Sale of Goods - Definition, Conditions and Performance

Definition of Goods and Sale

According to section 2(7) of the Sale of Goods Act, 1930, Goods means every kind of movable property, other than actionable claims and money; and includes stocks, 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.   

Thus we can define goods as every kind of movable property except actionable claims and money.

Types of Goods

  1. Specific Goods
  2. Future Goods and
  3. Generic Goods
  4. Specific Goods: means goods identified and agreed upon at the time of a contract of sale is made. They are also called existing goods or ascertained goods.
  5. Future goods: means goods to be manufactured or produced or acquired by the seller after making the contract of sale.
  6. Generic Goods: are unascertained goods that are not specifically identified at the time of a contract of sale is made. g. 50 kg of rice out of 500 kg of rice.

Sale: When under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale. 

Agreement to sell: The transfer of property in the goods that is to take place at a future time, or subject to some conditions, thereafter to be fulfilled, it is called an agreement to sell. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

Distinguish Between a Sale and an Agreement to Sell

Sale

Agreement to sell

 Property or ownership is of goods is transferred immediately to the future time or subject to certain buyer.               

 Ownership is to be transferred at conditions to be fulfilled.

 If the buyer fails to pay for the goods the seller may sue for price.

 The seller can sue only for the damages and not for the price.

 If the goods are destroyed the loss falls upon the buyer

 If the goods are destroyed the loss falls upon the seller unless otherwise agreed. 

 The seller cannot resell the goods

 The seller can resell the goods

 A sale is an executed contract

 Agreement to sell is an executing contract.

Distinguish Between Agreement to Sell and Hire Purchase Agreement

Agreement to sell & Hire purchase Agreement 

1.  Form

  • An agreement to sell can be in writing or oral
  • Hire purchase agreement must be in writing.

2. Possession

  • The buyer may or may not get the possession of the goods.
  • Possession: The buyer gets the possession of the goods and enjoys it.

3. Purpose

  • Generally businessmen and consumers may enter into an agreement to sell with the purpose of resale of goods or to enjoy them.
  • Consumers without sufficient money, but interested in the goods, enter into hire purchase agreement for the purpose of enjoying the goods.

4. 

  • Under this, if a person buys any goods and subsequently sells them to a third party, the third party acquires a good title.
  • A hire-purchaser is not entitled to sell the goods until all the installments are paid because until then the ownership lies with the vendor.

5.

  • Under this, a buyer is entitled to claim implied conditions and warranties.
  • A hire-purchaser cannot claim the benefits of implied conditions and warranties given by the law as sale is not completed.

6.

  • An agreement to sell imposes a legal obligation on the buyer to purchase it.
  • A hire-purchaser has liberty to opt whether to continue to pay the installments or put an end to it.

Essentials of a Valid Contract of Sale

Some essential elements are to be present in a contract which makes the contract of sale valid.  If, the essential elements are missing, then the contract of sale will not be valid.  For example, Ram agrees to sell his Car to Shyam without any consideration.  This contract of sale is not valid since there is no consideration.

From the Section 4 of the Sale of Good Act, we can understand that the following essential elements must be present in the Contract of Sale.

1. There must be two parties.

There must be at least two parties, i.e. one buyer and the other seller.  A person cannot buy his own goods.

For example Shyam is the owner of certain goods, but he is not aware of this fact.  Ram pretends to be the owner of the goods and sells them to Shyam.  Since the goods already belongs to Shyam, he cannot buy his own goods, hence there is no sale and the contract is not valid. There is exemption in the case of a part owner.

For the purpose of sale of partnership property, partners are not regarded as separate persons.  They cannot be both seller and buyer. But a partner may sell goods to the firm or buy goods from the firm. However, a part owner can sell his ownership to another part owner.  

2. Subject matter of Sale must be “goods”

The subject matter of contract of sale must be movable goods. Sale and purchase of immovable property is regulated by the Transfer of Property Act.  Contracts relating to services are also not treated as contract of sale.  So the subject matter of contract must be goods which can be movable.

3. Transfer of property in the goods: It is the ownership that is transferred in a Contract of sale.  The ownership is agreed to be transferred in an agreement to sell as in case of pledge.  According to Section 2 (II) of the Act, property means the general property in the goods and not merely a special property.   

The general property is transferred from seller to the buyer in a contract of sale. When the goods are pledged, it is only the special property which is transferred i.e., possession of the goods is transferred to the pledgee while the ownership rights remain with the pledger.  You should note that for transferring the ownership of goods, the physical delivery of the goods is not essential.

4. Consideration in Price:

Consideration in a contract of sale has necessarily to be money.  Thus, if for instance, goods are offered as consideration for goods, it will not amount to sale, but it will be called a ‘brater’.  Similarly, in case there is no consideration, it amounts to gift and not sale.  However the consideration may be partly in money and partly in goods.

Sale and Contract for Work and Labor

A Contract of sale of goods has to be distinguished from a contract for work and labor, involving the exercise of skill or labor on some material.  The dividing line between the two is very minute.  The distinction essentially rests on whether the rendering of the service and exercise of skill is the essence of the contract or the delivery of the goods is the essence of the contract, although some labor on the part of the seller might also have been out. 

In case of the former, it is a contract of work while in the later case it will be a contract of sale of goods. The distinction between the two may be understood by referring to the case of Robinson V. Graves.  In this case A engaged an artist to paint a portrait.  Canvas, paint and other necessary articles were to be supplied by A to the painter. 

Applying the above-mentioned test that whether application of skill and labor in the production of the portrait is the substance of the contract, it was held that it is a contract for work and labor and not a contract of sale. 

On the other hand, a contract for providing and fixing four different types of windows of certain size according to specifications, designs, drawings and instructions set out in the contract and a contract for making and supplying of wagons or coaches on the under frame supplied by Railways have been held by the Supreme Court to be contracts for work and labor and not a contract of sale.

From the above it should become clear to you that in a contract of sale ownership and possession of goods are transferred, while in a contract for work and labour through there may be delivery of goods, yet the emphasis is on the exercise of skill and labor upon the goods.

Conditions and Warranties

1.

A condition is a stipulation essential to the main purpose of the contract, the breach of which gives a right to treat the contract as repudiated. 

A 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 a right to reject the goods and treat the contract as repudiated.

2.

Condition is essential to the main purpose.

Warranty is incidental or collateral to the main purpose.

3.

Breach of a condition may be treated as breach of warranty.

Breach of warranty cannot be treated as breach of condition.

Difference Between Condition and Warranty with an Example

X sells food-stuff to Y. The contract between X and Y states that the food to be sold should be fit for consumption and this is the essential term in the contract.

So, if it contains any poisonous substance, Y is entitled to reject the food-stuff and to repudiate the contract this essential term is called a condition.  

On the other hand, if the contract stipulates that the food-stuff should be packed in 1 kilo box but the seller packs it in half-kilo box, only an auxiliary or minor term of the contract is broken, Y may be able to claim compensation in respect of its breach, but not avoid the contract. Such an auxiliary term is called warranty.  

The importance of the distinction between a condition and a warranty is that the breach of a “condition” normally entitles the innocent party to terminate the Contract and claim damages; while the breach of a “warranty” normally entitles the innocent party to only claim damages.

An example of a “condition” is a term that entitles the Buyer to vacant Possession of the property. If the Seller is unable to deliver vacant possession and is in breach of the condition, then the Buyer may have the right to affirm the Contract and sue for damages for default and/or sue for specific performance and/or terminate the Contract.

The remedies available to the Buyer may be set out in detail in the Contract and may oblige the Buyer to first issue a default notice requiring the breached condition to be fulfilled within a certain time period before exercising its further rights. A Buyer who terminates a Contract after a breach of a condition by the Seller will normally be entitled to recover the deposit and any other moneys paid under the Contract.

An example of a “warranty” is where the Seller warrants or agrees that at Settlement the property will be in the same state and condition it was in immediately before the date of the Contract. There may be a change in a physical feature of the property between the date of the Contract and settlement that the Seller is not willing to rectify.

In this instance the Buyer normally does not have a right to terminate or delay settlement unless the Contract provides otherwise. Rather, the Buyer must settle and separately pursue a claim for damages/ Compensation from the Seller.

A party should always seek legal advice so it can correctly identify the nature of a term of a Contract and ascertain what remedies are available in each particular Case. Depending on the type of term, the remedies for breach are likely to be quite different and the strategies to deal with the breach are also likely to be Different.

When is Condition Treated as a Warranty?

In certain circumstances, a condition may be treated as a warranty: 

1. Election in the hands of the buyer-Where a seller failed to fulfill a condition in a contract of sale; the buyer has a right to waive such condition or elect to treat the breach of condition as a breach of warranty. It depends upon the consent of the buyer, not the seller.

2. If a contract of sale is not severable and the buyer has accepted the goods partly, this is called part-performance. In such a case, it cannot be treated as a breach of condition by the seller but it can be treated as a breach of warranty.

However, if the parties have an express contract, the seller is liable for the breach of condition and not for breach of warranty. 

3. Impossibility of performance: If the seller is unable to perform his contract due to impossibility, then also a condition is treated as a warranty.

Transfer of property

Transfer of property is the process of transferring the property in goods to the buyer for a price. It is the essence of a contract of sale. 

Rules

1. Sale of specific goods:

  • Passing of property at the time of contract.
  • Goods to be weighed or measured for ascertaining price.

2. Sale of unascertained goods:

  • Goods must be ascertained.
  • Goods must be appropriated.

3. Sale of approval: 

  • Acceptance
  • Failure to return.

Goods Delivered on Approval or Sale on return basis.

Transfer of Title / Nemo Dot Quod Non Habet

This means No person can pass a better title than what he has. 

The object of the maxim Nemo Dot Quod Non Habet is to protect the property from mishandling. The owner of the property is entitled to transfer his title. A person, who is not the owner of the property, is not entitled to sell it. 

As per Sec. 27, no one can sell the goods and convey a better title thereof unless he is the owner. Therefore when the goods are sold by a person who is not the owner thereof and who does not sell them under the authority or without the consent of the owner, the buyer acquires no better title than the seller had. 

The exceptions are

1. Estoppels by owner: – This states that unless the owner of the goods is by his conduct precluded from denying the sellers authority to sell gives the right to a third person to sell a property not of his own by estoppels of the owner.

E.g. A son sells his mothers jewellery in presence of his mother who does not object to the sale. The buyer gets a good title due to estoppels by mother. 

2. Sale by mercantile agent:-provides that where a sale by a mercantile agent on behalf of the owner is valid.

E.g. A share broker obtains the signature of the share-holder on original share certificates and sells them on behalf of the share-holder. Here the broker is the mercantile         agent. 

3. Sale by one of joint owners:- The third exception to the maxim, Nemo Dot Quod Non Habet lays down that if one of the several joint owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to any person to any person who buys them of such joint owners in good faith and has not at the time of the contract of sale notice that the seller has no authority to sell.

E.g. A, B and C are joint owners of a horse. A who is in sole possession of it, sells it to X who purchases it in good faith. The sale is valid. B and C cannot claim the horse       back. 

4. Sale by a person in possession under voidable contract: – When the seller of the goods has obtained possession thereof under a voidable contract (a contract involving coercion or undue influence or fraud results in a voidable contract) but the contract has not been rescinded at the time of sale, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of the sellers defect of title.

5. Seller in possession after sale: A person having sold the goods, continues to be in possession of the goods or document of title to the goods, the delivery or transfer by that person of the goods or document of title under any sale or pledge to any person receiving the same in good faith and without notice of previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorized by the owner of the goods to make the same.

E.g. A, a seller sells some goods to Z, a buyer. Z keeps the stock of goods with A for some time due to lack of warehouse facility. A sells the same goods to another buyer, X. The buyer, X gets a good title. Z has a legal remedy against A for the recovery of the price paid and damages if any. 

6. Buyer in possession: Under a contract of sale of goods, a buyer is allowed to take the possession of the goods even though he has to pay the price for it.

Eg. A purchases certain goods from B by issuing a cheque and takes the delivery of the goods from B. A, thereafter sells the goods to C. B has a right to claim for the price of the goods and damages from A. However, C gets a bona fide title on the goods. 

What is Caveat Emptor

In business laws, the phrase ‘Caveat Emptor’ stands for ‘let the buyer beware.’ This implies that the responsibility of identifying goods and finding defects with them lies with buyer.

He should be finalizing the goods that he needs. It implies that the seller is not responsible to enquire what the buyer’s requirements are and not required to reveal faults in his products or services.

 E.g. Ram bought 10 cows from a cattle broker. Out of those 10, 2 cows had defects. However, Ram did not know this because he didn’t check all 10 cows though he paid for them. Guess what happened? The 2 infected cows died within three days of the purchase.

Now, as there was no tacit condition that the cows would be in great health at the time of the sale, Ram cannot hold the cattle broker as responsible for having sold him those infected cows. It was Ram’s basic duty to check the health of those cows and not expect the cattle broker to state all the defects.

In an interesting case, Jones vs. Padgett, the buyer bought cloth for making uniforms. However, the seller was not aware of the purpose of buying the cloth. Later, the buyer found that the cloth is not fit making uniforms. It was, however, fit for other normal purposes. The seller was not found guilty as the principle of ‘Caveat Emptor’ applied in this case.

Exceptions to the Doctrine of Caveat Emptor

Over time, some exceptions have been made to the rule of ‘let the buyer beware,’ in business laws. These exceptions include:

Quality: Under Section 16(1), these conditions are:

  • When the buyer makes the seller aware of the purpose for which the goods are needed.
  • When the buyer puts trust in the judgment of the seller.

Merchantability: As per section 16(3), if the goods are sold on the basis of description, there is a tacit condition that these are of merchantable quality.

Wholesomeness: This exception implies that foodstuff sold must be apt for human consumption.

Misrepresentation or fraud by seller: A condition in which a seller misrepresents the products and the buyer buys it trusting the misrepresentation, would be an exception to the principle ‘Caveat Emptor. ‘Others the chance to mislead, cheat or exploit you during any purchase or transaction.

Performance of Contract

Performance of a contract of sale implies a duty of the seller to deliver the goods, and of the buyer to accept the delivery of the goods and make payment in accordance with the terms of the contract (sec. 31).

Delivery of Goods:

‘Delivery’ has been defined as voluntary transfer of possession of goods from one person to another.

How is Delivery Made?

Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorized by him (Sec. 33).

 

Mode of Delivery:

1. Actual delivery:

Actual delivery means physical transfer of goods by the seller to the buyer. The delivery may be made by the agent of the seller to the agent of the buyer.

2. Symbolic delivery:

Where the goods are bulky, it is usual for the seller to give symbolic delivery. For example, where the timber is lying in a warehouse, the delivery of key is regarded as symbolic delivery which has the effect of putting the buyer in possession or actual control of the goods.

It should be noted that the key must give complete access to the goods. If for example, the key of a room in which the goods are kept is given but the key of the main gate or door is not given, it is not regarded as a valid delivery

3. Constructive delivery:

In place of actual or symbolic delivery, the goods may be delivered without any change in their actual or visible custody. For example, where the goods at the time of sale are in possession of a third person and such third person acknowledges to the buyer that he holds the goods on his (buyer’s) behalf; the delivery is called constructive delivery.

Example:

A sells to B 100 bags of rice lying in C’s warehouse. C acknowledges to B that he is holding these 100 bags on behalf of B. It is constructive delivery by A to B.

 

Rules Regarding Delivery:

1. Delivery by whom and to whom (Sec. 31):

It is the duty of the seller to deliver the goods and of the buyer to accept and pay for the goods delivered.

2. Delivery and payment are concurrent conditions (Sec. 32):

Unless otherwise agreed, delivery of goods and payment of price are concurrent conditions, i.e., at the same time or reciprocally.

The seller shall be ready and willing to deliver the goods and the buyer shall be ready and willing to pay the price in exchange for delivery of the goods.

3. Mode of delivery (Sec. 33):

This has been discussed in detail in earlier paragraphs. The delivery may be actual, symbolic or constructive. The parties may agree to any mode of delivery expressly or impliedly.

4. Effect of part delivery (Sec. 34):

A delivery of part of the goods, in the process of the delivery of the whole, has the same effect, for the purpose of passing the property in such goods, as a delivery of the whole. However, delivery of part of the goods, with an intention of severing it from the whole, does not operate as a delivery of the remainder.

Example:

A ship arrived at the port laden with a cargo of wheat. The owner endorsed the bill of lading to A. The master of the ship reported to the customs that the cargo was for A. Next day, A made entry of the wheat in his name at the customs house. Thereupon, part of the cargo was delivered to A. Held; this constituted a delivery of the whole.

5. Delivery to be made on request of the buyer (Sec. 35):

Apart from any express contract, a seller is not bound to deliver the goods unless and until requested by the buyer.

If the seller fails to deliver the goods on the application of the buyer, the seller is guilty of breach of contract.

6. Place of delivery [Sec. 36(1)]:

In the absence of an agreement, express or implied, the goods sold are to be delivered at the place at which they are at the time of sale. The goods agreed to be sold are to be delivered at the place at which they are at the time of the agreement to sell, or if not then in existence, at the place at which they are manufactured or produced.

7. Time of delivery:

If any time is specified by the parties, the goods must be delivered by that time.

  • If the seller is bound to send the goods to the buyer and no time has been fixed by the parties, the goods must be delivered within a reasonable time [Sec. 36(2)]. What is reasonable time is a question of fact in each case?
  • The demand for delivery should be made at a reasonable hour. What is a reasonable hour is a question of fact? 

8.Delivery of goods in possession of third persons [Sec. 36(3)]:

Where the goods at the time of sale are in possession of a third person, there is no delivery by the seller to the buyer unless such third person acknowledges to the buyer that he holds the goods on his behalf.

It should be noted that this rule does not affect the transfer of goods by means of a document of title of goods, e.g., where goods have been sold by a bill of lading, consent of the third party is not necessary.

9. Expenses of delivery:

Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state shall be borne by the seller. In case the buyer is compelled to pay these expenses, he can recover the same from the seller.

10. Effect of delivery of wrong quantity (Sec. 37)

(i) Short Delivery [Sec. 37(1)]:

Where the seller delivers lesser quantity than contracted for, the buyer has the option to accept or reject the whole. Naturally, when he accepts, he must pay for them at the contract price.

Example:

A ordered B to supply 10 bags of rice. B supplied only 6 bags. A is at liberty to accept 6 bags or to reject them. When he accepts them, he must pay for the 6 bags at the contracted price.

Example:

A ordered B to supply 10 bags of rice. B supplied 15 bags. A has the option to accept 10 bags and pay for them. He may accept even 15 bags and pay for him. He is entitled to reject the whole.

It should be noted that the right to reject the goods in excess of the contract does not apply where the variation is negligible. This is due to the reason that the law does not take account of trifles, i.e., the Court applies the maxim de minimise non curat lex.

(ii) Delivery of mixed goods [Sec. 37(3)]:

Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest, or may reject the whole.

Example:

Certain specific articles of China were ordered. The seller in addition sent some of his articles of China. Held, the buyer could reject the whole.

These rules can be modified by a contract expressly or implied, i.e., usage or custom of the trade [Sec. 37 (4)].

11. Delivery by installment (Sec. 38):

Unless otherwise agreed, the buyer of goods is not bound to accept delivery in installments. He may, if he so desires, refuse the goods.

Example:

25 tons of pepper October/November shipment was sold. The seller shipped 20 tons in November and 5 tons in December. Held, the buyer was entitled to reject the whole In case there is a contract for the sale of goods to be delivered by stated instalments which are to be paid for separately and the buyer or seller commits a breach in respect of one or more instalments. In such a case a question arises as to whether the buyer or seller can treat it as a breach of the whole contract, or a severable breach giving rise to a claim for compensation.

The answer to this question would depend upon facts and circumstances of each case. However, the following factors should be kept in mind:

(i) The quantum of breach which it bears to the contract as a whole. (ii) The degree of probability that it will be repeated 

 (iii) The nature of breach whether it goes to the root of the transactions.

12. Delivery to carrier or wharfinger (Sec. 39).

  • Unconditional delivery to carrier or wharfinger means delivery by buyer (sec. 39):

Where in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of goods to a carrier for the purpose of transmission to the buyer or to a wharfinger for safe custody is prima facie deemed to be a delivery of the goods to the buyer.

  • Seller’s duty to reasonably secure goods before delivery [Sec. 39(2)]:

Where the goods are delivered to a carrier or wharfinger, it is the duty of the seller to reasonably secure the responsibility of the carrier for the safe delivery of the goods. In case the seller fails to do so, he will be liable to make good the loss suffered by the buyer.

Example:

B, at Agra orders A, who lives at Calcutta, three casks of oil to be sent to him by railway. A takes three casks of oil directed to B to the railway station and leaves them there without conforming to the rules which must be complied with in order to render the railway company liable for their safe carriage. The goods are lost on the way. There has not been a sufficient delivery to charge B in a suit for the price. 

  • Seller’s duty to inform the buyer to get the goods insured in case the goods involve a sea transit [Sec. 39(3)]:

Where the goods are sent by the seller to the buyer by a route involving sea transit, the seller is bound to give such notice to the buyer as may enable him to insure the goods during sea transit. Failure to do so will mean that the goods are at the seller’s risk during the transit and the seller will have to make good the loss suffered by the buyer.

13. Acceptance of delivery by the buyer:

(i) Buyer’s right to examine the goods [Sec. 41)]:

Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conformity with the contract.

When is buyer deemed to have accepted the delivery of goods? (Sec. 42):

A buyer is deemed to have accepted the goods:

  • When he intimates to the seller that he has accepted them, or
  • When he does an act in relation to such goods which is inconsistent with the ownership of the seller.

The buyer has the following options:

  • Short delivery: Lesser quantity than ordered for. He may accept or reject the whole.
  • Excess delivery: More quantity than ordered for. He may accept the quantity asked and pay for the same or reject the whole.
  • Delivery of goods ordered mixed with other goods not ordered: He may accept the goods ordered and reject the rest or the whole.

14. The buyer is not bound to accept the delivery by installments.

15. Unconditional delivery to the carrier or wharfinger means delivery to the buyer. In this case, the seller should:

  • Reasonably secure the goods, and
  • In case of goods involving sea route, the seller should inform the buyer to get the goods insured.

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