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General

Formation of Contract of Sales

June 17, 2019

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This article is written by Ashpreet Kaur, IInd year student, B.B.A. LL.B, Symbiosis Law School, NOIDA. In this article, the author discusses how a contract of sale is formed and what are the requisites of making a contract of sale with a special reference to differences between the contract of sales and other kinds of contract like hire-purchase, bailment etc.

Introduction

Our modern age has evolved into an age of trade and commerce and sale and purchase of goods are inseparable and a core element of trade and commerce. In a diverse country like India, there is a need to set up rules and regulations governing different types of contract and sales of goods is one of them.

A typical bargain between seller and buyer is termed as sale, laws relating to these types of contracts are governed under Sale of Goods Act, 1930. This act came into force on 1st July 1930 and extends to the whole of India except Jammu and Kashmir. Before 1930, the issues related to the sale of goods were governed by Indian Contract Act 1872 under section 76-123, but these were not enough to cover all aspects, so, the constituent assembly separated these sections and formulated a whole new act in 1930 under the name, Sale of Goods Act 1930.

As defined under section 4(1), contact of sales of goods is a contract under which seller transfers or agrees to transfer certain goods in exchange for some consideration preferably money. According to Blackstone, when ownership of any goods transferred in exchange for money, then a sale have been made. This contract can be absolute or conditional. When a person buys goods outrightly it is considered as absolute but when a person buys goods on approval or trial basis then it is termed as a conditional contract.

Essentials of sale

Bilateral

According to Pothier, a sales need to be consensual, bilateral and commutative. In a contract of sales a property has to be passed from one person to another, a person cannot buy his own property this was held by the supreme court in case of Gujrat V Ramanlal And Sakalchand, where on dissolution of a partnership firm surplus assets and goods were divided among partners in specie, the sales tax officers sought to tax this but the court said that no money consideration was promised or paid by any partner to the firm as consideration for goods they can not be both buyer and seller of goods.

The element of consensuality is important because parties should agree with their free consent, a forced purchase is an acquisition not sales. Similarly, when a property is compulsorily acquired in accordance with the rules in accordance to an authority given by statute there is no sale of the property, despite the fact that compensation is payable its price can be fixed by negotiation. For instance, the supply of electricity, gas, water, essential medicines by the government cannot be considered as a sale.

Money

One of the essential element that separates sale from merely an exchange(barter) or gift or donation, is the price of goods and no sale can take place without price. Herein, price means consideration in terms of money. When the goods are sold for some price as well as in terms of goods, that will be considered as a sale not barter.

For example, in, Aldridge V Johnson fifty-two bullocks worth 6$ each were sold for 100 quarters of barley at 2$ per quarter, the difference has to be made up in cash, was treated as a contract of sale.

In another case Cit V Motor And General Store, an old car was returned to the dealer in exchange for a new car and the difference was paid in cash was considered as a sale by a court of law.

Price

1- It should be in terms of money.

2- It should be definite.

3- It should be realistic.

In order to make sure all these essentials are met, there should be an ascertainment of the price which can be done in many ways, as per section 9 and 10 of Sales of Goods Act 1930:

Contract- one of the basic method of ascertaining price is directly mentioning it in the contract of sale of goods. Reasonability of price does matter to the court of law. Seller and buyer can any price which is to be paid by the buyer to the seller.
A course of mutual dealing- in case there is no price or particular method to set price is laid down in the contract, it can be set by course of dealing between the parties through mutual understanding.
Fixing a reasonable price– according to law of the land, when no price is set in the contract of sale of goods, at the time of execution of the contract the buyer must pay the reasonable price which is subjective and depends upon the circumstances of the case.
Fixing it in the manner agreed- price can also be set by any manner that is agreed in the contract.
Fixing by third-party- acc to section 10, buyer and seller of the goods can also include the third party to ascertain the price of goods, but if the third party fails to do so, the contract becomes void. In case there has been any transfer of goods than the buyer has to pay a reasonable price.

For example, L has 5 cars. He enters into an agreement to sell 4 out of 5 cars to Z if A ascertain the price of all 4 cars. But A does not ascertain the price but 2 cars have been delivered to Z. in this case Z has to pay the reasonable price to L. For the rest 2 cars it entirely depends upon L and Z, if they want to proceed or not.

Apart from this when a certain part or full price is paid in advance by the buyer to the seller as a part of his performance, it is known as earnest money or security. This amount is adjusted against the cost of goods at the time of completion of the contract. In case there is a default on the part any party the other party has a right to ask for a refund of that amount.

Goods

As per section 2(7) of the sale of goods act good a can be defined as every moveable property other than actionable claims and money are considered as goods. An actionable claim is something which a person cannot use or enjoy but which can be recovered by him through a suit or an action in the court of law, for example, a debt due to a person from another. Stocks, shares, growing crops (separated) Mp v Orient Paper Mill court held that standing timber is a movable property if under any contract it has to be severed but the severance should take place when timber still vest in contracting parties, goodwill, trademark, patent, copyright, ancient/rare coins all can be termed as goods except immovable property, broadband is sale (Airtel V Karnataka), Software St Albans City And District Council v International Comp Ltd in this case, The appellant was the defendant company which had supplied computer software to the respondent, and for which the respondent had been awarded £1.3 million.

The software had overestimated the number of community charge payers in the council’s area with the result that there was a shortfall of £484,000 in revenue from the charge. The additional effect was that the council had to pay an increased precept to the county council of £685,000. It was held that a distinction should be drawn between the precept payment, which only arose because of the fault in the software and the community charge shortfall which formed an ongoing obligation which the council had always been subject to and therefore was held not to be recoverable.

Types of goods

According to section 2(7) of the sale of goods act 1930, every moveable property other than actionable claims and money is considered as goods. An actionable claim is something which a person cannot use or enjoy but which can be recovered by him through a suit or an action in the court of law, for example, a debt due to a person from another. Stocks, shares, growing crops(separated), goodwill, trademark, patent, copyright, ancient/rare coins all can be termed as goods except immovable property.

Section 6 sale of goods act bifurcates goods into 3 types: existing goods; future goods; contingent goods.

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Existing goods

At the time of making the contract, ownership or possession of the goods is under the authority of the seller and after fulfilling the obligations of the contract seller has all legal rights to transfer the ownership or possession of those goods to buyer, those goods are known as existing goods under section 6 of the sale of goods act. Existing goods may be classified as:

Ascertained goods

There are certain kinds of goods which need to be identified at the time of making the contract, those goods needed to be selected specifically are also known as specific goods. From a lot of unascertained goods when a specific quantity is set aside after making the contract of sales, it will be considered as specific goods.

For instance, A enters into an agreement with B to sell a car, at that A was having 5 similar looking cars, when B specifically chooses a car of a particular from an unascertained lot of 5 cars, then the selected car will be considered as ascertained goods.

Unascertained goods

The goods which are not identified specifically but are indicated by description or sample from a lot of goods are known as unascertained goods. For instance, A enters into an agreement with B to sell a car, at that A was having 5 same cars, when B does not specifically choose a car but gives the description of car which includes colour, then it will be considered as unascertained goods.

Future goods

The goods which made or acquired or produced on demand of the buyer and does not exist at the time of making the contract are known as future goods. These types of goods is not a contract of sale but agreement to sale because the essential condition of existence of goods is not fulfilled and seller cannot transfer which is not yet produced.

Contingent goods

These goods are the type of future goods, the acquisition of which by the seller is dependent on a contingent event which may or may not happen. The contract is not a sale but an agreement to sell. For instance, when A proposes to sell his car to B if and only if A’s brother returns from England and return his car.

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Agreement to sale versus sale

While entering into a contract of sale when the property is transferred from buyer to seller, it is considered as sales but when some contingent condition is to fulfilled or any future time is decided to transfer the property it is known as an agreement to sell. Under a contract of sales jus in rem i.e. right against property, is transferred whereas in agreement to sale jus in personam i.e. right against a person, is created. The only remedy available in case agreement to sell is unliquidated damages unlike a contract of sales where either of the party can sue in case of default. The case of sale the risk of loss is transferred to the buyer but in the agreement of sale, the risk is on the seller.

For instance, A offers B to sell 10 Maruti cars for Rs 10 lakhs if the price of Maruti cars in the market falls. This is an agreement to sell but if there was a simple agreement to sell Maruti cars for Rs 10 lakh without any contingent condition, it will be a contract of sales.

An agreement to sell becomes sale as per clause 4 of section 4, when the conditions are fulfilled or on the arrival of future time which is decided. Property is to be transferred after agreement to sale has became sale. This can clearly be understood by case of Wood V Manley, where, the sale of the whole of the haystack on the seller’s farm the buyer has liberty to take away whenever he likes is an immediate sale but in White V Wilks, where, contract to sell a portion of oil from seller’s cistern is considered as an agreement to sell.

Basis of distinction	Sale	Agreement to sale
Nature	The execution is complete in a sale, i.e. the contract is executed.	The execution is yet to take place, i.e. the contract is executory
Transfer of Ownership	At the time of the contract, the ownership of goods is transferred to the buyer. Thus, the buyer becomes the owner when the sale is made.	At the time of the contract, the ownership of goods is not transferred to the buyer. The transfer takes place on a later date or on fulfilment of a condition.
Right of Usage	The buyer has the right to use the goods he buys i.e. he becomes the sole owner of goods and can use them in any manner.	This contract is between the buyer and the seller. It does not give any right to the buyer to use the goods until the ownership of goods is transferred to him.
Consequence of Breach	If the buyer fails to make payment for goods, the seller can sue the buyer for such payment.	If the buyer fails to take the delivery and make the payment, the seller can sue the buyer for damages only and not for the cost of goods.
Risk of Loss	Unless there is a contract to the contrary, any damage or loss to goods is to be borne by the buyer even if he has not received the delivery of the goods.	Unless there is a contract to the contrary, any damage or loss to goods is to be borne by the seller only.
Insolvency of seller	If the seller is declared insolvent before the delivery of goods, the buyer can claim the goods from the official receiver of the seller because he is the legal owner of the goods.	The buyer has no right to claim the goods in the event of insolvency of the seller.
Insolvency by buyer	The seller is required to deliver the goods to the official receiver of the buyer becomes insolvent.	If the buyer is declared insolvent before making the payment for goods, the seller has the right to refuse the delivery of goods.
Default by seller	If the seller defaults in delivering the goods, the buyer can claim damages from the seller and can also file a suit against the third party as the owner of the goods.	The buyer can sue for damages only in case the seller defaults in delivering the goods because the owner of the goods is the seller.

Sale and hire purchase

In hire purchase agreement buyer pays a part of total price and rest of amount in instalments, but possession is transferred at the time of making the contract and ownership is transferred when the instalments are completed. If any instalment is not paid by the buyer, the seller has the right to take away the goods and is not bound to return the amount already paid by the buyer.

In Lee v. Butler, an agreement was entered into between H a furniture dealer, and L who was referred to throughout as ‘the hirer,’ for the hire and purchase of certain chattels, and it was provided that ‘the hirer’ should pay to H ‘as and by way of rent for the hire and use’ of the chattels the sum of £1 on 6 May the further sum of £96 4s on 1 August. Other provisions forbade the hirer to remove the chattels, and it was declared that ‘no property or interest in the chattels should rest in the hirer until the whole of the payments of rent’ should have been actually made: Held the agreement was an agreement for purchase within s 9.

Whereas in the contract of sale, ownership of the goods are transferred immediately and the seller has no right over the goods if he had received the price but possession is not yet transferred.

The basic difference between two is established in case of (Helby V Mathews), where, Helby let a piano on hire to Brewster at the rate of 10s d6 every month for 36 months to claim the piano as his property, if he wants to terminate the contract he can return the piano anytime. After few instalments, Brewster pledged the instrument with Mathews and Helby sued Mathews to recover the instrument. It was held that he could do so because Brewster was not in the possession but merely under the hire-purchase agreement under which he has no right to pledge.

Further Lord Herschell, LC said that, an agreement to buy imports a legal obligation to buy. If there was no such obligation, there cannot properly be said to have been an agreement. In this case, Brewster might buy or not he did not agree to pay 36 instalments, he only agrees to pay monthly instalments as long as keeps the piano. So under these circumstances, he neither bought or agrees to buy. Thus, it the presence of the option on the hirer to buy or to terminate the hiring marks the distinction.

Basis of difference	Sale	Hire-purchase
Party’s position	The position of the buyer is that of the owner of goods	The position of the hirer is that of bailee of goods till he pays the last instalment.
Time	Property is transferred immediately at the time of contract	Property in goods is passed after paying last instalments
Termination of contract	Buyer is bound to pay price, he cannot terminate the contract	Hirer has a right to terminate the contract by returning the goods to its owner without any liability to pay remaining instalments.
Transfer of title	Seller takes the risk of any loss if the buyer turns out to be insolvent	The seller has no such risk, if hirer turns out to be insolvent, the seller can simply take back the goods.
Burden of risk	Buyer can pass good title	Hirer cannot pass the title
Resale	Buyer can resell the goods	Hire-purchase can resell the goods only if he had paid all the instalments.

Basis of difference	Sale	Bailment
Transfer of property	Transferred from seller to buyer	Only one transfer of from bailor to the bailee
Return of goods	The return of goods is not possible	After the accomplishment of the purpose, bailee should return goods to the bailor
consideration	Price in terms of money	Gratituous and non-gratuitous

Formalities (how made)

According to section 5 of the Sale of Goods Act, a contract of sale is made when-

Clause (1)

There should be an offer to buy or sell goods for a price.
Acceptance of such offer.
The contract may provide for immediate delivery or payment or both. In case payment or delivery by instalment, both delivery or payment can be postponed.

For instance, in the case of MP Laghu Udyog Nigam v Gwalior Steel Sales Branch, these essentials were neither proved nor pleaded, so, the court of law held that these essentials are mandatory and have to be pleaded in the complaint.

Clause (2)

Should be in writing or word of mouth or partly in writing and word of mouth or implied by the conduct of parties, according to clause (2) of section 5 under The Sales of Goods act.

When all these essential conditions are fulfilled a contract of sales is considered as valid.

References

Law of Sale of Goods, Avtar Singh.
Business law, CA Foundation.
Business law, Avtar Singh.