Formation of the Contract | Law of Contracts - CLAT PG PDF Download

Understanding the Contract of Sale 

A contract of sale is a broad term that encompasses both actual sales and agreements to sell. According to Section 4, when the ownership of goods is transferred from the seller to the buyer under a contract, it is termed a sale. 

On the other hand, if the transfer of ownership is set to occur at a future date or is contingent upon certain conditions being met, the contract is referred to as an agreement to sell. This agreement to sell transforms into a sale once the specified time elapses or the conditions are fulfilled.

Sale & Hire Purchase Agreement

• A hire purchase agreement involves the rental of goods with the option to buy them at the end of the rental period. The goods are delivered to the hirer, who makes payments in installments. Ownership of the goods transfers to the hirer upon payment of the final installment. These agreements are considered a form of bailment, with rights similar to those of a bailor and bailee. The hirer has the right to terminate the agreement at any time before ownership transfers.
• The distinction between a sale and a hire purchase agreement was established in the case of Lee vs. Butler [1893 2 QB 318]. If the person receiving the goods has no option to terminate the agreement, it is considered a contract of sale, regardless of whether the price is paid in installments.

Sale of Goods & Work and Labour 

A contract for the sale of goods involves the sale of goods for a specified price and requires the delivery of those goods. However, there are instances where the focus is on the exercise of skill and labor, with the delivery of goods being secondary. These scenarios pertain to contracts for work, labor, or services. The distinction lies in the intention of the parties involved—whether the primary intention is the delivery of goods or the exercise of skill and labor concerning the goods to be delivered.

 For instance: Example: A person commissions an artist to paint their portrait and provides the necessary materials for the painting. This is a contract for work and labor because the essence of the agreement is the artist's skill, not just the delivery of materials.

In a legal case called  Robinson vs. Graves [1935 1 KB 579]  , a painter named A was orally hired by B to paint a portrait of a lady. When B canceled the contract before its completion, it was determined that the agreement was for work and labor because the key aspect was the artist's skill and expertise in creating the portrait.

 Example:  If someone buys a portrait painted by a renowned artist, such as B, it is a contract of sale rather than a contract for work and labor because the focus is on the delivery of the painted portrait.

 In the case of Lee vs. Griffin [1861 30 LJ QB 252]  , a dentist was hired by a woman to create false teeth to be fitted into her mouth. When the woman passed away before the work was finished, a legal question arose regarding the nature of the contract. It was determined that the contract was one of sale.

When gold is given to a goldsmith for making ornaments, it constitutes a contract of work and labor. Similarly, when a photographer takes a photograph, develops the negative, and produces prints for their client, the contract is based on skill and labor rather than the sale of goods, as established in the case of  Assistant Sales Tax Officer vs. B C Kame [AIR 1977 SC 1642]  .

 Sale and Barter 

•  Sale:  A sale always involves a price. In a sale, ownership of goods is transferred in exchange for money.
•  Barter:  In a barter transaction, ownership of goods is exchanged for other goods without any price being paid.

Sale by Pawnee of Goods 

• Definition:  When a bank sells goods pledged with it in the course of its banking business, it falls under the definition of 'SALE' of goods as per section 2(13) of the Sale of Goods Act, 1930.
•  Case Example:  In the case of  State Bank of Travancore v. Commercial Tax Officer  , the bank sold goods, ornaments, or bullion pledged with it through public auction to realize security and exercise its rights as a pledgee. This sale is considered valid under section 2(13) of the Sale of Goods Act.

Conditions and Warranties in the Sale of Goods Act, 1930 

When we purchase items like electronic gadgets, we often inquire about warranty periods to ensure that if the product turns out to be faulty after the purchase, we can easily get it repaired or replaced. The terms "Condition" and "Warranty" are outlined in the contract of sale to determine the remedies available to the parties in case of a breach by either party. This article will explore the definitions of these terms, their differences, and their legal implications under the Sale of Goods Act, 1930.

In a contract of sale, certain provisions need to be fulfilled as stipulated. A condition is a fundamental prerequisite upon which the entire contract is based, while a warranty is a written assurance from the seller to repair or replace the product in case of any defects. Sections 11 to 17 of the Sale of Goods Act provide guidance on the provisions related to Conditions and Warranties.

Distinction between Condition and Warranty 

Section 12 of the Sale of Goods Act distinguishes between a condition and a warranty. The classification of a stipulation as a condition or warranty depends on its interpretation, which should be based on its function rather than the wording used.

 Definitions under the Sale of Goods Act 

The Sale of Goods Act, 1930, includes various provisions regarding the sale of goods, including conditions and warranties. Section 12 of the Act defines conditions and warranties as follows:

• A stipulation in a contract of sale regarding goods may be classified as a condition or a warranty.
• A condition is a stipulation crucial to the main purpose of the contract, and its breach gives the right to treat the contract as repudiated.
• A warranty is a stipulation ancillary to the main purpose of the contract, and its breach gives rise to a claim for damages but not the right to reject the goods and treat the contract as repudiated.
• Whether a stipulation is a condition or a warranty depends on the construction of the contract. A stipulation may be a condition even if referred to as a warranty in the contract.

Implied Conditions and Warranties 

Our focus here is on 'Implied Conditions and Warranties.' If a stipulation forms the very basis of the contract or is essential to the main purpose of the contract, it is considered a condition. Conversely, if the stipulation is not essential to the main purpose of the contract, it is deemed a warranty.

Parties may explicitly include any conditions or warranties in their contract. For instance, in the sale of a red saree to be worn by a woman at a specific function on a particular day, it is an express condition that the saree should be red, intended for a specific day, and should reach on time.

However, there can be other conditions that are not explicitly stated by the parties but are understood implicitly. In the aforementioned example, implied conditions could include the saree being in perfect condition, not torn, and matching with the selected piece.

Conclusion 

Understanding the concepts of conditions and warranties in the context of the Sale of Goods Act, 1930 is crucial for both buyers and sellers. These legal provisions help in determining the rights and remedies available in case of breaches, ensuring clarity and protection in commercial transactions.

Conditions in the Sale of Goods Act, 1930 

In the Sale of Goods Act, 1930, a condition is considered a crucial element of the contract, serving as its foundation. It is an integral part necessary for the execution of the contract. When a condition is breached, it gives the aggrieved party the right to treat the contract as repudiated. This means that if the seller fails to fulfill a condition, the buyer has the option to refuse to accept the goods or repudiate the contract altogether. If the buyer has already made payment, they can recover the price and also claim damages for the breach of contract.

 According to Section 12(2)  of the Sale of Goods Act, 1930, a condition is defined as a stipulation essential to the main purpose of the contract. Breaching this stipulation gives rise to the right to treat the contract as repudiated.

•  Conditions  are viewed as essential elements attached to the subject matter of an agreement, as specified by the buyer to the seller, either explicitly or implicitly, at the time of entering into the contract. If the seller fails to comply with a condition specified by the buyer, the buyer has the right to reject the goods delivered.
• Conditions can be either express or implied. An express condition is one explicitly stated by the buyer at the time of contract formation. For instance, if a buyer specifies that goods must be delivered by a certain date, that date becomes a condition of the contract. On the other hand, an implied condition is one that is not explicitly stated but is understood to be part of the contract. For example, if a buyer orders a red saree for a wedding on a specific date, even if the delivery date is not mentioned, it is implied that the saree must be delivered before the wedding date.

 Example:  Consider a scenario where Sohan wants to buy a horse from Ravi, specifying that the horse should be able to run at a speed of 50 km per hour. If Ravi shows Sohan a horse that he claims meets this requirement, and Sohan purchases the horse, only to later discover that it can only run at 30 km per hour, this situation represents a breach of condition. The buyer’s specific requirement was not met, leading to the breach.

Kinds of Conditions 

•  Expressed Condition:  An expressed condition refers to a stipulation explicitly included in a legal agreement, indicating something that must be done or exists within the contract. These conditions are essential for the contract's functioning and are mutually agreed upon by the parties involved. For example, if both parties agree that a certain product must be delivered by a specific date, this becomes an expressed condition of the contract.
•  Implied Condition:  Implied conditions are assumptions made by the parties involved in a contract regarding certain aspects that are not explicitly stated but are understood to be part of the agreement. These conditions are outlined in Sections 14 to 17 of the Sale of Goods Act, 1930. For instance, in a sale by description or sale by sample, certain conditions are implied as if they were incorporated into the contract. Unless otherwise agreed upon, these implied conditions are treated as integral parts of the contract, similar to expressed conditions.

Warranty 

A warranty, as defined in Section 12(3) of the Indian Contract Act, 1872, is a stipulation that is collateral to the main purpose of a contract. When a warranty is breached, it gives rise to a claim for damages but does not entitle the aggrieved party to reject the goods and treat the contract as repudiated.

Understanding Warranty 
A warranty serves as additional information regarding the good or its condition. While it holds significance, it is of secondary importance to the core objectives of the contract. If the seller fails to comply with the warranty, the contract remains intact, and the buyer cannot refuse to purchase the goods. Instead, the buyer is entitled to seek compensation for the breach.

Essentially, a warranty is an extra stipulation and a written guarantee that is collateral to the main purpose of the contract. When a warranty is breached, the affected party cannot reject the entire contract but can claim damages. This distinguishes a breach of warranty from a breach of condition, where the buyer has the right to treat the goods as repudiated.

Kinds of Warranty 

Expressed Warranty
Expressed warranties are those explicitly agreed upon by both parties and included in the contract. These warranties are clearly stated and form part of the contractual agreement.

Implied Warranty
Implied warranties are those that are assumed to be part of the contract, even if not explicitly mentioned. These warranties are incorporated based on the nature of the transaction and the expectations of the parties involved. The following are examples of implied warranties in a contract of sale:

•  Warranty as to Undisturbed Possession  : Section 14(2) of the Sale of Goods Act implies that the buyer has the right to uninterrupted possession of the goods. If the buyer is disturbed after taking possession, they can sue the seller for breach of warranty. For example, if 'X' buys a second-hand bike from 'Y', unaware that it was stolen, and later has to return it, 'X' can sue 'Y' for breach of warranty.
•  Warranty as to Freedom from Encumbrances  : Section 14(3) implies that the goods should be free from any charges or encumbrances in favor of third parties unknown to the buyer. If the buyer was aware of such encumbrances at the time of the contract, they cannot make a claim. For instance, if A pledges goods with C for a loan and later sells those goods to B, B can claim damages if affected.
•  Implied Warranty to Disclose Dangerous Nature of Goods Sold  : If the goods sold are inherently dangerous or potentially dangerous, the seller has a duty to inform the buyer of the possible risks. If this warranty is breached, the seller is liable. For example, if A buys a horse from B and the horse is violent, B is responsible for informing A about the potential danger. If A is injured while riding the horse, A can claim damages from B.

 Differences Between Condition and Warranty 

•  Condition:  An obligation that must be fulfilled before another action can take place.
•  Warranty:  A guarantee by the seller about the state of the product.

 Key Distinctions 

•  Importance:  Conditions are crucial to the contract's core, while warranties are secondary.
•  Breach Consequences:  Violating a condition can lead to contract termination, whereas breaching a warranty may not.
•  Violation Impact:  Breaching a condition also breaches a warranty, but the reverse is not true.
•  Remedies:  In case of a condition breach, the innocent party can rescind the contract and claim damages. For warranty breaches, the aggrieved party can only claim damages.

Implied Conditions and Warranties under the Sale of Goods Act 

 Meaning:  Implied conditions and warranties are those that are automatically included in every contract of sale of goods, as outlined in Sections 14 to 17 of the Sale of Goods Act, 1930. These stipulations are binding unless they conflict with any express conditions and warranties agreed upon by the parties.

 Implied Conditions 

There are seven implied conditions in a contract of sale of goods.

•  Condition as to Title [Section 14(a)]  Section 14(a) of the Sale of Goods Act 1930 explains the implied condition as to title as 'in the case of a sale, he has a right to sell the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass'.
•  Sale by Description (Section 15)  Section 15 of the Sale of Goods Act, 1930 explains that when a buyer intends to buy goods by description, the goods must correspond with the description given by the buyer at the time of formation of the contract, failure in which the buyer can refuse to accept the goods.
•  Sale by Sample (Section 17)  When the goods are to be supplied on the basis of a sample provided to the seller by the buyer while the formation of a contract the following conditions are implied:
•  Sale by Sample as well as Description (Section 15)  When the sale of goods is by a sample as well as a description the bulk of the goods should correspond with both, i.e., description and sample provided to the seller in the contract and not only sample or description.
•  Doctrine of Caveat Emptor  meaning 'Buyer beware'. This doctrine of caveat emptor is based on the fundamental principle that once a buyer is satisfied with the product's suitability, then he has no subsequent right to reject such product.
•  Condition as to Quality or Fitness (Section 16)  The doctrine of Caveat Emptor is applicable in the case of sale/purchase of goods, which means 'Buyer Beware'. The maxim means that the buyer must take care of the quality and fitness of the goods he intends to buy and cannot blame the seller for his wrong choice.

 Implied Warranty 

•  Enjoy Possession of the Goods [Section 14(b)]  In a contract of sale unless the circumstances of the case show different intention, there is an implied warranty that the buyer shall have and enjoy possession of goods.
•  Goods are free from any charge or encumbrance in favor of any third party [Section 14(c)]  Any charge or encumbrance pending in favors of the third party which was not declared to the buyer while entering into a contract shall be considered as a breach of warranty, and the buyer is be entitled to compensation and claim damages from the seller for the same.

Exclusion of Implied Terms and Conditions 

Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.

When Does a Condition Diminish to the Level of a Warranty? 

Section 13 of the Act outlines the situations where a breach of Condition can be treated as a breach of Warranty. In the first two scenarios, it depends on the buyer's discretion, while the last scenario is mandatory and acts as an estoppel against the buyer:

1.  Waiver of Condition:  If the buyer waives the condition, it is treated as a warranty.
2.  Buyer’s Discretion:  A condition breaches to a warranty if the buyer voluntarily treats the breach of condition as a breach of warranty.
3.  Indivisible Contract:  In cases where the contract is indivisible and the buyer has accepted the whole or part of the goods, the condition is regarded as a warranty. In such instances, the contract cannot be repudiated, although damages can be claimed.

During the sale or purchase of goods, both the buyer and seller establish certain preconditions regarding payment methods, delivery, quality, quantity, and other essential aspects. These stipulations are classified as either conditions or warranties, depending on the specific circumstances. Understanding these concepts is crucial as they safeguard the rights of the parties involved in the event of a contract breach.

• Legal Principles Governing the Transfer of Goods : The Sale of Goods Act, 1930 encompasses four key principles related to the transfer of goods. This article will delve into these principles, focusing on the transfer of property in the sale of specific or ascertained goods.
• Transfer of Property in Sale of Specific or Ascertained Goods : Sections 19 to 22 of The Sale of Goods Act, 1930, govern the transfer of goods when they are specific and ascertained in nature.

 Property When Intended to Pass (Section 19) 

• Section 19 of The Sale of Goods Act, 1930, is further divided into subsections:
• When a contract for the sale of ascertained or specific goods is in place, a specific time is mutually agreed upon by both parties for the transfer of property from the seller to the buyer.
• It is crucial to consider the circumstances and conduct of both parties involved in the contract.