Structure of a sales contract

Structure of a sales contract

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There are no hard and fast rules about forming a commercial agreement. It may be oral or written, or a combination of the 2. However, it's always best to put down what you've both agreed in writing.

It's important for the contractual terms to be clear and understandable, and to accurately reflect what you've both agreed. If there's a dispute between you in the future, a court may have to interpret your contract.

Typical elements of the contract

The structure of a commercial contract varies depending on its nature, but many would contain the following:

  • Date - the date of the contract
  • Parties - who is involved
  • Recitals - the factual background to a clause or to the contract
  • Commencement - when it would start
  • Term - how long the contract will last
  • Operative part - the essence of a contract, i.e. who has to do what
  • Schedules - lists of relevant matters (usually appear separately)
  • Execution and attestation - the signing clause.

Most of the above are self-explanatory. However, there are 3 areas that could be explained further.

Recitals

Recitals aren't essential, but are useful. They explain the factual background and reasons why the parties have agreed on certain terms. For example, they may state the factors that the parties considered when agreeing what the seller should be responsible for. These may help to show the reasonableness of clauses, which say that the seller isn't legally responsible for particular types of loss. (See Unfair contract terms, under 'Reasonableness'.)

The operative part

The operative part creates the legal rights and obligations of the parties. The clauses found here vary with the nature of the contract. These are some of the common clauses found in the operative part of a commercial contract:

Conditions precedent clauses: these are conditions that must be met before a contract becomes effective.

Rights and obligations: clauses setting out what the parties are promising to do, and how they're promising to do it.

Representations and warranties: promises made by either one of you about certain facts that may have encouraged the other party to enter into the contract. For example, the seller may promise that the goods will fulfil particular requirements.

Standard clauses: these are included in all agreements. For example, those about how and when any notices under the agreement must be delivered; and 'force majeure', where it has become impossible to fulfil a contract because of unforeseen circumstances beyond anyone's control. These circumstances would include war or natural disaster.

Schedules

Schedules allow you to keep the body of the contract fairly short and put other details in a separate place at the end of the agreement. For example, in an agreement for the sale of several goods, you can include a list of all the goods along with any accompanying details in a schedule. The body of the agreement would refer to the goods in that schedule.

Drawing up the contract

Before there can be a contract, one party must make an offer to the other intending to be legally bound by that offer. The other party must then accept the terms of the offer without trying to change them.

If you're the seller, you'd want the offer to come from the buyer. This means it will be up to you to decide whether you want to accept the offer and create a binding contract. However, you'd also want the buyer to offer to buy on your terms and conditions so that these become the terms of the contract. You should therefore send the buyer your order form containing your standard terms and conditions. Your order form should say that by completing the form and sending it to you, the buyer is making you an offer.

Ideally, you should ask the buyer to sign your form, as the buyer will then be bound by the terms whether or not they've actually read them. If the buyer doesn't sign your terms, you'd need to show that you've taken reasonable steps to bring them to the buyer's attention. Or, you'd need to show that you've used the same terms consistently in a course of regular dealings with that buyer.

If you, as the seller, make the offer, rather than the buyer, there are some safeguards you should adopt in relation to the buyer accepting the offer. You should give them a deadline to accept, and say that your offer will lapse if they haven't accepted by the deadline.

If the buyer is accepting by post, you should also exclude the postal acceptance rule, i.e. that the buyer's acceptance takes effect (and the contract is made) when the buyer posts their acceptance, and not when you actually receive it. Instead, you should say when making the offer that if the buyer is accepting by post, the acceptance is only effective when you receive it.

Termination of contract

You can agree that just one of you has the right to end the contract, or that both of you have this right. You could agree to a right to end in a variety of circumstances. However, if these circumstances are too wide, the promises in a contract might be reduced to mere statements of intention and the contract will be void.

Variation

If one party to your contract promises to do something extra over and above the terms already agreed, the party benefiting from this variation will normally only be able to enforce it if they've also given something extra in return. This is also the case if one party promises to let the other party off fully performing the contract.

However, there are 2 situations where such a promise may still be valid even when nothing is given in return. These are the rules for waiver and promissory estoppel:

Waiver (England and Wales only)

The law allows one party to a contract to waive their right to insist on the other party strictly performing the contract. For example, a buyer could agree to waive the original delivery time agreed and accept a later delivery. However, the buyer always keeps the right to reinstate the original terms of the contract (i.e. the original delivery time) if they give you reasonable notice.

Promissory estoppel (England, Wales and Northern Ireland only)

The law of promissory estoppel allows promises to be enforced where this is just and fair, even if nothing has been given in return. The law on this is complicated and not entirely clear. An example of this is where a person who should be paid in instalments agrees to let the payer off paying some of the instalments, or agrees to accept lower instalments. If it would be unfair for them to go back on their agreement and claim full payment, the law may prevent them from doing so.