In many business transactions, buyers often hesitate to place an order before they know exactly what they are getting. One way to close this gap is using a sale on approval contract.
This contract allows a customer to receive the products and test them before deciding whether to buy it or not. If the product lives up to the expectation of the customers, the sale is finalised. Otherwise they can return the goods to the seller without making any payment.
This arrangement gives both sides some practical benefits. The sellers can boost the sales of new or high-value items that customers might otherwise hesitate to buy. The buyers, on the other hand, get the freedom to inspect and test the goods before committing to purchase them.
Such contracts are common in industries where quality and performance matter, such as manufacturing, technology, and retail. They are especially useful for businesses introducing new products or selling equipment that needs to meet precise operational standards.
How Does A Sale On Approval Contract Work?
A sale on approval contract is a conditional agreement where the buyer receives goods from the seller for testing or evaluation before deciding whether to finally buy them or not.
This setup creates a bailment. In simple words, it means that the buyer becomes only a custodian of the goods until they decide to purchase them.
The buyer must make the decision to purchase or return the goods within a stipulated time period. If satisfied, the buyer makes the payment and keeps the goods. Otherwise the buyer must return them to the seller. The seller retains the ownership of the goods until the buyer makes a final decision. The buyer may accept the goods by:
- sending a written confirmation to the seller,
- continuing to use the goods beyond the agreed testing period, or
- taking any other action that shows approval.
If the buyer decides to reject the goods they must return them to the seller within the stipulated time. The expense for this return is usually borne by the seller.
Because ownership stays with the seller, they bear the risk if the goods are lost or damaged by factors outside the buyer’s control, such as weather or third-party negligence. The seller is also responsible for bearing the repair or replacement costs in such cases.
If the buyer is in debt, their creditors cannot seize the goods because they do not yet own them. However, the seller’s creditors can claim those goods since legal ownership still lies with the seller.
This flexible yet legally sound structure benefits both parties. The buyers can assess performance, compatibility, or quality of the goods without getting into any immediate financial commitment. On the other hand, the sellers get an opportunity to demonstrate the value of their goods in real conditions. This agreement often improves long-term business trust between the parties.
Important Clauses In A Sale On Approval Contract
A well-drafted Sale on Approval contract clearly defines what happens before, during, and after the trial period given to the prospective buyer.
It includes the following essential clauses to maintain transparency in transactions and prevent disputes.
1. Details Of The Parties And The Effective Date
This section mentions who is entering into the contract and when it becomes effective. It contains the full names, roles, and addresses of both the buyer and the seller.
For example: “This Sale on Approval Agreement is made on 15 May 2025 between ABC Pvt. Ltd. (Buyer) and XYZ Manufacturing Ltd. (Seller).”
2. Description Of The Goods
This clause details what is being sold or tested. It must list the quantity, model, specifications, and standards that the goods must meet. For large quantities, it is common to attach a separate list or inventory sheet.
3. Terms Of Delivery
This clause explains when and how delivery will happen and who will pay for it. It may also specify where the goods will be delivered, and what will happen if there is a delay in the delivery.
For example: “Delivery will take place on 20 May 2025 at the buyer’s warehouse in Pune.”
4. Inspection And Approval Period
The buyer’s right to test or inspect the goods is defined here. It must clearly mention how long the buyer can hold the goods for testing, who can inspect them and how the buyer will be able to approve or reject them.
5. Sale On Approval Clause
This clause tells both parties that ownership does not pass on to the buyer until he accepts the goods. It should also cover the process for returning the goods if the buyer does not approve them and the timeline for giving notice to the seller.
6. Acceptance And Payment
Once the buyer approves the goods, they have to pay for it. This clause governs how the payment will be made. It must outline the total price, due date, and acceptable methods of payment.
This clause can also mention that if the buyer does not return the goods within the evaluation or trial period, they will be deemed to have been accepted, and payment will become due.
7. Risk Of Losses And Warranties
This section clarifies who will be responsible for any damage, loss, or defects that may happen during the approval period. It should confirm that the seller bears the risk until approval and can include product warranties that guarantee certain quality standards.
8. Force Majeure And Termination
These clauses protect both parties from obligations and losses if any unforeseen events make it impossible to continue the contract. Examples of such events are floods, strikes, or natural disasters. The termination clauses in the contract should explain how either side can end the contract before acceptance.
9. Notice
This clause specifies how both parties should send official communications like approvals, rejections, or termination notices to each other. It must also specify the acceptable modes of communication, like email, courier, or registered post, and the addresses to be used. This clause helps in preventing disputes related to the proper delivery of the notices arising in the future.
10. Severability
This clause specifies that at a later date if any part of the contract is found to be invalid or unenforceable by a court, the rest of the agreement will continue to remain valid and enforceable. This will keep the contract legally enforceable, even if one clause fails.
11. Jurisdiction And Dispute Resolution Mechanism
This is another important clause that identifies the laws governing the contract. It must also clearly specify where any legal disputes arising from the contract will be resolved and whether the parties will use arbitration or litigation to settle them.
A clear contract with these well-defined clauses increases trust between the buyer and the seller and helps prevent future misunderstandings. It also creates a strong record that supports compliance and accountability within the business.
12. Entire Agreement
This clause states that the written agreement represents the full understanding between the buyer and seller. It prevents either party from later claiming that there were verbal promises or side agreements outside the written contract.
Key Takeaways
A sale on approval contract gives businesses a practical way to build trust in high-value or performance-based sales. By allowing buyers to test goods before purchase, these agreements reduce hesitation and create transparency in transactions.
Managing these contracts digitally can make the process far easier. A contract lifecycle management (CLM) platform helps teams track approval timelines, maintain a single source of truth, and stay compliant across jurisdictions.
To learn more about effective contract management, you can read other articles in Legistify’s Learning Hub or explore how Legistify’s CLM solution helps enterprises manage complex contracts efficiently.
Frequently Asked Questions
1. What is a sale on approval contract?
A sale on approval contract lets a buyer test goods before deciding to buy. Ownership and risk remain with the seller until the buyer accepts the goods.
2. How is a sale on approval different from a sale or return?
In a sale on approval, the buyer receives goods for testing, and ownership stays with the seller until acceptance. In a sale or return, ownership transfers immediately, but the buyer can return any unsold items within a set period.
3. Who bears the risk during the approval period?
The seller bears the risk of loss or damage until the buyer accepts the goods.
4. What happens if the buyer doesn’t respond within the approval period?
If the buyer neither approves nor returns the goods within the agreed timeframe, the law usually treats this as acceptance. The buyer must then make payment as per the contract.
5. Can a sale on approval contract be used for services?
Sale on approval contracts usually apply to physical goods, though similar principles can be used for service trials under separate agreements.
6. Can sale on approval contracts be managed digitally?
Yes. Digital contract tools help track approval timelines, automate alerts for due actions, and maintain a secure record of each transaction. This saves time and reduces compliance risks.
