Sales contracts are the linchpins of successful partnerships. They lay out the terms, rights, and obligations the contracting parties encounter. They shield businesses from unforeseen events like litigation.
Here, we attempt to cement the basics of sales contracts while looming over their types, benefits, and much more. Also, we have covered some best practices for weary-free sales contract execution.
Let’s get started.
An Introduction to Sales Contracts
Also referred to as a sale of goods contract, a sales agreement, a purchase agreement, or a contract of sale, a sales contract precisely describes the rights and obligations of buyers and sellers and acts as a binding agreement. In addition to including specially negotiated conditions, such as price, value, and quantity, sales contracts are essential to accruing revenue and achieving mutually beneficial outcomes.
Business teams often employ sales contracts to legally protect both buyers and sellers. Upon signing these contracts, involved parties owe legal responsibilities to one another. In short, sales contracts:
- Determine who the buyer and seller are.
- Affirm the specifics of the transaction.
- Call out the terms of the sale and the descriptions of the goods or services.
- Help businesses grow and generate revenue.
- Include clauses that safeguard involved parties when something goes wrong.
Note: In exchange for the agreed-upon fixed price from the buyer, the seller promises to provide or sell something. In sales contracts, ownership transfers only after the buyer pays and the seller delivers.
The Who, Why, and When of Sales Contracts
Contracts allow businesses to insulate themselves from blunders and mishaps such as lawsuits. Sales contracts are always needed as they help in documenting the specifics of deals. They also give buyers and sellers the ability to bind their obligations legally.
Whether SMBs or large enterprises, both equally employ sales contracts for a more significant benefit.
Manual sales contract workflows might suffice for small businesses with low sales volume. For small businesses, legal teams mostly own and create contracts with some input from the sales team.
However, large businesses with a reasonable sales volume opt for contract automation software such as SpotDraft. Firstly, legal teams create standard templates and upload them to a CLM platform. Secondly, sales and other business teams create contracts on demand themselves using these templates, nipping the legal intervention for low-risk tasks.
For instance, imagine processing 100,000 sales contracts per week. Though it’s good for your business, it’s not meaningful or productive for your legal team to offer input on each of those. That’s why creating templates and automating workflows will be helpful and valuable. With templates in place, business teams can create, sign, and execute contracts on a self-serve basis.
Also read: The Ultimate Guide to Enterprise Contract Management
What Exactly Do Sales Contracts Contain?
Usually, the nature of the product or services exchanged dictates the content of any sales contract. Some common elements of a sales contract include
Buyer and seller details - Sales contracts identify all the parties' full legal names, addresses, and contact information. In most cases, it's just the buyer and seller information.
Goods, product descriptions, or services - If a product gets exchanged, the sales contract lists its model, size, color, weight, and quantity. The contract also contains the work scope, engagement tenure, and key deliverables if they agree upon service.
Payment terms - Price is one of the most negotiated and essential pieces of a sales contract. In such contracts, teams often include the payment schedule, mode of payment, and expected invoice date. It's also a good idea to include late payment terms, such as interest, a repayment schedule, or a penalty fee.
Delivery - This section outlines the cost, method, place, and time for delivery and what happens in case of damage or faltered delivery. Companies add a force majeure clause, which attributes the delivery failure to things beyond each party's control.
Inspection Period - The term "inspection period" describes a refund or return policy. Essentially, it offers the buyer a fixed period to inspect the goods and determine whether they are of the appropriate calibre.
Warranties - A warranty clause is a legally binding assurance that the products or services will be of the expected quality and level of reliability.
Also, within sales contracts, it’s common to find other provisions like governing law, breach of contract, confidentiality, amendments, and notices. Check out the six key clauses used in sales agreements.
Also read: Everything about sales contract management
The Benefits of Using Sales Contracts
Sales contracts explicitly state each party's rights, obligations, and responsibilities. So, they can quash confusion and be on the same page. Moreover, sales contracts serve as a cheat sheet calling out the accepted terms precisely when things don't pan out as planned. For instance, if delivery or payment gets delayed, the buyer and seller know the next steps based on the conditions outlined in the contract.
Finally, sales contracts safeguard the buyer and seller from anyone breaking the terms of the sale and lay the foundation for a healthier business relationship. Through sales contracts, buyers, and sellers:
- Gain clarity and set the right expectations.
- Give enough value to your otherwise oral pronouncements.
- Forge positive business relationships.
- Ensure payments get done as initially planned out.
- Get hold of an enforceable contract.
Types of Sales Contracts
The following narrative briefs the types of sales contracts and the occasions they come into the picture.
Type 1 - Sales agreements
Definition
A sales agreement is a written agreement between a buyer and a seller. It specifies the goods bought and the conditions of the transaction. They aid in increasing the predictability of your business's transactions, earnings, and revenue margins.
When are they used?
Sales agreements are commonly used in real estate and auto sales.
Type 2 - Order forms
Definition
Buyers use order forms to request specific items from a seller. You could also find shipping details and payment terms on some order forms. Upon filling and signing them, a legally binding engagement begins between a buyer and a seller.
When are they used?
Order forms are used for large business orders or high-value transactions.
Type 3 - Master Service Agreements
Definition
An initial agreement signed by parties to govern ongoing commercial interactions is known as a master service agreement (MSA). MSA lists the parties' collective general terms and conditions.
Also, it serves as a framework for any upcoming business dealings between the parties, enabling them to rapidly and effectively negotiate and execute new agreements.
When are they used?
Industries that offer open-ended services, such as technology, manufacturing, and government mostly use Master Service Agreements.
Type 4 - Statement of work
Definition
A Statement of Work (SOW) outlines the objectives, deliverables, and timeline of the project. It also includes liabilities, obligations, and work agreements between two parties. Additionally, these agreements are usually signed between a client and an agency, contractor, or service provider.
When are they used?
Professionals in project management use Statement of Work agreements extensively.
Type 5 - Terms of Service
Definition
Terms of Service (ToS) are legally binding agreements between customers and service providers. They include components such as responsibility clause, liability clause, opt-out clause, privacy regulation, and appropriate usage. These contracts help users review and accept conditions before utilizing a service on the company's website.
When are they used?
Terms of Service agreements are typically found within e-commerce and small businesses.
Type 6 - Renewal agreements*
Definition
A renewal contract is an agreement that parties use to prolong an existing agreement. These contracts usually resemble the original due to the similarity of the requested services. Normally, the contracts are renewed through amendments if there is no change in the Terms & Conditions (T&Cs).
When are they used?
Renewal agreements are used to extend an existing contract for another term.
Type 7 - Upsell agreements*
Definition
Instead of just renewing, the upsell agreement includes new products and services. If the agreement is active, this is usually done through amendment.
When are they used?
This type of contract is used by companies looking for long-term, positive relationships with their clients and customers.
[Expert Opinion] 7 Best Practices for Executing Sales Contracts Correctly
Following is a step-by-step process you should consider for a successful and prompt signing of sales contracts.
Look for standard clauses: Before executing a sales contract, your foremost step is to check for the following provisions - warranty, limitation of liability, indemnity, publicity, the scope of work, intellectual property, and termination. If something is not as per your standard, acknowledge and incorporate practical terms.
Add fallback positions on the go: CLMs make an edge by providing a clause library, which is an easier way to add fallback positions when the provisions are not as per your company standards or not in favour. Using legal-approved language means you must always be compliant and adhere to the organization's standards. This alignment makes signing sales contracts a lot faster.
Generate contracts faster with CRM integrations: Modern CLMs have robust CRM integrations. That means all the deal properties automatically sync and populate into the sales contracts, reducing room for errors and saving ample time for teams. Once you have pulled your information from the CRM, a contemporary CLM platform helps you smartly fetch prospect information through forms. Also, maintaining consistency across systems is possible as the sales agreement gets stored in the CRM as well as in the repository once executed.
To summarize, the seven best practices for smooth sales contract execution include
1. Standardizing your terms
2. Syncing information between CRM and CLM
3. Collecting counterparty information through smart forms
4. Streamlining approvals on the agreement
5. Picking up fallback positions quickly from the clause library
6. Signing contracts electronically with a push of a button
7. Tracking critical dates like expiration/renewal through a centralized repository and reminders
“Sales agreements are the bloodline of every successful partnership. A reliable and agile tool that helps salespeople close contracts faster in a risk-free convenient way not only helps meet targets but also fosters trust and communication between parties.”
- Punit Batra | Strategic Accounts
Bringing It All Together
CLMs such as SpotDraft help you templatize your high-volume sales contracts. They help drive alignment between legal and sales.
By empowering team members to create sales contracts on-demand on a self-serve basis, SpotDraft helps them achieve outsized outcomes. So, what’s the wait for? Start creating invaluable sales contracts effortlessly with SpotDraft. Register for a free demo!
