A sales contract is an agreement between a buyer and seller covering the sale and delivery of goods, securities, and personal property other than goods or securities. In the United States domestic sales contracts are governed by the Uniform Commercial Code (UCC). International sales contracts fall under the United Nations Convention on Contracts for the International Sale of Goods (CISG), also known as the Vienna Sales Convention.
Under Article 2 of the UCC, which has been adopted by every state (except Louisiana), the District of Columbia, and the U.S. Virgin Islands, a contract for the sale of goods for more than $500 must be in writing in order to be enforceable (UCC 2-201). The sale of securities is a special case covered in Article 8 (UCC 8-319); to be enforceable a contract for the sale of securities must be in writing regardless of the amount involved. For the sale of other kinds of personal property, a minimum of $5,000 must be involved before an enforceable contract must be in writing. Otherwise, an oral agreement is enforceable as a binding contract.
Contracts that must be in writing to be enforceable are said to be within the Statute of Frauds. The Statute of Frauds dates back to 1677, when the English Parliament decreed that certain types of contracts must be in writing. The applicable parts of the UCC effectively define the types of sales contracts that must be in writing. In addition, every state has its own version of the Statute of Frauds.
Under the UCC a written sales contract should specify the parties involved, the subject matter to be sold, and any material or special terms or conditions. Some states also require that the consideration—the amount and type of payment for what is purchased—be specified. The UCC does not require a formal sales contract, though. In many cases a memorandum or collection of papers is sufficient compliance. The courts have held that a written check can be considered a written memorandum of a sales agreement. The UCC allows a written sales contract to be enforced even if it leaves out material terms and is not signed by both parties. One party, however, may not create a sales contract on its own that is binding against another party, and an enforceable contract must be signed by the defendant, or the one against whom the contract is sought to be enforced.
Although Article 2 of the UCC has not been revised since the 1950s, it was reviewed during the 1990s for possible changes to reflect changing ways of doing business. Five specific issues were addressed in the review of Article 2:
In many cases a purchase order, pro forma invoice, or order acknowledgment may serve in place of a formal sales contract. A purchase order is issued by the buyer and sent to the seller, stating the type and amount of goods to be purchased, the price, and any other material terms such as a time limit on filling the order. A pro forma invoice is issued by the seller and sent to the buyer, often in response to a purchase order or oral agreement. In international transactions, the pro forma invoice may enable the buyer to open a line of credit with which to pay for the goods ordered. The pro forma invoice typically includes relevant terms and conditions that apply to the sale.
A formal order acknowledgment is useful for establishing the seller's position in case a dispute should arise. The order acknowledgment is drawn up by the seller in response to a received purchase order. It does not necessarily repeat the details of the purchase order, but it may clarify details such as delivery schedules.
When a formal order acknowledgment is countersigned by the buyer, it becomes a type of sales contract.
For international transactions, the Vienna Sale Convention is binding on signatory countries, of which the United States is one. Each of the nations that has signed the convention may state up to five reservations. For example, the United States has stipulated that it shall apply to U.S. companies only when the transaction involves another signatory country. Much of the convention parallels the UCC, with these notable exceptions: (1) acceptance of an offer that includes a request for additions or modifications constitutes a counteroffer; (2) there is no provision requiring a contract be written in order to be enforceable; and (3) the period for discovering defective merchandise may be as long as two years.
Sales contracts are useful in providing for a common understanding between buyer and seller, minimizing disputes. When a dispute does occur, the sales contract can help provide for a fair settlement.
[ David P. Bianco ]
Brinkman, Daren R. "Unsecured Creditors' Rights in Sales and Secured Transactions: Is the Revised UCC 'New and Improved' or Just 'New'?" Business Credit, September 1998, 34-37.
Fraser, Jill Andresky. "Around the World in 180 Days (Collecting International Receivables)." Inc., April 1997, 107-8.