International Sales Contracts
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This article is written by Darshit Vora from SVKM Narsee Monjee Institute of Management Studies. This article analyses the essentials of sale of goods and the existing exception on the sale of goods by a non-owner.  

Introduction

The Indian Sale of Goods Act was enacted in 1930. Initially, the Sale of Goods Act was included in the Indian Contract Act, 1872. Due to the expansion of trade and business, there was a need for the establishment of a separate Act for the sale of goods. The Act mostly gains its emphasis from the English Sale of Goods Act, 1893. Since the passing of the Act in 1930, there have been minor changes made in the Act, till now.

new legal draft

Essentials of sale of goods

  • Two Parties: It is necessary for the constitution of a sale agreement that there should be at least two parties because a person cannot buy his/her own goods. However, there are exceptions to this clause:
    • Auctions Sale
    • Execution of decree
    • Sale of goods between part owners.  
  • Goods: Goods refer to any kind of movable property other than actionable claims and money. A sale is incomplete without the existence of goods. 
  • Agreement: To constitute the contract of sale, there should either be an implied or express form of agreement. It is due to the presence of an agreement that the goods are passed from the buyer to the seller.
  • Transfer of ownership: One of the most essential ingredients of sale is the transfer of ownership from the buyer to the seller. Without this ingredient, the sale agreement would be incomplete. For example, A agreed to buy a new two-wheeler from B, an agent for Rs. 25,000. A paid the price, got the two-wheeler registered in his name and the registration book was delivered by B to A. This is a valid contract of sale because the ownership of the two-wheeler has been transferred to A. 
  • Price: A sale agreement cannot be completed if it is not considered in the form of price. Barter systems won’t be considered as sales. The special feature that distinguishes contract of sale from the barter system is the element of price. 
    • Illustration: Ali wants to sell his car for $50,000. Rasheed shows an interest in purchasing that car and is willing to pay $50,000 for that car. In this illustration all the essentials of sale are satisfied.  

The general principle of sale of goods by a non-owner

The sale of goods by a non-owner, without the consent of the owner, doesn’t lead to the passage of good title; only the owner has the liberty to sell his/her own property. The goods sold to the buyer, without the consent of the owner, by the third party who is not the owner of goods, doesn’t have the authority to sell and can’t pass a better title. The main purpose behind this is that there should be a rightful transfer of ownership and possession from the seller to the buyer. This is based on a Latin principle Nemo dat quod non-habet which means that no one can transfer a better title than what he already has. Only the owner of goods can transfer a better title to the buyer. 

According to Section 27 of the Sale of Goods Act, 1930, the person who doesn’t have the authority to sell a good, sells it, and if the buyer purchases that product, then there would be a passage of defective title from the seller to the buyer. 

Illustration: If A finds B’s ring in the park and without informing B, A sells the ring to C. In this scenario, the principle of Nemo dat quod non-habet would apply and there will be a passage of defective title from A to C. 

National Employers’ Mutual General Insurance Association Ltd vs Jones (1990)

Facts: In this case, the car belonging to Jones was stolen. It was sold four times. Jones was the fifth buyer of his stolen car. The fourth person, who was in possession of the car, claimed that he bought it with the consent of the seller, who, in this case, was the third buyer. Jones pleaded that he had a good title.

Judgment: In this case, the Court held that the thief cannot be a seller and, therefore, a good title of the car cannot be passed from an unlawful seller. 

Exceptions to the general rule 

This principle strongly favours the owner of the property and is harsh towards those buyers who purchase goods in a good faith. Due to this, there are various exceptions in which a non-owner can pass a better title to the buyer, who purchases products in good faith.

Estoppel

It refers to a person who has obtained the possession of goods in a fraudulent manner and is selling those goods in presence of the real owner of the goods. Later, the actual owner of goods cannot claim the right. In Jerry vs Wells, the court held that “A party, who negligently or culpably, stands by and allows another to contract, on the faith and understanding of a fact which he can contradict, cannot afterwards dispute on this ground in an action brought against the person whom he himself assisted in deciding.”  

Illustration: If B is selling the car to C in front of A, who is the actual owner of the car but B claimed that he was the real owner of the car. And if A didn’t object to it, later he can’t claim any action against B. 

The buyer, in cases of estoppel, gets a better title than the seller. The estoppel can be created in various ways if: 

  • The owner is present during the sale; 
  • He assists the sale process;
  • He allows the transfer of possession goods to another person; or
  • He has participated or acted in inducing the buyer. 

Heap vs Motorist Agency Ltd (1923)

Facts: In this case, the owner of the car gave his car to a North, a prospective customer. North drove it for a few weeks and sold it to the agency. The owner sued the agency but the agency claimed estoppel.

Judgment: The Court, in this case, held that the owner was entitled to take back the car. There was mere negligence on the part of the owner which doesn’t create the exception of estoppel. 

Sale of goods by a mercantile agent

The person who is given the authority by the owner to sell or consign goods on his behalf in front of the third party is referred to as an agent. The agent creates a contractual relationship between the third party and the owner. If any default is committed by the agent, then the owner would be directly responsible for his/her acts. Various kinds of agents are as follows:

  • Factor: He is an agent who is involved in disposing of the goods which are entrusted to him by the owner of the goods. 
  • Broker: He is a type of agent who is involved in negotiating contracts involving the sale or purchase of goods but doesn’t have the possession of goods. 
  • Del-credere agent: He is a type of agent who takes the guarantee for the payment of goods by the third party. If there is a failure in the payment, then the agent would be held liable. However, he won’t be held liable for the failure of performance by the owner of goods.

A is an agent, B is the owner of a ship and C wants to purchase the ship. The purchase price was set at $50,000. Due to a decrease in the prices of the ship, C retracted from the contract. In this scenario, the del-credere agent would be liable to pay B because he took the guarantee for C. On the other hand, other agents can’t be held liable for the act of C.

Conditions necessary to be fulfilled:

  • Possession with the owner’s consent: The consent obtained by the person should be without any fraud, misrepresentation, or coercion. The owner of the goods should be aware of the possession of goods. Possession is defined as an act of having and taking into control a good. 

Eg. A employs B to sell his car, for which B has the possession. In a few weeks, the car is sold to C. In this scenario, the possession of goods was taken with the owner’s consent. 

Proper documents of title involved with the goods

The owner needs to furnish proper documents and the title, so that the person, while selling the goods, can pass the buyer a good title. If there is no proper trader of the title, then the sale won’t be considered as valid. 

The person should act in the ordinary course of business

The agent, who is authorized by the owner, to sell the goods should act in his ordinary course of business and anything done outside the course of business won’t amount to a valid sale.

Good Faith

The agent selling goods on behalf of the owner should not sell the goods with malice. The things are said to be done in a good faith when it is done honestly and without any negligence. 

Eg. A wants to sell his diamonds for which he appoints B. B persuades C to buy a diamond on his behalf, and if C did so, then B would have sold it at a price lower than the actual sale price. The sale won’t be held valid because, here,  B had a mal intention and was not acting in good faith.

Sale of goods by a seller who has the possession of goods even after the sale

This is an exception to the original rule. Under this exception, if a person who has sold goods continues to be in possession of them or the documents of title, even after the goods are sold, sell the goods to another buyer and the buyer acts in good faith, then the buyer will have a good title of the goods, even though the property in goods were passed to the new buyer. 

Conditions to be fulfilled:

  1. The seller must be in possession of goods.
  2. The goods must be delivered to the buyer. 
  3. The second buyer should purchase them in good faith. 

Illustration: If A sold his horse to B and it is not delivered to him because B was not in town. Then, A sells the same horse to C because he was offering a better price. In this case, a good title would pass to C as he purchased goods from A and was unaware of the prior sale.

Sale by a buyer who continues to have the possession of goods, even after their sale 

A person who buys the goods with the consent of the seller but before the actual sale, the buyer resells the goods to another buyer and if that buyer purchases the goods in good faith, then he would have a good title of the goods. 

Conditions to be fulfilled:

  1. The buyer must be in the possession of the goods.
  2. The goods purchased by the second buyer must be done in a good faith. 
  3. The goods must have been delivered to the buyer. 

Cohn vs Docklett’s Packet Co. Ltd(2010)

Facts: In this case, the defendant sent copper in a ship to the buyer Printscher. The buyer turned insolvent. The buyer then sold the goods to the plaintiff. He took the bill of lading in good faith and paid the price to the buyer. The plaintiff had no knowledge about the original sale. The defendant, after coming to know of the actual traction, stopped the copper at the transit. The plaintiff filed the suit against the defendant.  

Judgment: The Court held that the transfer of goods from the seller to the plaintiff was done with a good title. The seller was not entitled to stop goods in transit. 

Sale of goods by the finder of goods

The finder of goods gets the right to sell the goods if the owner of the goods cannot be found by due diligence. The finder of goods may sell the goods on two grounds, when: 

  1. the thing is in danger of losing the greater part of its value; or
  2. the lawful charges of the finder are two-third than that of the actual amount of the goods. 

Illustration: A found a bag of vegetables lying on the road near the station. He tried finding the owner of those vegetables. Even after 5 hours of finding, he couldn’t find the owner of the vegetables. Due to the perishability of the product, he sold them. In this scenario, A was right in selling those vegetables. 

Resale of goods by an unpaid seller

The seller gets to exercise the right of lien and stoppage in transit. These rights can be exercised when the buyer fails to perform his/her duties. Though the goods are already sold to one buyer, due to the default of the buyer’s part, the seller gets the chance to sell the product again. 

Illustration:

A quantity of timber was supplied from the seller to the buyer. Before accepting the delivery, the buyer went bankrupt. The agent of the buyer asked for the delivery from the captain of the ship. The captain of the ship asked for freight charges but before the delivery, the seller sent the notice to stop it. The buyers claimed that the delivery was already made and, therefore, goods cannot be taken back.In the illustration the delivery of goods is not complete and, therefore, the seller can take back his goods.  

Sale by a person in possession of goods under a voidable contract

According to Section 19 of the Indian Contract Act, 1872, if the consent of the parties is obtained by fraud, coercion, or misrepresentation, then the contract is rendered voidable at the option of the coerced party. If the contract is not rescinded by the other party, then the buyer acquires a good title. 

It is necessary that three conditions be  fulfilled: 

  1. The buyer should act in good faith. 
  2. The person should enter in a voidable contract and not a void contract. 
  3. The contract should not be rescinded before the sale. 

Illustration: A is the wife of B. B threatens to commit murder if she doesn’t allow him to sell her ring. A agrees, due to the threat, and allows the sale to happen. Later, she can’t claim the ring back because, in this case, the buyer gets a good title. 

Philips vs Brooks (1919)

Facts: In this case, a person, pretending to be someone else, purchased a valuable ring and gave a cheque to the plaintiff. Before the discovery of the fraud, the ring was sold .

Judgment: In this case, the Court held that the sale is valid because the contract was voidable and the sale was completed before the discovery of fraud. 

Sale of goods by pawnee in case of default by the pawner

A pawner, who has pledged his/her goods to the pawnee, fails to pay off the debt within a stipulated time period, then the pawnee gets the authority to sell off the products. The buyer who purchases products from the pawnee would get a good title. In case of default, there are two options available to the pawnee. The pawnee can either sue the pawner or sell the goods.

Lallan Prasad vs Rahmat Ali (1966)

Facts: In this case, the defendant borrowed Rs. 20,000 from the plaintiff and pledged aerospace worth Rs. 35,000. The plaintiff sold the aerospace due to the default of payment by the defendant. He also filed a suit to recover his money. 

Judgment: The court rejected the action of the plaintiff because he sold the pledged goods and, therefore, cannot file a suit to again recover the money. 

In this case, the buyer to whom the property is sold is unaware of the pledge, then it would lead to the passage of a good title to the buyer. 

Sale by a joint owner

This exception mentions that if the joint owner has the possession of the property, he can sell the property with the permission of the other joint-owner(s). And if the buyer purchases the goods in a good faith, then the property on goods is transferred to him and so does the good title. 

Conditions to be fulfilled:

The buyer should purchase goods in good faith. 

  1. The goods must be in the sole possession of the seller. 
  2. The purchaser should not be aware that the seller didn’t have the authority to sell. 

Illustration: A, B, and C are the joint owners of a bike. B and C sold the bike to D without the permission of A. In this scenario, the exception shall apply because the buyer purchased the bike in good faith.

Sales of goods by the order of the Court

Under this exception, if the court finds it necessary to sell the goods of the owner, then the court may sell the said property. If the Court finds that the goods are perishing or losing a large value, then it can decide to sell the property, though being a non-owner of the goods. 

Illustration: A defaulted bank worth $50,000 crores and fled to India. In this case, the court ordered him to sell off the property of A in order to repay the amount which he owed to the bank. 

In all the above scenarios a good title is passed to the innocent buyer. In the UK, along with these exceptions, there are various other exceptions.  

Sale of Motor Vehicle in the Hire purchase agreement

It refers to when a bona fide purchaser purchases a motor vehicle from a person under a hire agreement, he or she obtains a good title of the vehicle. 

The Hire agreement doesn’t apply to other goods. It only applies to motor vehicles. 

Illustration: A acquires a car and a Casio on hire purchase and sells it to D. There would be a transfer of good title of the car but not the Casio. 

Market overt

The general rule is that stolen property cannot lead to the passage of effective title. However, under the principle of market overt, any stolen goods sold between sunrise and sunset lead to the passage of effective title to the buyer. Recently this concept was repealed from the UK Sale of Goods Act

Conclusion

The principle of Nemo dat quod non-habet is not an absolute principle through a series of cases various exceptions have now been developed. These exceptions prove useful for the buyer who purchases the goods in good faith. It is necessary to bring a balance between protecting the interest of the owner and the buyer and, thus, the Sale of Goods Act,1930 along with exceptions to the principle of Nemo dat quod non-habet, have played a crucial role.  

References  

[1]http://www.legalserviceindia.com/legal/article-1196-no-one-can-transfer-a-better-title-than-what-he-himself-possesses-judicial-interpretation.html

[2]https://blog.ipleaders.in/transfer-of-title-of-goods/.

[3]https://www.lawctopus.com/academike/nemo-dat-quod-non-habet/


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