This article is written by Abhay, a student from Kirit P. Mehta School of Law, NMIMS and edited by Abanti Bose, pursuing B.A.LL.B(H) from Amity University Kolkata, India. This is a comprehensive article which deals with various aspects associated with the formalities and the subject matter to the Contract of the Sale.
The Indian Contract Act, 1872 governed all transactions relating to the sale of goods until 1930. Now, the contract of the sale of goods is regulated by The Sale of Goods Act, 1930 (hereinafter, referred to as the ‘Act’). Sections 76-123 of the Indian Contract Act, 1872 were superseded by the Act of 1930. Excluding the state of Jammu & Kashmir, the Act applies to all of India.
The object of the contract of sale is always the goods. This is codified in Sections 6, 7, and 8 of the Sales of Goods Act, 1930. Consequently, almost any sort of movable property falls within the ambit and definition of the “goods” provided for in Section 2(7) of the Sales of Goods Act, 1930. Goodwill, patents, trademarks, copyrights, and more are known as movable assets. Although, the Act excludes actionable claims and assets.
The Act deals with movable property subject-matter and not about selling immovable assets. The transaction concerning immovable property, such as sales, rentals, gifts, etc., is regulated by a separate Act, known as the Transfer of Property Act, 1882. Money here means actual money and not the rare or old coins that can be regarded as goods purchased and sold as such.
A contract for the sale of goods has many unique characteristics, mentioned in the Sales of Goods Act, 1930 such as the transfer of possession of the goods, the distribution of goods, buyer’s and seller’s rights and duties, remedies for breach of contract, terms, and guarantees provided by a contract for the sale of goods, etc.
Essentials of the contract of sale
The contract for the sale of goods is a contract between the buyer and the seller agreeing to trade goods for a profit. Section 4(1) of the Sales of Goods Act, 1930 describes the phrase ‘Contract of Sale’ as a contract for the sale of goods under which the seller transfers or agrees to move the goods to the purchaser for a price. The definition shows that the essential elements involved in the transfer of ownership at a price include two parties to the contract who are willing to trade their goods or services in order to receive a common benefit i.e. price.
There are some features that must co-exist to form a contract for the sale of goods under the Sale of Goods Act, 1930. There have to be at least two parties, the seller and the buyer. The subject-matter of the contract should definitely be goods that include only movable property. They can be either actual goods owned or owned by the seller or potential goods. The price of goods should be paid or agreed to.
The transfer of the goods from the seller to the buyer must take place. The contract of sale shall be made by proposing the purchase or sale of goods at the price by one party and the acceptance of that bid by another party. The contract of sale must be absolute or conditional, as stated in Section 4(2). The other important aspects of a legal contract must be included in the contract of sale, as mentioned later in the article.
Sale and an agreement to sell
In the sale of goods, the asset is passed directly from the seller to the buyer. The word ‘sale’ is defined in Section 4(3) of the Sale of Goods Act, 1930. In the contract of sale, the property and the goods are passed from the seller to the buyer, and the contract is known as the sale. In an agreement to sell, the ownership of the goods shall not be transferred immediately. First, the conditions need to be fulfilled, then it can be transferred.
The term ‘agreement to sale’ is specified in Section 4(3) of the Sale of Goods Act, 1930, which says that in a contract of sale, the transition of the property or goods takes place at a certain time or pursuant to the requirement that has to be satisfied. Therefore, whether a contract for the sale of goods is an actual sale or a sale agreement relies on whether it allows for an instant transfer from the seller to the buyer or if the transfer has to happen at the point in the future.
Differences between sale and an agreement to sell
In the case of Sale, the goods move along with the liability associated with it to the buyer. It’s an enacted deal i.e. the contract in respect of which consideration has already been paid. The seller could sue the buyer for the price of the goods on account of the transfer of the property to the buyer. Possible loss or degradation of the goods shall be considered as the fault of the buyer. Breach on the part of the seller offers the buyer a double remedy that means a claim for damages against the seller and a proprietary remedy for the recovery of the goods from third parties that purchased them.
Whereas, in an agreement to sell, the property in the goods does not pass on to the purchaser and that is why the risk also does not pass on to the purchaser. It is an executive contract i.e. a contract for which payment is due at a future date. The aggrieved party may sue for damages only and not for a price unless the price has been paid at the agreed date. Any loss or injury is the responsibility of the seller. The seller, by far the owner of the goods, may dispose as he pleases, and the buyer’s recourse will be to discard the suit for damages only.
A distinction of Sale from Other Similar Contracts
Difference between the contract of sale and the contract of purchase of the hire
- The contract of sale is very similarly related to the contract of purchase of the hire, and the true object of the contract of purchase of the hire is the sale of the goods. Nonetheless, the sale must be differentiated from the buying of hire, because their legal events are very distinctive.
- In the case of a sale, the property in the goods shall be transferred to the purchaser immediately on the date of the contract. While the property in the goods shall be transferred to the hirer after payment of the last installment.
- The state of the buyer is that of the owner of the goods, while the state of the hirer continues as the bailee until the last payment is paid.
- The buyer cannot end the contract and is obliged to pay the product’s price in the event of a sale. However, the hirer can, if he wishes, end the contract by restoring the goods to its owner without any duty to pay the remainder.
- The seller shall bear the responsibility for any losses arising from the insolvency of the buyer. However, the owner does not take the risk, because if the hirer fails to pay the installment, the owner does have the authority to take the goods back.
- The buyer may turn over a good title to a bona fide purchaser from him. However, the hirer can not transfer the title to the bonafide purchaser.
- In the case of a sale, the tax is collected at the time of the contract. But in the case of hire, it can not be assessed unless it finally matures into a sale.
Difference between the contract of sale and bailment
A ‘bailment’ involves the transfer of goods for a particular reason under a contract provided that the same goods are to be returned to the bailor or disposed of in compliance with the orders of the bailor.
The disparity between bail and sale is as follows-
Property in products shall be passed from the seller to the purchaser. Whereas, in the case of bailment, there is only the transfer of possession of goods from the bailor to the bailee for some cause, such as secure custody, transportation, etc.
It is not necessary to return goods under the contract of sale. While the bailee must return the goods to the bailor for the reason for which the bailment was made. In the case of a sale, consideration is given as the price in terms of money. Whereas, the criterion can be gratuitous or non-gratuitous in the case of bailment.
A contract for the sale of goods is one where those items are sold or are to be sold at a particular price. However, if no goods are sold, and only some work of labour is done or made, then the contract is for labour and not for the sale of goods.
Formalities for the Contract of Sale
- There is no need for a particular form to constitute a valid contract unless and until it is specifically required by law.
- The agreement can be expressed or implied by the actions of the parties. Section 5 of the Sale of Goods Act, 1930 lays down the law as to how a contract of sale can be made that has nothing to do with the transfer/delivery of the goods.
- The contract of sale can be fulfilled if the items are delivered immediately or if the price is paid, although it can be agreed that the delivery is to be made at some future date.
- Therefore, it can be achieved if the items are shipped immediately and the price is also paid immediately. These are some of the formalities of a contract of a sale.
Subject Matter of Contract of Sale
Section 6 explains that the contract’s subject-matter must always be goods. The products can be products that are currently in existence or will be in the future. As an ordinary contract, a contract for the sale of goods may also be concluded for the goods, the purchase of which relies on a contingency by the seller, which may or may not occur.
For instance, a contract for the sale of the bag to be produced by a factory is a legal contract. If the specific good is destroyed or damaged without the knowledge of the seller at the time a contract of sale is entered, the contract is considered void ab initio. The Section is based on the rule that if both parties to a contract are in error as regards a matter of fact which is necessary to a contract, the contract becomes void as mentioned in Section 7 of the act.
Ascertainment of Price
‘Price’ means the monetary value for the sale of goods referred to in Section 2(10). Pursuant to Section 9, the price can be set by the contract or accepted to be set in the way mentioned in the contract, e.g. by the valuer, or decided in the process of the negotiations between both the parties.
Section 10 allows for the price to be decided by a third party. When there is an agreement to sell goods on the terms on which the price has to be set by a third party and the third party does not or can not make such a valuation, then the agreement would be invalid.
In the situation that the third party is prohibited for setting the price by default of either party, the third-party shall be responsible for damages to the other party and the other party can not be blamed for the same. Though, in any case, the buyer who has received and retained the goods must pay a fair price for them.
Stipulation of the time
As far as the duration for paying the price is concerned, when a certain purpose emerges from the contractual terms, the stipulation in that regard is not considered to be the nature of the contract of sale. However, the delivery of goods should be done without delay. Whether or not such a stipulation was of the nature of a contract depends on the conditions agreed.
The price of goods can be fixed by contract or could be decided to be fixed in a particular manner at a later stage. The stipulations concerning the time of delivery are generally the crux of the contract.
Conditions and Warranties
The requirement in the contract of sale relating to the goods that are the basis of the contract can be a condition or a warranty. A condition is a stipulation that is vital to the main objective of the contract, the infringement of which provides the right to reject the contract and to seek damages. A condition is important for the main objective of the contract, while a warranty is only collateral for the main objective of the contract.
The aggrieved party may, in the event of a breach of condition, reject the contract or claim damages. The aggrieved party may only seek damages in the event of a breach of the warranty. Breach of the condition may be regarded as a breach of the warranty. A breach of the warranty can not be viewed as a breach of the condition.
Conditions and Warranties can be expressed or implied. They are considered to be “expressed” when they are explicitly stated in the contractual terms. They are considered to be implied if they are not explicitly provided for. Express terms and conditions shall be those decided among the parties at the time of the contract and specifically given for in the contract.
The implied conditions are those which are assumed by law to be already present in the contract, though not in very clear terms. By an express agreement, the parties to the contract are allowed to negate or waive the implied condition.
A contract shall not be avoided, in the event of a breach of a condition that involves, the situation in which the buyer waives the full performance of the condition. A party may, for its own advantage, waive a provision or on the situation that the buyer chooses to classify the breach of the conditions as one of a warranty. In other words, he can only seek damages rather than rejecting the contract.
The contract would not be avoided even though it is non-severable and the buyer has taken either all or a part of the goods. Acceptance means acceptance as provided for in the Indian Contract Act, 1872. A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. It shall not be avoided even though the condition or warranty can not be fulfilled as justified by law on grounds of impossibility or otherwise.
Passing of the property
Passing or transferring property is perhaps the most essential part and component in deciding the legal rights and responsibilities of sellers and buyers. Passing on the property means passing on ownership. If the property has been passed to the buyer, the liability in the goods sold lies with the buyer and not with the seller, even though the goods may still be in the possession of the seller.
In the sale of particular or ascertained items, the property transfers to the purchaser at the time when the parties agree to do so. The purpose must be determined from the contractual terms, the actions of the parties, and the situations of the case as referred to in Section 19 of the Sale of Goods Act, 1930.
The procurement of goods includes the collection of goods for use in the execution of the contract and with the mutual consent of the seller and the buyer. The products should comply with the definition and specification set out in the contract. They should be in a deliverable condition and must be subject to an unconditional contract, either by delivery to the customer or his agent or the carrier.
The appropriation should be made by the seller with the approval of the buyer or vice-a-versa. The consent must be expressed or implied. The consent should be given either before or after the appropriation.
Remedies of the Buyer against the Seller
- If the seller unjustly ignores or fails to deliver the goods to the buyer, the buyer can sue the seller for compensation for non-delivery.
- When the seller has committed a violation of the contract of sale, the purchaser can appeal to the court for particular reasons. The court may order a particular performance only if the goods have been ascertained or are particular, the damages are inadequate or if the goods are defective.
- When there is a violation of the warranty on the part of the seller or if the buyer wants to view the infringement or breach of condition as a violation of the warranty, the buyer is not permitted to refuse or not accept the product solely on the grounds of any breach of the warranty. However, the buyer may sue the seller for the breach of warranty.
- The buyer may treat the contract as non-permanent and wait for the date of delivery or may view the contract as repudiated and seek damages for infringement.
- The buyer has the right to claim interest or additional damages in order to recover the money charged if it has not been charged in consideration.
Remedies of the Seller against the Buyer
Suit for Price as per Section 55
- When the property has passed to the buyer, the seller can only sue for the payment except as provided by sub-section (2).
- The assignment of the property depends on certain terms, and if certain conditions are not met, the seller cannot sue for the payment under this clause.
- If items are sold for a certain sum and the payment has to be made partly in cash and partly in kind, the default entitles the seller to sue for the remainder of the price if made in kind.
Damages for non-acceptance as per Section 56
- The damages are calculated on the basis of the principles found in the Indian Contract Act, 1872, sections 73 and 74.
- According to section 73 of the Indian Contract Act, if a contract is infringed, a party suffering an infringement is entitled to claim compensation from the party infringing the contract for any loss incurred by the infringement, which inevitably occurred in the ordinary course of the case as a consequence of the infringement, or which the parties realised at the time of the infringement would be likely to result in the infringement.
- In addition, the means of remedying the inconvenience caused by the non-performance of the contract must be taken into account in the calculation of the loss or harm caused by the violation of the contract.
- The date on which the selling price is to be decided is the date on which the delivery and acceptance of the contract should have been carried out as provided for in the contract or, where no time is set, at the time of refusal.
- In accordance with the provisions of sections 55 and 63 of the Indian Contract Act, where the period for completion of the contract is set but extended and another date is replaced by an arrangement between the parties, the date of replacement must be treated as the date of determination of the measure of the harm.
Remedies for both Buyer and Seller
Suit for repudiation of contract before date or anticipatory breach
- This section does not occur in the English Act and concerns an anticipatory breach of a contract, i.e. a clear intent on the part of any party not to be constrained by the obligation to satisfy that part of the contract at the time of performance.
- In truth, whether or not there has been a repudiation depends on the circumstances in each case. The measure of compensation shall not be set by the date of repudiation by the defaulting party.
- In the case of commodities for which a demand exists, it is determined based on the disparity between the contract price of the goods and the market price on that day. In an attempt to get the plaintiff as close to the role as he would have been in, this is done if the contract had not been repudiated.
- The concept of reasonable time is applied to situations of contracts where no deadline is set and a party declines to fulfil the contract. In this case, the date of repudiation shall be treated as the date on which the contract is terminated and the compensation shall be determined on the basis of that date.
- If the party does not refuse by default to acknowledge the repudiation of the other party, as can be seen from Frost v. Knight, it holds the contract intact for all reasons. It, therefore, implies that if he is unable to fulfil or may not fulfil his contract when the time for performance comes, the case would be the same as it would have been if the other party had not been repudiated in advance and the latter may be discharged and could therefore sue for damages.
- Accordingly, when the seller, after refusing to accept the buyer’s anticipatory repudiation, arrives at the time of performance, offers goods that are not of the description of the contract, or offers documents under a CIF contract that the buyer is not obliged to accept, the buyer may legally reject the goods or the documents and the seller will be without remedy; or the buyer may accept the goods.
The arrangement on the sale of goods must be subjected to certain phases and procedures in order to become a legal contract. Before entering into a contract or completing a contract, the parties must test the integrity of the agreement and then finalize it. There is no specific structure for drafting up the contract of sale, it can be formed according to the specific needs of the parties.
However, there are some clauses in this Article that set out the main structure for the essential provisions of the contract for the sale of goods. There really is no legal structure for the content of a contract for the sale of goods, but the inclusion of certain clauses really strengthens the contract.
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