What Is a Sale on Approval Contract?
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Also known as a sale on satisfaction or sale on trial, a sale on approval contract regulates the conditional sale of goods made on a trial basis. Sellers use this contract to induce sales that buyers may not be enthusiastic about, while buyers use it to examine and inspect goods they may not otherwise buy.
Read on to learn when to use sale on approval contracts and the differences between a sale on approval, a sale or return, and similar contracts. You’ll learn how to write sale on approval contracts, what to include in them, and how contract management software can help you manage all of your contracts.
What Is a sale on approval contract?
A sale on approval contract regulates a conditional sale where the buyer receives goods for evaluation before deciding to buy them.
Goods sold through a sale on approval contract are held in bailment by the buyer until they accept them. In other words, the buyer has physical access to the goods, but the goods still belong to the seller.
Accordingly, the seller must pay for repair or replacement costs if the goods are destroyed or damaged by forces outside the buyer’s control, such as third-party negligence or weather. If the buyer is in debt, their creditors cannot take the goods held in bailment. However, the seller’s creditors can take the goods if the seller is in debt.
The sale on approval closes when the buyer accepts the goods. If the buyer does not make a decision within a specific time frame, they will be deemed to have accepted the goods. Ownership, benefits, and obligations will then pass to the buyer at this time.
If the buyer does not accept the goods, they will return them to the seller.
Who uses sale on approval contracts?
Buyers regularly use sale on approval contracts to test goods that may not meet their standards. Sellers also use these contracts to induce sales that buyers may not agree to otherwise.
You can encounter sale on approval contracts in almost any industry, especially technology, manufacturing, transportation, and marketing. Common examples of items that may require sale on approval contracts include:
- Niche or new enterprise machines and programs
- Magazine subscriptions
- Office furnishings
- Sale of goods that are subject to change, such as contracts to purchase a forthcoming version(s) of a shoe, car, or product
Similar contract types
Contracts similar to sale of approval agreements include:
- Sale or return agreements: These sale contracts give buyers the right to return the goods to the seller if they don’t like the product.
- Conditional sale agreements:These agreements transfer ownership only once parties meet certain terms. For instance, an installment contract to buy equipment is conditional if it requires the buyer to make payments before giving them the title.
- Futures contracts: Buyers and sellers use these contracts to establish prices and quantities of a product for delivery at a later date. Companies often use futures contracts for speculation and hedging.
- Consignment agreements: Unlike sales agreements, consignment agreements aren’t between buyers and sellers. Instead, they occur between a consignor (a party that transfers goods) and a consignee (a party that receives the consignor’s goods). The consignor transfers goods to the consignee to grant them the legal right to sell on their behalf. In return, the consignee stores, sells, and transfers the consignor’s goods and receives a commission for the goods they sell. Businesses often use consignment agreements for seasonable merchandise, including summer clothes, Christmas decorations, and beach accessories.
What is the difference between a sale on approval and a sale or return?
It’s easy to confuse sale on approval with sale or return. However, these two contract types have key differences.
Sale on approval contract parameters:
- Definition: A sale on approval is a future contingent sale by the seller to the buyer. It closes when and if the buyer accepts the goods.
- Alternative names: Sale on satisfaction, sale on trial
- Purpose: Sellers use sale on approval agreements to deliver goods to buyers primarily for their usage.
- Common use cases: Buyers use sale on approval contracts to try new products before buying them.
- Industries: Every industry, especially manufacturing, technology, marketing, and transport.
- When the buyers’ creditors can claim the goods: Goods held on approval are not subject to buyers’ creditors’ claims until acceptance.
- Risk of loss: The risk of loss remains with the seller until and unless the buyer accepts the goods. If the buyer chooses to return the goods, the seller will bear the expense and risk of loss during the return.
Sale or return contract parameters:
- Definition: A sale or return is a present sale of goods where the seller takes back the goods instead of demanding payment if they aren’t resold.
- Purpose: Sellers use sale or return contracts to deliver goods to the buyer primarily for resale. Accordingly, buyers of sales or return agreements are usually merchants or retailers.
- Common use cases: Buyers use sale or return agreements to eliminate write-offs by returning unsold stock.
- Industries: Sale or return agreements are typically used in manufacturing and retail. Buyers tend to be retail businesses, while sellers tend to be manufacturers.
- When the buyers’ creditors can claim the goods: Goods held on sale or return are subject to the buyers’ creditors’ claims while in the buyer’s possession.
- Risk of loss: The buyer bears the expense and risk of return if they choose to return the goods.
How To write a sale on approval contract
A solid sale on approval contract should include a few key provisions, including parties and the date of the agreement, a description of goods, a delivery clause, a sale on approval clause, and an acceptance and final payment clause.
Parties and date of agreement
The first part of your sale on approval agreement establishes the agreement date and the identities of the parties. Be sure to include the full legal names of the parties to the contract and their roles in parentheses. For example:
This Sale on Approval agreement is made this 15th day of May 2023 between ABC Inc. (“Buyer”) and DCB Inc. (“Seller”).
Description of goods
Once you’ve established the date of your agreement and the parties’ identities, you must explain what is being sold or bought. Provide a detailed description of the goods at issue, industry standards the goods should meet, and the quantity of goods. Consider attaching an Excel sheet if you’re selling or buying more than 50 items.
Inspection of goods
Use this section to outline:
- Who from the buyer’s side can inspect the goods (i.e., the CEO or a department head)
- When the buyer can inspect goods
- Where the buyer can perform inspections
Next, explain when and where the delivery will take place. For example:
The delivery will take place on May 20, 2023, at 11:30 am. Unless otherwise agreed, the place of delivery of the goods is the buyer’s place of business.
Sale on approval clause
This section reminds both parties that the contract is a sale on approval. Make sure to include the following points:
- All goods sold to the buyer are sold on a sale on approval basis
- The buyer may return the goods to the seller at any time before an agreed-upon date
- The buyer agrees to notify the seller within a reasonable time of its choice to return the goods
- The buyer is presumed to have accepted the goods if they do not make a decision before the agreed-upon date
Acceptance and final payment
This clause establishes how the buyer can indicate acceptance and how much they will have to pay the seller after acceptance. It should also cover the payment method, the date of payment, and payment schedule(s), if applicable.
You should also include standard sales contract provisions, including:
- Warranties: These provisions assure the buyer that the product will meet a certain level of reliability and quality.
- Notice: This establishes how each party should send notices to others.
- Termination:This establishes how the parties can terminate the agreement.
- Force majeure: This clause excuses parties when they fail to honor the contract due to uncontrollable and unforeseen events, such as hurricanes, COVID-19 disruptions, and floods.
- Severability: This states that other remaining parts of the contract will remain valid and enforceable if any clause or provision is found unenforceable or invalid.
- Jurisdiction: Discuss which state law is applicable, whether disputes will be settled by litigation or arbitration, where lawsuits will be litigated, who will bear litigation costs (if applicable)
Use sale on approval contracts to your advantage
If you have difficulty clearing inventory or selling niche goods, consider using sale on approval contracts. Sale on approval contracts can induce sales that may not ordinarily happen by allowing buyers to inspect and test goods beforehand.
On the other hand, if you’re a merchandiser interested in eliminating write-offs, try using a sale or return contract. Unlike sale on approval contracts, sale or return agreements are present sales of goods where buyers return the goods if they aren’t resold.
Creating and managing sale on approval contracts can be difficult, especially if you are already up to your nose with other contracts. Fortunately, contract management software is here to help. The right contract management platform has the tools you need to create an enforceable contract, including a contract repository and a state-of-the-art editor.