Product delivered without a written contract

Product delivered without a written contract Product delivered without a written contract – Seller’s practice is to obtain written and customer-signed sales agreements. Seller delivers a product to a customer without a signed agreement based on a request by the customer to fill an urgent need.

Can an enforceable contract exist if Seller has not obtained a signed agreement consistent with its customary business practice?

Analysis Product delivered without a written contract

It depends…….. and here is the reasoning: Product delivered without a written contract

Seller needs to determine if a legally enforceable contract exists without a signed agreement. The fact that it normally obtains written agreements does not necessarily mean an oral agreement is not a contract. However, Seller must determine whether the oral arrangement meets all of the criteria to be a contract. Product delivered without a written contract

Example: Assessing the existence of a contract: No written sales agreement

Shoe Manufacturer S holds products available to ship to customers before the end of its current fiscal year. Shoe Shop T places an order for the product, and S delivers the product before the end of its current fiscal year.

S generally enters into written sales agreements with this class of customer that require the signatures of the authorised representatives of both parties. S prepares a written sales agreement and its authorised representative signs the agreement before the end of the year. T does not sign the agreement before the end of S’s fiscal year. However, T’s purchasing department has orally agreed to the purchase and stated that it is highly likely that the contract will be signed in the first week of S’s next fiscal year.

After consulting its legal counsel and obtaining a legal opinion, S determines that based on local laws and legal precedent in T’s jurisdiction, T is legally obliged to pay for the products shipped to it under the agreement, even though T has not yet signed the agreement.

Therefore, S concludes that a contract exists and applies the general requirements of the standard to sales made under the agreement up to the year end.

The parties have approved the contract and are committed to perform their respective obligations (IFRS 15  9(a))

The boards decided to include this criterion because if the parties to a contract have not approved the contract, it is questionable whether that contract is enforceable. Some respondents questioned whether oral and implied contracts could meet this criterion, especially if it is difficult to verify an entity’s approval of that contract.

The boards noted that the form of the contract does not, in and of itself, determine whether the parties have approved the contract. Instead, an entity should consider all relevant facts and circumstances in assessing whether the parties intend to be bound by the terms and conditions of the contract.

Consequently, in some cases, the parties to an oral or an implied contract (in accordance with customary business practices) may have agreed to fulfil their respective obligations. In other cases, a written contract may be required to determine that the parties to the contract have approved it.

In addition, the boards decided that the parties should be committed to performing their respective obligations under the contract. However, the boards decided that an entity and a customer would not always need to be committed to fulfilling all of their respective rights and obligations for a contract to meet the requirements in IFRS 15 9(a). For example, a contract might include a requirement for the customer to purchase a minimum quantity of goods from the entity each month, but the customer’s past practice indicates that the customer is not committed to always purchasing the minimum quantity each month and the entity does not enforce the requirement to purchase the minimum quantity. In that example, the criterion in  paragraph 9(a) of IFRS 15 could still be satisfied if there is evidence that demonstrates that the customer and the entity are substantially committed to the contract.

Product delivered without a written contract

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