A contract of sales is a formal contract which contains all terms and conditions in the written form related to a sale. This contract states the agreement between a seller to sell and buyer to buy at an agreed price.
A contract of sales is also referred to as sales’ contract, agreement of sales, or sale agreement. A contract of sale is made in written form so that there is no scope of contradiction later. In the old times, Handshakes were used at the place of the contract of sales.
Deals made through handshakes is known as “Oral contracts.” Because of various flaws in the oral contract, it is replaced with a sales contract or contract of sale. In an oral contract, a misunderstanding takes place because of the lack of clear records.
Contract of sale is governed by Article 2 of Uniform commercial code in many jurisdictions. Islamic law called “Sharia governs the contract of sale,” and in the United Kingdom, the contract of sale for goods is governed by the sale of good act 1979.
In the United States of America, it is necessary for people to make a contract of sale for deals worth more than $500. However, the contract can be transferred to the third party in the case, the buyer is not ready to pay, and the seller is ready to deliver, but both the parties should agree to do so.
A seller can take back the goods provided in buyer fails to make the payment under the resolutory condition, as a contract of sales is subject to resolutory conditions.
A contract of sale can be simple with little information, or it can be detailed containing even smallest information about the deal such as the number of goods, price, date of delivery, and advance deposits, etc.
In the next section, you will learn about the components of a Contract of Sale:
There is a total of six components which are part of a contract of sale. These components are parties involved, goods to be sold, price of goods sold, transfer of ownership, all essential of a valid contract of sale, and an agreement to sell.
#1 Parties involved in the contract:
A contract of sales is created when two parties deal with each other. There should be two separate parties involved in the contract of sale. A party can’t sell its products to itself.
Therefore, a contract of sale should be of bilateral nature, which means that goods mentioned in contract pass from one party to another party.
If a transaction is taking place between two organizations, then the legal names of both organizations along with the name of people in charge and the signature section should include the name of the organization and the signature of the person-in-charge of the party.
#2 Goods/Items to be sold:
Goods/ items involved in the transaction should be clearly mentioned in the contract. All types of movable goods except services can be considered for the contract of sale. Services cannot be considered for the contract of sale.
There is different law for the movement of immovable properties. The law is known as the “Transfer of Property Act.”
The detailed information about the goods should be mentioned clearly in the contract. The information about goods such as the number of goods, industry standards (shape, size, weight).
#3 Price of Goods being sold:
After goods, price is the most important element of the contract of sale, and it should be mentioned clearly in the contract. A final price of goods after negotiation should be reached and mentioned in the contract of sale.
The price of goods can’t be changed once the contract is written and can’t be altered later. In addition to price, information such as the method of payment, time of payment, and whether the payment will be paid in installments or in a single transaction.
This information should be clearly mentioned in the contract of sale to avoid conflicts later.
#4 Transfer of ownership:
The next important element of the contract of sale is “transfer of ownership.” The goods in the transaction are under the ownership of the seller. Once the price as per mentioned in the contract is paid to the seller of goods by the buyer, then the ownership of goods should be transferred to the new owner.
There should be an agreement between both the parties. However, only the “general goods” can be transferred under the contract of sale. Special property can’t be transferred through “contract of sale.”
In case of a special property, only the possession of the property is transferred to the buyer or pledgee, but the ownership of the property remains with the real owner /pledger of the property. In case of a contract of sale, the ownership, as well as possession both, should be transferred to the buyer.
The contract of sale should clearly mention the time of delivery, method of delivery, place of delivery, what actions should be taken in case of failure of delivery, and what course of action should be taken in case of natural calamities.
#5 All essential of a valid contract of sale:
In addition to above-mentioned elements, all essential elements of a contract of sales such as lawful objects, competency of contracting parties, free consent, consideration, and all other mandatory legal formality completed should be mentioned separately in the contract of sale.
A sale’s contract or contract of sales can be considered valid only if it contains all above-mentioned essential elements.
#6 An agreement to sell:
A contract of sale contains an agreement between both parties to sell goods. The agreement mentions all the conditions of the contract of sale. It is not necessary to pay the price of goods at the time of the binding of the contract.
In addition to above-mentioned mandatory elements, a few optional elements such as Confidentiality, warranties, severability, etc. can also be included in the contract of sale.
Examples of the contract of sale
- Let us understand the uses of “Contract of Sale” with the example of a sales contract between the retailer and his supplier. The retailer buys goods to be sold in-store from the supplier in bulk. The retailer buys goods from the supplier in bulk frequently. Therefore, a contract of sale is created between the retailer and the supplier. According to the “Contract of sale” payment should be paid in three installments. The contract of sale makes the process of sale easy and less confusing.
- A contract of sale is not valid when a buyer sells goods to himself or to his own family. There should be two separate parties involved in the contract of sale to make it a valid contract of sale.
- A contract of sale can be created between the two partners of a property. For example, a retail store is owned by two partners. One partner decides to sell his rights and ownership to another partner. In this scenario, a contract of sale can be created between two partners where one partner gives the sole ownership of the store to another partner. In the contract of sale, the owners can mention whether the ownership of property will be paid out in installments or in one lump.