Unit 1: Formation of the Contract of Sale Chapter Notes | Business Laws for CA Foundation PDF Download

Overview

Introduction to the Sale of Goods Act, 1930

The Sale of Goods Act, 1930, governs the sale of goods in India. It was introduced because there was a need for a separate law specifically for the sale of goods, as previously, these provisions were included in the Indian Contract Act, 1872. The Act is based on the English Sale of Goods Act, 1893, and came into effect on July 1, 1930, applying to the whole of India.

Scope of the Act

• The Act applies to contracts involving the sale of movable properties, which are goods that can be moved from one place to another.
• However, it does not apply to the sale of immovable properties such as land, buildings, or other fixed assets. For immovable properties, the Transfer of Property Act, 1882 is applicable.
• The Sale of Goods Act, 1930 is concerned only with movable property.
• The general provisions of the Indian Contract Act, 1872 are applicable to contracts of sale of goods, unless they conflict with the specific provisions of the Sale of Goods Act.
• Terms used in the Sale of Goods Act that are not defined in the Act but are defined in the Indian Contract Act have the meanings assigned to them in the Contract Act.
• Customs and usages that are reasonable and known to both parties at the time of entering into the contract of sale will bind both parties.

Definitions in the Sale of Goods Act, 1930

• Buyer: A buyer is defined as a person who buys or agrees to buy goods. This definition is broader than the common understanding of a buyer, as it includes not only those who physically purchase goods but also those who enter into an agreement to purchase goods.
• Seller: A seller is a person who sells or agrees to sell goods. Similar to the definition of a buyer, this term is used in a broader sense to include not just those who sell goods but also those who agree to sell them.

Relationship between Buyer and Seller

• The terms "buyer" and "seller" represent the two parties involved in a contract for the sale of goods.
• These terms are complementary, meaning that they describe the respective roles of the parties in the contract.
• For example, a person who agrees to buy goods is considered a buyer, even if they have not yet completed the purchase. Similarly, a person who agrees to sell goods is considered a seller, regardless of whether the sale has been finalized.

B.  Goods and Other Related Terms

• Goods refer to all types of movable property, excluding actionable claims and money. This includes items like stock and shares, growing crops, grass, and things attached to or forming part of the land, provided there is an agreement to sever them from the land before sale or under the contract of sale, as defined in Section 2(7) of the Sales of Goods Act.
• Actionable claims are claims that can only be enforced through legal action, such as debts. While debts are not typically classified as goods, it is important to understand this in the context of legal definitions. For instance, Fixed Deposit Receipts (FDR) are considered goods under Section 176 of the Indian Contract Act and Section 2(7) of the Sales of Goods Act.
• Goods encompass both tangible and intangible items, such as goodwill, copyrights, patents, and trademarks. Additionally, stock and shares, gas, steam, water, electricity, and court decrees are also classified as goods.

Classification of Goods

Existing Goods

• Existing goods are those that are present at the time of the contract of sale, meaning they are owned, possessed, or acquired by the seller at that time.
• These goods can be further classified into specific, ascertained, and unascertained goods.

(a) Specific Goods

• Specific goods are those that are identified and agreed upon at the time of making the contract of sale. For example, a particular model of a smartphone or a specific washing machine.
• Example 1: Selling a specific car model, like a Samsung Galaxy S7 Edge or a Whirlpool washing machine.
• Example 2: If 'A' agrees to sell his 'Santro' car to 'B,' it is a sale of specific goods because the car is identified and agreed upon at the time of the contract.

(b) Ascertained Goods

• Ascertained goods are those identified in accordance with the agreement after the contract of sale is made. They are often used interchangeably with specific goods.
• Example 3: A wholesaler selling 50 bales of cotton out of 100 in his warehouse. Once the bales are selected, they become ascertained goods.

(c) Unascertained Goods

• Unascertained goods are not specifically identified or ascertained at the time of making the contract. They are usually described or defined by sample.
• Example 4: Selling one packet of salt out of a hundred without specifying which one. Once a packet is chosen, it becomes ascertained or specific goods.
• Example 5: Promising to sell one of ten horses without specifying which one. This is a contract for unascertained goods.

Future Goods:Future goods refer to items that will be produced, manufactured, or acquired by the seller after the contract of sale is made, as per Section 2(6) of the Sale of Goods Act.

• When a contract involves future goods, it is always an agreement to sell, not an actual sale. This is because a person cannot transfer ownership of something that does not yet exist.
• Example 6: if A agrees to sell 1,000 quintals of potatoes that will be grown in his field, this constitutes a contract for the sale of future goods.
• Example 7 & 8 : if P agrees to sell Q all the milk his cow will produce in the coming year, or if T agrees to sell S all the oranges that will be harvested from his garden this year, these are also contracts for the sale of future goods.

Contingent Goods:Contingent goods are those whose acquisition depends on an uncertain event or contingency. For instance, if A agrees to sell B a painting only if A can purchase it first, the painting is considered a contingent good.

• Similar to future goods, contingent goods operate as an agreement to sell rather than a sale at the time of the contract. This means that the property does not pass to the buyer when the contract is made.
• Example 9: if A agrees to sell B a Picasso painting on the condition that A can buy it from its current owner, this is a contract for the sale of contingent goods.
• Example 10:  is when P contracts to sell 50 pieces of a particular article, contingent on the safe arrival of the ship bringing them to the port.

Delivery and its Forms :Delivery, as defined in Section 2(2) of the Sale of Goods Act, refers to the voluntary transfer of possession from one person to another. Generally, delivery of goods can be made by any action that transfers possession to the buyer or someone authorized to hold the goods on the buyer's behalf.

• Actual Delivery:This occurs when goods are physically handed over to the buyer. It involves the seller transferring the physical possession of the goods to the buyer or to a third party authorized to receive the goods on behalf of the buyer. Actual delivery is the most common form of delivery.
• Constructive Delivery:This type of delivery takes place without any change in the custody or actual possession of the goods. It is exemplified by delivery by attornment, where the possession is acknowledged and transferred constructively.
  Example 11: Where a warehouseman holding the goods of A agrees to holdthem on behalf of B, at A’s request.
• Symbolic Delivery: Symbolic delivery involves transferring possession through symbolic means, such as handing over the keys to a warehouse where the goods are stored.

Condition of Goods for Delivery

• Goods are considered to be in a deliverable state when they are in a condition that the buyer is obligated to accept them according to the contract. This is outlined in Section 2(3) of the relevant legal framework.
  Example 12: When A contracts to sell timber and make bundles thereof, the goodswill be in a deliverable state after A has put the goods in such a condition.
• For instance, if A agrees to sell timber and bundle it up for delivery, the goods will be in a deliverable state once A has prepared them suitably for delivery.

Documents of Title to Goods

• A "document of title to goods" refers to various documents such as bills of lading, warehouse keeper's certificates, railway receipts, and others that prove possession or control of goods. These documents authorize the transfer or receipt of goods by the possessor. This is defined in Section 2(4).
  Example 13:Bill of lading, dock warrant, warehouse keeper’s certificate, wharfinger’scertificate, railway receipt, warrant, an order of delivery of goods. 
• A bill of lading is a document of title, whereas a mate's receipt is not, as it merely acknowledges receipt of goods. A document of title shows an unconditional commitment to deliver goods to the holder.
• A share certificate is an example of a document showing title, but not a document of title, as it does not allow transfer of shares by endorsement and delivery.

Mercantile Agent

• A mercantile agent is an agent who, in the normal course of business, has the authority to sell, consign, or buy goods, or to raise money on the security of goods. This definition is provided in Section 2(9) of the relevant legal framework.
  Example 14: Such kind of agents are auctioneers or brokers, etc.

Property in Goods

• In the context of a contract of sale, "property" refers to ownership or general property rights in the goods. The seller must transfer ownership of the goods to the buyer, or there must be an agreement to do so.
• This concept pertains to general ownership rights, not just special property rights. Property means ownership in general. In every sale contract, the seller must transfer ownership of the goods to the buyer, or there must be an agreement to do so. It refers to general ownership rights, not just special property rights.
  Example 15: If A who owns certain goods pledges them to B, A has general propertyin the goods, whereas B has special property or interest in the goods to the extent of the amount of advance he has made. In case A fails to repay the amount borrowed on pledging the goods, then B may sell his goods but not otherwise.

Price [Section 2(10)]

• Price refers to the money consideration for a sale of goods, which is the value of goods expressed in monetary terms. It is an essential requirement to make a contract of sale of goods.

Quality of Goods [Section 2(12)]

• Quality of goods includes their state or condition.

Insolvent [Section 2(8)]

• A person is said to be insolvent when he ceases to pay his debts in the ordinary course of business or cannot pay his debts as they become due, regardless of whether he has committed an act of insolvency or not.

Sale and Agreement to Sell

Thus, whether a contract of sale of goods is an absolute sale or an agreement to sell depends on the fact whether it contemplates immediate transfer from the seller to the buyer or whether the transfer is to take place at a future date.

Example 16: X agrees with Y on 10th October 2022 that he will sell his car to Y on 10th November 2022 for a sum of ` 7 lakhs. It is an agreement to sell.

When an agreement to sell becomes a sale: An agreement to sell converts into a sale upon the passage of time or fulfillment of the specified conditions that allow for the transfer of property.

Essential Elements of a Contract of Sale of Goods

• Parties: There must be at least two parties involved - the seller and the buyer. One person cannot be both the seller and the buyer in the same contract.
• Subject Matter: The subject matter of the contract must be goods, which typically involve movable property. These goods can be existing goods that the seller owns or possesses, or they can be future goods that the seller promises to deliver.
• Price: The price must be expressed in money. While the price can be partly in money and partly in kind, at least a portion of it must be in money.
• Other Contract Elements: All other essential elements of a valid contract must be present, such as the free consent of the parties, the competency of the parties, the legality of the object, and consideration.

Distinction Between Sale and an Agreement to Sell

Sale Distinguished From Other Similar Contracts

Sale and Hire Purchase

• Sale: In a sale, the buyer acquires ownership of the goods immediately upon payment, and the seller transfers the ownership rights to the buyer.
• Hire Purchase: A hire purchase agreement involves the hiring of goods with the option to purchase them later. The hirer pays in installments, and the ownership of the goods is transferred only after the final installment is paid.
• Legal Incidents: The legal consequences of a sale and a hire purchase are different. In a sale, the buyer has a right to the goods immediately, whereas in a hire purchase, the hirer has the right to use the goods but does not own them until the agreement is fulfilled.
• Risk of Loss: In a sale, the risk of loss typically transfers to the buyer upon payment. In a hire purchase, the risk may remain with the seller until the ownership is transferred.
• Insolvency Implications: In the event of the seller's insolvency, the official assignee can take control of the goods, but the price may not be recoverable. In the buyer's insolvency, the official assignee may have control over the goods, depending on the specific circumstances.

Sale and Agreement to Sell:

• Sale: In a sale, the ownership of the goods is transferred immediately from the seller to the buyer upon payment. The buyer acquires the rights to the goods right away.
• Agreement to Sell: An agreement to sell, on the other hand, involves a future transfer of ownership. The seller agrees to transfer the goods to the buyer at a later date, and the buyer does not obtain ownership rights until that agreed-upon time.

Sale and Exchange

• Sale: In a sale, one party transfers ownership of goods to another party in exchange for a price. The focus is on the transfer of ownership for monetary consideration.
• Exchange: An exchange involves the transfer of ownership of goods between parties without the involvement of money. Instead of a price, the parties agree to swap goods of similar value

Sale and Gift

• Sale: In a sale, there is a transfer of ownership of goods from one party to another in exchange for a price. The seller receives monetary consideration for the goods.
• Gift: A gift involves the transfer of ownership of goods from one party to another without any consideration or price. The giver voluntarily relinquishes ownership of the goods without expecting anything in return.

Hire Purchase vs. Sale and Bailment

• In hire-purchase agreements, the property in the goods is transferred to the buyer immediately at the time of the contract.
• However, in hire agreements, the property in goods passes to the hirer only upon payment of the last installment.

Position of the Party:

• The position of the buyer in a hire-purchase agreement is that of the owner of the goods from the outset.
• In contrast, the hirer's position in a hire agreement is that of a bailee until the last installment is paid.

Termination of Contract:

• In a hire-purchase agreement, the buyer cannot terminate the contract and is bound to pay the price of the goods.
• On the other hand, the hirer in a hire agreement has the option to terminate the contract by returning the goods to their owner without any liability to pay the remaining installments.

Risk of Buyer’s Insolvency:

• In a hire-purchase agreement, the buyer typically assumes the risk of any loss resulting from his insolvency unless otherwise stated in the contract.
• The owner in a hire agreement does not take such a risk, as he has the right to take back the goods if the hirer fails to pay an installment.

Transfer of Title:

• In a hire-purchase agreement, the buyer has the right to resell the goods.
• However, the hirer in a hire agreement cannot pass any title to the goods, even to a bona fide purchaser, until he pays the last installment.

Resale:

• The buyer in a hire-purchase agreement has the right to resell the goods at any time.
• In contrast, the hire purchaser in a hire agreement cannot resell the goods until he has paid all the installments.

• Sale and Bailment

  A "bailment" refers to the delivery of goods for a specific purpose under a contract, with the condition that the same goods will be returned to the bailor when the purpose is accomplished or disposed of according to the bailor's directions.
• The provisions related to bailment are governed by the Indian Contract Act, 1872.

Distinction between Bailment and Sale
Transfer of Property:

• In a sale, the property in goods is transferred from the seller to the buyer, constituting a transfer of general property.
• In bailment, there is only a transfer of possession of goods from the bailor to the bailee, which is a transfer of special property, often for purposes like safe custody or carriage.

Return of Goods:

• In a contract of sale, the return of goods is usually governed by the terms agreed upon by the parties involved.
• In bailment, the bailee is obligated to return the goods to the bailor once the purpose of the bailment is fulfilled.

Consideration:

• In a contract of sale, the consideration is typically the price in terms of money.
• In bailment, the consideration may be gratuitous (free of charge) or non-gratuitous (involving a fee).

Sale vs. Contract for Work and Labor

• A contract of sale involves the sale of goods for a price.
• However, if the contract solely pertains to performing work or providing labor without the sale of goods, it is a contract for work and labor.
• Example 17:Where gold is supplied to a goldsmith for preparing an ornament orwhen an artist is asked to paint a picture. Here, the basic substance of the contract is the exercise of skill and labour, therefore it is contract for work and labour.

Contract of Sale: How Made (Section 5)

• According to Section 5(1), a contract of sale can be established through various modes, including offer and acceptance, immediate delivery, future delivery, installment agreements, and more.
• For example, if R agrees to trade his old motorcycle valued at ₹55,000 with S for a new motorcycle, along with a cash difference, it constitutes a contract of sale.

Subject Matter of Contract of Sale

Existing or future goods (section 6)

• Goods in a contract of sale can be either existing goods that are owned or possessed by the seller, or future goods that the seller intends to acquire.
• A contract may involve the sale of goods that the seller does not yet own but intends to acquire, depending on a future event.
• Example 19:A contract for sale of certain cloth to be manufactured by a certain mill is a valid contract. Such contacts are called contingent contracts.
• There are also situations where a seller makes a present sale of goods that do not yet exist; in such cases, the contract functions as an agreement to sell.

Goods Perishing Before Contract (Section 7):

• When specific goods are the subject of a contract, and those goods have been destroyed or damaged without the seller's knowledge at the time of the contract, making them no longer fit the description in the contract, the agreement is void.
• Example 20: if Party A agrees to sell Party B 50 bags of wheat stored in Party A's warehouse, but all the goods are destroyed due to water damage, and neither party was aware of this at the time of the agreement, the contract is void.

Goods Perishing Before Sale But After Agreement (Section 8):

• In cases where there is an agreement to sell specific goods, if those goods perish or are damaged without fault from either the seller or buyer before the risk is transferred to the buyer, the agreement becomes void.
• This situation occurs when the goods no longer meet the description in the agreement.

Perishing of Future Goods:

• When future goods are specific and they are destroyed, it leads to supervening impossibility, rendering the contract void.
• Example 21: if Party A agrees to sell Party B 100 tons of tomatoes to be grown on Party A's land next year, but due to a disease, only 80 tons can be delivered, the contract is considered impossible to fulfill because of the inability to deliver the agreed quantity.

Ascertainment of Price (Section 9 & 10)

• Fixed by the Contract: The price can be explicitly fixed by the terms of the contract.
• Agreed to be Fixed: The price can be agreed upon to be fixed in a specific manner as stipulated in the contract, such as by a valuer.
• Determined by Course of Dealings: The price can be determined based on the established course of dealings between the parties involved.

Agreement to Sell at Valuation (Section 10)

• Section 10 of the Sale of Goods Act deals with situations where the price of goods in an agreement to sell is to be determined by a third party.
• If the third party fails to fix the price, the agreement becomes void.
• If the third party is unable to fix the price due to the default of one party, the party at fault is liable for damages to the other party.
• However, if a buyer has already received and appropriated the goods, they are obligated to pay a reasonable price for them, regardless of the circumstances.
• Example 22: If P agrees to sell two bikes to S at a price to be fixed by Q, and Q refuses to fix the price, S must pay a reasonable price for the bike already delivered. The contract for the second bike can be voided, depending on legal interpretations and local laws.