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Sale of goods contracts

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Contents

Introduction

When goods are sold in a commercial context, a sale of goods contract is created. Within that contract it is important that all the necessary terms are covered. These can include things such as the price, the time and method of payment, and the time and method of delivery. It is essential that nothing is overlooked.

The price

There are a number of ways in which the price of goods under a sale of goods contract can be determined. The most obvious way is for the parties to negotiate a price specifically for the contract on hand. In other cases, the price is determined according to a price list or by an independent third party.

Issues to pay attention to

The following things need to be considered when the provisions relating to price under a sale of goods contract is drafted.

Price lists

If a price list is to be used, it is important to establish which price is the relevant one. It may be wise to insert a clause to the effect that the price is set according to a price list amended by the seller from time to time.

Charges and expenses

The parties have to think about whether other charges and expenses are involved in the performance of the contact. If so, can these charges and expenses be specifically named, or they are going to be covered by a general clause. The question that follows is who will be responsible for the charges.

From the seller's point of view, they may wish to increase the price if their expenses increase between the date of the contract and the date of supply. It may be a good idea to put in a specific price escalation clause in a sale of goods contract. In light of the Unfair Terms in Consumer Contracts Regulations 1999, the contract should also allow the buyer to terminate the order if the price increases beyond a certain amount.

Third party valuation

If the price is to be determined by a third party's valuation, it is important to note that if the third party cannot or does not make the valuation, the agreement will be voided altogether according to Section 9 of the Sale of Goods Act 1979.

VAT

According to law there is an assumption that unless the contract otherwise provides, the price will be deemed to include VAT. Therefore, if a seller wishes to quote prices exclusive of VAT, this has to be made clear in the agreement.

Payment

Time for payment

It is important to provide in the sale contract as to when the buyer has to pay for the goods. Is payment to be made on delivery or is a period of credit to be allowed? If so, how long is the credit period?

Late payment clauses

Although at the time of contracting, parties are positive about the performance of the contract, it is always advisable to provide for the possibility of default in a contract to avoid any possible argument in the future. The following clauses may be included in a typical sale of goods contract:

  • Clauses can be included to provide for interest payable on overdue sums. The rate of interest specified should relate to the loss the seller is likely to suffer. If not, there is the danger that a court will consider that it is a penalty clause, which would be unenforceable
  • If the buyer is paying by instalments, one should consider whether the contract should provide that if the buyer defaults in payment, the balance becomes immediately payable
  • Where goods are to be delivered by instalments, it is advisable to specify whether non-payment for one instalment will allow the seller to refuse further deliveries until the outstanding sum is paid
  • If a clause is included to the effect that time for payment is to be of the essence of the contract, the seller can terminate the contract altogether on late payment
Late payment of commercial debts

When drafting commercial agreements, one should also consider the effects of the Late Payment of Commercial Debts (Interest) Act 1998. However, recent evidence suggests that small firms are still unwilling to use the rights given to them by the Act in case they antagonise the customers on whom they are most heavily reliant.

The Act gives businesses the right to claim 'statutory interest' from other businesses. The rate of interest is presently set at 8% above the Bank of England base lending rate. The Act will be important for sellers who wish to devise their own clauses to cover late payment since they may find that their freedom to do so is restricted.

In an attempt to prevent contracting out of the statutory rights, the Act provides that the parties may substitute another 'substantial contractual remedy' for the right to statutory interest but may not agree that late payment will not carry any remedy at all.

Place of delivery

In sale of goods contracts, it is important to decide whether the seller will deliver the goods to the buyer or whether the buyer will collect such goods from the seller's premises. The law provides that in the absence of contrary agreement, the place of delivery will be at the seller's place of business or residence. The date of delivery should also be agreed upon.

Date of delivery

  • Delivery is likely to be specified as the moment the seller hands the goods over to the buyer when the seller transports the goods themselves
  • Delivery is likely to occur when the seller hands the goods over to the carrier in cases where the seller uses an independent carrier to transport the goods
  • When no time is fixed for delivery, this has to take place within a reasonable time
  • Delivery can be at the time when the buyer actually physically removes the goods from the seller's premises.
  • Delivery can be fixed at a date earlier than handover or removal, e.g. at the time when the seller gives the buyer a delivery order authorising the buyer to collect the goods from the seller's premises
Delivery by instalments

Unless it has been agreed between the parties, the buyer does not have to accept delivery by instalments. When the seller makes defective deliveries in respect of one or more instalments or the buyer neglects or refuses to take delivery of or pay for one or more instalments, the Sale of Goods Act is not helpful as to whether the innocent party can rely on the breach as a reason for terminating the contract as a whole.

To avoid uncertainties, it may be sensible to have a specific provision in the contract preventing the buyer terminating the contract for late or defective delivery of one or more instalments. This clause is, in effect, an exemption clause and will be subject to the test under the normal rules (generally reasonableness) of the Unfair Contract Terms Act 1977.

Retention of title clauses

Introduction

Under a retention of title clause, ownership of the goods sold will not normally pass to the buyer until the buyer pays for the goods. If the seller believes that the buyer is in financial difficulties, the seller may want to terminate or suspend the contract. In either case, they may wish to demand immediate payment for the goods already supplied (irrespective of the credit period allowed in the contract itself).

As the goods have already been delivered, a carefully worded retention of title clause is needed to allow the seller to repossess the goods. The Sale of Goods Act 1979 recognises these retention of title clauses and provides that:

'Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may ....... reserve the right of disposal of the goods until certain conditions are fulfilled.'

Issues to consider

  • Due to legal complexities, the seller should ensure that they retain legal title in the goods until they are paid for. The best way to do this is through an express term in the contract to this effect.
  • The retention clause has to give the seller the right to enter the buyer's premises to recover the goods. Otherwise, the seller may be guilty of trespass if they enter into the buyer's premises to take back the goods.
  • The specific goods have to be identified for the retention of title clause to work. This means that a retention clause over '1kg of apples' will be ineffective unless the specific apples themselves are identified. If the goods are themselves distinctive, no difficulty arises. Otherwise, the retention of title clause has to be widened to stipulate that the buyer has to store the goods separately from others.
  • Difficulties arise when the goods have been mixed with other goods and lost their original identity or when the buyer has already sold the goods. There have been attempts to extend the retention of title clauses to the finished products or to the sale proceeds of the goods but none of these have succeeded yet.