understanding
Words & Expressions:
Be sure you know all these words. Click to learn how each word or phrase is pronounced:
Be sure you know all these words. Click to learn how each word or phrase is pronounced:
| commitment [n] | : sự cam kết |
| confidentiality [n] | : sự cẩn mật, sự tin cẩn |
| construe [v] | : hiểu, giải thích (câu, lời nói...) |
| definitive [adj] | : cuối cùng, dứt khoát |
| diligence [n] | : sự sốt sắng, tích cực |
| disclose [v] | : tiết lộ, phơi bày |
| essence [n] | : bản chất, thực chất |
| exclude [v] | : loại trừ, ngăn chặn |
| exclusion [n] | : sự loại trừ, ngăn chặn |
| exclusivity [n] | : tính độc quyền |
| good faith | : thiện ý |
| legally binding | : ràng buộc về luật pháp |
| liquidate [v] | : trả, thanh toán (nợ) |
| materialise [v] | : trở thành hiện thực |
| memorandum [n] | : bản ghi nhớ |
| moral [adj] | : về mặt tinh thần |
| precursor [n] | : văn bản báo trước, mở đầu |
| reassurance [n] | : sự cam đoan |
| stall (over) [v] | : ngăn trở, trì hoãn |
| subsequent [adj] | : theo sau, xảy ra sau |
| synonymous [adj] | : đồng nghĩa |
| 10.1 Introduction |
Heads of Agreement (sometimes Heads of Terms), Letter of Intent and Memorandum of Understanding are some of the terms used to describe pre-contract documents. Unfortunately, these terms can be confusing because they can have a different significance and purpose, subject to the country in which they were issued, and the type of agreement involved. In some circumstances they can be almost synonymous, because they are all used to describe the process that leads to a formal, definitive contract, but in other circumstances they can be a final, legally binding document.
As a very general rule, Heads of Agreement tend to be less formal in style, and are not usually legally binding, although they can be. A Letter of Intent tends to use similar language and vocabulary to contracts, and can be either binding or non-binding, subject to the wishes and intentions of the parties. Sometimes, certain clauses will be specified as legally binding, and others may identified as subject to contract. A Memorandum of Understanding can have the same purpose as a Letter of Intent, but it is often a final, legally binding document, especially for
governmental agencies and for agreements which do not involve payment.
governmental agencies and for agreements which do not involve payment.
For the purpose of this unit, we will refer to Heads of Agreement, although most of the content is equally relevant to a Letter of Intent and to a Memorandum of Understanding.
| 10.2 Heads of agreement |
10.2.1 What is a Heads of Agreement?
A Heads of Agreement (HOA) is an important document that requires time and attention to detail before being presented or signed. It can be described as:
A summary of a commercial agreement that is the formal precursor to a contract, and which is signed by the parties in negotiation. It usually contains the main detail of the contract, but without all the boilerplate conditions of a formal contract.
In broader terms, a HOA serves as a record of a commercial agreement that outlines the terms that the parties have agreed to in principle. It helps to avoid subsequent misunderstanding or disagreement, and can be used as a reference document by the legal advisers to the respective parties when drafting a definitive contract. It can also provide a timetable of events and issues that must be dealt with before the formal contract is signed.
10.2.2 Why use a Heads of Agreement?
The first question is whether a HOA is necessary. Before spending time and money on preparing such a document the parties should have a clear idea of what they wish the HOA to achieve, which issues should be settled at the outset and which should be left for the definitive contract. If discussions about HOA terms stall over points of unnecessary detail, preparation of the definitive documents will be delayed and the length and cost of the negotiations will increase.
A HOA can be a valuable component of the contract process, because it can define the mutual expectations of the parties and point them in the right direction towards that objective, but it must be approached practically in order to avoid delay or progress in the wrong direction. If used properly, the advantages of an HOA can be summed up as follows:
- They are particularly helpful in complex negotiations. HOAs can help focus the negotiations so that the parties avoid wasting time and money.
- They can set out the timetable and obligations of the parties during the negotiations. The parties may or may not have agreed some of the main terms in principle at this point.
- They can act as a framework for a number of binding clauses such as exclusivity, confidentiality, product liability, etc.
- HOAs create a moral commitment on both sides to observe the terms agreed. It is difficult for one party to amend commitments if they are recorded in formal terms.
- They emphasise the fact that a legally binding agreement has not yet been reached. (But see Legal Consequences below)
HOAs can also be used for certain other purposes:
- They can provide a summary of proposed terms to obtain approval in principle from the main board of directors when negotiations are being handled at a lower management level.
- They can be used as a method by which the parties to an agreement give each other reassurance of their intentions, and are useful when outsiders need to be involved, such as a bank or another source of finance
- HOAs can be submitted to the relevant authorities in order to obtain a clearance that a particular way of structuring an agreement will not cause problems, such as a Business Co-operation Contract drawn up in accordance with the Law on Foreign Investment in Vietnam.
10.2.3 Legal consequences
The term Heads of Agreement has no legal status (neither do documents referred to as a Letter of Intent or Memorandum of Understanding). Calling a document by one of these names is not sufficient in itself to prevent it from being declared a legally binding contract, because the descriptive titles are meaningless from a legal point of view. It is the contents of the document which are important when determining legal status, and courts have often treated so-called HOAs as contracts capable of being enforced, so care must be taken when drafting them.
If you write a HOA, and you do not intend the document to be legally binding, either in whole or in part, then the document should:
a) make it clear that it is subject to contract
b) include a clear statement that nothing in the document is intended to be legally binding, or to be construed as an offer capable of acceptance.
If you have any doubts about what you are writing, include a detailed clause on legal effect. For instance, the use of the term subject to contract, which normally indicates that a contractual relationship will be created later, is not always effective in this regard. Courts have ruled on several occasions that work done following agreement of a HOA should be paid for at a reasonable rate, when the anticipated contract did not materialise.
The contents of the HOA should be clear and accurate, with an introductory paragraph explaining its context, followed by a full explanation of what the document is trying to achieve. From a commercial point of view, this is essential in order to ensure that there can be no misunderstanding. Also, although the document may be stated to be not legally binding, it may be used by a court to assist in the interpretation of a subsequent contract. Therefore it is important to ensure that the contents are accurate and not misleading, and do not give any assurances that may not be achievable.
10.2.4 Binding clauses
A HOA can contain certain clauses that are legally binding, even when the rest of the clauses are not. Legally binding clauses in a HOA must be clearly identified as such, and must be complete, in the same way that a contract clause must be complete.
One legally binding clause that is often included in HOAs is a confidentiality clause which states that confidential information acquired during negotiations will not be disclosed to any third party or otherwise used.
10.2.5 Binding clauses in international agreements
Where international agreements are concerned, great care must be taken to ensure that signing a HOA (or Letter of Intent, or Memorandum of Understanding) does not create legal obligations, which the parties are not yet ready to undertake. Certain jurisdictions will enforce a pre-contract if the parties have agreed all their major elements and it is possible to define the content of the main contract from this.
In many jurisdictions there is a duty to negotiate in good faith which can give rise to liability should one party withdraw from the negotiations. The extent of the duty varies from country to country but, in essence, the duty creates an obligation on the parties to:
- Inform the other party, where reasonable, of all important points which, if known to the other party, could very well influence that party’s decision whether or not to enter into the transaction on those terms, and which that party could not discover on its own.
- Observe reasonable diligence in the performance of pre-contractual and contractual obligations.
- Observe moral and ethical standards of behaviour.
Because of the complexity of international agreements, you should ask yourself the following questions before signing an HOA, especially if the the document is governed by foreign jurisdiction:
- Does it matter what the document is called? For example, if the terms pre-contractor preliminary agreement are used, it could be legally binding?
- Is it possible to exclude the intention to create legal relations by including appropriate wording? If so, what is the correct wording?
- Is there an obligation to negotiate in good faith? If so, can this duty of good faith be excluded?
- Can Heads of Agreement (or Heads of Terms), Letters of Intent, or a Memorandum of Understanding give rise to any extra-contractual liability?
- Can any of these documents state a sum for liquidated damages or a penalty?
- What formalities are required for clauses to be legally binding?
| Review of section 10.2 |
1. A HOA is always necessary before a contract can be exchanged
2. A HOA can be legally binding, either in whole or in part
3. In a court of law, the content of a HOA is more important than its title
4. Under certain jurisdictions, inaccurate wording in a HOA can create a legally binding agreement
5. A detailed clause on legal effect can prevent an HOA from being legally binding
6. Under certain jurisdictions, a duty to negotiate in good faith is recognised
7. The same rules apply under all jurisdictions
8. Banks are not interested in HOAs
(The unit assignment has an example of a simple Heads of Agreement, and additional questions about this document.)
2. A HOA can be legally binding, either in whole or in part
3. In a court of law, the content of a HOA is more important than its title
4. Under certain jurisdictions, inaccurate wording in a HOA can create a legally binding agreement
5. A detailed clause on legal effect can prevent an HOA from being legally binding
6. Under certain jurisdictions, a duty to negotiate in good faith is recognised
7. The same rules apply under all jurisdictions
8. Banks are not interested in HOAs
(The unit assignment has an example of a simple Heads of Agreement, and additional questions about this document.)
Answer Key
F 1. A HOA is always necessary before a contract can be exchanged
T 2. A HOA can be legally binding, either in whole or in part
T 3. In a court of law, the content of a HOA is more important than its title
T 4. Under certain jurisdictions, inaccurate wording in a HOA can create a legally binding agreement
T 5. A detailed clause on legal effect can prevent an HOA from being legally binding
T 6. Under certain jurisdictions, a duty to negotiate in good faith is recognised
F 7. The same rules apply under all jurisdictions
F 8. Banks are not interested in HOAs
PART 2
Contract clauses
Contract clauses
Words & Expressions:
Be sure you know all these words. Click to learn how each word or phrase is pronounced:
Be sure you know all these words. Click to learn how each word or phrase is pronounced:
| aforementioned [adj] | : đã nói, đề cập ở trên |
| beneficiary [adj] | : người được thụ hưởng |
| compliance [n] | : sự bằng lòng, sự làm đúng theo |
| comply (with) [v] | : tuân theo, làm đứng theo |
| conciliation [n] | : sự hoà giải |
| duly [adv] | : đúng đắn, chính đáng, đầy đủ |
| escalate [v] | : leo thang |
| execution [n] | : sự thực hiện, thi hành |
| expertise [v] | : sự thành thạo, tinh thông |
| fraud [n] | : sự gian lận, sự lừa gạt |
| fraudulent [adj] | : gian lận, lừa gạt |
| hereto [adv] | : theo đây, đính theo đây |
| hereunder [adv] | : dưới đây |
| indexation [n] | : việc lập chỉ số (giá/tiền tệ) |
| inspection [n] | : sự kiêmtra, thanh tra |
| litigate [v] | : kiện, tranh chấp |
| negligence [n] | : sự cẩu thả, sơ suất |
| ordinance [n] | : sắc lệnh, quy định |
| paralysis [n] | : tình trạng tê liệt, không vận hành |
| perishable [adj] | : dễ hư hỏng |
| preclude [v] | : ngăn ngừa |
| recourse (to)[n] | : sự nhờ đến, trông cậy vào |
| solely [adv] | : chỉ có, một mình |
| substantially [adv] | : về thực chất, về căn bản |
| tribunal [n] | : toà án |
| 10.3 Introduction |
A contract can contain just a few clauses, or hundreds, depending on the complexity of the agreement, and the requirements of the parties. International contracts tend to be lengthier, because of the special factors that have to be dealt with. In Unit 9, we looked at the descriptions of some common clauses, and we will now look at some examples of complete, authentic clauses, including some that are often found in international sales and agency agreements.
Please note that you do not need to learn, and nor are you expected to learn, every type of clause that might be found in a contract. The purpose of this section is for you to become more familiar with the language and structure of the English used in formal agreements. The examples given do not signify particular importance.
Typically, the first part of an agreement includes the terms and conditions, or main provisions, that are essential to performance of the contract (the meeting of minds), and the second part includes the boilerplate provisions, which deal with the general operation of the contract, and the respective rights of the parties.
| 10.4 Examples of main provisions |
10.4.1 Representation on authority of signatories
This clause states that the parties who sign the agreement have the authority to bind the parties to the agreement. It’s surprising how frequently contracts fail because a court finds that a signatory did not have the authority to sign and thus make the agreement legally binding. Many organisations require the signatures of at least two authorised, senior executives for contracts over a certain value. Here is a sample clause that is intended to avoid any problems in this respect:
Each person signing this Agreement represents and warrants that he or she is duly authorized and has legal capacity to execute and deliver this Agreement. Each party represents and warrants to the other that the execution and delivery of the Agreement and the performance of such party's obligations hereunder have been duly authorized and that the Agreement is a valid and legal agreement binding on such party and enforceable in accordance with its terms.
10.4.2 Inspection of goods
A buyer may request a pre-shipment survey of the goods. The survey report will certify that the goods conform to the contract’s specifications. The objective of the clause is to specify the inspection’s scope, purpose, and duration. Here is an example of a clause contained in a sales contract:
The Seller shall not unreasonably refuse any request by the Buyer to inspect and test the goods during manufacture, processing or storage prior to dispatch, and the Seller shall provide to the Buyer with all facilities reasonably required for inspection. If as a result of inspection or testing the Buyer is convinced that the goods will not comply in all respects with this contract and the Buyer informs the Seller accordingly within 2 days of inspection or testing, the Seller shall take such steps as are necessary to ensure compliance; by failing so, the Buyer is entitled to cancel the purchase order and recover damages from the Seller. Final inspection shall be performed by the Buyer before shipment of the goods.
10.4.3 Time of the essence
The objective of this clause is to deal with any issues of timing for the delivery of goods (or services). By including such a clause, failure to perform in accordance with the contract conditions constitutes a breach, which can lead to a claim for damages. For obvious reasons, this clause is essential for products such as perishable goods, but it is useful in many other situations. Here is an example of part of a clause contained in a sales contract:
Delivery shall be effected within the delivery time stated in the purchase order unless the Buyer expressly agrees otherwise. If the delivery time is expressly fixed, failure to effect delivery on such time shall constitute a fundamental breach of contract. In other cases late delivery shall constitute a fundamental breach if it is not effected within one week after delivery had become due. ............... Part delivery is subject to prior approval by the Buyer.
10.4.4 Limitation of liability
The objective of this clause is to limit the liability of one party to the contract to the other. As we saw in Unit 9, the clause can provide that neither party will be responsible for indirect or consequential damages to the other party arising out of the contract. Another provision may provide that no matter what happens in connection with the agreement, neither party will have liability in excess of the amount to be paid under the contract. The following example is a liquidated damages clause contained in a sales contract, in which the parties have agreed a fixed sum for damages to be paid for default. Note that there is no limitation on product liability, and note the other exclusions from limitation of liability, because in most jurisdictions they would not be allowed by law.
The Seller warrants and undertakes that all products, packaging, operation manuals delivered comply with all applicable laws, rules, regulations, decrees and other ordinances issued by any governmental, state or other authority at the time of arrival of the goods to the destination specified in the purchase order and relating to the subject matter of these Terms and Conditions and to the performance by the parties hereto of their obligations hereunder.
The Seller is in any event responsible for the correctness and validity of a safety certificate such as a CE (European Union) declaration and for the compliance of the goods delivered with the declarations herein at the time of arrival of the goods to the destination agreed upon. If the Seller fails to meet the above mentioned requirements the Buyer shall be entitled to claim liquidated damages at an amount of € 5,000.00. .......... The Seller shall bear the entire product liability.
Nothing in this Agreement shall exclude or limit the liability of the Seller:
- for death or personal injury caused by the Seller’s negligence; or
- for any matter which it would be illegal for the Seller to exclude or attempt to exclude its liability; or
- for fraud or fraudulent misrepresentation.
10.4.5 Force majeure
This is a very common clause that is designed to protect the parties against liability claims for problems caused by situations outside their reasonable control. For example, if supplies of an essential raw material were interrupted by a strike, the seller could not be held responsible for any consequent delay in delivery. However, if the supplies were interrupted as the result of negligence on the part of the seller, then the force majeureclause would not apply.
The following example is taken from a services contract for software supply. Note that the clause has been modified to cover possible problems that are specific to software.
If any of the parts in this agreement encounters force majeure including but not limited to: direct or indirect war (no matter if it has been announced), emergency, strike, industrial entanglement, accident, server paralysis because of virus from the third party, server is hacked, fire, earthquake, flood, storm, snowstorm, any reasons due to disasters or exceeding the controlling limit of the effected part, the portion / whole duties under this agreement cannot be carried out or is delayed, it should not be treated as breaching this agreement and should not be responsible for the delay.
10.4.6 Price and currency risk
This is a very complex, but very important, of international agreements. The actual clauses can be very long, and can contain mathematical formulas that will apply in certain circumstances. Rather than show examples of such clauses, some explanations about the types of clauses available follow:
Price risk: both buyers and sellers need to be protected against changes in the market price of a product, especially where long-term contracts are concerned, and which may involve continuing deliveries over months or years. For example, if you are buying a product that has a high aluminium content, and the market price of aluminium falls substantially, then you would not want to be committed to a contract that requires payment of a fixed price, because your competitors would soon be selling a cheaper product. In the same way, if the market price of aluminium rises substantially, the seller would not want to be committed to supplying the product at a fixed price.In order to maintain a fair balance, the following clauses are often included in international agreements:
| Review of section 10.4 |
When dealing with the main provisions of a contract, which of these statements is True, and which is False? Mark T or F in the box.
1. A Representation on authority of signatories clause is concerned with liability
2. An Inspection of goods clause allows for goods to be inspected at various times
3. A Time of the essence clause is only usually applied for perishable goods
4. A Limitation of liability clause cannot override national laws regarding liability
5. A Force majeure clause covers problems caused by severe weather conditions
6. A Price risk clause allows the buyer to return the goods if the price is not competitive
7. A Currency risk clause protects the parties against changes in the price of raw materials
1. A Representation on authority of signatories clause is concerned with liability
2. An Inspection of goods clause allows for goods to be inspected at various times
3. A Time of the essence clause is only usually applied for perishable goods
4. A Limitation of liability clause cannot override national laws regarding liability
5. A Force majeure clause covers problems caused by severe weather conditions
6. A Price risk clause allows the buyer to return the goods if the price is not competitive
7. A Currency risk clause protects the parties against changes in the price of raw materials
Answer Key
F 1. A Representation on authority of signatories clause is concerned with liability
T 2. An Inspection of goods clause allows for goods to be inspected at various times
F 3. A Time of the essence clause is only usually applied for perishable goods
T 4. A Limitation of liability clause cannot override national laws regarding liability
T 5. A Force majeure clause covers problems caused by severe weather conditions
F 6. A Price risk clause allows the buyer to return the goods if the price is not competitive
F 7. A Currency risk clause protects the parties against changes in the price of raw materials
| 10.5 Boilerplate clauses |
As we saw in Unit 9, boilerplate clauses do not deal with performance of the contract, but with the respective rights of the parties in the event of such matters as dispute and modification. Because they are often described as standard clauses, their importance is easily overlooked, but they are essential components of a contract, and must therefore be carefully read or drafted.
Again, the number of boilerplate clauses in a contract is subject to the complexity of the agreement, and the requirements of the parties. In this section, we will examine just two of the most important clauses: jurisdiction and arbitration.
10.5.1 Jurisdiction / Choice of law
It is obviously to your advantage that any contract disputes involving legal action or proceedings take place in Vietnam. However, Vietnamese Trade Law does allow foreign trade contracts to apply foreign laws, provided that they are not inconsistent with Vietnamese laws. You could, therefore, be party to a contract that contains a clause similar to this extract from the sales contract of a U.S. company based in California:
Consent to Jurisdiction. The parties hereto agree that all actions or proceedings arising in connection with this Agreement shall be tried and litigated exclusively in the State and Federal courts located in the County of San Francisco, State of California. The aforementioned choice of venue is intended by the parties to be mandatory and not permissive in nature, thereby precluding the possibility of litigation between the parties with respect to or arising out of this Agreement in any jurisdiction ................. Any final judgement rendered against a party in any action or proceeding shall be conclusive as to the subject of such final judgement and may be enforced in other jurisdictions in any manner provided by law.
In more simple English, the clause states that the parties have agreed that any disputes will be litigated solely in San Francisco, even if it's inconvenient for one party, and that any final judgement can be enforced anywhere else that is desirable.
In addition to national laws, the United Nations has drafted a number of conventions in connection with international trade, one the most frequently used being the Convention on the International Sale of Goods (CISG). At the time of writing, 59 nations are signatories to the CISG, but this does not yet include Vietnam, and there are other notable exceptions, such as Japan and the U.K. However, Vietnamese law allows the provisions of the CISG to apply if the treaty is referred to in the contract, except those provisions which are contrary to the basic principles of the country's social and legal systems.
The choice of not having the provisions of CISG apply to a contract is done by including explicit clauses to this purpose, or in an implicit manner whereby another regulation applicable to the contract is indicated.
If you are thinking of drafting a contract that refers to CISG, the United Nations website http://www.uncitral.org gives a complete list of the articles and the rules of application.
10.5.2 Arbitration
This clause states that all disputes will be handled by arbitration rather than litigation. This allows for an independent arbitrator (or arbitrators) to settle a contract dispute rather than a court of law. The arbitration process is becoming increasingly popular because of the delays and cost involved in litigation.
Advantages of arbitration:
Here is an example of an arbitration clause contained in the sales contract of a German company:
Any dispute arising out of or in connection with this Contract of Sale, including any question regarding its existence, validity or termination, shall be finally settled according to the Arbitration rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law. The arbitration tribunal may also decide on the validity of this arbitration agreement. The arbitration tribunal shall consist of three arbitrators. The place of the arbitration shall be Bonn.
In Vietnam, arbitration can be referred to the Vietnam International Arbitration Center in Hanoi. Here is an example of an arbitration clause taken from a Business Co-Operation Contract drafted in accordance with the Law on Foreign Investment in Vietnam:
Any disputes among the parties related to or arising from the contract must first be resolved through negotiation and conciliation. In case of continued disagreement, the disputes shall be referred to The Vietnam International Arbitration Center, 9 Dao Duy Anh, Dong Da City, Ha Noi, Viet Nam.The decision of The Vietnam International Arbitration Center shall be final and binding on both parties.
| Review of section 10.5 |
When dealing with the boilerplate clauses of a contract, which of these statements isTrue, and which is False? Mark T or F in the box.
1. Boilerplate clauses deal with the respective rights of the parties in the event of a dispute
2. Contracts signed with a Vietnamese party are always subject to Vietnamese law
3. Vietnam is a signatory to the CISG
4. CISG clauses can be legally binding in Vietnam if they don’t contravene Vietnamese law
5. An arbitration hearing is held in a court of law
6. There is no appeal process if a dispute is dealt with by arbitration
1. Boilerplate clauses deal with the respective rights of the parties in the event of a dispute
2. Contracts signed with a Vietnamese party are always subject to Vietnamese law
3. Vietnam is a signatory to the CISG
4. CISG clauses can be legally binding in Vietnam if they don’t contravene Vietnamese law
5. An arbitration hearing is held in a court of law
6. There is no appeal process if a dispute is dealt with by arbitration
Answer Key
T 1. Boilerplate clauses deal with the respective rights of the parties in the event of a dispute
F 2. Contracts signed with a Vietnamese party are always subject to Vietnamese law
F 3. Vietnam is a signatory to the CISG
T 4. CISG clauses can be legally binding in Vietnam if they don’t contravene Vietnamese law
F 5. An arbitration hearing is held in a court of law
T 6. There is no appeal process if a dispute is dealt with by arbitration
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