Unit 2: Conditions & Warranties Chapter Notes | Business Laws for CA Foundation PDF Download

Overview

Stipulation as to Time (Section 11)

• Time for Payment: In a contract of sale, unless specified otherwise, the stipulation regarding the time for payment is not considered essential.
• Delivery of Goods: Unless stated otherwise in the contract, delivery of goods must be made without delay. Whether a stipulation is essential or not depends on the agreed terms.
• Price: The price for goods can be fixed by the contract or agreed to be fixed later in a specific manner.
• Time of Delivery: Stipulations regarding the time of delivery may be essential depending on the specifics of the contract.

Introduction to Conditions and Warranties

• When selling goods, a seller often makes statements to encourage a buyer to make a purchase. These statements typically relate to the quality and nature of the goods, as well as their fitness for the buyer's intended use. 
• If these statements are not part of the sales contract, they do not affect the contract legally. However, if they are included in the contract and the buyer relies on them, they do have legal implications. 
• A statement that is part of the contract and impacts it is called a stipulation. Not all stipulations are equally important; some are crucial while others are less significant. 
• The more important stipulations in a sales contract are referred to as Conditions, while the less important ones are called Warranties.
• According to Section 12: 
  • A condition is a stipulation that is essential to the main purpose of the contract. If it is breached, the buyer has the right to treat the contract as void. 
  • Example 1: if person P wants to buy a car from person Q, who claims that the car has a mileage of 20 km/litre, but P later discovers that the mileage is only 15 km/litre, this is a breach of condition. The mileage is essential to the contract, so the breach is significant. 
  • A warrantyis a stipulation that is not crucial to the main purpose of the contract. Breaching a warranty leads to a claim for damages but does not allow the buyer to reject the goods or void the contract. 
  • Whether a stipulation is a condition or a warranty depends on the specific details of the contract. Sometimes a stipulation called a warranty may actually be a condition. 
  • Example 2: if Ram asks Shyam, a car dealer, for a vehicle suitable for touring, and Shyam recommends a 'Maruti', if the car turns out unsuitable for touring, the stipulation about its suitability is a condition of the contract. Its failure means Ram can reject the car and get a refund. 

If Ram buys a new Maruti car that comes with a one-year warranty against manufacturing defects, and the horn stops working after six months, he cannot cancel the contract. The manufacturer must either repair or replace the horn. Ram can claim damages but does not have the right to void the contract. 

Distinction between Conditions and Warranties

Key Differences between Conditions and Warranties

Warranty:

• Meaning: A warranty is a stipulation that is secondary to the main purpose of the contract.
• Right in Case of Breach: If a warranty is breached, the aggrieved party can only claim damages.
• Conversion of Stipulations: A breach of warranty cannot be treated as a breach of condition.

Condition:

• Meaning: A condition is a stipulation that is essential to the main purpose of the contract.
• Right in Case of Breach: If a condition is breached, the aggrieved party can repudiate the contract, claim damages, or both.
• Conversion of Stipulations: A breach of condition may sometimes be treated as a breach of warranty.

When Condition is Treated as Warranty (Section 13)

The following are the cases where a contract is not avoided even on account of a breach of a condition:

(i) Waiver of Condition by Buyer: A buyer can waive the performance of a condition for their own benefit, provided it is a voluntary waiver.

(ii) Election to Treat Breach as Warranty: The buyer can choose to treat a breach of condition as a breach of warranty, claiming only damages instead of repudiating the contract.

Example 3: If a supplier delivers second quality sugar instead of first quality, the buyer can reject the goods for breach of condition. However, if the buyer decides to accept the second quality sugar and claim damages, they are treating the breach as a warranty.

(iii) Non-Severable Contracts: If the contract is non-severable and the buyer has accepted either the whole goods or any part thereof, the breach of condition does not void the contract.

(iv) Excuse of Condition or Warranty by Law: If the fulfillment of any condition or warranty is excused by law due to impossibility or other reasons, the breach does not void the contract.

Waiver of Conditions

Express and Implied Conditions and Warranties (Section 14-17)

Implied Conditions in a Contract of Sale

• Condition as to Title: The seller must have the right to sell the goods. In a sale, this means the seller is the rightful owner. In an agreement to sell, the seller must have the right to sell the goods when ownership is set to transfer. If the seller's ownership is flawed, the buyer must return the goods to the rightful owner and seek a refund from the seller.
• Condition as to Description: Goods sold must match their description. If there is a discrepancy, the buyer has the right to reject the goods.
• Sale by Sample: When goods are sold by sample, the goods delivered must match the sample provided. This condition can apply alongside other conditions.
• Condition as to Quality or Fitness: Goods must be of satisfactory quality or fit for a particular purpose, depending on the buyer's requirements.
• Condition as to Merchantability: Goods must be fit for sale in the ordinary course of business. This is particularly relevant for food products, where the condition as to wholesomeness applies.

Condition as to Title
The condition as to title is a fundamental aspect of a contract of sale, ensuring that the seller has the legal right to sell the goods. This condition protects the buyer's interests by guaranteeing that they are purchasing goods from a legitimate owner.

Key Points:

• Right to Sell: In every contract of sale, unless otherwise agreed, the seller implicitly condition is that: (a) In a sale, the seller has the right to sell the goods. (b) In an agreement to sell, the seller will have the right to sell the goods at the time when ownership is to transfer.
• Transfer of Ownership: The condition implies that the seller must have the right to sell the goods at the time when ownership is to pass to the buyer. This means the seller should be the rightful owner of the goods at the time of the sale.
• Defective Title: If the seller's title or ownership turns out to be defective, the buyer has the right to return the goods to the true owner and recover the purchase price from the seller. This protects the buyer from losing their money if the seller does not have the legal right to sell the goods.

Example 4:A purchased a tractor from B who had no title to it. After 2 months, the true owner spotted the tractor and demanded it from A. Held that A was bound to hand over the tractor to its true owner and that A could sue B, the seller without title, for the recovery of the purchase price. 

Example 5: If A sells to B tins of condensed milk labelled ‘C.D.F. brand’, and this is proved to be an infringement of N Company’s trade mark, it will be a breach of implied condition that A had the right to sell. B in such a case will be entitled to reject the goods or take off the labels, and claim damages for the reduced value. If the seller has no title and the buyer has to make over the goods to the true owner, he will be entitled to refund of the price.

Sale by Description

• Implied Condition:  When goods are sold by description, there is an implied condition that the goods must match the description. This means that if you agree to sell a specific type of goods, like peas, you cannot force the buyer to accept something different, like beans.
• Buyer’s Rights:The buyer has the right to reject goods that do not conform to the description. It must be determined whether the buyer agreed to purchase the goods based on their description, which is crucial for identifying the goods.
• Breach of Condition:  If the goods do not match the description and the description was essential to the agreement, it constitutes a breach of condition. This breach allows the buyer to reject the goods, regardless of whether they had the opportunity to inspect them.
• Importance of Condition:  This condition is fundamental to the contract. 
  Example 6: if a seller in Kolkata offers to sell bags of "waste silk," there is an implied condition that the silk must meet the market standard for "Waste Silk." If it does not, the buyer has the right to reject the goods.
• Example 7: If a ship is sold as a "copper-fastened vessel" but is only partially copper-fastened, the goods do not match the description. In such cases, the buyer can return the goods or claim damages for the breach if they accept the goods.
• Definition of Description:  The Act does not provide a specific definition of 'description.' However, it can include cases where the class or kind of goods is specified, such as "Egyptian cotton" or "java sugar." It can also refer to goods described by essential characteristics, like jute bales of a specific shipment or steel of specific dimensions.
• Examples of Description: Description can involve statements or representations regarding the identity of goods based on their place of origin or mode of packing. Whether such a statement is essential to the identity of the goods depends on the specifics of each case and the interpretation of the contract.

Sale by Sample

• Correspondence with Sample:  When goods are sold by sample, there is an implied condition that the bulk of the goods must match the sample in quality. This ensures that the buyer receives goods that are consistent with the sample provided.
• Opportunity for Comparison: The buyer must have a reasonable opportunity to compare the bulk of the goods with the sample. This allows the buyer to verify that the goods meet the expected quality standards set by the sample.
• Example 8: In a case of sale by sample of two parcels of wheat, the seller allowed the buyer an inspection of the smaller parcel but not of the larger parcel. In this case, it was held that the buyer was entitled to refuse to take the parcels of wheat.

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 shall 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 or both, the buyer can repudiate the contract. 
• Example 10: A agreed with B to sell certain oil described as refined sunflower oil, warranted only equal to sample. The goods tendered were equal to sample but contained a mixture of hemp oil along with sunflower oil. Hence, B can reject the goods because the goods were as per sample but do not correspond to the description.

Condition as to Quality or Fitness

• If the buyer relies on the seller's skill and judgment to select goods for a particular purpose, there is an implied condition that the goods will be fit for that purpose. This applies whether the seller is a manufacturer or not. However, if the buyer does not inform the seller of the specific purpose, there is no implied condition.
• Example 11: ‘A’ bought a set of false teeth from ‘B’, a dentist. But the set was not fit for ‘A’s mouth. ‘A’ rejected the set of teeth and claimed the refund of price. It was held that ‘A’ was entitled to do so as the only purpose for which he wanted the set of teeth was not fulfilled. 
• Example 12: ‘A’ went to ‘B’s shop and asked for a ‘Merrit’ sewing machine. ‘B’ gave ‘A’ the same and ‘A’ paid the price. ‘A’ relied on the trade name of the machine rather than on the skill and judgement of the seller ‘B’. In this case, there is no implied condition as to fitness of the machine for buyer’s particular purpose.

Condition as to Merchantability

• When 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. This applies whether the seller is the manufacturer or not. The buyer should examine the goods before the purchase, and there shall be no implied condition regarding defects that the examination would have revealed.
• Example 13:If a person orders motor horns from a manufacturer of horns, and the horns supplied are scratched and damaged owing to bad packing, he is entitled to reject them as unmerchantable.
• Example 14:A bought a black velvet cloth from C and found it to be damaged by white ants. Held, the condition as to merchantability was broken.

Condition as to Wholesomeness

• In the case of eatables and provisions, there is an implied condition that the goods shall be wholesome, in addition to the implied condition as to merchantability.
• Example 15:A supplied F with milk. The milk contained typhoid germs. F’s wife consumed the milk and was infected and died. Held, there was a breach of condition as to fitness and A was liable to pay damages.

Implied Warranties in Contracts

Implied warranties are automatically included in every contract of sale unless explicitly excluded by the parties' agreement. These warranties are inherent in sales contracts unless stated otherwise. They can also be excluded by the course of dealings between the parties or by usage of trade, as per Section 62 of the Sale of Goods Act, 1930.

• Warranty as to undisturbed possession: This warranty ensures that the buyer will have and enjoy quiet possession of the goods. If the buyer is later disturbed in their possession, they are entitled to sue the seller for breach of warranty.  
  Example 16:  If X buys a laptop from Y and later finds out it was stolen, Y is responsible for breach of warranty.
• Warranty as to non-existence of encumbrances:This warranty guarantees that the goods are free from any charge or encumbrance in favor of a third party, which was not declared or known to the buyer before or at the time of entering into the contract.  
  Example 17:  If A pledges his car to C for a loan and then sells it to B without disclosing the pledge, B may have legal recourse against A.
• Warranty on Quality or Fitness: According to Section 16(3), an implied warranty about the quality or suitability of a product can be based on trade practices. 
  Buyer Beware: The general rule for implied conditions or warranties regarding the quality or fitness of goods is “let the buyer beware.” This means that the seller does not have to disclose any negative aspects of the items sold, although there are some exceptions to this rule. 
• Disclosure of Dangerous Goods: If the goods are dangerous and the buyer is unaware of this danger, the seller is required to inform the buyer about the potential risks. 
  Seller's Liability: If the seller fails to provide this warning and there is a breach of warranty, they may be held responsible for damages.

Caveat Emptor

• The term "Caveat Emptor" refers to the principle of "let the buyer beware" in the context of the sale of goods. 
• When sellers offer their goods in the open market, it is the responsibility of the buyers to make an informed selection or choice. 
• If the purchased goods are found to be defective, the buyer cannot hold the seller liable for the defect. 
• The seller is not accountable for the buyer's poor selection and is not obligated to disclose any defects in the goods being sold. 
• It is the buyer's duty to ensure that the goods will meet their intended purpose before making a purchase. 
• If the goods are defective or unsuitable for the buyer's needs, or if the buyer relies on their own skill or judgment, the seller cannot be held responsible. 
• Section 16 of the relevant law reinforces the rule of Caveat Emptor by stating that there is no implied warranty or condition regarding the quality or fitness of goods supplied under a contract of sale, unless specified by law. 

For a buyer to hold a seller accountable, certain conditions must be met:

• The buyer must have communicated the specific purpose of the purchase to the seller. 
• The buyer must have relied on the seller's skill and judgement in selecting the goods. 
• The seller's business must involve supplying goods of the described nature. 

Example 18: A sold pigs to B. These pigs being infected, caused typhoid to other healthy pigs of the buyer. It was held that the seller was not bound to disclose that the pigs were unhealthy. The rule of the law being “Caveat Emptor”. 

Example 19: A purchases a horse from B. A needed the horse for riding but he did not mention this fact to B. The horse is not suitable for riding but is suitable only for being driven in the carriage. Caveat emptor rule applies here and so A can neither reject the horse nor can claim compensation from B.

Exceptions to the Doctrine of Caveat Emptor

• Fitness for Quality or Use:  If the buyer informs the seller of the specific purpose for which the goods are needed, relying on the seller's expertise, and the goods fall within the seller's usual business, the seller is obligated to provide goods that are suitable for that purpose. This is outlined in Section 16(1) of the Sale of Goods Act.
• Example 20:  If a buyer orders trucks for heavy traffic in a hilly area, and the trucks provided are unsuitable and break down, it constitutes a breach of the condition regarding fitness for purpose.
• Case Study - Priest vs. Last:  In this case, a draper named P purchased a hot water bottle from a retail chemist. P specifically asked the chemist if the bottle could withstand boiling water, to which the chemist replied affirmatively. However, when P's wife used the bottle with boiling water, it burst and caused injury. The court ruled that the chemist was liable for damages to P because he knew the bottle was being purchased for a specific purpose.
• Specific Purpose:If an item is suitable for only one specific purpose, the buyer does not need to inform the seller of that purpose. However, if the item can be used for multiple purposes, the buyer should specify the intended use to hold the seller accountable.
• Case Study - Bombay Burma Trading Corporation Ltd. vs. Aga Muhammad: In this case, timber was purchased with the explicit intention of using it as railway sleepers. When the timber was found unsuitable for this purpose, the court ruled that the contract could be terminated.
• Goods Purchased Under Patent or Brand Name:  When goods are purchased under their patent or brand name, there is no implied condition that the goods will be fit for a particular purpose. This is because the buyer is relying on the reputation of the brand.
• Goods Sold by Description:When goods are sold by description, there is an implied condition that the goods will match the description. If they do not, the seller is held responsible, as per Section 15 of the Sale of Goods Act.
• Goods of Merchantable Quality:When goods are bought by description from a seller who specializes in those goods, there is an implied condition that the goods will be of merchantable quality. The rule of Caveat Emptor does not apply to hidden defects. However, if the buyer has inspected the goods, the rule applies if the defects should have been evident upon ordinary examination, as stated in Section 16(2) of the Sale of Goods Act.
• Sale by Sample:When goods are purchased based on a sample, the principle of  Caveat Emptor  (let the buyer beware) does not apply if the bulk of the goods does not match the sample. This is outlined in Section 17 of the relevant legislation.
• Goods by Sample and Description:If goods are bought based on both a sample and a description, the rule of  Caveat Emptor  is not applicable if the goods do not correspond with either the sample or the description. This is specified in Section 15.
• Trade Usage:An implied warranty or condition regarding the quality or fitness of goods for a particular purpose may arise from trade usage. If the seller fails to meet this trade usage, the rule of  Caveat Emptor  does not apply. This is mentioned in Section 16(3).
• Example 21: In the ready-made garment industry, there is an implied condition based on trade usage that the garments will be reasonably fit for the buyer's purposes.
• Seller's Misrepresentation or Concealment: If the seller misrepresents or commits fraud in the sale of goods, and the buyer relies on this misrepresentation, or if the seller actively conceals a defect that the buyer could not discover through reasonable examination, then the rule of  Caveat Emptor  does not apply. In such cases, the buyer has the right to void the contract and seek damages.