ICAI Notes 2.2 - Conditions and Warranties, Sale of Goods Act - 1930 - CA Foundation PDF Download

Learning Objectives

• To understand and identify conditions and warranties,
• To know the implied conditions and warranties,
• To understand doctrine of ‘caveat emptor’.

2.12 CONDITIONS AND WARRANTIES 

A stipulation in a contract of sale with reference to goods, which are the subject thereof, may be a condition or a warranty. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives right to repudiate the contract and to claim damages. On the other hand warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated (Section 12(3) of the Sale of Goods Act, 1930).

Differences: The following are important differences between conditions and warranties.

2.13 WHEN A CONDITION MAY BE TREATED AS WARRANTY?

In the following cases, a contract is not avoided even on account of a breach of a condition.
(i) Where the buyer altogether waives the performance of the condition a party may for his own benefit, waive a stipulation; or
(ii) where the buyer elects to treat the breach of the condition as one of a warranty. That is to say, he may only claim damages instead of repudiating the contract; or
(iii) where the contract is non-severable and the buyer has accepted either the whole goods or any part thereof. Acceptance means acceptance as envisaged in Section 72;
(iv) where the fulfillment of any condition or warranty is excused by law by reason of impossibility or otherwise.

2.14 EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES 

‘Conditions’ and ‘warranties’ may be either express or implied. They are “express” when the terms of the contract expressly state them. They are implied when, not being expressly provided for. Express conditions are those, which are agreed upon between the parties at the time of contract and are expressly provided in the contract. The implied conditions, on the other hand, are those, which are presumed by law to be present in the contract. It should be noted that an implied condition may be negated or waived by an express agreement. Following conditions are implied in a contract of sale of goods unless the circumstances of the contract show a different intention.

(i) Condition as to title [Section 14(a)]: In every contract of sale, unless there is an agreement to the contrary, the first implied condition on the part of the seller is that (a) in case of a sale, he has a right to sell the goods, and (b) in the case of an agreement to sell, he will have right to sell the goods at the time when the property is to pass. In simple words, the condition implied is that the seller has the right to sell the goods at the time when the property is to pass. If the seller’s title turns out to be defective, the buyer must return the goods to the true owner and recover the price from the seller.

(ii) Sale by description [Section 15]: Where there is a contract of sale of goods by description, there is an implied condition that the goods correspond with the description. This rule is based on the principle that “if you contract to sell peas, you cannot compel the buyer to take beans.” The buyer is not bound to accept and pay for the goods which are not in accordance with the description of goods.

(iii) Sale by sample [Section 17]: In a contract of sale by sample, there is an implied condition
(a) the bulk shall correspond with the sample in quality;
(b) the buyer shall have a reasonable opportunity of comparing the bulk with the sample, and
(c) the goods shall be free from any defect rendering them unmerchantable, which would not be apparent on reasonable examination of the sample. This condition is applicable only with regard to defects, which could not be discovered by an ordinary examination of the goods. But if the defects are latent, then the buyer can avoid the contract.

(iv) Sale by sample as well as by description [Section 15]: Where the goods are sold by sample as well as by description the implied condition is that the bulk of the goods supplied must correspond both with the sample and the description. In case the goods correspond with the sample but do not tally with description or vice versa, the buyer can repudiate the contract.

(v) Condition as to quality or fitness [Section 16]: Ordinarily, there is no implied condition as to the quality or fitness of the goods sold for any particular purpose. However, the condition as to the reasonable fitness of goods for a particular purpose may be implied if the buyer had made known to the seller the purpose of his purchase and relied upon the skill and judgement of the seller to select the best goods and the seller has ordinarily been dealing in those goods. Even this implied condition will not apply if the goods have been sold under a trademark or a patent name.

(vi) Conditions as to wholesomeness: In the case of eatables and provisions, in addition to the implied condition as to merchantability, there is another implied condition that the goods shall be wholesome.

2.15 IMPLIED WARRANTIES 

The examination of Section 14 and 16 of the Sale of Goods Act, 1930, disclosed the following implied warranties:
1. Warranty as to undisturbed possession: An implied warranty that the buyer shall have and enjoy quiet possession of the goods. That is to say, if the buyer having got possession of the goods, is later on disturbed in his possession, he is entitled to sue the seller for the breach of the warranty.

2. Warranty as to non-existence of encumbrances: An implied warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time the contract is entered into.

3. Disclosure of dangerous nature of goods: There is another implied warranty on the part of the seller that in case the goods are inherently dangerous or they are likely to be dangerous to the buyer and the buyer is ignorant of the danger, the seller must warn the buyer of the probable danger. If there is breach of this warranty, the seller will be liable in damages.

4. Warranty as to quality or fitness by usage of trade [Section 16(4)]: An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade.

Regarding implied condition or warranty as to the quality of fitness for any particular purpose of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal unflattering truths about the goods sold, but this rule has certain exceptions.

2.16 CAVEAT EMPTOR 

In case of sale of goods, the doctrine ‘Caveat Emptor’ means ‘let the buyer beware’. When sellers display their goods in the open market, it is for the buyers to make a proper selection or choice of the goods. If the goods turn out to be defective he cannot hold the seller liable. The seller is in no way responsible for the bad selection of the buyer. The seller is not bound to disclose the defects in the goods which he is selling. It is the duty of the buyer to satisfy himself before buying the goods that the goods will serve the purpose for which they are being bought. If the goods turn out to be defective or do not serve his purpose or if he depends on his own skill or judgement, the buyer cannot hold the seller responsible.

The rule of Caveat Emptor is laid down in the Section 16, which states that, “subject to the provisions of this Act or of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale”.

Exceptions: The doctrine of Caveat Emptor is, however, subject to the following exceptions;
1. Where the buyer makes known to the seller the particular purpose for which the goods are required, so as to show that he relies on the seller’s skill or judgement and the goods are of a description which is in the course of seller’s business to supply, it is the duty of the seller to supply such goods as are reasonably fit for that purpose [Section 16(1)].
2. In case where the goods are purchased under its patent name or brand name, there is no implied condition that the goods shall be fit for any particular purpose [Section 16(1)].
3. Where the goods are sold by description there is an implied condition that the goods shall correspond with the description. [Section 15].
4. Where the goods are bought by description from a seller who deals in goods of that description there is an implied condition that the goods shall be of merchantable quality. The rule of Caveat Emptor is not applicable. But where the buyer has examined the goods this rule shall apply if the defects were such which ought to have been revealed by ordinary examination [Section 16(2)].
5. Where the goods are bought by sample, this rule of Caveat Emptor does not apply if the bulk does not correspond with the sample [Section 17].
6. Where the goods are bought by sample as well as description, the rule of Caveat Emptor is not applicable in case the goods do not correspond with both the sample and description [Section 15].
7. An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade and if the seller deviates from that, this rule of Caveat Emptor is not applicable.
8. Where the seller sells the goods by making some misrepresentation or fraud and the buyer relies on it or when the seller actively conceals some defect in the goods so that the same could not be discovered by the buyer on a reasonable examination, then the rule of Caveat Emptor will not apply. In such a case the buyer has a right to avoid the contract and claim damages.

2.17 SUMMARY

While entering into a contract of sale, certain stipulations are put by both the parties i.e. the buyer and the seller such as time for payment of price, time for delivery, quality of goods, transfer of title, etc. These stipulations with reference to goods may be ‘conditions’ or ‘warranties’ depending upon the construction of the contract. A stipulation essential to the main purpose of the contract is a ‘condition’ whereas collateral stipulations are called warranties. Breach of a ‘condition’ and that of a ‘warranty’ have different consequences. Every contract of sales have certain conditions and warranties implied by law. Besides, the parties may provide for ‘conditions’ and ‘warranties’ by an express agreement.

Regarding implied condition or warranty as to the quality of fitness for any particular purpose of goods supplied, the rule is ‘let the buyer beware’ i.e., the seller is under no duty to reveal unflattering truths about the goods sold, but this rule has certain exceptions.