Clarification of a Sales Agreement
Sales contracts are formalized documents that are used to outline the terms and conditions of the sale of a physical good or product, including specific details regarding utility, supply, and expectations that match those of the buyer and the supplier. In many ways, they are the backbone of the sales process, acting as the legally binding agreement between both parties that signifies the acceptance of the sale . A sales contract can be created to document simple, single-sale transactions, or more complex arrangements that could involve multiple parties or even hundreds of products. The most common implementation of a sales contract is to formalize traditional wholesale purchases. When a retailer orders goods from a supplier, it does so to fulfil its need for inventory for either physical storefronts or online billing systems. The order placed with the supplier is then matched with a sales contract that outlines the purchase.
Legal Safeguards and Responsibilities
The purpose of a sales contract is to protect the legal interests of both parties. Protection can be obtained by ensuring that all details are clearly outlined in a contract. This also protects businesses if the contract is breached by giving them recourse to collect damages for any breach. In other words, they can sue for any losses suffered as a result of a breach of the contract.
There are rights and obligations attached to sales contracts, which both parties must abide by. These obligations may include the following: A buyer is also obligated not to misrepresent itself to the seller. For example, if as a buyer you enter a contract to purchase goods and another company already has the contract for these goods, your obligations may include paying damages to the seller for interfering with the other contract.
Core Components of a Sales Agreement
Key Elements of a Sales Contract include:
1. Identification of the Parties
i. This is simply the names of the parties, in this case, the seller and buyer;
ii. This is usually sufficient but it is always preferable to include the address of each party, as well as the name of a contact person for each party in the event something goes wrong or we are unable to fulfill the contracted obligation.
2. Description of Goods or Services to be Sold
i. This may appear to be obvious, but it is important to make sure that everyone knows what they are buying and/or selling. In many cases it is advisable to produce, attach or refer to a "Schedule A" or other description of the goods or services that are being sold.
3. Payment Terms
i. The payment terms must be specific. They should include:
a. The amount to be paid;
b. When payment is to be made;
c. How payment is to be made, e.g. cash, certified cheque, etc.; and
d. Anti-money laundering clauses, which will become more common and involved starting October 1, 2008. Anti-money laundering clauses inform the parties of their obligations, but these obligations become much more significant on October 1, 2008.
4. Delivery Terms
i. The delivery terms include:
a. Date delivery must take place;
b. A failure to perform clause – what happens if one party doesn’t perform; and
c. Damages if one party fails to perform – including breach of contract damages and consequential damages.
Importance of Transaction Clarity
Establishing Clarity in the Transaction
By clearly delineating the terms of the exchange, a sales contract serves as a vital reference point, preventing overzealous parties from opportunistically revisiting previously-agreed-upon deal points to re-engineer a better bargain for themselves.
Mechanisms for Resolving Conflicts
The purpose of a sales contract is also to provide efficient mechanisms by which disputes can be resolved. Accordingly, most sales contracts will contain a dispute resolution clause which requires the parties to make every possible effort to amicably resolve their dispute and then, if amicable efforts are not successful, to submit their dispute to formal mediation, arbitration or litigation.
For example, the sales contract may provide that the parties will promptly attempt to resolve any disagreement concerning the contract. If such efforts are not successful, the parties will promptly submit the dispute to mediation before a jointly selected mediator. If the parties cannot agree on a mediator, one will be selected, at random , from the applicable dispute resolution organization or panel of court-approved mediators in the jurisdiction. If the dispute remains unresolved after good faith mediation, the parties will promptly submit the dispute to binding arbitration before a panel of three arbitrators. These arbitrators will be selected by agreement of the parties, or if they cannot agree, the two parties will select one arbitrator each and these two will select the third arbitrator. The arbitration will be conducted according to the rules of the applicable dispute resolution organization or governing association that has been designated in the sales contract.
A dispute resolution clause and the other clauses discussed above help provide a clear contractual framework for the completion of a transaction and provide some certainty of outcome if a dispute arises.
The Significance of Personalization in a Sales Agreement
Sales contracts are not one-size-fits-all forms, and the process of buying and selling products can be complex. There are often distinctions, for example, between different industries, different types of goods, and different markets. A contract providing for the sale of widgets at a price of $X in one state may bear little resemblance to a contract for the sale of the very same widgets at a price of 2X in another state. Many recent cases under the uniform commercial code have arisen because the parties have erroneously applied the wrong laws to their transactions, and time was required to sort out the resulting problems. In some cases, serious questions occurred as to the liability of the parties. A custom sales contract can help sort out these questions can be problematic. Adding clear provisions on governing law, warranty, dispute resolution, where the goods are to be delivered, and indemnifications, among many other aspects, frequently helps to efficiently resolve many issues that can arise.
Common Mistakes and Tips to Avoid Them
Sales contracts are prone to specific pitfalls that, if not avoided, can lead to major losses for the companies signing them.
- Be sure you’re working with a legitimate company rather than a fraudster. It’s not enough to run the business name through a search engine or even file a trade name registration with your state. Red flags that you may be dealing with a fraudulent company include: – An actual address that cannot be located (for example, the number corresponds to a non-existent building). – A central business telephone number that does not correspond to the address, or even a personal cellular number that connects to an individual. – No business email address, or a free email service (such as gmail or yahoo) that does not contain the person’s name (as in a new or generic name, or no name at all). A legitimate supplier or purchaser should be able to provide not only an address that corresponds to the telephone number, but also an email domain name that corresponds to the business name such as "Yourbusinessname.com".
- Don’t assume everyone has the same interests. Frequently, the supplier and purchaser may have entirely different aims for signing up suppliers. When drafting or reviewing a sales contract, consider: – What you want to get out of the deal (including some downside scenarios), and consider what your partner wants as well. – Anticipate issues that may come up during your relationship (e.g. how do you deal with price increases, delivery issues, etc.) . – Many disputes arise from not spelling out who is responsible for certain problems or expectations, so anticipate those when negotiating or drafting the agreement. – As necessary, ask your attorney to help structure the deal so nobody is surprised by the responsibilities or tasks required.
- Treat the contract like a highly valuable piece of equipment If you sign the sales contract and lose (or throw away) it or mishandle the version you have, you must understand that: – Signing a sales contract is the start or a continuation of the beginning of a relationship. Data and other details may change over time and you’ll need the original signing document to support your position. – There are business and industry changes that may affect the contract and heartburn between you and the signatory can be avoided if the original document can be found. – Original documents are often necessary to validate claims against another party so keeping track of them is valuable.
- Be smart about the law There are many laws regulating the purchase and sale of products and services. – Compliance with the law is critical and any deficiencies can come back to haunt you. – Have your attorney review and explain relevant laws that apply to your contract arrangement so you can become aware of your obligations and how they affect your bottom line. – Appropriate state law modifications in the contract can prevent potential regulatory issues from arising.
You’ll reap benefits now and later – especially if you have advice and law backing you up.