Formation of Contract under Sales of Good Act, 1930 | Law Optional Notes for UPSC PDF Download

Sales of Good Act, 1930

• The Sales of Goods Act, 1930, is a significant Mercantile Law legislation established during the British colonial rule on 1 July 1930. This law draws extensively from the 1893 Sale of Goods Act and primarily focuses on the formation of contracts involving the transfer of goods from a seller to a buyer in exchange for consideration.

Formation of Contract

Definition of Contract Formation

The process of forming a contract under the Sales of Goods Act, 1930, involves the seller agreeing to transfer the ownership of goods to the buyer in return for a specified consideration.

Understanding a Contract of Sale

• Definition: A contract of sale represents an agreement between a seller and a buyer where the seller commits to delivering or selling something to the buyer at an agreed-upon price.
• Key Elements: In this type of contract, the transfer of ownership occurs when the buyer makes the payment and the seller completes the delivery.
• Legal Framework: The sale of goods agreement is governed by the Sale of Goods Act, 1930. This act outlines the rules and regulations that apply to such transactions.
• Scope of the Contract: It involves an arrangement where the buyer and seller mutually consent to exchange property for a specified price.
• Legal Definition: Section 4(1) of the Sale of Goods Act defines a contract of sale as an agreement for the transfer of property from the seller to the buyer in exchange for a price.

Illustrative Examples

• Example 1: When you purchase a smartphone from a store at a fixed price, you enter into a contract of sale. The ownership of the phone transfers to you upon payment.
• Example 2: Similarly, when a farmer sells a harvest of crops to a grocery store, a contract of sale is formed. The store becomes the owner of the crops upon payment.

The Essentials of a Contract of Sale

• For a valid contract of sale, there must be a minimum of two parties involved.
• The subject matter of the contract should be products or goods.
• There should be a clear agreement on the price of the products.
• The ownership of the property must be transferred from the seller to the buyer.
• The contract can either be unconditional or conditional in nature.
• Other vital elements of a valid contract include legality and meeting the requirements of a lawful contract.

This discussion primarily focuses on the formation of a contract of sale as outlined in sections 4 to 17 of the Sales of Goods Act, 1930.

Sale and Agreement to Sell

Sale and Agreement to Sell are fundamental concepts in the Sale of Goods Act 1930.

Sale

• A sale, as per Section 4(1) of the Sale of Goods Act 1930, involves the transfer of goods from seller to buyer for a price, creating an immediate and binding contract.
• This transaction is defined by the exchange of goods for payment and mutual agreement between the parties involved.

Agreement to Sell

• An agreement to sell signifies a future transfer of goods or a transfer based on specific conditions outlined in Section 4(3).
• Upon meeting the conditions, an agreement to sell transforms into a sale, detailing terms like price, payment date, and potential contingencies.

Both sale and agreement to sell involve existing goods and can specify ownership or possession by the seller. Terms and conditions of a sale, including payment amount and future payment dates, are crucial components of these agreements. An agreement to sell acts as a precursor to a sales deed, outlining the terms that must be fulfilled before the final sale is completed. While a sale occurs immediately, an agreement to sell occurs based on future conditions, with risks shifting differently for each party.

Formalities of Contract of Sale

Contract of Sale How Made

• A contract of sale is established as per section 5 of the Sale of Goods Act when:
• There must be an offer to buy or sell goods for a price.

Acceptance of such an offer is necessary

• The contract may involve immediate delivery, payment, or both. In some cases, delivery and payment can be deferred.
• In the case of MP Laghu Udyog Nigam v Gwalior Steel Sales Division, the court emphasized the essential elements required for a valid contract.
• As per clause (2) of section 5 of the Sales of Goods Act, the contract can be written, oral, partially written and oral, or implied through the parties' conduct.
• A sales contract becomes legally binding when all these essential conditions are fulfilled.

Subject Matter of Contract of Sale

• Commodities as Subject Matter: The contract of sale must always involve commodities. These goods can either currently exist or be acquired in the future.
• Potential Existence of Goods: It is permissible for a contract to be made for goods that are not yet in existence, such as in cases where the procurement is contingent on an event that may or may not happen.
• Example of Legal Contract: For instance, a contract for a bag to be produced by a factory constitutes a valid legal agreement. If the specified product is lost or damaged without the buyer's consent at the time of entering the contract, it renders the contract void from the beginning.
• Mutual Error Rendering Contract Void: If both parties are mistaken about a material fact relevant to the contract, as outlined in Section 7, the contract becomes null and void.
• Goods Damaged Before Sale: Section 8 addresses situations where goods perish after the agreement to sell but before the actual sale. It underscores cases where goods deteriorate or are destroyed without fault on either the seller's or buyer's part, exemplifying a contract to sell.

The Price

• Definition of Price: The term 'price' refers to the monetary value assigned to the sale of goods as defined in Section 2(10).
• Price Fixing: According to Section 9, the price can be determined either by the contract itself or through an agreed-upon method specified within the contract. This could involve a mutually appointed valuation agent or a calculation reached through negotiations between the involved parties.
• Involvement of a Third Party: Section 10 allows for a scenario where a third party is responsible for setting the price. If an agreement is made to sell goods under conditions where a third party is meant to determine the price but fails to do so, the agreement becomes void.
• Consequences of Third Party Default: If either party prevents the third party from setting the price by default, that party will be held responsible for any resulting damages. The other party, however, will not be accountable for such damages. Nevertheless, if the buyer has received and retained the goods, they are obligated to pay a reasonable price for them regardless.

Conditions and Warranties

Stipulation of Time

• A stipulation regarding the timing of payment is not usually considered fundamental to a sales contract unless explicitly stated. Timely delivery of goods, however, remains crucial.
• The price of goods can be agreed upon in the contract or determined at a later stage. Delivery time stipulations are typically critical to the agreement.

Condition vs. Warranty

• A condition is vital to the entire contract and is a key component for its success under the Sale of Goods Act, 1930.
• If a condition is breached by the seller, the buyer has the right to reject the contract or refuse the goods.
• If payment has been made, the buyer can seek refunds and potentially claim damages for the contract breach.

Kinds of Conditions

• Expressed Condition: In a legal agreement, an expressed condition refers to a declaration that specifies a mandatory action or event within the contract. These conditions are crucial for the contract's fulfillment and are mutually agreed upon by both parties.
• Implied Condition: Implied conditions are unspoken requirements that parties assume in various sales contracts. For instance, conditions like selling by definition or selling by sample are implied unless stated otherwise. The Selling of Goods Act, 1930, outlines implied conditions in Sections 14 to 17, which are deemed to be part of the contract unless explicitly excluded.
• Violation Consequences: If a condition is breached, the aggrieved party has the right to reject the contract or seek compensation. Damages can be claimed only in the case of a breach of guarantee, not for breaching a condition. The breach of a condition may also be considered a breach of guarantee.

Implied Condition as to Title

• Authority to Sell: The seller must have the legal authority to sell the goods.
• Right of Sale: The seller should possess the right to sell the goods at the time of contract execution in the case of an agreement to sell. If the seller lacks this right, the buyer can reject the goods and claim a refund.
• Illustration: In Rowland v. Divall, a buyer purchased a second-hand car but later discovered that the seller had no right to sell it. The buyer was entitled to a refund in this scenario.

Implied Condition as to Description

• Compliance with Description: Goods must match their description as per Section 15 of the Act. Buyers have the right to accept or reject products that deviate from the description provided.
• Merchantable Quality: Goods should be of merchantable quality, meaning they are fit for ordinary use. Buyers have the right to inspect goods and can reject them if they are found to be defective within a reasonable timeframe.
• Example: If a buyer purchases sugar infested with ants, rendering it unusable, the buyer can seek damages for the unfit product.

Implied Condition as to Sale by Sample

• Consistency with Sample: The actual products should match the sample in terms of characteristics like size, color, etc.
• Comparison Opportunity: Buyers must be given a fair chance to compare the goods with the sample provided.
• Flaw-Free Products: The goods should be free from any defects that would make them unfit for use.
• Case Example: If a company sold shoes to the French Army based on a sample but later delivered products with a different sole, the customer could claim compensation for the discrepancy.

Implied Condition as to Sale by Sample and Description

• Compatibility Requirement: Both the sample and the description of the goods delivered must align with what was promised in the contract.
• Legal Precedent: In the case of Nichol v. Godis, where oil supplied did not match the description, the vendor was held liable to refund the buyer.

Warranty: A warranty is an additional guarantee in a contract that is supplementary to the main agreement. Breach of warranty allows the aggrieved party to claim damages but does not permit them to void the entire contract as in the case of breaching a condition.

Kinds of Warranty

• Expressed Warranty: These are warranties explicitly agreed upon by both parties and included in the contract.
• Implied Warranty: Implied warranties are not expressly stated in the contract but are believed to be part of the sales agreement.
• Warranty as undisturbed possession: Section 14(2) implies that the buyer is guaranteed uninterrupted possession of the products. For instance, if a buyer unknowingly purchases stolen goods and later has to return them, they can sue the seller for breaching this warranty.
• Warranty as to freedom from Encumbrances: Section 14(3) ensures that products are free from any undisclosed third-party claims. If the buyer is unaware of any potential hazards associated with the product, the seller is responsible for providing that information to the buyer to avoid breaching this warranty.

Contract for Selling of Goods

Legal Requirements for a Valid Contract

• For an agreement to become a legal contract for selling goods, certain stages and procedures must be followed.
• The parties involved need to ensure the fairness of the agreement before finalizing it.
• There is no fixed framework for drafting a sales contract; it can be tailored to suit the parties' specific needs.

Framework for Selling of Goods Contract

• While there is no rigid legal structure for the substance of a contract for selling goods, including specific clauses can enhance the contract.
• Key conditions for the contract are outlined in certain clauses, providing a basic framework for the agreement.
• Adding clauses can strengthen the contract, even though the core substance lacks a formal legal structure.