The Vietnamese plant is built — now the contracts and orders must move from the Chinese company. A quick “heads-up” won’t do: a contract is a three-party legal relationship (you – the counterparty – the new company) needing a proper novation. This article guides.
1. Novation vs assignment
- Novation: replacing a contract party with a new one — needs all parties’ consent;
- Assignment: transferring rights only (not obligations) — consent sometimes unneeded;
- Practice: moving production orders needs novation — both rights and obligations shift;
- Effect: novation extinguishes the old party’s obligations — the new party takes over fully;
- In writing: novation agreements must be written — signed by all three.
2. Will customers accept the entity switch?
- Reality: most customers accept — if quality and schedule hold;
- Blocking clauses: anti-assignment clauses — some contracts forbid party changes;
- Blocking clauses: change-of-control — customers may terminate;
- Handling: negotiate early — not when shipping;
- Assurance: parent-company performance guarantees — building trust.
3. Long-term framework agreements: renegotiating price?
- Issue: old prices reflect Chinese costs — Vietnamese costs differ;
- Opportunity: novation is a chance to renegotiate — sharing lower costs;
- Risk: customers squeezing — “Vietnam is cheaper, cut prices”;
- Prepare: compute the new cost base before negotiating — know breakeven;
- Strategy: hold prices initially — then phase reductions.
4. Risks of producing in Vietnam under Chinese contracts
- Tax: revenue booked in China but produced in Vietnam — dual tax risk;
- Customs: goods exported from Vietnam but invoiced by the Chinese company — customs suspicion;
- Liability: product defects — who’s liable? The contracting company or the producing plant;
- Cash: money to Chinese accounts — the Vietnamese company starved of cash flow;
- Bottom line: this model is only temporary — novate promptly.
5. Phased transition
- Phase 1: new orders — signed directly with the Vietnamese company;
- Phase 2: ongoing orders — novate contract by contract;
- Phase 3: framework agreements — renegotiate and re-sign;
- Priority: move big customers first — they need audit time;
- Parallel: both entities coexist for a while — no disruption.
6. Novation paperwork
- Tripartite agreement: China company – Vietnam company – counterparty — fully signed;
- Content: terminating the old relationship, establishing the new — transition terms;
- Receivables: reconcile old balances — who pays, who collects;
- Warranty: warranty liability for old orders — clearly allocated;
- Keep: originals — each party holds one.
7. Suppliers: novate too?
- Rule: same as customers — purchase contracts need moving too;
- Priority: strategic suppliers — key materials;
- New terms: delivery location changes — new Incoterms;
- Price: volume buying in Vietnam — negotiate better;
- Localise: find Vietnamese suppliers — reducing dependence.
8. Tax of novation
- Transfer: novation is not a sale — but taxes may arise;
- Receivables: transferring balances — VAT treatment;
- Assets: moving machinery and inventory along — import duty, VAT;
- Advice: tax accountants review — no tax shocks from novation;
- Plan: budget the tax cost of transition.
9. Common mistakes
- Mistake 1: skipping novation — just shipping and invoicing via the China company;
- Mistake 2: verbal novation — no paper, no evidence in disputes;
- Mistake 3: forgetting old balances — uncollectable, unsettleable;
- Mistake 4: forgetting warranties — customers claim against the new company, which blames the old;
- Mistake 5: moving too fast — counterparties unready, disruption.
10. Novation checklist
- All contracts to move — listed?
- Anti-assignment clauses — reviewed?
- Counterparty consent — in writing?
- Balances and warranties — allocated?
- Tax — computed?
- Phased roadmap — ready?
11. Novation with banks and lenders
- Loans: the Chinese company borrows working capital — the Vietnamese company needs fresh borrowing, not automatic succession;
- Guarantees: the parent guarantees Vietnamese borrowing — accepted by Vietnamese banks;
- Credit lines: build a new credit history — initially low limits;
- Collateral: mortgage Vietnamese assets — register security transactions;
- Warning: don’t starve the Vietnamese company of working capital during transition.
12. Insurance: switching the policyholder
- Rule: insurance contracts attach to the purchasing entity — re-sign or convert;
- Property: Vietnamese factory and machines — new policies;
- Liability: product liability — coverage follows the producing entity;
- Transition: no coverage gaps — an accident would be catastrophic;
- Brokers: international brokers — global programmes for both entities.
13. Land and factory leases: can they be novated?
- Leasing in Vietnam: the Vietnamese company signs fresh with the industrial-park developer — unrelated to Chinese leases;
- Leasing in China: terminate early — negotiating early-termination fees;
- Deposits: recover Chinese lease deposits — per contract terms;
- Fixtures: dispose of improvements on leased land — who owns them;
- Plan: synchronise Chinese lease exits with Vietnamese lease starts.
14. Disputes during the transition
- Risk: during transition — whose responsibility is often blurry;
- Clauses: novation agreements need clauses allocating past vs future liability;
- Resolution: agree the mechanism — arbitration or courts, governing law;
- Evidence: keep complete emails and minutes — transition periods lose trails;
- Prevention: counsel reviews novation agreements before signing.
15. Novation and tax invoices
- VAT invoices: after novation — the Vietnamese company issues Vietnamese VAT invoices;
- Old invoices: reconcile invoices issued by the Chinese company before novation;
- Cross-border: services between the two entities — invoice properly, withholding tax;
- Timing: align invoicing with the novation effective date;
- Records: keep both sets — tax audits will ask.
16. Communicating novation to counterparties
- Letter: a formal notice — reasons, timeline, new contact points;
- Meetings: meet key counterparties in person — not just email;
- Assurance: guarantee continuity — same quality, same team;
- FAQ: prepare an FAQ — payment details, contacts, procedures;
- Follow-up: confirm receipt — don’t assume silence means consent.
17. Novation of IP licences
- Licences in: technology licensed to the Chinese company — the Vietnamese company needs its own licence;
- Licensor consent: ask the licensor — most allow intra-group transfers;
- Royalties: withholding tax on royalties paid abroad;
- Register: record the licence in Vietnam — if required;
- Timing: don’t produce unlicensed — infringement risk.
18. Employment contracts: transferring staff with orders
- Key staff: staff moving with the business — new Vietnamese contracts;
- Seniority: recognise prior service — negotiated;
- Benefits: align benefits — avoiding a two-tier workforce;
- Non-competes: check enforceability under Vietnamese law;
- Communication: tell staff early — rumours destroy morale.
19. Post-novation audit
- Checklist: audit 90 days after novation — everything transferred;
- Missed contracts: find stragglers — small contracts often missed;
- Systems: update ERP, CRM — counterparty records;
- Bank: update payment instructions — no money to old accounts;
- Close: formally close the transition project.
20. Digital signatures on novation agreements
- Validity: electronic signatures — valid if legal requirements are met;
- Cross-border: three parties in different countries — e-signing speeds things up;
- Evidence: audit trails — who signed, when;
- Originals: keep certified copies — some authorities want wet ink;
- Check: confirm each jurisdiction accepts e-signatures for novation.
21. Novation timeline template
- Week 1–2: list all contracts — owners assigned;
- Week 3–6: draft novation agreements — counsel reviews;
- Week 7–10: negotiate with counterparties — signatures;
- Week 11–12: systems updated — invoicing switched;
- Week 13: audit — nothing missed.
22. Keeping the old entity alive during transition
- Don’t rush: keep the Chinese entity operational — until novation completes;
- Licences: maintain licences — don’t let them lapse mid-transition;
- Staff: retain key staff — until handover is done.
Contact us
FLAT Law Firm advises Chinese investors throughout the Vietnam investment cycle — from deal structuring and licensing to operations and compliance. Contact us for advice tailored to your project.
This article has been quality-reviewed by the FLAW AI Legal Council
