A sales agreement, or sale of goods agreement, is a written document between a buyer who wants to purchase goods and a seller who owns those goods and wants to sell them. In general, goods are something that you can use or consume that are moveable at the time of the sale, including watches, clothing, books, toys, furniture, and cars.
What Is a Sales Agreement?
A sales agreement is a legally binding contract that outlines the terms of a sale where there is an exchange of goods and services. It involves two or more parties, including the seller and buyer, and identifies the items to be sold, the selling price, and all other relevant details of the transaction. Sales agreements may be limited to isolated transactions for specific goods or may be used to create an ongoing sales relationship between parties.
Without a sales agreement, you may not be able to enforce the deal you made with the other party. Courts prefer a written agreement when choosing whether to enforce it against a person or business. A written agreement also helps you know all your obligations and benefits as part of the transaction.
A sales agreement may also be called:
- An agreement for the sale of goods
- A sale of goods agreement
- An agreement to sell
- A sales contract
Types of Goods in a Contract of Sale
Goods are defined as movable property that can be sold as part of a sales agreement. This includes things like crops or stocks, for example. There are different categories of goods, which can significantly impact the nature of the contract:
Existing Goods
These kinds of goods physically exist at the time the seller and buyer sign the contract. They can be split into two subcategories:
- Specific goods – also known as ascertained goods, are specific items that are agreed by both parties at the time of the sale. For example, the buyer may agree to buy a specific piece of equipment with a specific serial number.
- Unascertained goods – goods with no specific distinction. For example, a company may buy goods of the same type, such as chairs, without defining the exact style or make of chair in the contract.
Future goods don’t exist at the time the contract is signed. Instead, the goods will need to be manufactured or grown before they’re supplied to the buyer. A common example is crops that aren’t yet grown. If a company wishes to buy corn from a farmer, it can purchase the right to the future product.
Contingent goods are a type of future goods but are based on a contingency. The buyer is obligated to purchase the goods listed in the agreement if those specified conditions are met. If the conditions aren’t met, the buyer isn’t required to pay for the goods.
Warranties in Sales Agreements
Warranties are legally enforceable guarantees assuring the buyer that certain facts or conditions about the goods are true. Without a sales agreement, warranties may either apply automatically or not apply at all. Under the Uniform Commercial Code (UCC), there are two kinds of warranties — express warranties and implied warranties.
Express Warranties
A seller creates an express warranty when they agree to replace or repair an item if its quality or performance isn’t as promised [1] .
An example is an electronics manufacturer guaranteeing a television against defects for three years. When a customer discovers and reports a defect to them, the manufacturer will have to replace or repair the TV.
Although a seller can create an express warranty, even when they didn’t intend to create one. If the sales agreement has a description of the goods, the customer has an expectation the goods will match that description. In this case, an express warranty is automatically created.
Similarly, if the seller provides a sample of the goods to the buyer, an express warranty is created – the goods will conform to the sample.
Having a written agreement allows both the seller and buyer to clearly state what, if any, express warranties will apply to the goods.
Implied Warranties
An implied warranty is an unwritten promise that the goods will meet a minimum level of quality [2] . Buyers receive automatic warranties when they buy goods from a merchant. There are two implied warranties arising under the UCC:
Warranty of merchantability
A warranty of merchantability is created based on the agreement that the goods will work as expected.
For example, when a buyer purchases a bicycle intended for road cycling, there’s an implied warranty that the bicycle is suitable for road cycling.
But if the buyer uses it for mountain biking, they aren’t using the bicycle for its intended purpose, and there’s no warranty of merchantability.
Warranty of fitness for a particular purpose
This particular warranty is created when:
- The seller knows what the buyer intends to use the goods for
AND
- The buyer depends on the seller to select an appropriate item for that purpose.
An example is a homeowner buying paint to paint a house. Suppose a seller recommends a certain type of paint. But it turns out that paint isn’t suited for houses. In this case, the seller has breached the implied warranty of fitness for a particular purpose.
Implied warranties don’t automatically apply if sellers clearly exclude or modify them in a sales agreement.
What Is Risk of Loss?
Risk of loss describes which party should carry the risk for damage to the goods after the sale has been completed but before delivery. If the seller carries the risk of loss, they’ll have to send the buyer another shipment of goods. Or they can pay the buyer damages if the goods are damaged before delivery.
If the buyer carries the risk of loss, the buyer will have to pay for the goods even if they’re damaged during shipment.
Under Article 2 of the UCC, there are four risk of loss rules you should be aware of:
- The terms of the agreement between the parties will control the risk of loss.
- If there’s a breach or wrongdoing by a party, then that party is liable for the risk of loss.
- Where the seller needs to transfer the goods to the buyer through a common carrier (a transportation service such as a ship, truck, plane, etc.), the risk of loss will transfer to the buyer only when the seller completes its delivery obligations. This is called a free on board (FOB) term. There are two types of FOB shipments — a FOB shipping contract and a FOB destination contract.
- A FOB shipping contract transfers the risk of loss from the seller to the buyer once the seller drops the goods off with the common carrier.
- A FOB destination contract transfers the risk of loss from the seller to the buyer only when the goods arrive at the buyer’s destination.
- Where the seller is a merchant [3] , the risk of loss will shift to the buyer only when the buyer receives the goods. If the buyer never receives the goods, the seller still carries the risk of loss.
If you know you want to buy or sell certain goods, but haven’t agreed on all the details or aren’t ready to sign a sales agreement, you can first sign a letter of intent to outline the terms and your agreement to negotiate.
Rights and Duties of Buyer and Seller
It’s important to know the rights and duties of the buyer and seller when creating a sales agreement.
Buyer Rights and Duties
The buyer’s rights and duties include:
- Duty to pay for goods when properly tendered by the seller
- Duty to follow the terms of the contract
- Right to on-time tender of the goods
- Right to applicable warranties that weren’t disclaimed
- Right to the goods identified in the sales agreement
Seller Rights and Duties
The seller’s rights and duties include:
- Duty to tender correct goods identified in the contract
- Duty to tender goods at the correct time
- Duty to tender goods in appropriate condition
- Right to timely payment for goods tendered to buyer
- Right to payment in the proper amount
When To Use a Sales Agreement
You need a sales agreement if your business sells goods or services to other parties or businesses. A professional sales agreement will help keep things clear and understood by both parties by detailing the terms of the sale.
You’ll want to make sure that you have an agreement in writing to ensure that it’s smooth sailing until the money and goods have been exchanged. Both you and the other party will want to know what to do if there are any issues along the way. This agreement can be used for a range of sales types, from small-scale purchases to large-scale contracts.
For certain sales contracts, the buyer has a statutory right to cancel the contract until midnight of the third business day after the sale. But this can only apply if the location of the sale is NOT the seller’s permanent place of business [4] .
Here are some examples of potential sellers and buyers who would need to use this agreement.
| POTENTIAL SELLER | POTENTIAL BUYER |
|---|---|
| Party supply store | Professional party planner |
| Clockmaker | Collector of specialty clocks |
| Office supply store | Start-up company |
| Car dealership | Rental car company |
| Winery | Wedding planner |
What Happens if I Don’t Use a Sales Agreement?
If you don’t have a sales agreement, you risk failing to understand:
- Your contractual rights and obligations
- The economic consequences of the risks
- The legal remedies and protections available to you at law.
This agreement lays a strong foundation and framework for a sale and provides details on how to address and remedy them should something go wrong.
Suppose you’re a successful individual or business. You want to maximize profits by anticipating the large sales periods and purchasing the inventory needed to meet the demand. Without a sales agreement, you or your business may not be able to sell or secure inventory at the best prices, failing to maximize profits.
Your buyer may suddenly decide not to buy from you, in which case you would be left with unexpected inventory and no recourse. Or your seller may find a buyer willing to pay more, leaving you with no inventory — and angry customers.
A simple sale of goods agreement can help guarantee the following:
| SELLER | Buyer |
|---|---|
| Guarantees the buyer will purchase a specific amount of goods | Guarantees the seller will supply a specific amount of goods |
| Guarantees the buyer will purchase the goods at a specific time | Guarantees the seller will supply the goods at a specific time |
| Guarantees the buyer will purchase the goods for a specific price | Guarantees the seller will supply the goods for a specific price |
| Guarantees the buyer will not back out of a promise after seller has devoted capital to produce the goods | Guarantees the buyer will be unaffected by market changes |
| Guarantees the buyer certain remedies should the seller breach | Guarantees the seller certain remedies should the buyer breach |
How to Write a Sales Agreement
When writing a sales agreement, you can follow these steps to help you create an enforceable contract:
Step 1 – Identify Party Information
Include the full name of the seller and buyer, their addresses, and other contact information. For businesses, this should include service of process information and the contact information of the officers or agents who will sign the contract. Be sure to include any additional buyers or sellers.
Step 2 – Provide a Description of the Goods
The contract should describe the goods sold. This should include:
- The type and quantity of goods
- Whether specific goods or unspecified goods are identified
- Whether they are existing or future goods
Step 3 – Include the Purchase Price and Payment Information
The contract for sale of goods should include the price the buyer must pay for them. This includes the flat rate for the goods or the cost per item outlined in the contract. Any conditions or terms that affect the purchase price should be clear. This includes information on who will pay taxes on the goods and how the buyer will make payment.
Step 4 – Determine Delivery Method
The contract should include how the seller will deliver the goods. Will they be shipped by the seller or picked up by the buyer? When are the goods to be delivered? These important questions require a clear answer.
Step 5 – Allocate Risk of Loss
The contract should state when the risk of loss of the goods shifts from the seller to the buyer. This may be upon shipment of the goods or delivery.
Step 6 – Include a Right of Inspection Provision
The contract should include a provision as to whether the buyer can inspect the goods before they’re delivered.
Step 7 – Establish Warranties
The warranties section should state what warranties cover the goods and disclaim any warranties the seller doesn’t wish to provide in the transaction.
Step 8 – Add Assignment Information
Either the buyer or the seller “assigns” or transfer its rights, obligations, or any benefits they will receive under this contract to a 3rd party. For example, if the seller is a company that has been bought by another company, the seller may assign its rights under this contract to the new company. The new company would then be obligated to provide the goods to the buyer and receive payment.
Step 9 – Provide a Right to Cancel
Many federal and state laws require a three-day cooling-off period for certain types of sales. [5] If this applies to your transaction, be sure to include the required right to cancel language in the agreement.
Step 10 – Address Potential Breach of Contract
The contract should address what will happen if there’s a dispute over the sales agreement. This should determine whether it will go to court, arbitration, mediation, or other potential resolution. It should also address the governing law of the contract and any venue provisions if necessary.
The dispute resolution options available are:
Court litigation – when a party files an action or claim in court and each side presents its case or defense in a trial for a judge or jury to determine a final outcome on the claim. The decision by the judge or jury is final and binding.
Arbitration – when an arbitrator, a neutral third party selected by the parties, evaluates the dispute and determines a settlement. The decision by the arbitrator is final and binding.
Mediation – when a mediator, a neutral third party selected by the parties, tries to facilitate a compromise and agreement. The decision by the mediator is nonbinding.
Step 11 – Add Signatures of Both Parties
Finally, add the signatures of the seller and buyer so the sales agreement can become a legally binding contract.
What Should Be Included in a Sales Agreement?
A well-drafted sales agreement will also include provisions for:
- Amendments — how the contract may be modified
- Assignment — whether a party requires written permission to transfer their rights to another party
- Notices — how the parties will communicate or send notices to one another
- Severability — a provision that states the remainder of the agreement will still be valid if one part is rendered unenforceable
- Entire Agreement — a provision that states the written contract is the entire agreement and not subject to unwritten modifications
Sales Agreement Sample
The sample sales agreement below details an agreement between a seller and a buyer. Under the terms specified, the buyer agrees to purchase items from the seller. You can also use our template builder to create your sales agreement in a step-by-step process.
Sales Agreement
Sales Agreement Frequently Asked Questions
Is a sales agreement a contract?
A sales agreement is a contract. It’s a legally binding document that obligates the seller and buyer to the terms of the agreement. A properly drafted sales agreement is enforceable in court if one party breaches the contract.
When does an agreement to sell become a sale?
An agreement to sell becomes a sale when the contract conditions are fulfilled, the items are tendered, and they’re paid for. While an agreement is legally binding, the sale does not occur until the items are delivered and paid for successfully.
Does a sales agreement need to be notarized?
A sales agreement doesn’t have to be notarized to be effective. The signed contract itself is legally binding even without a notary’s signature and stamp. The parties may choose to have the contract notarized as additional proof of its enforceability, but they aren’t required to use a notary.
What’s the difference between a sales agreement and a bill of sale?
A sales agreement is a more detailed document with all the terms of the sale. It’s a binding contract the parties must follow in their transaction. A bill of sale is often a part of a sales agreement but is used to show that the goods have officially changed owners.