Sale Of Goods A

1 Indian Sale of Goods Act 1930

Contract of Sale of Goods –

Definition – It is a contract whereby the Seller transfers or agrees to transfer the property in the goods (i.e. ownership of goods) to the buyer for a price. Contract of sale may be 1) Absolute or 2) Conditional, according to the desire of the parties. The term “Contract of Sale “includes an “actual sale” as well as “agreement to sale”. Where contract of sale is executed i.e. the property in the goods has passed from the seller to the buyer, it is called sale, but where the contract is executory i.e. the transfer of property in goods is to take price at a future time or subject to some condition thereafter to be fulfilled it is an agreement to sale. The difference between sale and agreement to sale is of vital importance since the two have different legal effects.

Distinction between sale and agreement. 1)

In sale, the property in goods sold passes to the buyer so that the seller is no more the owner

of the goods but it is the buyer who owns them. In an agreement to sale the ownership does not pass to the buyer at the time of contract so that the seller continues to be the owner until the agreement to sell becomes an actual sale by the expiry of certain time or the fulfillment of some conditions. 2)

Sale is an executed contract. An agreement to sale is an executory contract.

3)

Sale is contract plus conveyance and creates jus in rem (i.e. gives right to buyer to enjoy

goods as against the whole world). An agreement to sell is a contract pure and simple and thus creates merely just impersonal (i.e. gives a right to either buyer or seller against the other for any default in fulfilling his part of the agreement). 4)

In a sale, the seller can sue for the price even though the goods are in his possession.

2 But in agreement to sell his only remedy is to sue for damages if buyer fails to accept and pay for the goods. 5)

In a sale, seller’s breach gives the buyer double remedy, a suit for damages against the seller

and the proprietary remedy in respect of the goods so that if the goods are sold to third parties, he can sue and recover them as owner from the third parties. In an agreement to sale the seller being still the owner he can dispose of the goods as he likes and the buyer’s remedy for sellers breach is a suit for damages. 6)

In sale, if goods are destroyed by an accident, the loss falls on the buyer even though the

goods are with the seller. In similar circumstances in an agreement to sale the loss falls on the seller, even though the goods are in the possession of the buyer.

Distinction between Sale and Bailment In a contract of bailment, goods are delivered by one person (bailor) to another (bailee) for a certain purpose on the condition that when that purpose is over the goods will be returned back. The ownership does not pass to the bailee. It is only the possession that is given to him. In sale, the delivery of goods is made by the seller to the buyer for a price and the buyer becomes the owner of the goods and can deal with them as he likes.

Distinction between Sale and Gift Where goods are transferred by one person to another without any price the transaction is called a gift. In a gift ownership of the goods passes to the donee and thus the price element is absent. This is not in sale.

Distinction between Sale, Barter and Exchange

3 It is necessary for sale that goods must be exchanged for a money consideration called the price. Where goods are exchanged for goods, it does not amount to sale but only to barter. If money is exchanged for money it will be a transaction of exchange and not a sale.

Distinction between Sale, Mortgage, Pledge and Hypothecation of goods Mortgage of goods is a transfer of interest in goods from a mortgagor to a mortgagee to secure a debt. A pledge is a bailment of goods by one person to another to secure payment of a debt. If pledger makes default in paying the debt the pledgee may sell the goods after due notice to the pledger. A hypothecation of goods is an equitable charge on goods without possession, but not amounting to a mortgage. All the three are different from sale, because the ownership is not transferred by one party to the other in any of them. The essence of a contract of sale is the transfer to general property in goods for a price.

Distinction between Sale and Hire Purchase Agreement The hire-purchase agreement is a development of modern commercial transactions. Here the owner of goods delivers the goods to a person who agrees to pay certain stipulated periodical payments as hire-charges. Though the possession of the goods is with the hirer, the ownership still remains with the original owner. If the payments are made regularly, the hirer gets the option of purchasing the goods on making the full payment. Before this option is exercised, the hirer may return the goods hired. The essence of hire-purchase agreement is that there is no agreement to buy, but only an option is given to the hirer to buy under certain conditions so that the hirer has a right to become the owner after paying regularly the stipulated rent or to return the goods and put an end to hiring.

Essential Elements of Sale –

4 1)

There must be some goods, the general property in which is transferred from the seller to the

buyer. 2)

A price in money must be paid or promised to be paid.

3)

There must be seller and buyer two persons are necessary to complete a sale, as the same

person can not be both seller and buyer. A person cannot buy his own goods as there is nothing to buy. 4)

There must be a transfer of ownership from the seller to the buyer. The transfer must be of

the absolute or general property in the goods sold. In law, transfer of general property is called sale while transfer of special property is not sale. In pledge special property is transferred from pledger to pledge. 5)

All the essential elements of a valid contract must also be present.

Formalities of a Contract of Sale In a contract of sale there must be an offer to buy or sell goods, acceptance that offer, parties competent to contract, mutual consent, property to be transfer for money consideration called price. A contract of sale may be made in any of the following modes. 1)

There may be immediate delivery of the goods.

2)

There may be immediate payment of price but the delivery to be made at some future date.

3)

There may be immediate delivery of goods and also immediate payment of price.

4)

It may be agreed that the delivery or payment or both are to be made in particular

installments. 5)

Delivery or payment or both may be given at some future date. The subject matter of contract of sale is essentially the goods.

Definition of Goods

5 It means every kind of moveable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Money and actionable claims are not goods and can not be brought and sold. An actionable claim is a thing which a person can not make use of or enjoy but which can be recovered by him by means of a suit or an action. Thus debt is an actionable claim and can not be sold as goods, although it can be assigned.

Goodwill, trade mark, copyrights, patents are all considered goods. Similarly water, gas, electricity are regarded as goods.

Price – No sale can take place without a price. Therefore, price constitutes the essence of a contract of sale. It may be money actually paid or promised to be paid.

Modes of Fixing Price The price must be certain and definite. The Act gives following methods of fixing the price. 1)

Price may be expressly stated in the contract. The parties are free to fix any price they like. A

manufacturer may sell goods to a wholesaler on the condition that they shall not be sold at less than a certain price. But that condition does not bind a subsequent buyer since there is no privity between him and the original seller. However, in case of a patented goods the sub-buyer may be bound by such a condition, if he has notice of it. 2)

The contract may provide for the manner in which the price is to be fixed. The agreement may

be to pay as much for the goods as others pay. 3)

Where nothing is said by the parties regarding price, the law implies, in the case contract is

executed and the goods sold are accepted that the buyer agrees to pay a reasonable price i.e. market price. 4)

The price may also be left to be fixed by the valuation of a third party.

Mode of Payment

6 The seller is not bound to accept any kind of payment except in the currency of the country. He is not bound to accept payment by cheque. Further, the price should be in legal tender money.

Earnest Money Sometimes it happens that the buyer pays part of the price in advance as security for the due performance of his part of the contract. The money so paid as security is called Earnest Money. If the purchase is carried out, the earnest money goes against the purchase-money and only the balance of the price is required to be paid. But if the sale goes off through buyer’s fault, the earnest money is forfeited and where it goes off by seller’s default he must return the earnest money.

Conditions and Warranties

Caveat Emptor – The parties are at liberty to enter into a contract with any terms they please. In the case of a sale of goods, the ordinary common law maxim is Caveat Emptor (let the buyer beware). Thus it is not the seller’s duty to point out the defects in the goods he is selling. If the buyer depends upon his own skill and integrity and the goods turn out to be defective, it is his own fault and he can not hold the seller responsible. But the buyer may want to be sure of the quality of the goods and may make known to the seller the purpose for which he intends to buy the goods so as to show that he relies on the seller’s skill or judgement and buys them depending on the representations made by the seller such representations may rank either as conditions or warranties and in that case the principle of Caveat Emptor will not apply and the contract will be subject to the condition or warranty. A stipulation in a contract of sale made with reference to goods which are the subject matter thereof may be either a condition or a warranty. If a stipulated forms the very basis of the contract or Which is essential to the main purpose of the contract, it is condition. If however the stipulation is collateral to the main purpose of the contract it is known as warranty. The effect of a breach of condition is to give the aggrieved party a right to treat the contract as repudiated, while in the case of breach of warranty he can not repudiate the contract but can only claim damages. Thus if the condition is not fulfilled, the buyer has a right to repudiate the contract, to refuse the goods and if he has already paid for them, to recover the price. In the case of a breach of warranty, the buyer must

7 accept the goods and claim damages for the breach of warranty. Ex :- A man buys a particular horse, which is warranted quiet to ride and drive. If the horse turns out to be vicious, the buyer’s only remedy is to claim damages. But if instead of buying a particular horse, a man asks a dealer to supply him with a quiet horse and the horse turns out to be vicious, the stipulation is a condition and the buyer can reject the horse. Conditions and warranties may be express or implied. An express condition or warranty is one stated definitely in so many words as the basis of the contract. Implied conditions or warranties are those which attach to the contract by operation of law or custom. Ex :- A sold cows to B and it was mentioned that B was to take the cows sold “with all faults” . The cows were diseased and B suffered a heavy loss. It was held in the court that as it was expressly agreed that the seller was giving no

warranty and as he had done nothing to conceal the defect he was relieved from all liability in respect of any defect in the goods.

Time Factor of Contract Where no time is fixed for performance the contract is required to be performed within a reasonable time. Therefore, if time is specified for delivery of goods, delivery must be made at specified time and if not done the other party can repudiate the contract. Thus if A agrees to sell and deliver goods to B on a certain day, he must delivery them on that day.

Implied Warranties 1)

Implied warranty of quiet possession in a contract of sale there is an implied warranty that the

buyer shall have enjoy quiet possession of the goods. This means that where the buyer has obtained possession of the goods, he has a right to enjoy them and if the right of possession and enjoyment is any was disturbed, he is entitled to sue the seller for damages. 2)

Implied warranty against encumbrances. The buyer is also entitled to warranty that the goods

are not subject to any right in favour of a third party. If there is breach he is entitled to damages. This claim will not apply if such encumbrances are declared to the buyer when the contract is made or he has notice of them.

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Implied Conditions The first implied condition in every contract for sale of goods is that the seller has right to sell the goods. As a result of it, if the title turns out to be defective, the buyer is entitled to reject the good.

Sale by description [Exceptions to Caveat Emptor]

i)

Goods must correspond with description In a contract of sale by description there is an implied condition that the goods shall

correspond with the description.

Ex :- Where sale was made of second hand sewing machines which the buyer had never seen, but which the seller had stated to be almost new and used very little, this was a sale by description and when the machine was found to be old and repaired there was breach of condition and the buyer could return the machine.

ii)

Condition as to quality or fitness Ordinarily in contract of sale, there is no implied warranty or condition as to the quality or

fitness for any particular purpose of goods supplied. But where the buyer makes known to the seller the purpose for which he is purchasing the goods, then there is an implied condition that the goods shall be reasonably fit for such purpose. The rule of caveat emptor will not apply. Where an article is fit for one particular purpose alone and turns out to be unsuitable for that purpose when used it is easy to see that the condition as to fitness has been broken. Here the buyer must prove that he informed the seller of the purpose for which he was buying and that the goods supplied are not fit for the particular purpose. Ex.:- Where timber was purchased for the railway sleepers and they were found to be unsuitable for the purpose, the buyer could reject them.

9 iii)

Condition as to merchantability- where the goods are sold by description and they answer

to the description, still there is another implied condition that they shall be of merchantable quality. But if the buyer has examined the goods, there is no implied condition as regards defects which such examination ought to have revealed. If however, examination by the buyer does not reveal the defect and he approves and accepts the goods, but when put to work, the goods are found to be defective, there is breach of condition of merchantable quality. Ex.:- A bought black yarn from B and found it to be damaged by white ants. If was held that condition as to merchantability was broken. The merchantable quality means that the goods comply with the description in the contract so that to a purchaser buying goods of that description, the goods would be good tender. Ex:- A woman with abnormally sensitive skin, bought woolen coat and got rashes through wearing the coat. It was held that no breach of condition as she had not disclosed the fact that her skin was abnormally sensitive.

Ex.:- It was held that where a hair dye is sold to a customer who is allergic to a particular dye, there is duty on part of the customer to disclose known peculiarities.

iv)

Condition as to wholesomeness.- The goods sold must be wholesome.

Ex.:- A bought milk from B and the milk contained typhoid germs. A’s wife became infected and died B was liable for damages.

Sale by Sample

Definition : A contract of sale is a contract for sale by sample where there is a term in the contract express on implied to that effect. Therefore, the sale must be by sample. Ex.:- A sale of tobacco is always considered to be sale by sample.

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Implied conditions in sale by sample

1)

Bulk should correspond to sample – In a sale by sample there is an implied condition that

the bulks shall correspond with sample in quality.

2)

Buyer to have reasonable opportunity to compare

3)

Condition of merchantability as regards latent defects.

Unpaid Seller The seller of goods is deemed to be an unpaid seller. a)

When the whole of the price has not been paid or tendered or

b)

When conditional payment was made by a bill of exchange or other negotiable instrument and

the instrument has been dishonored. In simple words, an unpaid seller is one who has sold goods on cash terms and does not include a seller who has sold goods on credit. An unpaid seller has a two fold right 1)

Against the goods

2)

Against the buyer personally

Rights of unpaid Seller against the Goods An unpaid seller of goods, even though the property in the goods has passed to the buyer has following rights – i)

A lien on the goods remaining in his possession.

ii)

If the buyer is insolvent, a right of the stoppage in transit after he has parted with possession

of the goods. iii)

A limited right of resale.

11 i)

Right of Lien The seller’s lien is a possessory lien i.e. the lien can be exercised only so long as the seller is

in possession of the goods. Lien can be exercised for the non-payment of price, not for any other charges. For example the seller can not claim lien for godown charges which he had to incur for storing the goods in exercise of his lien for the price. Lien depends on physical possession. Therefore the unpaid seller loses his lien on the goods in following cases –

ii)

a)

When he delivers them to a carrier for the purpose of transmission to the buyer

b)

When buyer lawfully obtains possession of the goods.

Right of Stoppage in Transit The right of stoppage in transit is a right of stopping the goods while they are in transit,

resuming possession of them and retaining possession until payment of price. It is available when a)

the buyer becomes insolvent and

b)

the goods are in transit.

The buyer is insolvent if he is unable to pay his debts.

This right may be exercised either by taking actual possession of the goods or by giving notice of seller’s claim to the carrier. The notice need not be a written notice and no particular form is necessary, all that is required is to ask the carrier not to deliver the goods to the buyer and it must reach the carrier before the goods have been delivered by him to the buyer. If the carrier after receiving notice, wrongfully delivers the goods to the buyer, he does so at his own peril. His duty is to re-deliver the goods to the unpaid seller.

iii)

Right of Resale Unpaid seller’s right of lien and stoppage in transit does not amount to rescision of the

contract. He may retain or regain the possession of the goods but he does not regain the property in them. He does not become owner of the goods. Then the question arises what is the use of these rights if the buyer after notice to take the goods and pay the price remains in default? Must he keep

12 them until he can obtain judgement against the buyer and sell them on execution? If the goods are perishable e.g. fruits or expensive to keep as cattle or horses etc. The Act gives him limited right to resell the goods. The unpaid seller may re-sell. i)

Where the goods are perishable

ii)

Where the right is expressly reserved in the contract.

iii)

Where in exercise of right of lien or stoppage in transit seller gives notice to the buyer

of his intention to re-sell and the buyer does not pay the price within a reasonable time. If on re-sale there is a deficiency between the price due and the amount realised, he will be able to recover this from the buyer. But if on such resale, a surplus is left, the seller need not hand over this surplus to the buyer. The profit arising on a resale belongs to the seller because the resale is the result of a breach of contract on the part of buyer and such buyer can not take advantage of his own wrong and claim the profits.

The seller is bound to give reasonable notice to the buyer that he is going to resale the goods unless the goods are of perishable nature. What is reasonable notice is question of fact

depending upon the nature of goods, the distance at which the parties are situated and other circumstances of the case. The notice is compulsory due to following reasons.

1)

buyer may have an opportunity of fulfilling the contract by paying the price even at the last moment before such re-sale.

2)

if buyer is still unable to pay, he may atleast see that on such resale the goods fetch a proper price.

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Rights of parties in case of breach of contract Buyer’s right against the seller in case of breach of contract (Sec. 57-59) The law also confers certain protective rights on the buyer of goods, They are as follows:

1)

Suit for non-delivery: Where the seller wrongfully neglects or refuses to deliver the goods to

the buyer, the buyer may sue the seller for damages for non-delivery. (Section 57) Where there is an available market for the goods in quest., prima facie the measure of damages would be contract price minus market price at the date of the breach. If, however, there is no such market, the measure of damage would be the estimated loss naturally resulting from the breach (Hadley V. Baxendale). Thus, if the goods contracted for are not obtainable, then the purchaser may purchase similar goods and may claim from the seller the difference in price. If he does not purchase such similar goods but has during the contract period settled contracts for the same kind of goods with other persons, the rates at which those contracts were settled might afford a basis for ascertaining the damages. Where, on breach of contract, the goods are irreplaceable in the market, the proper measure of damages is the profits which the buyer would have made if the contract had been carried out.

2)

Suit for specific performance (Section 58) : Where property has passed to the buyer, he

also can exercise another right, viz, a right to sue for specific performance and its limits regulated by the Specific Relief Act. In such cases, the court may, in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject matter of the contract. You should note that the remedy is discretionary and will only be granted if the goods are of specific value or are unique, e.g., rare book, a picture or a piece of jewellery and the damages are not an adequate remedy.

3)

Suit for damages for Breach of Warranty (Section 59) : Where there is a breach of

warranty by the seller or where the buyer elects or is compelled to treat any breach of condition on the part of the seller as a breach of warranty, the buyer is entitled to reject the goods but the buyer may : a)

Set up against the seller the breach of warranty in diminution or extinction of the price, or

14 b)

Sue the seller for the breach of warranty

The measure of damage for breach of warranty is the estimated loss or damage arising directly or naturally from the breach, which is prima facie the difference between the value of the goods at the time of the delivery and the value they would have had, if the goods had answered to the warranty.

4)

Suit for recovery or price : Under Section 61, the buyer has a right to recover the money

paid to the seller where the consideration for payment of it has failed. For example, where the buyer is deprived of goods by their true owner, he may recover the price for breach of the condition as to title.

B)

Seller’s right against the buyer in case of breach of contract (Sec. 55 & 56)

1)

Suit for the price : Where the property in the goods has passed to the buyer or he was

wrongfully neglected or refused to pay for the goods according to the terms of the contract, the sellers may sue him for the price of goods. Further, where the price is payable under the contract on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price even if the property in the goods has not passed and the goods have not been appropriated to the contract (Sec. 55). For instance, there was a sale of some quantity of iron to be delivered between 3rd May and 30th June, if the buyer so required, the price to be paid on the latter date at all cost. By 30th June, only a portion of the iron had been delivered since the buyer did not require any further delivery. In such a situation, the seller would be able to recover the whole price without showing that he had appropriated to the contract any specific iron to complete the delivery of the remainder. Incidentally, the seller has a lien or the goods for the price while he is in possession of them.

2)

Damages for non acceptance : Where the buyer wrongfully neglects or refuses to accept

and pay for the goods, then the seller may sue him for damages for non-acceptance (Section 56).

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