Key Takeaways:

  • A contract of sale is a legal contract between a buyer and a seller that governs the transfer of ownership of a property in goods between them.

  • Creating these contracts involves six steps: offer, acceptance, consideration, intention to create legal relations, legal capacity, and certainty and completeness.

  • Familiarity with contract terms and knowing what to look for can protect your interests.

  • Parties must have the capacity to understand the contract and its implications.

  • Contract terms must be clear and complete to ensure enforceability.

  • Use plain language, include essential elements, verify facts, follow laws, ensure mutual consideration, and specify remedies for breach.

  • Common challenges include ambiguous terms, incomplete contracts, breach of representation, breach of statutory form, and lack of consideration.

  • If you want to ensure the contract is enforceable and covers all the bases, post a job on UpCounsel today to find a contract lawyer for your legal requirements.

Before you create any contract, a comprehensive understanding of the essentials of a contract of sale in business law is critical.

Being familiar with the terms used in a contract and knowing what to look for will help you avoid problems in the future and protect your best interests. 

This article will discuss the fundamental components of a contract of sale, how they work, and practical applications for these legal contracts.

What is a Contract of Sale?

A contract of sale is a particular type of legal contract between a buyer and a seller. It governs the transfer of ownership of property or goods between two parties. 

The buyer and the seller must be different people or entities to create a legal contract. However, a person could contract to sell property to a trust or entity that they completely own or control.

The contract must include certain details such as an agreed-upon fixed price, payment terms, delivery and description of the goods, warranties, and information about the buyer and seller.

For it to be valid, it must contain clauses about mutual understanding and the competency (if a person) or validity (if an entity) of the signing parties.

How Do Futures Contracts Work?

A futures contract has some similarities to a contract of sale, but the two have distinct and important differences. 

A futures contract is a legal agreement to buy or sell a given commodity or financial instrument at a specific price at a specific time in the future. These contracts are bought and sold on futures exchanges. 

They have in common that both are legally binding agreements between parties to buy or sell an asset at a certain price within a specific timeframe. This allows for more certainty in the future market and can help buyers and sellers mitigate potential risks. 

Futures are also traded on a stock exchange, whereas a contract of sale is typically done between two private parties.

Essential Elements of a Contract of Sale

Understanding the essential elements of a contract of sale is important before creating any contract, whether you are a business or an individual. 

Here are some basic elements of a contract of sale:

  • A contract of sale is between two parties, where one party transfers ownership of property or goods to another.

  • The subject of the contract must distinctly specify the goods to be sold. This is usually the most important element in a contract of sale because confusion could result if the goods are not described precisely.

  • The seller must transfer ownership of the goods from the seller to the buyer, or there should be clear language establishing the specifics of a future or contingent transfer.

  • The buyer in the contract must pay a price or give up something of value for the goods.  This is called consideration.

  • A contract of sale does not require formalities or a particular form in order to be valid. It can be made simply by offering and accepting as long as there is consideration made by the buyer and delivery of the goods by the seller.

Contract of Sale: Steps

We can further explain a contract of sale by breaking it down into six steps: offer, acceptance, consideration, intention to create legal relations, legal capacity, and certainty and completeness. 

1. Offer

A validly binding sales contract consists of an offer to sell or buy goods for a price and acceptance of that offer. The payment or delivery of goods is not immediately necessary when creating the sales contract unless agreed to. 

An offer can be made in the following ways:

  • In writing (this is what most lawyers recommend and is necessary in most states for the sale of goods over $500).

  • Partly in writing and partly orally.

  • In some cases, they can also be made orally and through actions and implied by those actions.

2. Acceptance

Acceptance of an offer results in a contract when the seller agrees to the buyer's offer. 

An acceptance manifests the seller's intention to be bound by the terms of the offer. Actual acceptance of an offer requires the seller’s explicit consent (the “seller says yes, I agree to “X” terms of your offer” or signs their name on a written offer of acceptance) to be effective.

A seller must make sure the terms of the offer are communicated clearly and the acceptance is not ambiguous or unclear or the contract may not be enforceable.  

3. Consideration

The second element is consideration: this is the property value, the thing each party gains or gives up as a consequence of the contract. Consideration means the parties agree to exchange something of value. 

In the typical contract of sale, the consideration is the price paid by the buyer to the seller in exchange for the goods or services. This distinction between a contract and a promise or gift makes the obligation binding. 

There must also be an exchange, an agreement between the parties to give something of value and receive something of value in return. 

4. Intention to Create Legal Relations

Without evidence of intention, there can be no binding agreement. A legally enforceable contract exists only when the parties agree that their arrangement will be enforced by law.

Intent can be shown through the words of the financial contract, the circumstances that provided the background for the agreement, and the parties' conduct. 

For example, if two parties have signed an agreement in writing, that contract often constitutes intent if the agreement is formal in language and includes specific terms.  In other circumstances, the actions or conduct of the parties may evidence the intent, or lack of intention, for the parties to have a binding contract.

Clear vs. Questionable Intent

An agreement's intention must be legal in nature for it to be enforceable.

Agreements between family or friends are not often made with the intention of creating legal implications for the agreement. Agreements lack legal intent when vague, hypothetical,  informal, or casual.

Conversely, a formal agreement, such as a sales contract, indicates clear intent. Agreements that must be formal by law, involving notarization or registration, would also indicate clear intention.

5. Legal Capacity

Legal capacity refers to an individual’s capacity to enter into a legally binding contract. It means a person can understand the relevant information and consequences of the other party’s actions.

Legal capacity is important because it demonstrates that people understand what they agree to and can make sound decisions. 

It prevents vulnerable people from: 

  • Being taken advantage of.

  • Entering into agreements where they do not understand what they are agreeing to.

  • Agreeing to things they are not capable of carrying out.

People might lack the legal capacity to enter into a contract in certain situations. 

These include:

Minors

Any person who has not yet reached the age of majority—usually 18 in the United States—generally does not have the legal capacity to make a contract, and these contracts are voidable.  

However, there are exceptions, including in Alabama, where the age of majority is 19. Car rentals are also an exception because renters must be at least 21. 

Learn more about the legal contract age here. 

Mentally-Incapacitated Persons

Those unable to agree to a contract because of mental incapacity or because they have certain mental health disorders are considered mentally incapacitated as it relates to contract law. As such, these contracts can be voidable.

Examples can include those with advanced dementia, people with intellectual disabilities (depending on severity), and affective disorders, including severe bipolar disorder.

Incapacitated Person

Contracts made with an incapacitated person can also be voidable. This applies to people who are under the influence of drugs or alcohol to such an extent that they do not understand the nature and consequences of the contract at the time it is made.

Find more examples of capacities in parties here.

6. Certainty and Completeness

Consideration of certainty and completeness is vital in contract terms so both parties have no doubts regarding their rights and obligations. This is vital in determining the performance and enforcement of the contract. 

Certainty means that the contract terms are precisely defined, with no room for ambiguity, and completeness ensures all the necessary characteristics of the agreement are covered.

Contract of Sale Example: Practical Applications

A contract of sale applies to the transfer of ownership of goods. 

For example, Party A agrees to sell wheat crops from land they own to Party B. Both parties agree that Party B can cut and take the crops after paying the agreed price. Once Party B pays the price and takes the crops, they are now the owner of those crops.

Since wheat crops are classified as a good, this is a valid contract of sale. In fact, every movable property is a good except for cash and actionable claims. 

Importantly, contracts for services are not contracts of sale. Additionally, the sale of immovable property and book debt are dealt with differently and have more complex laws to make them enforceable.

Common Issues with Contract of Sales and How to Avoid Them

When contract law is not followed precisely, common contract of sales issues can arise and end up unenforceable or voidable.

These include: 

  • When terms and conditions in a contract are ambiguous, the parties might dispute who is owed what rights and obligations. 

  • Incomplete contracts (e.g., missing terms like the payment amount or the time and place of delivery) will likely lead to disagreements about what the contract obliges each party to do. 

  • Misrepresentation or fraud (when a party provides false information about a material term or omits material information) might invalidate the contract.

  • Contracts that do not comply with legal formalities will likely not be enforceable.

  • Contracts that are lacking consideration, such as a gift, may be unenforceable.

Creating Valid Contracts

Fortunately, many of these challenges can be overcome by creating a valid, legally sound contract from the start. A valid contract meets all legal requirements and can be enforced in court. 

  • Use plain language so all information is unambiguous. 

  • Include every single essential element under the law. 

  • Verify that every fact in the contract is accurate to avoid any claims of fraud or misrepresentation. 

  • Follow every relevant law and regulation to ensure your contract is enforceable. 

  • Confirm that mutual understanding and consideration exists 

  • Spell out exactly what your remedies are in the case of a breach.

Bottom Line: The Importance of a Well-Defined Contract of Sale

A well-defined, legalized contract of sale offers leverage in the future if any disputes arise between the parties involved. It is also legally binding and provides clarity and understanding for all parties involved.

If you need help with a contract of sale, post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5% of contract lawyers on its site. 

The contract lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.