Types of Sales Contracts

Your Legal department knows that there’s much more involved in the sales process than just exchanging money for goods or services. When selling the product or service your company offers, you need to take precautions and cover your bases to prevent complicated litigation. That’s why sales involve many types of sales contracts, including:

• Sales agreements
• Order forms
• Change order forms
• Master service agreements
• Statements of work
• Terms of service
• Renewal and upsell agreements.

You won’t always need every one of these contracts, though. A fundamental part of the contract management process is understanding when these agreements are necessary and ensuring that they’re appropriately executed. Read on to learn more about each of these contracts, who uses them, and why they’re used.

A sales agreement is the most fundamental sales contract. This is the document between a buyer and a seller that explains what’s being purchased and the terms of the sale. These contracts include critical information about both parties, how the goods or services will be delivered, and the terms of liability if either party reneges on the sale.

Sales agreements are used in most industries. Some of the most obvious sales agreements appear in real estate and vehicle sales. These large-scale purchases require thorough contracts to ensure that buyers and sellers are protected from potential fraud. However, sales agreements can also be used to set up recurring sales, such as a janitorial contract in which the buyer arranges for regular cleaning services from the seller. 

Order forms are a particular variation of a sales agreement. While sales agreements can take many forms, an order form is a standardized form designed to be issued blank to buyers. The buyer then fills out the order form with their specific needs and returns it to the seller. Once the seller accepts it, it’s considered a legally binding contract. 

These agreements are intended to simplify the ordering process by collecting identical information from every buyer. With a well-designed order form, you also make it easier for your customers to get the products or services they need. And they won’t need to contact your Sales or Legal team every time they want to submit a new order. They can simply submit a new order form and trust that they will receive the goods or services they need once it’s accepted. 

Order forms are most often used by companies that sell standardized goods or services. The static nature of an order form doesn’t allow much room for customization. The buyer simply identifies what they want to buy, how much of it they want, and potentially any minor variations the seller has added to the form. For instance, Girl Scouts offer order forms to collect customer requests for types and quantities of cookies.

A change order form isn’t directly responsible for any kind of sale. Instead, it allows the buyer to request a change to a pre-existing long-term order. Change orders act as legally binding addendums to existing contracts that adjust the terms and conditions of those agreements. 

The goal of a change order is to prevent the need to renegotiate a contract from the ground up. These contracts are most often used to adjust long-term agreements, such as construction or service agreements. By permitting change orders, organizations can include customer requests halfway through the project. Without a change order, it’s unwise for an organization to deviate from a contract for any reason, even if a client requests it. 

Suppose a painting company’s customer requests that they use a different color in a particular room than designated in the contract. If the company complies without a change order, the customer could sue them for deviating from the original agreement. The lack of a legally recognized contract making that adjustment can make the resulting litigation complicated and time-consuming. 

Alternatively, if the company does require a change order, the client has no grounds to sue. The order is a simple piece of proof that demonstrates the change was requested and permitted. 

A master service agreement (MSA) is a sales contract covering a long-term relationship. The MSA acts as an umbrella contract that explains the terms and conditions of all future agreements between the parties. MSAs provide the basis for good business relationships by delineating basic contractual terms, such as liability, intellectual property rights, product delivery, and dispute resolution. 

With an MSA in place, Legal doesn’t need to negotiate every subsequent contract from scratch. Instead, each additional agreement can refer to the MSA to cover the basic terms and conditions. All Legal needs to manage is the specific details that have changed in the contract at hand.

MSAs are most often used in the tech industry. They offer a convenient format for software-as-a-service agreements and other long-term technology relationships. However, MSAs can be used in any industry where two parties work together on multiple projects. 

Many sales contracts are structured as statements of work (SOWs) to provide detailed information about what the seller will give the buyer. SOWs include a detailed scope of work section as well as other standard sales details. 

SOWs are often used to define contractor relationships. The statement of work explains precisely what the freelancer intends to provide, including deliverables, deadlines, and communication. It also covers payment details and requirements for that relationship. SOWs can also be used in any transaction where a buyer requests a list of customized goods or services or when your business is sub-contracting projects to external parties.

Note that an SOW is different than an MSA. An MSA is open-ended, and an SOW is not. SOWs should be specific, and changes need to be made through change orders. However, an MSA covers more general terms, with individual requests taking place through new sales contracts. 

Your terms of service (TOS)—sometimes called terms and conditions, terms of use, or standard service agreement—are a collection of clauses that define how users interact with something. Terms of service are most often found on digital products. They can be added to websites, mobile apps, software, or online stores.

These contracts don’t directly affect sales. However, if clients don’t agree to the TOS, most businesses refuse to sell them anything. That’s because a TOS agreement is a vital part of protecting online companies.

Well-written terms of service provide three crucial forms of protection to your business:

1. Limitation of liability: Your TOS should specify that your organization is not responsible for anything your customers choose to do with your products. This reduces the risk that you will be held liable for actions you could not have reasonably predicted or prevented. For instance, Adobe Photoshop’s TOS includes a liability waiver regarding any misrepresentations its clients make using photoshopped images.
2. Intellectual property protection: Digital products are unique in that they are almost entirely composed of intellectual property (IP). Your TOS allows you to clarify that your business retains full ownership of your products’ IP, and your customers are simply granted permission to use it in specific ways.
3. Dispute resolution: You can use your TOS to ensure that your clients must resolve any disputes they have with your company through arbitration instead of the courts. This can significantly reduce the amount of work your Legal team needs to do.

Renewal and upsell agreements are similar in some ways to change orders. These contracts reference a previous long-term agreement and alter how it works. However, where a change order acts as a supplement to other agreements, renewals and upsells supersede them.

A renewal contract is an order form in which a client chooses to renew a previous contract. These contracts are often nearly identical to the original because the services or products being ordered are the same. The differences are minor and may include things like raised prices and new service dates. You can send partially-completed renewal contracts to your customers to prompt them to continue their relationship with your company. 

An upsell contract is a renewal that also includes additional goods or services. You can use a renewal agreement to upsell clients by leaving additional order fields blank and suggesting offerings that they may add to the contract. 

Upsell and renewal agreements are invaluable to companies that want to build long-term client relationships. By making it easy to continue buying from your business or to increase the amount customers spend there, these forms help reduce customer churn and increase customer lifetime value.

There are so many types of sales contracts and variations that it can be challenging to keep track while selling the product or service your company offers. You can simplify the process by working with a contract management system like Ironclad that offers convenient, customizable workflows for different sales.