In general, a sales contract or a sales agreement, is basically a contract which outlines the whole transaction between two parties which are the buyer and seller.
As a manufacturer you will need a sales contract or agreement to ensure that the sales deal that you are making with the purchaser is clear. You do not want to be put in a situation where payment not made according to expectation.
In this article, our main focus would be between manufacturers and distributors.
Just so you are aware that in Malaysia, the general legislations which govern the sales contract would be the Contracts Act 1950, Sales of Goods Act 1957 and the Consumer Protection Act 1999. There are however other laws that may be applicable according to the industry that you are in or the product that you are supplying.
The common names of the agreement in the market are usually referred to as a “Distribution Agreement”, “OEM Agreement” where “OEM” stands for Original Equipment Manufacturer, “Marketing Agreement”, and “Offtake Agreement”.
Although the name can be varied, the key principle of these agreements would be you as the manufacturer selling the products to another party..
In this article we will discuss the main purpose of a sales contract, its importance and other information that would be useful for you. The content of this article would be as follows:-
What happens if you don’t have a Sales Agreement;
How can you secure your interest as a manufacturer in a Sales Agreement;
The difference between an RFQ, Letter of Intent (LI), Order Acceptance (OA), Invoice, and Sales Agreement;
The importance of Sales Agreement; and
What terms should you include in the Agreement.
1. What happens if you don’t have a Sales Agreement
There are a lot of things that would need to be documented. It will function later as a proof to your arrangement.
When you don’t have a sales agreement, you will have to go through the hassle of having to quarrel on many issues.
For example, issues on taxes, packaging criteria and quality standards, costs that should have been passed to purchaser and many others..
You may also want to ensure that the purchaser does not expose your intellectual property in the products that you provide or back-engineer the products that you have sold. A clear term on this will assist you in the event there is a breach to your intellectual property.
Other expected issues would be failure of payment by the buyer. This will cost you not only about the unpaid goods or services, but you will also incur losses due to non-existing proof of initial arrangement/agreement that you had with the buyer. A sales agreement would assist to secure your payment in many other ways for example bank guarantee arrangements, corporate guarantees and other security arrangements placing you in a better footing to recover your loss should the purchaser fail to pay after you have manufactured the product specifically for them.
Lastly, it will cost you a lot of time to build and arrange the facts of your case if the dispute ever goes to a court. And most probably you may lose because of the lack of evidence for the whole transaction that you have with the buyer.
2. How you can secure your interest as a manufacturer in a Sales Agreement
As a manufacturer, while in the process of drafting the sales agreement the people you can ascertain the identity and financial capability of the buyer. The main reason as to ascertain these matters is we can ensure that the whole transaction is in the best interest of you and that you are not dealing with a party that is not able to keep his end of the bargain.
If it is a legitimate transaction and the deal goes south, you can rely on the law to recover your loss with debt recovery procedures such as by giving notice of demand or by commencing an action in Court.
You can also rely on the terms of the agreement should the buyer argue on the quantity, quality or the method of the delivery of the product. Therefore, the existence of this sales agreement can help save you from having headaches in the future.
3. The Difference between an RFQ (Refer for Quote), Letter of Intent (LI), Order Acceptance (OA), Invoice and Sales Contract.
If you are a consumer, the sale and purchase of a product at a store is fairly straightforward. You will bring over the product that you have chosen to the cashier, the person attending will key in the name of the product, tell you the total price of the product, you will pay it and thereafter they will bag it and you can take the product back with you.
For a manufacturing sale and purchase process however things may not be as straightforward. Apart from stating the quantity that you would like to be manufactured, there are also other elements that you need to determine such as the material, quality, packaging, logistics, manufacturer warranty and other items.
For these reasons, several documents are needed to funnel both parties into the negotiation process and ultimately conclude the sale process into a proper valid sales contract. Among the documents are;
i.Refer for Quote (RFQ)
ii. Letter of Intent (LI)
iii. Purchase Order (PO)
iv. Order Acceptance (OA)
v. Delivery Note
vi. Invoice
Now let’s look into the use case of these documents deeper.
i. Refer for Quote (RFQ)
It is a document sent by the potential purchaser to the manufacturer to request information about a particular product and price quote for the order that the purchaser intends to purchase from the manufacturer. In response to this, the manufacturer may prepare a quotation based on the specification as stated by the potential purchaser.
ii. Letter of Intent (LI)
Upon receiving the quotation, the purchaser and the manufacturer may be agreeable to the terms of the arrangement and thereafter the purchaser may then send out a Letter of Intent to the manufacturer which indicates that they are agreeable to the terms but orders have yet to be made. At this point no sales are made yet by the manufacturer.
iii. Purchase Order (PO)
If in the event that the purchase requires the product and is ready to make a purchase, a purchase order shall be placed with the manufacturer according to the terms agreed. This is called a Purchase Order.
iv. Order Acceptance (OA)
This is a document accepting and notifying the purchaser that the manufacturer is able and ready to manufacture the product according to the specification agreed earlier on.
v. Delivery Note
Once the product has been manufactured, the manufacturer now is set to deliver the product to the purchaser. The question is, at which point will the product be considered delivered to the purchaser? Upon acceptance of the product by the courier service servicing the parties, or upon the product being placed at the loading bay, or it can be upon the product received by the purchaser? These questions must be decided and ascertained between the parties as it is the issue to the risk of the safe keeping of product as well as the issue of how sale is defined.
vi. Invoice:
Once a sale is concluded, a document asking the purchase to make payment is issued by the manufacturer. This is called the invoice. Most of the time, a manufacturer would request a commitment fee in the form of a deposit prior to the manufacturing process. In this instance an invoice is issued too.
Though the documents listed above would be able to dictate the price, product and specification of the products, in our experience that when you review these documents in its entirety major and critical items are left out leaving behind unanswered scenarios especially when there is dispute between parties.
The documents listed above are simply to signify a transfer of ownership from one party to another. According to Section 4 of Sales of Goods Act 19757, the Sales agreement is a more comprehensive manner to provide proof that the goods are exchanged. This will then lead to our next subtopic which is the main part of this article.
4. What is the importance of Sales Agreement?
The main importance of Sales Agreement is where it clearly outlines the responsibilities and rights for both parties. Basically, it serves as a guarantee that the transaction should proceed in a way that both parties agree to which will protect your interests. Therefore, a sales agreement can act as a legal protection when one of the parties fails to carry their duties or responsibilities.
Aside from parties as one of the terms to the sales agreement, other important clauses include:
a. Quality and quantity of product;
b. Delivery of the product;
c. Consideration for the product;
d. Payment schedule of the product;
e. Security for payment; and
f. Guarantee and warranty.
5. What terms should I include in the Agreement
Sales agreement can require different or additional information based on the goods or services that are being exchanged. However, you should consider that there are important terms that must be included in the agreement. These terms will make the agreement strong as to its enforceability consisting of all the elements of a contract.
a. Identification of parties
The full names and contact information should be provided for all parties involved in the whole transaction.
b. Description of goods
This is an important clause in the contract/agreement as it entails not only the type of the product but also the quality and quantity of product involved.
c. Consideration for the product
This is also an important aspect of a sales agreement because the buyer is only obliged to pay for the amount of consideration that has been agreed by both parties. You have to ensure that the amount is final.
d. Payment schedule of the product
The payment schedule is where you have negotiated with the other party where you include deposits, timeline for making full payment, payment methods such as bank draft, online transfer, etc. On top of that, in cases where the buyer is not paying, this clause provides penalties and other details that may operate when late payment occurs.
Other clauses to be included in the agreement would be:-
a. Confirmation of process of the product;
b. Security for payment;
c. Representation on license/regulatory requirement;
d. Guarantee & warranty;
e. Jurisdiction; and
f. Termination.
We do not want unintended consequences to be happening in the future just because there is not enough solid proof of documentation. To ensure that you and your company’s rights are protected, you may have to look through the whole process of transaction that has taken or will take place and have your well-written sales agreement ready.
We hope that this article will benefit you and if you have any questions, please do not hesitate to contact any of us!