Contract of Sale and Delivery: What You Need to Know
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The sales and purchase agreement as well as the supply agreement are two of the most commonly used contracts in civil transactions. These contracts involve the transfer of property ownership from one party to another in exchange for payment and under specific conditions, to put it succinctly.
Under a sales and purchase agreement, the seller transfers specific property (goods) to the buyer's ownership. In a supply agreement, the supplier conveys the goods to the buyer. For instance, if you are procuring goods for resale, it is more advisable to enter into a supply agreement.
We provided this recommendation to one of our clients who sought our assistance in establishing a business for selling certain technically complex products in Ukraine.
For our client, we formed a limited liability company, established the use of cash registers, created the necessary sales and purchase agreements with customers (including online sales through the public offer agreements), and a supply agreement with the supplier. As a result, the client is content and continues to operate successfully.
Knowing When to Use a Purchase Agreement and When to Use a Supply Agreement
As per the Ukrainian Commercial Code, a supply agreement is typically made between business entities and involves the supply of goods with the intention of their subsequent resale. A supply agreement establishes long-term relations between the involved parties and may entail periodic deliveries (in batches).
In simpler terms, when the agreement involves individuals, it is appropriate to employ the structure of a purchase and sale agreement. For example, when buying goods online or purchasing a vehicle, a purchase and sale agreement is commonly used. Nevertheless, if you are operating as a sole proprietorship (FLP) or procuring goods from an LLC with the intent to resell them, it is advisable to opt for a supply agreement.
Recently, we aided a client in organizing and establishing the sale of a particular piece of equipment. The client intended to acquire equipment from a Ukrainian company, install their proprietary software, develop an interface, and ultimately sell the finished product to end customers. In this scenario, a supply agreement was formalized between the client and the equipment supplier, and a purchase and sale agreement was employed between the client and the end users.
Sometimes, terminology may be interchanged, and parties might mistakenly use "purchase and sale" instead of "supply" and vice versa. For instance, one of our clients, an IT company, ordered specific products for their office. The counterparty initially provided a purchase and sale agreement for signing. After clarifying that our client did not intend to resell the office products to other customers, an agreement was reached, and the contract was appropriately amended to a purchase and sale agreement.
If you want your contractual relationships to align with legal requirements and mitigate the risk of lawsuits or inspections, we recommend considering the distinct characteristics of these agreements and when each should be applied.
Transfer of Ownership and the Risk of Destruction (Damage)
Purchase and supply agreements involve the transfer of property ownership from one party to another. Typically, the risk of accidental destruction or damage to the goods is transferred to the buyer upon their receipt. It is crucial to specify the procedures in the agreement that will be followed if any damage or destruction occurs to the property, goods, packaging, accompanying documents, or components.
These procedures may include:
- A protocol for rejecting damaged goods.
- Submitting a claim to the supplier or seller.
In such cases, it is advisable to clearly outline the relevant procedure in the agreement, especially when a carrier or postal service is responsible for delivering the goods to the buyer.
In our practice, we encountered a situation in which our clients, involved in the trade of household appliances, received a shipment of damaged goods. The damage affected the labeling, packaging, and some of the appliances themselves. These damages prevented our client from introducing the appliances into the market and selling them to end customers.
As a result, during the equipment handover process, our client, as advised by our legal team, documented the damages and created a defect report. Subsequently, based on these documents, we filed a claim and, over time, received compensation from the logistics company responsible for transporting the goods.
Nonetheless, we have encountered negative instances where clients failed to thoroughly review the contract, leading to the transfer of the risk of accidental destruction from the moment the goods were unloaded at the supplier's warehouse. In such cases, obtaining compensation becomes challenging. Therefore, the clause addressing the risk of accidental destruction of goods or property is a crucial element of any contract and warrants careful attention.
You may also like: How to Get a Refund for Poor Quality or Incomplete Goods
The form of a sales or supply agreement
Contracts of sale and supply are generally executed in simple written form. Notarization of these contracts is required under the following circumstances:
- When the parties voluntarily opt for notarization.
- When the sale involves the transfer of ownership rights to real estate or land.
- In cases where the law explicitly mandates the execution of a notarized contract.
As technology has evolved and we've transitioned into the digital age, we've become accustomed to entering into contracts in what is commonly known as an "electronic" format. From a legal perspective, an electronically signed contract holds the same legal weight as a written one. Both supply and sales contracts can also be executed electronically, utilizing electronic digital identification methods. However, entering into such contracts comes with its own set of intricacies. We will provide more comprehensive information on this topic in a separate piece. We have extensive experience in handling sales and supply contracts, including the following services:
- Crafting a comprehensive contract tailored to your specific requirements.
- Analyzing contracts from the counterparty.
- Making necessary amendments to contracts.
- Handling contract terminations.
- Pursuing compensation and seeking remedies under the contract.
If you or your business requires contract development, our legal experts are more than willing to assist you.