When businesses transact with each other, they do not only exchange some products and services. They also exchange value, trust, commitments, and expectations that must be clearly defined and respected.
A Sales Agreement turns the verbal commitments of a sale into a formal contract that outlines what is being sold, its price, delivery conditions, and the rights of the buyer and the seller.
For enterprises handling multiple clients, suppliers, and distribution channels, relying on verbal deals and promises can be problematic. It can lead to various issues and even financial losses. A sales agreement helps enterprises avoid these problems.
It creates legal certainty and commercial discipline, which help businesses close deals faster, maintain compliance, and reduce the chances of disputes.
In this guide, we will understand what sales agreements are, how they are created, and some best practices for drafting them.
What Is A Sales Agreement?
A sales agreement is a legally binding contract created to formalise a sale of goods or services between a buyer and a seller. It provides the legal foundation that ensures that the sale happens smoothly according to what the parties had agreed to.
The sales agreement records essential details of the transaction, such as product description, quantity, price, terms of payment, delivery schedule, and the responsibilities of both parties. It also contains the remedies for a breach of the agreement by any party.
In other words, a sales agreement is both a commercial and legal document that creates transparency, defines the expectations and strengthens the trust between the buyer and the seller.
In most cases, a sales agreement is signed before the actual sale or transfer of goods takes place. It is a commitment to sell or buy the goods or services at a later date, once certain conditions are fulfilled. The ownership or title of the goods gets transferred from the buyer to the seller only after the completion of payment, inspection, or delivery, as mentioned in the sales agreement.
For enterprises which commonly transact in large values or create long-term commitments, this level of clarity is very important. The sales agreement is one of the most important documents that they need to always get right.
Key Terms And Components Of A Sales Contract
A strong sales contract is useful for multiple reasons. Not only does it record a transaction, but it also ensures that both the buyer and seller understand exactly what is being exchanged and the legal protection that they have. The following are some of the key components of a strong business-to-business sales agreement.
- Parties Involved
This is the first part of a sales contract which identifies the buyer and the seller and confirms who is responsible for completing each part of the transaction. It mentions their complete legal names, contact details, and their roles clearly.
- Description Of The Goods Or Services
This section specifies what is being bought and sold and in what quantities. It also mentions the product specifications and the scope of the services being provided. This is a very important section, and the clearer it is, the lower will be the chances of any disputes arising in the future.
- Price And Payment Terms
The contract should also outline the price that has been agreed upon, the method of payment and its due date. It must also note down the penalty is for late payment. In transactions involving overseas sales, the currency and the applicable taxes must also be mentioned.
- Delivery Terms
This section defines how and when the goods will be delivered and when the ownership of the risk will pass from the seller to the buyer. The mode of transportation and who will bear its cost must also be mentioned.
- Warranties And Liabilities
In this section the warranties that apply to the parties are mentioned. It also limits the seller’s liability for issues that are beyond their control. These provisions distribute the transaction risk among the buyer and the seller.
- Termination And Remedies
As in all other contracts, the sales agreement should have a termination clause which gives an option to either party to exit the transaction. The exact conditions for termination and the process to be followed are mentioned in this clause. The remedies available to the other party in case the other party terminates the contract are also mentioned.
- Governing Law And Jurisdiction
This section states the laws that will govern the agreement and how any disagreements will be settled. In case of a cross-border transaction, all the laws of the different countries that apply must be mentioned. The parties must also choose the city or court where the disputes will be resolved.
These terms make the sales agreements legally valid, and add clarity and certainty to them. They make every sales agreement a practical tool that safeguards the commercial and legal interests of the enterprises.
Types of Sales Agreements
Sales agreements can be of different types depending on the nature of the transaction being made, the timing of payment and how the goods will be delivered. Understanding these types will help your enterprise to choose the right structure for its deals and minimise the legal risks.
- Absolute Sales Agreement
In this, the buyer gets the ownership of the goods as soon as the agreement is signed and payment is made. These agreements are commonly used in straightforward and and one-time transactions, since both parties complete their obligations simultaneously,
- Conditional Sales Agreement
This type of sales agreement is made when the ownership of the goods and services will pass on to the buyer only after certain conditions, such as full payment or successful delivery, are met. This arrangement protects the seller in credit-based or high-value transactions.
3. Instalment Sales Agreement
In arrangement, the buyer makes payments in installments, i.e., in parts over a fixed period. The ownership of the goods may get transferred at the beginning or after the final payment, according to what has been negotiated in the contract.
4. International Sales Agreement
These contracts are commonly used in cross-border trade. They have to comply with international trade laws and include clauses covering customs duties, international taxation, currency risks, and overseas delivery.
Each of these types of sales agreement is suitable for specific business needs. Your enterprise must choose the right format that will give it both flexibility and legal protection and enable it to handle transactions of any scale with minimum risks.
Best Practices For Drafting A Sales Agreement
While writing a sales agreement, the enterprise legal teams need to keep certain important things in mind that will ensure that the document will reflect the intent of both the parties while protecting the company from legal and financial risk. Here are some best practices that will help the teams draft sales agreements that are clear, legally enforceable and easy to manage.
- Define The Scope Precisely
Clearly list down the products and services being sold, and mention their specifications in detail. Any ambiguity in the product quality, quantity, and delivery terms can become a source of dispute.
- Set Measurable Terms
Include specific timelines, pricing structures and payment schedules in the sales agreement. Avoid any weak statements like “payment to be made as soon as possible” or “delivery terms are subject to change”. Precisely mentioning the terms will prevent any misunderstandings and make it easier for the enterprise to enforce the agreement.
- Include Clear Risk And Liability Clauses
The agreement must mention when the risk of loss or damage will be transferred to the buyer from the seller.
- Align With Governing Law And Jurisdiction
Mention all the laws that will apply to the sales agreement and ensure that all their provisions have been included. You must also specify where the disputes will be resolved. This is especially important for cross-border or multistate trades.
- Review For Consistency Across Departments
The sales agreement must be reviewed by the legal, finance and sales teams together. This will ensure that the price, delivery terms and invoicing details mentioned in it are correct. These reviews will help in preventing errors that can cause problems later.
- Use Digital Templates And Approval Workflows
Drafting sales agreements consumes significant time when done manually. The legal teams must use modern contract management tools that will help them to create standardised templates that will reduce manual drafting time. These tools also provide the facility of electronic and automated approvals.
By following these best practices, enterprises can create sales agreements that are not only operationally efficient but legally sound too. A strongly drafted contract reduces compliance risk, improves transparency, and makes the entire sales process smoother.
Common Challenges and How to Manage Them
Enterprises often face some practical challenges in creating, managing and executing sales agreements. While these challenges will be few for a small business, they will quickly increase as it grows and starts handling more clients, products, and regions.
The following are some challenges that enterprises commonly face with sales agreements and their solutions.
- Manual Drafting And Version Control
Drafting the sales agreements manually takes up a lot of time and increases the chances of human errors creeping in. Version tracking also becomes a problem.
Solution: The process of drafting a sales agreement can be made faster and error-free by using standard templates and automated approval processes.
- Inaccurate Product Or Pricing Details
Any mistake made while recording important terms like price, product description, or terms of delivery can give rise to various disputes and even losses.
Solution: The data can be fetched automatically by the contract drafting system if it is integrated with the CRM and ERP systems of the company. This is a great way of ensuring that the correct terms are recorded in the sales agreement.
- Conditional Deliveries And Payment Delays
In sales agreements where the delivery or payment depends on predefined milestones, poor tracking can cause unnecessary delays and financial or operational confusion.
Solution: The legal teams need to use a system which gives them automated and real-time alerts about the completion of the various stages of the transaction. It can also give them prior notification about the upcoming payments.
- Regulatory And Tax Compliance
Cross-border sales agreements must comply with various tax, export, and data protection rules. Missing these will create legal and operational risks.
Solution: use contract templates that contain all the provisions of the local laws and maintain a compliance library that automatically remains updated when regulations change or new laws are enacted.
- Limited Visibility Into Contract Performance
After a sales agreement is signed, it needs to be monitored carefully. However, many enterprise legal teams lose sight of the contract obligations, which affects forecasting and renewals.
Solution: employ an analytics tool that tracks contact performance, prevents the legal team from missing commitments and flags any opportunities for renewing agreements or upselling more products.
A contract lifecycle management software can help enterprises overcome all the above-mentioned challenges. It will help in strengthening customer relationships and also protect revenue. It will ensure that every sale is tracked properly, compliance is maintained and the transactions are profitable from start to finish.
Final Thoughts
A well drafted sales agreement makes the transaction smoother and brings predictability to business transactions. It also creates and environment of trust among the parties, ensures compliance with the applicable laws, and speeds up the deal execution process.
If you are an enterprise managing hundreds of sales agreements then handling so many contracts manually is practically impossible in the current times. You must consider shifting to a digital solution that will change the way your legal team works.
Legistify’s Contract Lifecycle Management (CLM) platform helps the legal and business teams create, track, and renew sales agreements with ease. It will make contract drafting faster by providing standard templates, provide real time analytics and predictive alerts at every stage of the deal execution process. This will significantly speed up the deal cycles and strengthen your business relationships.
If you want to see how Legistify’s Contract Life Cycle Management solution can free up your legal team from repetitive tasks and improve their effectiveness then book a free demo. See for yourself how it can completely transform and simplify the contract management process of your enterprise.
Frequently Asked Questions
1. What is the main purpose of a sales agreement?
A sales agreement is created to record the terms of a sale of goods and services between a buyer and a seller, ensuring clarity on price, delivery, and payment to avoid future disputes.
2. Is a sales agreement legally binding on the buyer and the seller?
Yes. Once signed by both the parties, the sales agreement becomes a legally enforceable contract that protects their respective rights and obligations.
3. What should every sales agreement include?
Every sales agreement must clearly state all the essential terms of the agreement. These include the product details, price, payment and delivery terms, warranties and liabilities, and the laws governing the agreement.
4. Can a sales agreement be cancelled?
Yes, a sales agreement can be cancelled if both the buyer and the seller agree to it. It can also be ended if the contract includes a termination clause which allows for the agreement to be cancelled under certain circumstances.
5. How can businesses manage multiple sales agreements efficiently?
The enterprises can use a contract lifecycle management (CLM) system that helps in automating contract tracking, renewals, and compliance. It also saves time and reduces manual errors.
