A processing contract is a common type of commercial contract in which one party (the ordering party) requires either party (the processing party) to manufacture or produce goods according to specific requirements. This contract typically includes detailed provisions to ensure the rights and obligations of both parties, thereby minimizing risks and potential disputes during the cooperation process. A well-drafted processing contract must ensure transparency and fairness for both parties while complying with relevant legal regulations.
A processing contract is a common type of commercial contract in which one party (the ordering party) requires either party (the processing party) to manufacture or produce goods according to specific requirements. This contract typically includes detailed provisions to ensure the rights and obligations of both parties, thereby minimizing risks and potential disputes during the cooperation process. A well-drafted processing contract must ensure transparency and fairness for both parties while complying with relevant legal regulations.
I. The need for entering into processing contracts
In the context of globalized economies, processing has become an essential part of business strategies for many enterprises. Particularly in Vietnam, a country with a rapidly growing industrial sector, the demand for processing contracts is increasing not only in the textile and garment industry but also across various other sectors.
A processing contract offers multiple benefits for both parties. For the ordering party, it allows them to take advantage of cost-effective labor and high product quality from the processing party. For the processing party, the contract ensures a stable source of income and opportunities to expand their production expertise.
II. Legal regulations on processing contracts
1. Definition of a processing contract
Based on Article 542 of the Civil Code 2015, a processing contract is an agreement between parties whereby the processing party performs work to create products as required by the ordering party, and the ordering party receives such products and pays the processing fee.
2. Rights and obligations of the parties in the processing contract
For the processing party
Pursuant to Article 182 of the Commercial Law 2025, the rights and obligations of the processing party are as follows:
- Providing a part or all of materials for processing in accordance with the agreement with the ordering party regarding quantity, quality, technical standards, and price.
- Receiving processing fees and other reasonable expenses.
- In the case of implementing the processing for foreign organizations or individuals, the processing party is authorized to export on-site processed products, leased or borrowed machinery and equipment, surplus materials, by-products, and scrap under the authorization of the ordering party.
- If the processing for foreign organizations or individuals, the processing party is exempt from import duties on temporarily imported machinery, equipment, raw materials, supplies, and accessories within the specified limits for processing contract execution, in accordance with tax regulations.
- Taking legal responsibility for processing activities, especially if the processed goods fall under categories prohibited from business, export, or import.
For the ordering party
Pursuant to Article 181 of the Commercial Law 2005, the rights and obligations of the ordering party are as follows:
- Providing part or all of materials for processing as stipulated in the contract or provide funds for the purchase of such materials in agreed quantities, quality, and prices.
- Receiving the entire processed products, leased or borrowed machinery and equipment, materials, by-products, and scrap after liquidating the processing contract unless otherwise agreed.
- Selling, destroying, or donating on-site processed products, leased or borrowed machinery and equipment, surplus materials, by-products, and scrap as agreed and in compliance with legal regulations.
- Appointing representatives to inspect and supervise the processing at the processing location, assign experts for technical guidance and quality control of the processed products as stipulated in the contract.
- Taking legal responsibility for the intellectual property rights of the processed goods, materials, machinery, and equipment provided to the processing party.
3. Risk allocation in processing contracts (the parties take their responsibilities for the processing contract)
Pursuant to Article 548 of the Civil Code 2015, risk allocation in processing contracts is regulated as follows:
- Until the processed products are delivered to the ordering party, the party that owns materials shall take risks associated with those materials or the products created from them, unless otherwise agreed.
- If the ordering party delays in receiving the products, it shall take the risks during the delay period, even if these products are created from materials provided by the processing party, unless otherwise agreed.
- If the processing party delays the delivery of the products and risks arise concerning the processed products, it shall be liable for compensation for any damages incurred by the ordering party.
III. Common questions about processing contracts
1. What are the main components of a detailed processing contract? Which is the most important and why?
A detailed processing contract typically includes the following elements:
- Information of the contracting parties: Names, addresses, and contact details of both the ordering party and the processing party.
- Subject matter of the contract: A detailed description of the product to be processed.
- Processing materials: Regulations on primary and auxiliary materials, including quality and quantity specifications.
- Rights and obligations of the parties: Responsibilities and benefits of both the ordering and processing parties.
- Production and delivery timeline : Deadlines for completion and delivery of the processed products.
- Contract payment: Price, payment methods, and deadlines.
- Delayed delivery or acceptance of processed products: Provisions on handling delays.
- Risk allocation: The parties are responsible in case of risks.
- Unilateral contract termination: Conditions and circumstances on terminating contract.
Among these, the subject matter of the contract is the most important. This is because it clearly defines the product to be processed, including technical standards, quality, and quantity. A well-defined subject matter helps prevent misunderstandings and disputes regarding the final product.
2. Regulations on the delivery, acceptance, and payment for processed products
Pursuant to Article 549 of the Civil Code 2015, the processing party must deliver the products, and the ordering party must accept them within the agreed time and at the agreed location.
In cases of delayed delivery or acceptance, Article 550 of the Civil Code 2015 provides the following guidelines:
- If the processing party has delayed delivery, the ordering party may grant an extension. If the processing party still fails to complete the work within the extended period, the ordering party has the right to unilaterally terminate the contract and claim damages.
- If the ordering party has delayed acceptance, the processing party may store the product at a designated storage facility and must promptly notify the ordering party. The obligation to deliver is fulfilled once the agreed conditions are met and the ordering party has been informed. The ordering party must bear all storage costs incurred due to the delay.
Based on Article 552 of the Civil Code 2015, the payment obligations are as follows:
- The ordering party must pay the full processing fee at the time of receiving the product, unless otherwise agreed.
- If the processing fee is not agreed upon, the standard market rate for similar products at the location and time of payment will apply.
- The ordering party cannot reduce the processing fee if the product is low quality due to defective materials or unreasonable instructions given from such party.
3. Unilateral termination of the processing contract
Pursuant to Article 551 of the Civil Code 2015, the unilateral termination of the processing contract is regulated as follows:
- Each party has the right to unilaterally terminate the processing contract if continuing its performance no longer brings benefits, unless otherwise agreed or provided by law. However, the terminating party must give a notice to the other party in advance for the reasonable period.
- If the ordering party unilaterally terminates the contract, they must pay the processing fee for the completed work, unless otherwise agreed. If the processing party unilaterally terminates the contract, it is not entitled to the processing fee, unless otherwise agreed.
- The party that unilaterally terminates the contract and causes damage to the other party must compensate for the losses incurred.
IV. Legal advice services on processing contracts
The above information provides clarifications on common legal issues related to processing contracts, offered by NPLaw. If you require further guidance on procedures for establishing these contracts, please feel free to contact NPLaw via the following details:
