This article is written by Antra Shourya from the Faculty of Law, University of Delhi. The article explains the price ascertainment under Sale of Goods Act 1930, it dwells on various provisions under the act which provide how price is determined, future fixations and price fixed by valuations.
The Sale of Goods Act, 1930 can be viewed against the backdrop of Indian Contract Act, 1872 and Transfer of Property Act, 1882 and it lays down special rules of law in regard to sale of goods. The Sale of Goods Act doesn’t repeal any provisions of the Indian Contract Act, it applies to contracts sale of goods under Indian Contract Act, 1872 and if a rule of law is not consistent with this act is not repealed. Price ascertainment is a very crucial part of any contract of sale. When formulating a contract of sale the presence of money consideration is an essential element. When the consideration is not money but some other valuable consideration the transaction is a barter and not a sale, which makes price determination at the time of concluding a sale essential.
What is a sale?
According to Section 4 of the Sale of Goods Act, 1930 a contract of sale is a contract where the seller transfers or agrees to transfer the property in goods to the buyer for a price. It is a composite transaction consisting of an agreement to sell, passing of title, delivery of goods and payment of price, costs and charges of transportation.
- Hyderabad Engg Industries v State of AP
In this case the said Company was engaged in the manufacture and sale of electrical fans, sewing machines, fuel injection parts and accessories etc.There were prior contracts between the purchaser and the assessee and in pursuance of those contracts, the goods moved from the assessee’s factory at Hyderabad to its Branch offices to be delivered to the purchaser/ their nominees. In pursuance to sales agreement, the purchaser placed monthly orders to the seller with instructions to dispatch the goods of given size and quantity to the named destination.Following the orders,the seller dispatched the goods to its State godowns and the person-in-charge of the godowns to the purchaser division office by raising sales invoice.
Therefore, the transaction between the seller with its branch offices was a clear case of inter State sales within the meaning of Section 3(a) of the Sale of Goods Act, 1930 and not branch transfers as claimed by seller. The SC explained the difference between ‘sale’ and ‘agreement to sell’ stating that if the transfer is in present it is called a “sale” and when the transfer is to take place at a future time and is subject to some conditions to be fulfilled subsequently, the contract is called “an agreement to sell”. When the time in the agreement to sell lapses or the conditions therein subject to which the property in goods is to be transferred are fulfilled, the “agreement to sell” becomes a “sale”.
- State of Madras v Gannon Dunkerley & Co.
In this case the meaning of expression ‘sale of goods’ with respect to the State’s power of taxation on the materials in construction works, the legislative practice and the nature of the agreement in the building contract with respect to the Indian Sale of Goods Act, 1930 was debated. The issue was whether “works contracts’ ‘ were included within the ambit of the Madras General Sales Tax Act and the Company was made subject to the levy of sales-tax within the limitations provided in the Madras General Sales Tax Act and court dwelled in to what constitutes a “sale of good”, the SC held that in order to constitute a sale, it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course pre-supposed the capacity to contract, that it must be supported by money consideration that as a result of the transaction, the property must actually pass in the goods. Unless all these elements were present there would be no sale. It was held that the expression” sale of goods meant that there must be an agreement between the parties for the sale of the very goods in which eventually property passed.
What is the ascertainment of price?
According to Section 2 of the Sale of goods Act, “price” means the money consideration for a sale. Ascertainment of price is discussed in two sections under the Sales of Goods Act, 1930, Section 9 and Section 10. Price in a contract maybe:
- Fixed by the contract itself.
- Left to be fixed by an agreed manner.
- Determined in the course of dealing between the parties.
In the absence of this the buyer must pay the seller at a reasonable price. What is reasonable price is a question of fact dependent on the circumstances of each particular case.
In order for a contract to be a contract of sale it is essential that it should provide for the payment of a money consideration for goods. Section 9(1) says that the price in a contract of sale may be fixed in three ways, firstly by the contract itself, secondly it may be left to be fixed by a manner agreed by the seller and the buyer and lastly it may be determined by the course of dealing between the parties.
- The parties can choose any currency as the price of the goods. However, it is not necessary that the contract should specify the amount; the parties can leave the price to be determined by a method as they please and when it is so determined, the position is the same as if the parties had fixed it by the contract itself. Under Section 9 of the Sale of Goods Act, parties may fix the price at the time of transfer or may leave it to be determined at a later stage.
- Price can be fixed in the future. It is not necessary that the price is determined at the time when the contract of sale is drafted. Future fixation of price is also valid under Section 29 of Indian Contract Act, 1872. Such a contract is not void for uncertainty because the price was not fixed.
- Bhupendra S Bhatia v State of MP
In this case the State government framed a new policy for sale of liquor in some parts of the State under a monopoly. Bids were invited from manufacturers for supply of liquor and adhoc price was fixed for an entire financial year. Subsequently a final price was fixed at a rate lower than the ad-hoc price and the supplier became liable to repay to the state the difference between the final price and the adhoc price. In it’s judgment the Supreme Court held that the price must be known at the time of sale. The Court ordered that the adhoc rate should prevail for the entire year.The court said when a sale of any commodity is made, the seller and the purchaser both have to know the sale/purchase price at the time of or before the sale.
A sale/purchase price to be fixed subsequent to the sale is unknown in the world. If a sale of a commodity is made today and if the purchaser informs the seller that he will inform the purchase price subsequently, then it can always be open to the purchaser to reduce the purchase price subsequently to a negligible amount. Similarly, if the sale price can be fixed subsequent to the sale at the option of the seller it can be increased by the seller at his option, and the seller can later on while demanding the sale price increase it to an exorbitant amount. Such a view is not clearly contemplated by any sensible person or by any stretch of imagination. In fact, such an action by the State Government has to be treated as arbitrary and unreasonable.Further the court ordered that the adhoc rate should prevail for the entire financial year.
Price may be made subject to escalation clause in the agreement. Price may change at the time of delivery of the goods. The buyer may put the condition that price ruling on the date of delivery would apply.
- Aluminum Industries Ltd v Minerals & Metals Trading Corporation Ltd.
In this case, the said company was one of the prime manufacturers of Aluminium cables and conductors for supply to State Electricity Boards and other power utilisers in the country. For the manufacture of such conductors and cables, Aluminium is the basic product. Aluminium being an essential commodity, its production, distribution and supply were governed by the provisions of the Essential Commodities Act, 1955, and the orders made thereunder. The government undertaking sold metal to the company on the condition that the price ruling on the date of delivery would apply. The purchasers opened letters credits in favour of the seller and were issued delivery notes to enable them to take delivery of goods. Thereafter, the price of the goods was raised and delivery was postponed for no valid reason to a date after rise in price came into effect. It was held that the purchaser could not be compelled to pay the higher price. Government’s actions were held unreasonable and violative of Article 14, Constitution of India, hence writ petition under Article 226 was maintained in the High Court of Madras and the government was asked to sell at the price according to the scheduled delivery.
- In English law ‘when price is left uncertain in a contract of sale, reasonable price of the goods can be determined later, even when the contract is silent as to the method by which the price is to be determined. An agreement to pay a reasonable price will be implied; and what is implied by law is as strong to bind the parties as if it were under their hand. An agreement that one of the parties shall have power to fix the price himself is valid and a bona fide determination of the price by him would be binding.
Section 9(2) says that when the price is not determined by the contract itself, the buyer shall pay a reasonable price, and that reasonable price will be determined by circumstances of each case.
- When the nature of the goods is such that there is a market price for them then the market price will be taken as a reasonable price between the parties, though not conclusive, as accidental circumstances may make the current price unreasonable in the particular transaction.
- A subsequent fixing of the price by agreement of the parties is very strong evidence of what they think and therefore of what for them is reasonable. The principle may seem difficult to apply, as for instance when goods have been shipped, so as to pass the risk to the buyer but the exact price is to be determined by weighing or measuring the goods on their delivery from the ship.
- Martineau v Kitching (1872)
In this case the contract was made for Sugar to be sold, with the price payable ‘Prompt at one month; goods at seller’s risk for two months’, to be kept at the seller’s premises and drawn down by the buyers as wanted. After two months and after only some of the sugar had been drawn down by the buyers, a fire destroyed the rest. The buyer was asked to pay for the undelivered sugar which had been burned in the fire, the seller brought an action ‘to recover the price of [the] sugars sold’ and the question was whether the sellers were so entitled. The court held that the seller was entitled to recover the price. Lord Blackburn J said (in cases) “where the price is not ascertained and it could not be ascertained with precision in consequence of the thing perishing, nevertheless the seller may recover the price of the risk is clearly thrown on the purchaser, by ascertaining the amount as nearly as you can.”
Price to be Subsequently Arranged by the Parties
Section 9 also provides that ‘the price might be left to be fixed by subsequent arrangement,’ so that if there was a sale at a price to be subsequently agreed on by the parties there would be a valid contract; just as there is a valid contract of insurance ‘at a premium to be arranged’ for if no arrangement is made, a reasonable premium is payable. It would appear that if the arrangement is that the goods shall be sold at a price to subsequently agreed, there is no concluded contract for such an arrangement and where there is an effect of impliedly excluding an agreement to pay a reasonable price and the price is not ascertained which is an essential element in the contract. Presumably, however, if the goods were actually delivered and accepted under such an arrangement, the buyer would have to pay a reasonable price.
Can price be fixed by valuation?
Price can be fixed by valuation. Section 10 of the Sales of Goods Act, 1930 talks about an agreement to sell at valuation. One of the methods of ascertaining the price is to leave it to be determined by the valuation of a third party and Section 10 deals specifically with that method.
Section 10(1) states that price can be fixed by valuation by a third party, if the price isn’t fixed by valuation such contracts can be avoided, and lastly if any part of the contract is delivered then the buyer has to pay full price for it.
Further Section 10(2) of the section provides for remedy in case the valuation is disrupted by one party, then the other party has the right to sue the party at fault for damages.
- Generally, when the agreement stipulates that price is to be fixed by a third party, word of that third party will be final and binding. As under such a contract there is no other means of fixing the price, the contract is conditional on it’s being so fixed and consequently if the valuation does not take place there is no contract, and presumably if the proposed buyer has paid any money under it in respect of the goods, he may recover it as on total failure of consideration; and as provided by the section, if the buyer has received and taken any part of the goods, he must pay a reasonable price for them.
- If a time is fixed by the contract for the appointment of a valuer, it is usually of the essence of the contract, so that if the valuer is not appointed by that day, the contract is avoided; and if a particular person is named or appointed as a valuer, the task of vauling cannot be delegated to another. Neither party, therefore, is liable to pay, without his default, the valuations does not take place and even if one of the parties wrongfully prevents the valuation from taking place, the only remedy for the other party is an action for damages for preventing the valuation. Moreover, there being no contract, equity cannot decree specific performance though in cases where the court is of opinion that the appointment of the valuer is not of the essence of the contract, it may ascertain, the value for itself and decree specific performance after so ascertaining the price. In appropriate cases too it may make a mandatory order on the party obstructing the valuation.
- The valuation is complete when everything for the valuation has been ascertained and no more remains to be done, but the arithmetical calculation. It may however be questioned if the valuer has proceeded on a wrong standard or taken into account things which by the agreement ought to have been omitted. A valuation may also be impeached on the grounds of fraud or collusion. When valuation is made pursuant to agreement of the parties, it binds them, and the remedy of the party who pays too high price, or receives too little, is against the valuer. Where valuer has been fraudulent or negligent, he may be personally liable to a party who suffers loss as a result.
A sale is concluded when there is a transfer of property from seller to buyer for a consideration of money or promise for the same.Consideration of money is essential for a sale. Price in a sale can be determined by the contract itself, left to be fixed by an agreed manner or determined in the course of dealing between the parties. Section 9 of the Sale of Goods Act provides that price may be fixed by the parties in manner agreed upon by the both parties.In absences of a fixed method to determine the price the buyer shall pay a reasonable price to the seller for the good. Price can be fixed through valuation also by a third party if both the parties agree to it.
Pollock & Mulla, The Sale of Goods Act, Ninth Edition.
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