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Sale of goods contracts

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When you sell goods, a sale of goods contract is created. Within that contract, it's important that all the necessary terms are covered. This section looks at these in detail, as it's essential that nothing is overlooked.

The price

There are a number of ways to determine the price of the goods in a sale of goods contract. The most obvious way is for you to negotiate a specific price with the buyer. In other cases, the price is determined according to a price list or by an independent third party.

In order for you to have a contract, the essential terms, including the price, need to be certain enough for both parties to know what they are. The price should either be a set price or capable of being determined by a certain procedure, otherwise the contract may be too uncertain to be valid.

You'll need to consider the following issues relating to price:

Price lists

If you're using a price list, it's important to establish which price is the relevant one. You might want to include a clause that states that the price is set according to a price list that you might change from time to time.

Charges and expenses

You must both think about whether other charges and expenses are involved when carrying out the contact. If so, you should consider whether to specifically name these charges and expenses, and say who will be responsible for them.

If you're the seller, you might want to increase the price if your expenses increase between the date of the contract and the date of supply. It might be a good idea to put in a clause in a sale of goods contract to reflect this.

The contract should also allow the buyer to cancel 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 estimate ('valuation'), it's important to note that if the third party can't or doesn't make the valuation, the contract might be cancelled altogether.

VAT

Unless the contract says otherwise, the price will be deemed to include VAT. If you quote a price without saying that it doesn't include VAT, the buyer will only have to pay you that price, and you'll then have to pay any VAT due to HMRC. Therefore, if you want to quote prices that don't include VAT, you need to make this clear in the contract.

Payment

Time for payment

It's important to state in the contract when the buyer has to pay for the goods. The law provides that payment is due in full when the goods are delivered unless you agree on different terms. You might want to change this and think about questions such as:

  • Will the price be paid in one sum or in instalments?
  • Will you ask the buyer to pay part or all of the price in advance?
  • Will the buyer have to pay on delivery, or will you allow a period of credit?
  • If so, how long is the credit period?

Late payment clauses

Although you might both intend to fulfil the duties of the contract, it's always best to agree what should happen if the buyer doesn't pay on time. This way you can avoid possible arguments in the future. In a typical sale of goods contract, you can include any of the following terms in the event that the buyer doesn't pay on time:

  • Charging interest on overdue sums. The rate of interest that you specify in the contract should relate to how much you're likely to lose if the buyer doesn't pay on time. If the rate of interest is excessive, there's the danger that a court will consider that it's a penalty clause. Penalty clauses are intended to frighten the other party into complying rather than compensating for genuine loss, and can't be enforced. An excessive interest rate could also be an unfair term in a consumer contract. However, if you don't agree an interest rate in your contract, the law will give you the right to 'statutory interest' if commercial debts are paid late (see below.)
  • Making the buyer pay the full amount immediately, in circumstances where the buyer was originally paying in instalments.
  • Refusing to deliver the rest of the goods until the buyer pays the outstanding sum.
  • Stating that the time for payment is 'of the essence' of the contract. This means that it's such an important term that late payment would entitle you to end the contract altogether.

Late payment of commercial debts

When you draft commercial agreements, you should also consider the effects of the Late Payment of Commercial Debts (Interest) Act 1998. This Act protects suppliers in business-to-business contracts (but not consumer contracts) from late payment. It gives you the right to claim 'statutory interest' on debts paid late by other businesses. The rate of interest is currently 8% above the Bank of England base lending rate.

The Act prevents parties from agreeing that the supplier won't have this statutory right to interest, unless they agree to a fair and reasonable solution instead. You'd need to bear this in mind if you want to create your own clause to cover late payment.

Delivery

What is delivery?

In legal terms, delivery means the transfer from the seller to the buyer of the right to possess the goods. This may or may not coincide with physical handover of the goods. For example, when you give the buyer a delivery order authorising them to collect the goods from your premises, you could specify that delivery happens when you give them the delivery order, rather than when they physically collect the goods.

You should agree with the buyer what constitutes delivery:

  • If you deliver the goods yourself, you would usually specify that delivery is by you handing the goods over to the buyer.
  • If the buyer collects the goods, delivery is usually by the buyer physically removing the goods from your premises, but you could agree that it will be by you notifying them that the goods are available for collection.
  • If you use an independent carrier to transport the goods to the buyer, you would usually agree that delivery is by you handing the goods to the carrier.

Transferring the right to possession isn't the same as transferring ownership of the goods - you could agree to transfer ownership at a different time.

Place of delivery

When you're selling goods, it's important to specify in the contract the place of delivery. If you don't, the place of delivery will be at your place of business or residence, so the buyer will have to collect them.

Date of delivery

The buyer will generally want you to agree on a date for delivery. If you agree a specific date, but fail to meet it, you would be in breach of contract. You might prefer to agree an approximate date instead. If you're sending goods to the buyer and you don't specifically agree on a date, you must do so within a reasonable time.

Time for delivery not of the essence

As the seller, it would be in your interest to state in the contract that time for delivery of the goods isn't 'of the essence'. This means that if you're late in delivering the goods, the buyer doesn't have an automatic right to end the contract. If you don't state this, and you've agreed a specific delivery date, then the law implies that the time for delivery is of the essence. This means the buyer can end the contract if you deliver late. They can also claim damages from you if they've suffered loss as a result.

Time being of the essence just affects the buyer's right to end the contract. If you deliver late, you'll still be liable to pay damages for late delivery, regardless of whether time is of the essence.

Delivery by instalments

The buyer doesn't have to accept delivery by instalments, unless they've agreed to this. You might agree to deliver in instalments in return for payment in instalments. If you agree to this, the buyer might not be entitled to end the whole contract if you make a defective delivery (e.g. delivering the wrong number of goods, or by delivering the wrong goods or defective goods.)

Similarly, if the buyer rejects or doesn't pay one or more instalments, this may not be enough for you to end the contract as a whole. Therefore, to avoid uncertainty in this situation, it's best for you to spell out how many defective deliveries or missed payments are allowed before the other party can end the contract.

Risk and delivery

If you're the seller, it's best for you to state that risk in the goods passes with delivery. This means that although you're responsible for any damage to the goods before delivery, once they've been delivered, the buyer would be responsible for them. This means if the goods are damaged after delivery, the buyer would still have to pay you for them.

Retention of title clauses

If you include a retention of title clause in the contract, the buyer won't own the goods until they've paid you. If you've agreed a credit period, you should include this clause so you can get your goods back if the buyer doesn't pay for them on the due date, or if you believe that the buyer is in financial difficulties.

Issues to consider with retention of title clauses

The retention of title clause needs to be carefully worded to deal with the issues below:

  • Your retention of title clause must clearly say that you'll stay the legal owner of the goods until they're paid for.
  • The retention of title clause must give you the right to enter the buyer's premises to take back the goods. Otherwise, you will be trespassing if you enter their premises.
  • It should specify the circumstances in which you can enter the buyer's premises to take back the goods – e.g. if the payment is overdue or if any insolvency proceedings are started against the buyer.
  • It should also say that you can take back and re-sell the goods.
  • The clause should say that the buyer won't be the owner of the goods until they've paid 'all monies' owed to you. This means that if you've sold the goods in batches, each batch will belong to you until the buyer has paid for that batch, and all the batches previously delivered. If the buyer fails to pay, you could take back enough of your goods from any of the batches to pay the amount outstanding.
  • As the default legal rule is that risk passes at the same time as ownership, you should state in your contract that the risk in the goods will pass to the buyer when the goods are delivered to them (see above, under 'Risk and delivery'). You should also include a term that the buyer must insure the goods as soon as they have them, and that any insurance pay-outs should be made to you.
  • The goods that still belong to you have to be identifiable in order for you to recover them. You're not entitled to take goods that belong either to another supplier or to the buyer. You should state that the buyer has to store your goods separately from others. You should also label your goods if possible.
  • If the buyer is likely to attach your goods to other goods, you could include a term giving you the right to detach your goods and take them, as long as this will not cause damage to the goods they're attached to.
  • 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. If you do have clauses that allow you to take back mixed or manufactured goods, or to recover the amount the buyer received from reselling the goods (proceeds of sale), you won't be able to do so if the buyer becomes insolvent. A liquidator or administrator won't recognise these rights. Manufactured goods, mixed goods and proceeds of sale are regarded by the law as the buyer's property, regardless of anything you may have agreed to the contrary. The sub-buyer (your buyer's buyer) will own the goods once they've been sold on.