What is a contract of principle? Notes when signing a contract in principle you need to know

What is a contract of principle?

A contract of principle, also known as an agreement in principle, is a written agreement on behavior between parties on the purchase and sale of goods or the provision of services. More specifically, the principle contract is a framework contract for the parties to continue to perform the transactions that arise later.

The principle contract is often used when the parties are initially approached to learn each other's needs and capabilities and have agreed on a number of cooperation contents. This contract clearly stipulates the rights and obligations of each party to the transaction, however, this contract is usually signed for directional purposes only as a basis for signing an official contract.

When should the principle contract be signed?
During the negotiation process, changes between the buyer and the seller will be adjusted by the principle contract. This contract will be used to replace the official contract when the parties have found a general agreement but have not yet determined the specific volume of goods and services to be traded.

How long is the principle contract valid for?

Normally, when signing a contract in principle, the parties will agree that the contract will take effect on a monthly or yearly basis to facilitate the settlement and reconciliation of debts.

The validity of the principle contract will be determined in the following ways:

- First: Apply the contract term as agreed by the parties signed in the principle contract.

- Second: Apply the period from the effective date of the contract to the date of termination of the contract. Or one of the two parties to the contract is incapable of continuing to perform. Or when both parties sign an agreement to terminate or liquidate the contract.

- Third: Apply the time limit from the effective date of the contract until the date of contract termination according to the decision of the Court. Or apply the date on which one of the two contracting parties is dissolved or declared bankrupt.

- Fourth: Applying the time limit from the effective date of the contract until the date the contract is replaced by another agreement or commitment between the parties to the contract.

Cases in which a principle contract should be signed

Normally, the parties should sign a contract in principle in the following cases:

- Case 1: When the official transaction between the parties is not ready but it is necessary to have a written guarantee of the agreements, commitments on conditions and transaction intentions.

- Case 2: When the parties have many transactions or transactions between the parties need to be performed in many times but the contents of the agreements and commitments are only relatively similar. At that time, the parties need to sign a contract in principle and then, each arising transaction only needs to make a corresponding contract appendix.

- Case 3: When one of the two parties or both parties need to prove a reliable cooperative relationship between the two parties with a third party.

What is the legal value of the principle contract?

In the formal contract negotiation stage, the principle contract has the role of guiding clear agreements and commitments, other detailed conditions will be negotiated later. Therefore, the parties can rely on the principle contract to sign the official contract. In addition, the parties can add to the principle contract appropriate appendices related to what has been negotiated without having to sign too many other contracts.

The principle contract will replace a formal contract if the parties cannot or do not want to determine the quantity of goods/services to be exchanged clearly. At the same time, the parties can use the principle contract in case they only want to cooperate for a certain period of time and are not required to continue signing when any other transactions arise.

In case a dispute occurs during the formal contract negotiation, the parties can rely on the agreements and commitments stated in the principle contract to resolve the issue that has not been agreed in the official contract. However, when a dispute occurs, if the parties violate their rights and obligations, it will be very difficult to resolve because the principle contract only shows the general provisions.

What is the content of the principle contract?

Although it only covers the basic terms, the subject of the principle contract needs to respect the legal rules in the field of contracting. The principle contract should have the following important contents:

- Contracting subject: To identify the subject of the contract and the role in the process of buying and selling goods.

- Information about the main objects in the contract.

- Information and role of the third party in the process of entering into a contract or resolving a contract dispute.

- Quantity and quality of goods.

- Agreement to determine the purchase and sale price of goods.

- Payment method agreement.

- Negotiate order method and order confirmation form.

- Agreement on time, place of delivery and receipt of goods and how the parties change in the process of buying and selling goods.

- Product warranty agreement.

- Legal rights and obligations of the parties before, during and after the performance of the contract as well as the time of contract termination.

- Terms of binding liability: The parties anticipate situations that arise if the other party does not perform the commitments related to the contract. The parties can draft terms related to the responsibilities of the buyer and the seller during the negotiation process.

- Term of contract performance: Specifying clearly the time when the contract comes into effect and the time to terminate the contract, along with the arising grounds leading to the contract's forced termination.

- Dispute settlement terms: If a dispute occurs, the parties can bring it to a competent court or commercial arbitration for settlement.

- Joint commitment between the parties.

In the process of commercial negotiation, the principle contract is used to determine the commitments and agreements between the parties to the transaction before coming to a formal agreement.