ICAI Notes 2.1, Basics of the Acts, Sale of Goods Act - 1930 CA Foundation Notes | EduRev

Mercantile Law for CA CPT

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CA Foundation : ICAI Notes 2.1, Basics of the Acts, Sale of Goods Act - 1930 CA Foundation Notes | EduRev

The document ICAI Notes 2.1, Basics of the Acts, Sale of Goods Act - 1930 CA Foundation Notes | EduRev is a part of the CA Foundation Course Mercantile Law for CA CPT.
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Learning Objectives

  • Definitions of certain terms,
  • Meaning of contract of sale,
  • Distinctions of sale from other similar contracts,
  • Formalities of contract of sale,
  • Subject matter of contract of sale,
  • Ascertainment of price for the contract of sale,
  • Stipulation as to time.

Sale of goods is one of the specific form of contracts recognised and regulated by law in India. Sale is a typical bargain between the buyer and seller. The Sale of Goods Act, 1930, leaves the parties to modify the provisions of the law by express stipulations. However, in some places this freedom is severely restricted or negativated.

2.1 DEFINITIONS 

Section 2 of the Sale of Goods Act, 1930, defines the terms which have been frequently used in the Act, which are as follows –

(a) Buyer and Seller:Buyer’ means a person who buys or agrees to buy goods [Sub Section (1)]; ‘seller’ means a person who sells or agrees to sell goods [Sub Section (13)]. The two terms, ‘buyer’ and ‘seller’ are complementary and represent the two parties to a contract of sale of goods. Both the terms are, however, used in a sense wider than their common meaning. Not only the person who buys but also the one who agrees to buy is a buyer. Similarly, a ‘seller’ means not only a person who sells but also a person who agrees to sell.

(b) Goods and other related terms :

(i) “Goods” means every kind of movable property other than actionable claims and money; and includes stock 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; [Sub Section (7)]. This is a wider definition than contained in the English law, which does not consider ‘stock’ and ‘shares’ as goods, though it includes a ship. ‘Actionable claims’ are claims, which can be enforced only by an action or suit, e.g., debt. A debt is not a movable property or goods.
(ii) Existing goods are such goods as are in existence at the time of the contract of sale, i.e., those owned or possessed by the seller (Section 6).
(iii) Future goods means goods to be manufactured or produced or acquired by the seller after making the contract of sale [Section 2 (6)]. Thus, under the Act, a contract of sale of future goods, e.g., 1,000 quintals of potatoes to be grown on A’s field, is not illegal, though the actual sale of future goods is not possible. This is an example of agreement to sell.
(iv) Specific goods means goods identified and agreed upon at the time the contract of a sale has been made. Specific goods may be distinguished from ‘generic’ or unascertained’ goods defined only by description and not identified and agreed upon. Ascertained goods have been held to mean goods identified in accordance with the agreement after the contract of sale has been made.
(v) Goods are said to be in a deliverable state when they are in such a condition that the buyer would, under contract, be bound to take delivery of them, e.g., when A contracts to sell timber and makes bundles thereof, the goods will be in a deliverable state after A has put the goods in such a condition.

(c) Delivery - its forms and derivatives: Delivery means voluntary transfer of possession by one person to another [(Section 2(2)]. As a general rule, delivery of goods may be made by doing anything, which has the effect of putting the goods in the possession of the buyer, or any person authorised to hold them on his behalf. Delivery may be of three kinds, which may be enumerated as follows:
(i) Actual delivery: It is actual when the goods are physically delivered to the buyer.
(ii) Constructive delivery: When it is affected without any change in the custody or actual possession of the thing as in the case of delivery by attornment (acknowledgement) e.g., where a warehouseman holding the goods of A agrees to hold them on behalf of B, at A’s request.
(iii) Symbolic delivery: When there is a delivery of a thing in token of a transfer of something else, i.e., delivery of goods in case of transit may be made by handing over documents of title to goods, like bill of lading or railway receipt or delivery orders or the key of a warehouse containing the goods is handed over to buyer.

(d) “Document of title to goods” includes bill of lading, dock-warrant, warehouse keeper’s certificate, wharfingers’ certificate, railway receipt, multimodal transport document, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods or authorising or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented by it.

Examples of such documents are bill of lading, dock warrant, warehouse keeper’s certificate, wharfinger’s certificate, railway receipt, warrant, an order of delivery of goods. The list is only illustrative and not exhaustive. Any other document which has the above characteristics also will fall under the same category. Though a bill of lading is a document of title, a mate’s receipt is not; it is regarded at law as merely an acknowledgement for the receipt of goods. A document amounts to a document of title only where it shows an unconditional undertaking to deliver the goods to the holder of the document.
However, there is a difference between a ‘document showing title’ and ‘document of title’. A share certificate is a ‘document’ showing title but not a document of title. It merely shows that the person named in the share certificate is entitled to the share represented by it, but it does not allow that person to transfer the share mentioned therein by mere endorsement on the back of the certificate and the delivery of the certificate.

(e) Mercantile Agent [Sub-section (9)]: It means an agent having in the customary course of business as such agent an authority either to sell goods or to consign goods for the purpose of sale or to buy goods or to raise money on the security of the goods. Examples of such kind of agents are auctioneers, factors, brokers, etc.

(f) Property [Sub-section (11)]: It means the general property (right of owner-ship-in goods) and not merely a special property. Note that the ‘general property’ in goods is to be distinguished from a ‘special property’. It is quite possible that the general property in a thing may be in one person and a special property in the same thing may be in another e.g., when an article is pledged. The general property in a thing may be transferred, subject to the special property continuing to remain with another person i.e., the pledgee who has a right to retain the goods pledged till payment of the stipulated dues.

(g) Insolvent : A person is said to be insolvent when he ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of insolvency or not; [Sub-section (8)].

2.2 CONTRACT OF SALE

Contract of Sale of Goods is a contract between buyer and seller intending to exchange property in goods for a price. Section 4 (1) of the Sale of Goods Act, 1930 defines the term ‘Contract of Sale’ as – a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The definition as above reveals important elements of transfer of ownership for a price. Here, there are two parties to a contract who are willing to exchange their goods or services to gain a mutual benefit called price.

2.3 ESSENTIALS OF CONTRACT OF SALE

The following elements must co-exist so as to constitute a contract of sale of goods under the Sale of Goods Act, 1930.
(i) There must be at least two parties.
(ii) The subject matter of the contract must necessarily be goods.
(iii) A price in money (not in kind) should be paid or promised.
(iv) A transfer of property in goods from seller to the buyer must take place.
(v) A contract of sale must be absolute or conditional [Section 4(2)].
(vi) All other essential elements of a valid contract must be present in the contract of sale.

2.4 SALE AND AN AGREEMENT TO SELL

In the Sale of Goods, the property is transferred from seller to the buyer immediately. The term Sale is defined in the Section 4(3) of the Sale of Goods Act, 1930 as – “where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale.”

 In an agreement to sell the ownership of the goods is not transferred immediately. It is intending to transfer at a future date upon the completion of certain conditions thereon. The term is defined in Section 4(3) of the Sale of Goods Act, 1930, which is as follows – where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an 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 the transfer is to take place at a future date.

2.5 DISTINCTION BETWEEN SALE AND AN AGREEMENT TO SELL 

The differences between the two are as follows:

SaleAgreement to sell
1. The property in the goods passes to the 
 
1. Since property in the goods does not pass to the buyer, the risk also does not pass to him
2. It is an executed contract. i.e. contract for which consideration has been paid.

2. It is an executory contract, i.e. contract
for which consideration is to be paid at a future date.

3. The seller can sue the buyer for the price of the goods because of the passage of the property therein to the buyer.3. The aggrieved party can sue for damages
only and not for the price, unless the price was payable at a stated date.
4. A subsequent loss or destruction of the goods is the liability of the buyer.4. Such loss or destruction is the liability of
the seller.
5. Breach on the part of the seller gives the
buyer double remedy; a suit for damages against the seller and a proprietary remedy of recovering the goods from third parties who bought them.
5. The seller, being still the owner of the
goods, may dispose of them as he likes,
and the buyer’s remedy would be to file
a suit for damages only.

 

2.6 SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS 

(i) Sale and Hire Purchase: Contracts of sale resemble contracts of hire purchase very closely, and indeed the real object of a contract of hire purchase is the sale of the goods ultimately. Nonetheless a sale has to be distinguished from a hire purchase as their legal incidents are quite different. 

The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as follows:

SaleHire-Purchase
1. Property in the goods is transferred to
the buyer immediately at the time of contract.
1. The goods passes to the hirer upon payment of the last instalment.
2. The position of the buyer is that of the
owner of the goods
2. The position of the hirer is that of a bailee
till he pays the last instalment.
3. The buyer cannot terminate the contract
and is bound to pay the price of the goods.
3. The hirer may, if he so likes, terminate the contract by returning the goods to its owner without any liability to pay the remaining instalments.
4. The seller takes the risk of any loss
resulting from the insolvency of the buyer.
4. The owner takes no such risk, for if the hirer fails to pay an instalment the owner has right to take back the goods.
5. The buyer can pass a good title to a
bonafide purchaser from him.
5. The hirer cannot pass any title even to a bona fide purchaser.
6. Tax is levied at the time of the contract.6. Tax is not leviable until it eventually ripens into a sale.

 

(ii) Sale and Bailment: A ‘bailment’ is the delivery of goods for some specific purpose under a contract on the condition that the same goods are to be returned to the bailor or are to be disposed of according to the directions of the bailor.

The difference between bailment and sale may be clearly understood by studying the following:

SaleBailment
1. The property in goods is transferred
from the seller to the buyer.
1. There is only transfer of possession of
goods from the bailor to the bailee for any of the reasons like safe custody,
carriage, etc.
2. The return of goods in contract of sale
is not possible.
2. The bailee must return the goods to the bailor on the accomplishment of the
purpose for which the bailment was made.
3. The consideration is the price in terms of money.3. The consideration may be gratuitous or non-gratuitous.


(iii) Sale and contract for work and labour: A contract of sale of goods is one in which some goods are sold or are to be sold for a price. But where no goods are sold, and there is only the doing or rendering of some work of labour, then the contract is only of work and labour and not of sale of goods, e.g., where gold is supplied to a goldsmith for preparing an ornament or when an artist is asked to paint a picture, even when he himself arranges for all colours etc.

2.7 FORMALITIES OF CONTRACT OF SALE

Except where specifically required by any law, no particular form is necessary to constitute a valid contract. The agreement may be express or may be implied from the conduct of the parties. Section 5 of the Sale of Goods Act, 1930, lays down the rule as to how a contract of sale may be made and has nothing to do with the transfer or passing of the property in the goods. A contract of sale may be made in any of the following modes:
(i) There may be immediate delivery of the goods; or
(ii) There may be immediate payment of price, but it may be agreed that the delivery is to be made at some future date; or 
(iii) There may be immediate delivery of the goods and an immediate payment of price; or
(iv) It may be agreed that the delivery or payment or both are to be made in installments; or
(v) It may be agreed that the delivery or payment or both are to be made at some future date.

2.8 SUBJECT MATTER OF CONTRACT OF SALE 

The subject matter of contract of sale is always the goods. This is enshrined in the Sale of Goods Act, 1930, under Sections 6, 7 and 8.

(a) The Section 6 of the Act lays down following provisions :
(1) The subject matter of contract must always be goods. The goods may be existing or future goods.
(2) Like an ordinary contract, a contract of sale of goods can also be made with regard to the goods, the acquisition of which by seller depends upon a contingency, which may or may not happen. Thus, a contract for sale of certain cloth to be manufactured by a certain mill is a valid contract. Such contacts are called contingent contracts.
(3) When the seller purports by his contract of sale to effect a sale of future goods, the contract will operate only as an agreement to sell the goods and not as sale.

(b) Destruction of subject matter of a contract (Sections 7 & 8) 

(i) Goods not existing at the time of contract: If at the time a contract of sale is entered into, the subject-matter of a contract being specific goods, which without the knowledge of the seller have been destroyed or so damaged as not to answer to the description in the contract, and then the contract is void ab initio. The Section is founded on the rule that where both the parties to a contract are under a mistake as to a matter of fact essential to a contract, the contract is void.

(ii) Goods perishing after the contract is made: Where there is an agreement to sell specific goods and the goods, subsequently without any fault of the seller or the buyer perish or suffer such damages as not to answer to the description in the agreement before the risk passes to the buyer, the agreement becomes void (Section 8). It may be noted that this would apply only if the risk had not passed to the buyer. Generally speaking risk passes with property i.e., when the property in the goods sold has passed to the buyer bears the risk of subsequent destruction of, or damage to the goods.

2.9 ASCERTAINMENT OF PRICE (SECTIONS 9 & 10)

‘Price’ means the monetary consideration for sale of goods [Section 2 (10)]. By virtue of Section 9, the price may be (1) fixed by the contract, or (2) agreed to be fixed in a manner provided by the contract, e.g., by a valuer, or (3) determined by the course of dealings between the parties. When it cannot be fixed in any of the above ways, the buyer is bound to pay to the seller a reasonable price. What is a reasonable price is a question of fact in each case (Section 9). Section 10 provides for the determination of price by a third party. Where there is an agreement to sell goods on the terms that price has to be fixed by the third party and he either does not or cannot make such valuation, the agreement will be void. In case the third party is prevented by the default of either party from fixing the price, the party at fault will be liable to the damages to the other party who is not at fault. However, a buyer who has received and appropriated the goods must pay a reasonable price for them in any eventuality.

2.10 STIPULATION AS TO TIME (SECTION 11)

As regard time for the payment of price, unless a different intention appears from the terms of contract, stipulation as regard this, is not deemed to be of the essence of a contract of sale. But delivery of goods must be made without delay. Whether or not such a stipulation is of the essence of a contract depends on the terms agreed upon. Price for goods may be fixed by the contract or may be agreed to be fixed later on in a specific manner. Stipulations as to time of delivery are usually the essence of the contract.

2.11 SUMMARY 

In nutshell, contract of sale of goods is a contract where the seller transfers or agrees to transfer the property in the goods to the buyer for a price. Where, however, the transfer of property in goods is to take place at a future date or subject to some conditions to be fulfilled, the contract is called ‘agreement to sell’. The subject matter of such contract must always be goods. Price for goods may be fixed by the contract or may be agreed to be fixed later on in a specific manner. Stipulations as to time of delivery are usually of the essence of the contract.  

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