Sales Contract: Definition, Key Terms

What Is a Sales Contract?

Sometimes called a sale of goods contract, a sales agreement, or a purchase agreement, a sales contract outlines the terms of a transaction between two parties: the buyer and the seller. These formal agreements are used to detail the services, goods, or property that is to be exchanged for payment or the promise of future payment. The result is a document that should be kept for legal and record-keeping purposes. In an effort to specify the conditions of the agreement, a sales contract identifies the:

• Seller
• Buyer
• Goods or services
• Other important terms

When Should I Use a Sales Contract?

Whether it's a small-scale transaction or a large-scale purchase, a sales contract should be used to ensure that the transaction goes smoothly for both parties. Actually, in the United States, a sales contract generally must be put in writing if the sale of goods is for more than $500 in order for it to be enforceable under the Uniform Commercial Code, with some exceptions depending on the circumstances of the contract. Though the UCC isn't federal law, it serves as a model that every state has accepted and implemented in some form. Although each state has the ability to modify its implementation of the UCC or to interpret it differently, most of the UCC’s basic principles are shared by all states.

What Are the Benefits of Using a Sales Contract?

Unlike oral contracts, which are only enforceable under specific circumstances, sales contracts clearly outline the contractual obligations and rights as well as the economic consequences associated with an agreement. Put simply, this document helps guarantee that the transaction will proceed in a way that's acceptable to both parties based on the agreed-upon terms, allowing you to protect your interests. This is because a sales agreement supplies the legal protections available to the buyer and seller if one of the parties fails to deliver what they promised when they promised it.

Sales Agreement vs. Bill of Sale

Sales agreements and bills of sale have pretty similar purposes, but the major difference between them is the amount of detail provided. While the sales contract talks about payment plans, warranties, and legal ramifications, the bill of sale is simply a form that signifies the transfer of ownership from one party to another, although it can include other information about the transaction if the parties choose to do so. In fact, it is sometimes used as a component of a more comprehensive sales agreement to provide proof that the goods were indeed exchanged.

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What Should I Include in a Sales Contract?

Sales contracts can require different or additional information based on the goods or services being exchanged. Regardless, you should at least include these details when creating a sales contract :

Identification of the Parties

One of the first things that a sales contract should do is clearly identify the parties involved, which is typically just a buyer and a seller. The full names and contact information should be provided for all parties involved.

Description of the Services and/or Goods

This is typically the most important aspect of a sales contract because it lists the exact goods or services that the buyer is paying for. For this reason, a description of goods should include key details, like the:

• Model number
• Type
• Size
• Weight
• Color
• Quantity

In the case of exchanged services, you would clearly detail the jobs being performed and any deliverables. For example, if you were creating a sales contract for building a brand's website, you might describe the pages, copy, photos, graphics, and other special features that would be involved with the project.

Payment Plan

The payment is usually the term of a sales contract that is most negotiated, which is why it's so important to put it in writing as soon as you reach an agreement. Aside from the agreed-upon price, including any adjustments or deposits, your sales contract should outline:

• How and when the buyer will receive an invoice
• The timeline for payment
• Acceptable payment methods, like email transfer, bank draft, certified check, cash, etc
• Whether payments can be made in installments or paid in one lump sum

In cases where the buyer isn't paying the full invoice right away, a promissory note is usually added to the sales contract. A promissory note is a document that goes into greater detail about the repayment terms, including any interest that will be charged and the schedule for repayment.

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Delivery

Details about the delivery of the goods and/or services should also be addressed in a sales contract. This can include things like the:

• Cost of delivery
• Method of delivery
• Place for delivery
• Time for delivery
• Liability for a failed delivery or damage

It's also pretty common for a sales contract to include what's known as a force majeure, which is a clause that discusses the inability to deliver due to things that are out of both parties' control, such as riots, floods, and other natural disasters.

Inspection Period

An inspection period isn't included in all sales contracts, but it can be a great way to bolster a buyer's confidence and give them a chance to examine an item to make sure that it meets the terms of the agreement.

The time allotted for an inspection period varies depending on the type of goods that are involved. For example, when perishable items are involved, buyers typically have to inspect and then accept or reject the goods as soon as they are delivered. On the other hand, when the sale involves more expensive items, like machinery, the buyer is usually given as long as a month to inspect the goods.

Warranties

A warranty is a legally enforceable guarantee assuring a buyer that the goods or services provided will meet the expected level of reliability and quality. According to the Uniform Commercial Code, there are both express and implied warranties. While an express warranty is an affirmative statement made by the seller regarding the characteristics and qualities of the goods, an implied warranty is an unwritten guarantee that the goods they purchase will meet minimum requirements regarding the quality. In other words, these warranties automatically apply any time a buyer purchases goods from a seller.

If implied warranties are specifically disclaimed, excluded, or modified in a written agreement, like a sales contract, they no longer apply. That's why this section is such an important, yet sometimes overlooked, aspect of a sales contract. Without it, the seller could be unknowingly agreeing to certain warranties.

Miscellaneous Provisions

Depending on the goods or services you're providing, you can include these additional provisions in your sales agreement:

• Governing Law : Also known as choice of law, this outlines which state law is applicable for the interpretation and enforcement of the contract.
• Severability: This provision is made to ensure that all other provisions are still valid and enforceable even if part of the contract is unenforceable or invalid.
• Confidentiality: In transactions where confidential information is shared, this provision explicitly limits the distribution of these private details.
• Breach of Contract : A breach of contract outlines what would happen if one party violates the contract, when a contract can be terminated, and any actions a party can take to recover their losses in the event of a breached contract. The actions a party can take when a contract is breached, are also often limited by state laws.
• Notices: This section is especially useful if both parties need to remain in communication throughout the transaction because it describes how all communication should take place. Aside from the mode of communication, it sometimes even outlines the days and times that communication should occur.
• Amendments: An amendments section addresses the steps that should be taken in the event that the contract's terms and provisions need to be formally altered.

When doing business, it is in the best interest of both the buyer and seller to have an agreement in writing. Even though developing a sales contract does take more time, it can save you plenty of headaches in the future.