M3 - SOGA.pdf

Module III – Sales of Goods Act 3.1 Formation of Contract of Sale Agreement to Sell and Hire Purchase It is one of the special types of contract. Initially, it was the part of the Indian Contract Act, 1872. It came into force on 1st July, 1930. As per Section 4(i) of...

Module III – Sales of Goods Act 3.1 Formation of Contract of Sale Agreement to Sell and Hire Purchase It is one of the special types of contract. Initially, it was the part of the Indian Contract Act, 1872. It came into force on 1st July, 1930. As per Section 4(i) of the Sale of Goods Act, 1930, 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. Essential Elements: - There must be atleast two parties. (Bilateral Contracts) - The subject matter of the contract must be goods. - A price in money should be paid or promised. - A transfer of property in goods from seller to the buyer must take place. - It must be absolute or conditional. - All other essentials of a valid contract must be present. Goods As per Sec 2(7), it 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 contact of sale. - Money means current money and it includes rare and old coins. - Actionable claim means what a person cannot make a present use of or enjoy, but can recover it by means of a suit or an action. Thus, a debt due to a man from another is an actionable claim and cannot be sold as goods, although it can be assigned. Under the provisions of the Transfer of Property Act, 1882, goodwill, trademarks, copyrights, patents are all goods, so is a ship. As regards water, gas, electricity, it is doubtful whether they are goods Types of Goods  Existing Goods: It means such goods which are in existence at the time of the contract ofsale i.e. owned or possessed by the seller.  Specific or Ascertained Goods: It means goods identified and agreed upon at the time thecontract of sale has been made.  Generic / Unascertained Goods: It means the goods which are not specifically identified but are indicated by description.  Future Goods: It means goods to be manufactured or produced or acquired by the sellerafter making the contract of sale.  Contingent Goods: It means the goods the acquisition of which by the seller depends upon a contingency which may or may not happen. Page 31 of 65 DIFFERENCES BETWEEN SALE AND AGREEMENT OF SELL Sale Agreement of Sell 1. It is an executed contract. It is an executory contract. 2. Property in goods are transferred from Transfer of property in goods takesplace seller to buyer when the contract is at some future date. made. 3. Seller cannot resell the goods as the Seller can further resell the goods as property is with the buyer. the property in good remains with him. 4. Risks passes to the buyer, as he becomes Risks is with the seller as he remains the owner. the owner. 5. Breach on part of buyer, seller can sue Breach on part of buyer, seller can sue for the price and damages both. for damages only and not for the price. 6. Sale is contract plus conveyance. It is pure and simple agreement. 7. In this, if goods are destroyed then loss In this, if goods are destroyed by will be of Buyer. accident, loss will fall on seller. Sale Hire Purchase Agreement 1. Property in goods is transferred to the The goods passes to the hirer buyer immediately at the time of upon payment of the last installment. contract. 2. Position of buyer is that of owner of Position of hirer is that of a bailee till goods. He pays the last installment. 3. Buyer cannot terminate the contract and Hirer may terminate the contract is bound to pay the price of the goods. by returning the goods to owner without any liability to pay the remaining installments. 4. Seller takes the risk of any loss Owner takes no such risk for if hirer resulting from the buyer’s insolvency. Fails to pay the installment, he has the right to take back the goods. ' Page 40 of 65 Effect of Perishing of goods Goods perishing before making a contract - Where in a contract of sale of specific goods, the goods without the knowledge of the seller have perished at the time of making the contract, the contract is void. - If the seller was aware of the destruction and still entered into the contract, he is estopped from disputing the contract. Moreover, perishing of goods not only includes loss by theft but also where the goods have lost their commercial value Goods perishing after agreement to sell - Where there is an agreement to sell specific goods, and subsequently the goods without any fault of any party perish before the risk passes to the buyer, the agreement is thereby avoided. The provision applies only to sale of specific goods. - If the sale is of unascertained goods, the perishing of the whole quantity of such goods in the possession of the seller will not relieve him of his obligation to deliver. Price is money consideration for the sale of goods and it constitutes the essence for a contract of sale. The price may be fixed: (i) at the time of contract by the parties themselves, or (ii) may be left to be determined by the course of dealings between the parties, or (iii) may be left to be fixed in some way stipulated in the contract, or (iv) may be left to be fixed by some third-party. 3.2 CONDITIONS and WARANTEES Condition - If the stipulation forms the very basis of the contract or is essential to the main purpose of the contract, it is a condition. - The breach of the condition gives the suffering party a right to treat the contract as repudiated (cancelled). Thus, if the seller fails to fulfil a condition, the buyer may treat the contract as repudiated, refuse the goods and, if he has already paid for them, recover the price. He can also claim damages for the breach of contract Warranties - If the stipulation is collateral to the main purpose of the contract, i.e., is a subsidiary promise, it is a warranty. - The effect of a breach of a warranty is that the suffering party cannot repudiate (cancel) the contract but can only claim damages. - Thus, if the seller does not fulfil a warranty, the buyer must accept the goods and claim damages. - Stipulation (condition) as to time of payment are not to be deemed conditions (and hence not to be of the essence of a contract of sale) unless such an intention appears from the contract. - Whether any other stipulation as to time (e.g., time of delivery) is of the essence of the contract or not depends on the terms of the contract Page 41 of 65 WHEN A CONDITION MAY BE TREATED AS WARRANTY In the following cases, a breach of a condition is treated as a breach of a warranty: Waiver by the The buyer may waive a condition. Once the buyer waives a condition, Buyer he cannot insist on its fulfillment. Compulsory Where the contract is indivisible and the buyer has accepted the goods treatment by or part thereof, the breach of condition can only be treated as breach of buyer warranty. Thus, the buyer cannot terminate the contract but can only claim damages from the seller. IMPLIED WARRANTIES Implied warranties are those which the law presumes to have been incorporated in the contract of sale in spite of the fact that the parties have not expressly included them in a contract of sale. The following are the implied warranties in the contract of sale: Warranty as to There is an implied warranty that the buyer shall have and enjoyquiet possession possession of the goods. If the buyer’s possession is disturbed by anyone having superior title than that of the seller, the buyer may sue the seller for the breach of warranty. Warranty as to There is an implied warranty that the goods shall be so free from any freedom from charge or encumbrances in favor of any third party. If the goods are encumbrances found subject to some charge in favor of third party, the buyer may sue the seller for damages. However, this warranty is not applicable where the buyer has been informed of such charge or has notice of the same. Warranty to If the goods are inherently dangerous or likely to be dangerous to the disclose buyer, it is the duty of the seller to warn the buyer of the probable dangerous nature danger which may arise out of its use. of goods Warranty as to There is an implied warranty as to quality of fitness for a Quality or fitness particular purpose may be annexed by the usage of trade. by usage of trade IMPLIED CONDITIONS The implied conditions are those which are presumed by law to present in the contract. However, an implied condition may be negated or waived by an express agreement. The following conditions are implied in a contract of sale of goods unless the circumstances ofthe contract show a different intention: Page 42 of 65 Condition as to In every contract of sale, there is an implied condition on part of the title seller that: a. In case of sale, he has ownership and right to sell the goods, and b. In an agreement to sell, he will have a right to sell the goods at the time when the property is to pass. Sale by Where there is a contract of sale of goods by description, there is an Description implied condition that goods delivered by seller shall correspond with such description. If the goods does not correspond with the description, the buyer is not bound to accept and pay for the goods. Sale by sample In a contract of sale by sample, there is an implied condition that:  The bulk should correspond with the sample in quality;  The buyer shall have reasonable opportunity of comparing the bulk with the sample; and  The goods shall be free from any defect rendering them un- merchantable, which would not be apparent on reasonable examination of the sample. Sale by sample as Where the goods are sold by sample as well as by description the well as by implied condition is that the bulk of the goods supplied must description correspond both with the sample and the description. In case the goods correspond with the sample but do not tally with the description or vice versa, the buyer can repudiate the contract. Condition as to There is no implied condition as to the quality or fitness for any quality or fitness particular purpose of goods supplied under a contract of sale. There is an implied condition as to the reasonable quality or fitness of goods if: a) The particular purpose for which goods are required must have been disclosed by the buyer to the seller. b) The buyer must have relied upon the seller’s skill or judgment of the seller to select the best goods and c) The seller has ordinarily been dealing in those goods. However, there is no implied condition where: a) The buyer has not disclosed to the seller any abnormal circumstances or b) The buyer buys a specified article under its patent or other trade name and c) Buyer has not relied upon the skill and judgment of seller. Page 43 of 65 Condition as to Merchantable quality means that the goods should be resalable in the merchantable market under the particular description by which they are known. They quality are not merchantable if they have defects which make them unfit for ordinary use, or are such that a reasonable person knowing of their condition would not buy them. Where the goods are bought be description from a seller who deals in that type of goods, there is an implied condition that the goods shall be merchantable quality. Condition as to In a contract of sale of provisions and eatables, there is an implied wholesomeness condition that the goods shall be wholesome or sound, i.e. goods should be fit for human consumption. CAVEAT EMPTOR - The term caveat emptor is a Latin word which means “let the buyer beware”. - It implies that while purchasing the goods, the buyer must be cautious. This principle states that, at the time of buying goods, the buyer must make reasonable examination of the goodsto satisfy himself that the goods are suitable for his purpose. - Section 6 provides that there is no implied warranty or condition as to the quality or fitness for any particular purpose for which the goods are supplied under a contract of sale. - In simple words, it is not the seller’s duty to give to the buyer the goods which are fit for a suitable purpose of the buyer. It is up to the buyer to make proper selection of goods according to his needs. If he makes a wrong selection, he cannot blame the seller if the goods turn out to be defective or do not serve his purpose. Exceptions to the Doctrine of Caveat Emptor (1) Where the seller makes a false representation and the buyer relies on it. (2) When the seller actively conceals a defect in the goods which is not visible on a reasonable examination of the same. (3) When the buyer, relying upon the skill and judgement of the seller, has expressly or impliedly communicated to him the purpose for which the goods are required. (4) Where goods are bought by description from a seller who deals in goods of that description. (a) Risk follows the ownership, whether the delivery has been made or not. If the goods are lost or damaged by accident, then the loss falls on the owner of the goods at the time they are lost or damaged. (b) When there is a danger of the goods being damaged by the action of third parties, it is generally the owner who can take action. (c) In case of insolvency of either the seller or the buyer, it is necessary to know whether the goods can be taken over by the official assignee or the official receiver. It will depend upon whether the property in the goods was with the party adjudged insolvent. Page 44 of 65 3.3 Meaning and Importance of Movable Property in formation of Sale. Passing of Property in Specific / Ascertained Goods 1. Where there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made. 2. Where there is a contract for the sale of specific goods not in a deliverable state, i.e. the seller has to do something to the goods to put them in a deliverable state, the property does not pass until that thing is done by seller and buyer has notice of it. (Sec. 21) 3. When there is a sale of specific goods in a deliverable state, but seller is bound to weigh, measure, test or do something with reference to the goods for the purpose of ascertaining the price, the property to the goods for the purpose of ascertaining the price does not pass until such act or thing is done and the buyer has notice of it. (Sec. 22) 4. If goods are delivered to the buyer “on approval” or “on sale of return” basis then the property passes to the buyer when he signifies his approval or acceptance to the seller or he does not signify his approval or acceptance to the seller but retains goods beyond a reasonabletime. Passing of property in Unascertained Goods - The property in unascertained or future goods does not pass until the goods are ascertained. - The property in unascertained or future goods sold by description passes to the buyer when goods of that description and in a deliverable state are unconditionally appropriated. - If there is a sale of a quantity of goods out of a large quantity, for example, 50 quintals of rice out of a heap in B’s godown, the property will pass on the appropriation of the specified quantity by one party with the assent of the other. - Delivery by the seller of the goods to a carrier or other buyer is sufficient to pass the property in the goods - The general rule is that unless otherwise agreed the goods remain at the seller’s risk until the property is transferred to the buyer, but when the property is transferred to the buyer, the goods are at the buyer’s risk whether delivery has been made or not. - Rule is known as Resperit Demino i.e. the loss falls on the owner. - But the parties may agree that risk will pass at the time different from the time when ownership is passed, e.g. the seller may agree to be responsible for the goods even after the ownership is passed to the buyer or vice versa. Exceptions to the above general rule: (i) If there is agreement between the parties. (ii) If the delivery of goods are delayed either due to buyer’s or seller’s default, goodsare at risk of party in default. (iii) Trade customs. Relevant Case Laws: - Consolidated Coffee Ltd. V. Coffee Board - Multanmal Champalal V. Shah & Co. Page 45 of 65 3.4 Rights and duties of an Unpaid Seller Unpaid Seller Seller is deemed to be an unpaid seller, when: - Whole of the price has not been paid or tendered and seller had an immediate right of action for the price. - bill of exchange or other negotiable instrument was given as payment, but the same has been dishonoured, unless this payment was an absolute and not a conditional payment. Rights of Unpaid Seller against Goods Right of lien or retention. Right of stoppage in transit. Right of resale. Right to withhold delivery. Right of Lien or Retention (Sec. 47 - 49 & 54) It can be exercised on the goods for the price while he is in possession until the payment of price of such goods. It can be exercised in following cases: (a) Where goods have been sold without any stipulation as to credit. (ii) Where goods have been sold on credit but the term of credit has expired. (iii) Where buyer becomes insolvent. This right depends upon physical possession. It can only be exercised for the non-payment of price. This right is terminated under following circumstances: a. Where he delivers goods to carrier or bailee for the purpose of transmission to buyer without reserving the disposal right. b. Where buyer or his agent lawfully obtains possession of goods. c. Where seller has waived the right of lien. d. By estoppel. Right of Stoppage in Transit (Sec. 50 - 52) It means right to stop the further transit of goods, to resume possession and to hold the same till the price is paid. It can be exercised in following cases: (i) Seller must be unpaid. (ii) He must have parted with the possession of goods. (iii) Goods are in transit. (iv) Buyer has become insolvent. (v) Right is subject to provisions of the Act. Goods are deemed to be in transit from the time they are delivered to carrier or other bailee- Page 46 of 65 for transmission, until buyer or his agent takes delivery of them. This right is lost under following cases: (i) Buyer taking delivery (ii) Acknowledgment by carrier (iii) Delivery to ship (iv) Wrong denial to deliver by carrier (v) Sub sale (vi) Goods in possession of ship’s master acting as buyer’s agent. Right of Resale (Sec. 54) It can be exercised in following cases: a. Where the goods are of perishable nature, buyer need not be informed of the intention of resale. b. Where he gives notice to the buyer of his intention to resell the goods, the buyer doesnot within a reasonable time pay or tender the price. c. Where the right is expressly reserved in the contract. If no notice has been given to the buyer of intention to re-sell, unpaid seller cannot claim any damages and buyer will be entitled for all profits. Unpaid seller can recover from buyer the balance amount (if any) on resale. If notice has been given to buyer, then profits origin out of sale of goods won’t be shared with buyer. Only seller will hold the samples. Rights to Withhold Delivery - It is exercised if the property in goods has not passed to the buyer. - It is in additions to above 3 rights. - However if the property has not been passed the unpaid seller has a right of withholding delivery similar to and co-extensive with his rights of lien and stoppage in transit. Rights of Unpaid Seller against Buyer Suit for Price (Sec. 55) Seller may sue — (a) Where the property has passed to the buyer and he wrongfully neglects or refuses to pay for goods. (b) Where the property has not passed and price is payable on a certain day Irrespective of delivery and buyer wrongfully neglects or refuses to pay such price. Page 47 of 65