Sales Contracts: Types and Components

Whether you’re making a big-ticket purchase or selling an asset that’s of significant value, you need a sales contract to protect your interests and shield yourself from legal liabilities. To ensure you’re crafting the right agreement, you have to be familiar with the different types of sales contracts. You should also learn what to include in the agreement to ensure it’s legally binding.

First, let’s get back to the basics and discuss what a sales contract is and when you might actually need one.

Sales contracts: What are they and when do you need one?

So, what is a sales contract? Put simply, it’s a legally binding agreement between a buyer and a seller that lays out the terms of an exchange. It specifies both the rights and the obligations of the signing parties. 

So, when do you need a sales contract? 

  • When the value of the goods or services is significant

You need a sales agreement when the transaction involves goods or services of significant value. For instance, you wouldn’t want to walk away from the sale of a home or car with just a receipt to show for it. You need a legal document to protect yourself from fraudulent transactions.

  • When the transaction involves complex details

You’re better off sealing a deal with a sales contract if the exchange requires more than just the basic transfer of goods and services in exchange for full payment. Such is the case when the transaction involves paying in installments, financing, closing costs, titles, licenses, and other such details.

  • When the goods or services are to be delivered at a later date

If the transaction involves deferred delivery, you’ll need a sales contract to ensure all parties will meet their obligations. This way, you can rest assured the sale will go through as planned.

Now that you know what a sales contract is and when you’d need one, let’s dig deeper into their benefits.

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Why you need a sales contract

So, why should you go through all the trouble of crafting sales contracts? Here are the reasons it’s the most sensible choice.

Promotes clarity

A sales contract brings clarity to both the seller and the buyer. With the document laying out all the details, neither party has to grapple with ambiguities. They’ll know exactly what to expect from the other party and how to go about meeting their obligations.

With the contract providing clear language for proper execution, the parties are less likely to get into a legal dispute. And if disputes do arise, the agreement will tell the parties exactly how to handle them. 

Prevents miscommunication

One of the main purposes of a contract is to define the relationship between parties. This helps prevent any miscommunications that can strain the relationship.

You won’t get all these benefits if your contract is riddled with loopholes. Missing a crucial aspect in your contract can nullify it. So, let’s talk about the elements you must include in your agreement.

The key elements you must include in your contract

To avoid any legal quandaries, make sure your sales contract has the following elements.

Identification of parties

The contract must clearly specify the parties involved in the transaction. For instance, the agreement may identify a company as the seller even if an agent has been negotiating on their behalf. This way, the buyer knows who exactly is legally bound by the agreement.

Description of goods and services

The more detailed your description of the goods or services, the more protected you’ll be. Ambiguities can lead to legal complications. So, clearly indicate relevant features, quantities of goods, duration of service, dates of delivery, and specific limitations. This way, the other party can’t compel you to provide more than what’s agreed. On the other hand, you can also rest assured you’ll be getting what you expect from the transaction.

Delivery specifications

You must also be specific with the delivery instructions. Clearly indicate the dates of delivery, location details, and who shoulders the risk of loss or damage while the goods are in transit. If you’re providing software, the delivery specifications may cover the implementation and onboarding processes.

Inspection period

The inspection period provides buyers with the opportunity to inspect the goods after delivery and to reject those that are not up to scratch. On the other hand, it enables sellers to ensure any damages caused en route are reported promptly and avoid being held accountable for them. Your contract must clearly define the inspection period. This is especially crucial if you’re dealing with perishable goods. 

Payment details

More than just mentioning the price of the goods or services, the sales contract must also clarify the payment terms. It should indicate crucial details like the agreed payment method, schedule, and interest charges. That way, you can seek legal remedy if the other party fails to fulfill their obligation.

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Contingencies

Your contract should include stipulations that address “what if” scenarios. For example, your agreement may include warranties that can provide buyers with guarantees in case the product they receive does not live up to the expected standards. In this case, buyers get the assurance they’ll receive replacements or repair services for defective products.

You’re now familiar with what goes into a sales contract. Next, let’s explore the different forms they usually take.

Types of contracts in sales

Here are the common types of contracts of sale that you might need for your transactions. 

General sales contract

General sales contracts are the most used type of sales agreement. They cover all the necessary elements without honing on details that are specific to certain types of transactions. You’re likely to use this for everyday sales transactions or for exchanges that don’t involve complex contingencies. For example, those offering services like marketing consultancy and copywriting, or goods like raw materials for clothing production or catering services.

Conditional sales agreement

Conditional sales agreements are just like general sales contracts, except that they contain additional stipulations. You’ll need this in transactions where a buyer already has the product but does not own it yet. They’ll only earn full rights to the product once they’ve fully paid for it. Essentially, the agreement stipulates that the seller retains all rights to the asset until the buyer completes payment for it. 

Sale of business contract

This contract details the terms and conditions governing the transfer of business ownership. It has all the elements of a general sales contract, but instead of including warranty stipulations, it protects the seller from buyers changing their minds. It also protects the buyer by ensuring the seller provides accurate financial details and by highlighting the consequences of imparting false information.

Agreement for sale

Commonly used for real estate deals, an agreement for sale is a contract to buy or sell an asset at a future date. It details the date the purchase is to be made and indicates whether the sale is contingent on another event, such as the approval of a loan or the sale of the buyer’s existing assets.

International sales contracts

An international sales contract is much like a general sales contract, except that it includes complexities that are unique to international trade. It indicates the governing laws relevant to the country of trade. This type of contract is under the jurisdiction of the United Nations Convention on Contracts for the International Sale of Goods (CISG).

Sales contract addendum

A sales contract addendum is a supplementary agreement that you can add to an existing contract. It enables businesses to expand the terms of the agreement without creating a whole new document. Note that merely altering the agreement without creating a separate contract constitutes an amendment, not an addendum. 

In the course of doing business, you’re bound to encounter one of these common types of sales contracts. Fortunately, you can rely on a contract management tool to streamline the contract creation process. With a few clicks, you’ll have a contract complete with the necessary clauses and information. 

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Conclusion

You need sales contracts to safeguard your interests and avoid legal complications. And you need them when you’re dealing with high-value transactions or those that are riddled with complexities. In any case, you need to make sure the document has all the right elements to ensure it’s valid and enforceable. It also helps to be familiar with the different types of sales contracts, so you’ll know exactly what to craft when the need arises.

AXDRAFT’s contract management tool can simplify the process for you. It’s especially vital if you’re handling many different contracts. Try the demo to see how the tool can help you. 

FAQ

What are the parts of a contract?

The basic parts of a contract include the parties, agreement (legally called the consideration), terms of the contract, dates, titles, and signatures.

What are the elements of a sales contract?

The key elements of a sales contract include the identification of parties, description of goods and services, delivery specifications, inspection period, payment details, and contingencies.

What are the 3 types of contracts?

The three most common types of contracts are fixed-price contracts, cost-plus contracts, and time and materials contracts. For the most part, these classifications refer to the structure of the contract and the details of compensation.

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