A sales contract is a legally binding agreement made between a seller and a buyer to exchange goods for money.
Major Points of a Sales Contract
A sales contract should include the following pointsLegally required points
- type of product /quality
Additionally stated points
- terms of delivery
- terms of payment
- other contract agreements (means of transport, consequences of late delivery or payment, additional services, insurance, liabilities and warranties)
How quality is specified depends on whether the goods are fungible or non-fungible.
Fungible means that every piece of one type of product has the same characteristics (e.g. sugar, shoes).
Non-fungible means that every piece has different characteristics (e.g. antiques, paintings)
In sales contracts the quality can be stated in the following ways:
A brand or label is a distinctive symbol used to identify a specific product or service of a manufacturer or distributor. The aim is to distinguish a company’s product or service from competitor’s product, e.g. Apple, Microsoft, Intel
The symbol may consist of a device e.g. drawing, figure (=picture brands), words or numbers (= slogan or number brands) or a combination of these (= combined brands).
A brand/trademark is usually registered at the Register of Trademarks, which is at he Patent Office. The brand/trademark is then protected by law and the manufacturer or distributor has the exclusive right to use it in connection with the goods or services for which it was registered. Competitors or other people are not allowed to use a registered brand/trademark without the owner’s permission.
A sample iks a single item or part of a whole product that can be looked at to see what the rest is like.
Samples refer to a small portion of a larger quantity of goods. The term sample may be used for raw materials such as wool, tobacco, cotton or finished goods such as toothbrushes, combs, etc. Small cuttings of textiles are usually called patterns (e.g. for curtains or carpets).
- Sale by sample (Kauf nach Probe)
The goods are sold on the understanding that they match the quality and condition of a specimen available for inspection. In short, the goods delivered must correspond to the sample, e.g. champagne.
- Sale on approval (Kauf auf Probe)
The buyer may test or use the goods to decide whether or not he wishes to buy them. The buyer may return the goods without payment within an agreed period of time (e.g. if someone orders a dress from a mail-order company).
- Trial purchase (Kauf zur Probe)
Trial purchase is the purchase of a small quantity of goods for testing purposes. The buyer is not allowed to return the small quantity.
Standars, types and models
- Standards are fixed sizes, colours, quality, etc. that goods have to meet. Standards are fixed sizes, colours, quality, etc. that goods have to meet. Standards are samples deposited at International Commodity Exchange to provide a quality comparison.
- Types are sorts, classes or kinds of a certain product, a general category of industrial products (e.g. a type of car like an off-road or jeep).
- Models are variations in design or style of a product (e.g. a soft top or sports model).
- Rational description: can be expressed in numbers (e.g. alcohol content of beer).
- Irrational description: cannot be expressed in numbers, characteristics are described (e.g. shoes in modern design.).
Non fungible goods, e.g. real estate, can be inspected.
Special quality conditions
- Purchase on specification: Only the type of the goods to be delivered is stated in the sales contract. The buyer has the right to specify the exact quality within an agreed period of time.
- Lump-sum purchase: This means buying the whole stock of a business, e.g. buying a farmer’s whole harvest.
In sales contracts the quantity can be stated in the following ways:
- contracts with a precise statement of quantity
- contract with an approximate statement of quantity
- cotracts without any statement of quantity; e.g. lump-sum purchase
Packaging and quantity
- gross weight (weight + packaging)
- tare (weight of packaging)
- net weight (weight without packaging)
Unpacking the whole shipment is almost always impossible due to technical reasons (with tins) or economic reasons (with chocolate). Therefore one uses gross for net (the gross weight is controlled and calculated), experience rate (e.g. for customs duties), a random sample or spot check.
Fixed price contracts
Purchasing on the basis of a certain quality: The price is fixed according to a certain quality. If the delivered goods do not meet the fixed basic quality, deductions or extra charges are calculated as fixed in the contract ( e.g. white tiles, coloured tiles cost 10 % more)
Cost fluctuation clause: It is possible to increase the price when certain costs rise between the agreement date of the contract and that of delivery (e.g. a rise in wages, a rise in raw material prices).
Index (escalator) clause: An index shows how prices change in various areas (e.g. rent linked to the consumer price index).
This discount is based on the quantity purchased ( for 100 units 5 %, for 1000 units and more 10 %).
Cumulative quantity discount
This discount is based on the total volume purchase over a period of time. It ties customers more closely to the seller (1 % discount on annual purchase over EUR 10,000.-) It is normally paid at the end of the business year.
A trade discount is granted to the wholesalers and retailers to compensate them for particular marketing functions, especially the distributing function. Quoting retail prices and giving trade discounts to different classes of buyers (retailer, wholesaler) means that the manufacturer only needs one price list.
A cash discount is a price reduction (2 % or 3 %) given if a buyer pays immediately or before a certain date. The term 3/14 net 60 days means that a 3 % cash discount is given if the invoice is paid within 14 days from the date of invoice. Should the buyer not pay within 14 days, he must pay the full amount.
A cash discount is granted for the following reasons:
Allowance for interest: The seller receives the money earlier than agreed. He can use the money to pay back a loan or credit (and save interest) or to make other investments.
Risk premium: Having received the money immediately, there is no risk of any delayed payment or non-payment (risk of default) an no inflation risk either.
Allowance for administration: The seller does not have to supervise the payment, check the due dates, send reminders, etc.
Annual percentage of cash discount:
Discount in % x 360 / Credit period in days cash time limit in days
First Steps to a Sales Contract
A sales contract can be made
- In writing (binding offer and order)
- Orally (e.g. on the phone)
- Implied by non-verbal actions (someone takes a chocolate bar from the shelf and pays for it at the point of sale in supermarket)
- Sometimes in silence, but this is only applicable if two business partners have a permanent relationship. For instance the seller sends goods and the buyer does not respond in any way like sending the goods back.
Other Contract Agreements
The small print on order forms, invoices or additions to contracts has to be explicitly included in the contract. Usually most of the obligations are transferred to the business partner. Not reading the small print is no excuse!
Reservation of ownership
The buyer is allowed to use the goods, but they still belong to the seller until payment is made.
A penalty is a sum of money to be paid by a person who breaks a contract (Example: Any party not abiding by the terms and conditions of this contract will incur a penalty of EUR 500 per day. A penalty clause in a contract , for example, will ensure that the work is completed on time. If the seller has to pay a penalty, he nevertheless has to fulfil the contract.
This a payment made by either party in an agreement to withdraw from the agreement already made. Then the contract does not have to be honoured.
Right to exchange goods
Basically, no right to exchange the goods exists, but almost always – especially with consumers – it is granted. With goods purchased at sales it is usually not allowed.
Conditions of a Sales Contract
Meeting of minds: There must be an offer by one person (the future seller) and an acceptance by the person to whom the offer is made (the future buyer)
The contracting parties must have full capacity to contract, which means they must be legally capable of entering into binding contracts, e.g. age factor.
There must be an intention to create legal relations; it is not allowed to deal in illegal goods (like drugs); the parties should not be forced to enter into the contract (e.g. by violence); finally the sale should be possible (e.g. someone should not be offered a piece of land of the Mars).