Consulting and Drafting Goods Processing Contracts

Manufacturing is a common commodity production activity in Vietnam, especially manufacturing for foreign countries. In particular, manufacturing factories in Vietnam will act as processing parties, to process goods according to customer requirements.

According to Article 178 of the 2005 Commercial Law, commercial processing is defined as a commercial activity, in which the subcontractor uses a part or the entire raw materials of the contracting party to perform one or more stages in the production process according to the requirements of the ordering party to receive remuneration.

The 2005 Commercial Law also stipulates that subcontracting contracts must be made in writing or in another form with legally equivalent validity.

Relevant legal documents

1. Law on Commercial 2005
2. Decision 69/2018/ND-CP guiding the Law on Foreign Trade Management

Necessary contents in the Processing Contract

1. Names and addresses of the contracting parties and the manufacturer. Additional information such as the representative of the organization signing the processing contract, ID numbers, tax codes/business registration numbers, contact information of each party (address, phone number, email, website), bank account information (for payment transfers), and power of attorney information (if any).
2. Names and quantities of the subcontracted products. The specifications regarding the quality of the finished products should be clearly defined by the parties. Particularly important when manufacturing for export, information about intellectual property ownership of the goods should be included (if not, it shall not be exported).
3. Manufacturing price: Whether it is based on the product, the stage of production, or any other pricing unit price.
4. Payment Terms and Methods: Including deposit information, payment milestones, payment methods, and agreements on additional costs related to payments (e.g., transfer fees, foreign exchange fees).
5. List, Quantity, and Value of Materials: It is necessary to note the distinction between imported raw materials and supplies and domestically produced raw materials and supplies (if any); norms for use of raw materials and supplies; norms of consumable materials and raw material loss rate in processing. In addition, it is also necessary to clarify whether the raw materials are provided by the outsourcing party or the processing party themselves (this will affect the processing unit price).
6. List and Value of Machinery and Equipment: that the ordering party rents or borrows to the processing party to serve processing (if any).
7. Processing of treating scrap, waste products, principles for handling rented or borrowed machinery, equipment, raw materials, auxiliary materials, and surplus supplies after the end of the processing contract.
8. Location and time of delivery. If you manufacture export goods, you need to pay attention to the time of goods transfer (risk transfer). In addition, it is also important to note the costs incurred by delivery activities, such as loading and unloading fees.
9. Trademarks and names of origin of goods. It is necessary to pay attention to information related to intellectual property of goods (design, style, brand…).
10. Responsibilities of the parties: Reference Articles 181 and 182 of the 2005 Commercial Law (additional terms can be agreed based on needs).
11. Contract validity period.

In fact, manufacturing activities can also be expressed in the form of production according to orders. These two activities have quite similar forms of expression (one party producing goods according to another party’s design requirements), but there are some differences in determining the ownership of goods, as well as such as production raw materials (and there is also a difference between “processing goods for export” and “manufacturing and exporting goods” in the customs procedures). Businesses can choose the appropriate form of contract which is suitable for themselves.

If you have any questions related to goods processing contracts, feel free to contact An Luat Vietnam for support and advice.