Sale Contract

Definition :

Contract of sale is defined as “formal contract by which a seller agrees to sell and a buyer agrees to buy, under certain terms and conditions spelled out in writing in the document signed by both parties. Also called agreement of sale, contract for sale, sale agreement, or sale contract.” (source : www.businessdictionary.com) A sales contract can cover any kind of sales action such as sales of intellectual property rights, sales of real estate etc... We will be focusing only on international contracts for sale of goods.

Usage :

Under international business transactions exporters and importers define their roles and responsibilities of each other with sales contracts. A sale contract is a legally binding document for both parties. In practice small volume of international sales are handled by proforma invoices whereas medium size sales are covered under sale contracts. Big volume of sale contracts should be written by lawyers. In addition to volume of the trade transaction duration of the business is another point of consideration when deciding to use a proforma invoice or sale contract. If business transaction will be completed over a period of time such as 1 year or more than sale contracts should be preferred instead of proforma invoices.

Proforma Invoices vs International Sale Contracts : Points of Consideration

Table 1 : Choosing a Sale Contract or a Proforma Invoice

Effective Sale Contract Should Cover Below Points :

  • Company information of the seller and the buyer (company name, address, contact details, etc.)
  • Subject of the sale contract
  • Description of the goods 
  • The unit price of the goods, total contract quantity and total contract amount
  • Package and shipment details
  • Delivery date or delivery period
  • Penalties of late shipment 
  • The delivery terms according to Incoterms
  • Payment terms (irrevocable documentary credit, cash against documents, electronic fund transfer)
  • Definition of trade documents that will be supplied by the exporter, how are they completed, how many originals and copies will be supplied  
  • Force Majeure ( Act of God)
  • Resolution of disputes (arbitration or litigation).
  • Authorized signatures

Special Hints on Sale Contract for Letters of Credit Transactions :

UCP 600 Article 4 states that "A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary...An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like."
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What is a sale contract? How can we use a sale contract in a letter of credit transaction? 
In international trade transactions, a sale contract defines the roles and responsibilities of the parties to each other. Without a sale contract you can not define exporters and importers rights and obligations.

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Proforma Invoice
Sale Contract
Trade Volume
Small Trade Volumes
Medium to Big Trade Volumes
Duration of Business
Spot Sales
Long Term Business Relation