This article has been written by Suryanshi Bothra. It discusses in depth all aspects of a Sales contract, including its components, types, legal requirements, important clauses, objectives and performance. This article will also discuss breach of contract and relevant case laws. 

Introduction  

The sales process involves much more than just exchanging money for goods and services. A sales contract is often referred to as a sales agreement, purchase agreement, contract of sale, sale of goods contract, etc. 

Sales contracts bind parties in a mutual agreement. It includes various types of sales contracts, including order forms, change order forms, master service agreements and many more. The main objective of the contract is to ensure that the product or service which was agreed upon is given in exchange for the promised payment. It is entered into by multinational corporations dealing in millions of dollars or individuals purchasing everyday items. A person buying something from the local store may not think it’s important to create a sale contract. In these contracts, the terms of sale are clear. The formation of sales contracts is especially essential for all business-to-business transactions, as it protects the interests of both parties. It allows businesses to protect themselves against future lawsuits.

The article aims to look at the different parts and details of how sales contracts are made, carried out and enforced. It will explain important aspects like legal requirements, terms and conditions, duties of the parties and some common problems that can happen during the contract process. 

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What is a sale contract 

Earlier sales contracts were governed by Sections 76 to 123 of the Contracts Act of 1872.  Currently, the Sale of Goods Act of 1930 governs sales contracts. Section 4 of the Act defines a sales contract. It is a contract in which the seller transfers or agrees to transfer goods to the buyers. The contract of sale may be absolute or conditional. The difference between a sale and a contract to sell is that in a sale, the goods are transferred from the seller to the buyer immediately. In a contract of sale, the transfer of goods takes place at a future time. According to Section 4(4), an agreement to sell becomes a sale when the conditions of the agreement are fulfilled and the goods are transferred. 

Types of sales contracts 

The common types of sales contracts are:

General sales contract

These contracts are involved in everyday transactions concerning goods and services. It contains detailed descriptions of the goods or services being sold and the prices. The payment terms as well as the delivery terms and delivery schedules are also mentioned in the contract.  

Conditional sales agreement

In these contracts, the buyer takes possession of the goods only if the criteria mentioned are fulfilled. Usually, full payment is the condition that needs to be fulfilled before the ownership and possession is transferred. It includes provisions which state what actions need to be taken in case the buyer defaults. Typically repossession terms are also mentioned. 

International sales contract

These contracts are drawn up when buying and selling happens between traders in different countries. Incoterms (International Commercial Terms) like buyers and sellers, risks and costs are mentioned in these contracts. It specifies the currency and method of payment. Responsibilities regarding customs clearance and payment duties of taxes are to be specified in the contract. International arbitration bodies that will be responsible for dispute resolution in such cases are mentioned in the dispute resolution clauses.  It ensures adherence to international trade laws and regulations.

Upsell agreements

These contracts come into play when a seller offers additional products or services to the buyer, usually at the point of sale or after the initial sale. Pricing and Payment Terms: like additional costs for the upsold items are mentioned. Any discounts or special terms offered as part of the upsell too need to be clarified. The delivery or installation terms of the additional products/services are an essential element of these contracts. Lastly, conditions under which the buyer accepts the additional products/services too need to be specified.

Terms of service 

These are primarily used by service-oriented businesses. It outlines the terms and conditions under which the services will be provided. It includes a detailed description of the services being provided. Pricing and billing frequency need clarification. It also places a limit on the liability of the service provider in certain situations. User or client responsibilities and obligations are also specified. 

Commonly used terms in sales contract

Section 2 of the Sales of Goods Act of 1930 defines the following terms. 

Buyer– Section 2(1) of the Sale of Goods Act of 1930 defines the term buyer. It refers to anyone who buys or agrees to buy goods. In Helby v. Mathews (1895), the court held that a person will only be considered a buyer if the purchase of a product subjects him/her to some legal obligation. 

Delivery- Section 2(2) of the Sale of Goods Act, 1930, defines the term delivery. It refers to the transfer of possession of goods from one person to another. 

Deliverable State- According to Section 2(3) of the Sale of Goods Act of 1930, a deliverable state is defined as a state in which the buyer is bound by law and contract to take delivery from the seller. 

Document of title to goods- Section 2(4) of the Sale of Goods Act 1930 talks about the documents which are used as proof of possession and control of goods. The documents included in the document of title of goods are a bill of lading, warehouse keepers certificate, wharfingers certificate, railway receipt, warrant or order for the delivery of goods, etc. 

Future goods- Section 2(6) of the Sale of Goods Act 1930 defines it as goods that are to be manufactured after the formation of a contract. 

Goods- According to Section 2(7) of the Sale of Goods Act 1930,  goods refer to all kinds of movable property, including shares, stock, growing crops, grass, etc. It also includes things attached to or forming a part of the land which are agreed to be severed before sale or under the contract of Sale. The interpretation of this can be observed in the State of Maharashtra v. Champalal (1971), where the court held that the timber growing on the land was considered good. In Bacha F. Guzdar v. CIT (1955), the court set a precedent that shares of a company will be considered goods. The definition excludes actionable claims like pledges, mortgages, etc. and money. As per Union of India v. Martin Lottery Agencies Ltd. (2009), lottery tickets are actionable claims and therefore not included in the definition of goods. It also excludes documents entrusted to lawyers. It was decided in R.D. Saxena v. Balram Prasad Sharma. 

Specific Goods- As per Section 2(14) of the Sale of Goods Act 1930, specific goods mean goods identified and agreed upon at the time the contract of sale is made.

Formation of a sales contract

Section 5 of the Sale of Goods Act of 1930 describes how a contract of sale is made. According to the Act, a contract is made when an offer to buy or sell for a specific price is accepted. The contract can be about immediate delivery or delivery in instalments. The contract may be written or by word of mouth. Partly written and partly oral contracts are also enforceable. It could also be implied by the conduct of the parties. There must be a complete exchange of property to constitute a sale. According to this, the seller and buyer must be different people. This means that a man cannot buy his own goods. However, under this provision, there is an exception. This special provision takes into account that one person may have an interest in several entities. Therefore, one part owner may sell to another. The exception to this rule is that the sale must not be in distress. In some other exceptions, a bankrupt person may buy back his/her own goods from his/her trustee. 

Section 4, when read with Section 2(10) of the Sale of Goods Act of 1930, requires that the contract of sale provide for the payment of money as a consideration for the transfer of goods. But Section 9 of the Sale of Goods Act 1930 allows parties not to fix the price at the time of transfer and to leave the determination of the amount of consideration for a later date. Therefore, a contract that provides for the future fixation of price has an element of uncertainty. Section 29 of the Indian Contracts Act specifies that any uncertain contract is void. 

If the contract provides a condition that a third party will determine the price, and the third party, due to his fault, fails to do so, the agreement becomes void. If the third party can’t determine the price due to one party’s fault, the other party can sue for damages caused by that party’s fault. However, if the buyer has already received and accepted the goods, they are bound to pay a fair price for the goods. 

Essential elements of a sales contract

Proposal 

Section 2(a) of the Indian Contracts Act 1872 defines an offer as an instance when someone signifies to another his/her willingness to do something or to abstain from doing something in return for something from the other. In the context of a sales contract, it is related to the offer of selling goods at a particular price. An offer is distinguished from an invitation to offer. Just providing information, such as the price of the good or displaying the good, does not count as an offer. It is an invitation to offer. Sales proposals, business proposals, and product proposals are all offers or proposals, according to ICA.   

Acceptance 

Section 2(b) of the Indian Contracts Act 1872 defines acceptance. In this case, the buyer agrees to the terms offered by the seller or vice versa. It is essential that the acceptance be unconditional and communicated to the other party. The court in Brodgen v. Metropolitan Railway held that a contract between a buyer and seller was valid even if it was accepted by conduct.  

Consideration 

Section 2(d) of the Indian Contracts Act 1872 defines consideration. The definition includes some key features, like that consideration is given at the desire of the promise, it is given by the promisee or any other person on his behalf (privity of consideration), and it can be past, present or future. In India, there can be no valid contract without a valid consideration. Section 25 states that any agreement without consideration is void unless it is in writing and registered.   

Consent

Section 13 of the Indian Contracts Act 1872 defines consent. It requires a meeting of minds to agree upon the same thing in the same sense. Consent is said to be free only when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake. A contract entered into without free consent is voidable at the option of the party whose free consent wasn’t obtained. 

Capacity

Section 11 of the Indian Contracts Act 1872 states who is competent to enter into a contract. It is premised on the fact that each party entering into a contract must understand the terms of the contract. The act bars the following people from entering into a contract like minors, people disqualified by law and people of unsound mind. Mentally incapacitated individuals and individuals under the influence of drugs or alcohol may lack the capacity to enter into contracts.

Legality

Section 10 of the Indian Contracts Act 1872 clarifies that for an agreement to become a contract, it must have a lawful object and lawful consideration. The purpose of the contract must not violate any laws or public policy. The goods and services being sold and bought must be legal. They should comply with all the relevant laws and regulations. Contracts that deal with the sale of stolen goods or that promote illegal activities are void and unenforceable. For example, a contract to sell illegal drugs would be void and unenforceable.

Essential clauses of a sales contract 

Scope of work

This is one of the most important clauses in a sales contract. It answers questions like what will be delivered, how will it be delivered, and when and where will it be delivered. The terms are very clearly mentioned in the scope of work clause of a contract. It prevents any confusion or ambiguity. The description of the goods being delivered is given here. It is detailed and specific, providing details like quality standards, brands, sizes, etc. It should also lay down what is and isn’t included in the quoted price. If there are any deadlines or deliveries to be made after the completion of certain milestones, then those are to be specified. Acceptance criteria are also mentioned in the scope of work clause. The criteria mentioned could involve testing, inspection or other verification processes. These need to be very strictly worded to prevent future lawsuits. The location and mode of delivery should also be clearly specified to avoid misunderstandings that cause delays or additional costs. 

Payment terms

This clause in a sales contract includes how much the buyer will pay to the seller for the goods. It must include the total price of the goods, discounts and applicable taxes. Also, if there are any penalties or fees, they should also be specified. The mode and date of payment are also mentioned in this clause. It should be clearly stated whether the payment is to be done upfront, half before delivery, half after or completely after delivery. The time period should be clearly mentioned. If the payment is to be done in parts, clear milestones need to be set. Lastly, the clause should also include what would happen if the buyer failed to pay on time.  

Conditions and warranties

During negotiation, parties exchange many statements regarding the subject matter of the contract. Whatever the parties say during the course of such negotiations does not always become part of the contract. Therefore, if a particular statement is a part of the contract, it can either be a condition or a warranty. Conditions are essential clauses in a contract. There are some terms in the contract that talk directly about the substance of the contract. These terms are so essential to the contract that their non-performance may fairly be considered by the other party as a substantial failure to perform the contract at all. Such terms are called ‘conditions’. 

According to Section 12 of the Sale of Goods Act 1930, conditions are stipulations that are essential to the main purpose; a breach of them could lead to the contract being repudiated. On the other hand, there are some terms that have to be performed but aren’t as essential as they do not form the root substance of the contract. These are called ‘warranties’. They are collateral for the main purpose of the contract. If it is breached, damages could be claimed, but the contract cannot be treated as repudiated. No specific words are prescribed to hold a particular term, a ‘condition’ or a ‘warranty’. The construction of a contract and its intention determine whether a clause is a condition or a warranty. A stipulation called a warranty in the contract may be a condition. The distinction between the two is important because of the remedies available. In both cases, the buyer is entitled to damages. But, in the case of a breach of a condition, the buyer has another remedy, namely, treating the contract as repudiated and rejecting the goods altogether. 

Implied warranties

Section 14  of the Sales of Goods Act 1930 talks about implied warranties in a contract, which apply by default if something contrary to these implications isn’t specified in the contract. Some of the implied warranties are-

  • Section 14 (1) guarantees that the buyer has the right to sell the goods; he/she has legal ownership of the goods at the time of sale or, in case of agreement to sell, at the time of transfer of property. 
  • Section 14(2) specifies that there is an implicit warranty in sales contracts that the consumer can enjoy uninterrupted possession of the goods. If the buyer is disturbed by using the goods, he or she has the right to sue the seller. It ensures that the buyer has peaceful possession of the goods and that he will not face any legal challenges regarding his ownership of the goods. 
  • Section 14(3) talks about an implied warranty, which states that the goods being sold are free from any encumbrances or undisclosed charges. It ensures that the goods are not subject to any mortgages, liens or claims that could hamper the buyer’s possession of the goods.     

Implied conditions 

  • Section 15 of the Sale of Goods Act 1930 talks about a condition that is implied for every sales contract; it specifies that the appearance and functions of goods should be according to the description as mentioned in the contract. According to this implicit condition, the buyer has the right to refuse the goods if they do not adhere to the description. If a sales contract is made on the basis of both a description and a sample, then the product must be compatible with both.
  • Section 16(2) of the Sale of Goods Act of 1930 specifies that the goods sold to the buyer must be of merchantable quality. By merchantable quality, the act states that it should be sellable within the usual course of trade. It should be free from any latent defects. However, if the buyer has inspected the goods beforehand, this condition would not apply. Section 14(3) specifies that even if there is an express warranty of condition that goes against the provisions of this Section, it will not override the implied conditions unless there is a clear inconsistency between them. 
  • Section 17 of the Sale of Goods Act 1930 states the rights of the buyer in case the goods are bought or a sales agreement is entered into on the basis of a sample provided by the seller. It states that there is an implied condition that the quality of the bulk of goods should be the same as the sample. Section 17(2)(b) of the Sale of Goods Act 1930 provides the buyer with a right of inspection of the goods. There is also a provision that there must not be any latent defect that makes the goods unmerchantable.  

Termination and dispute resolution

This clause outlines the procedure that must be followed while ending the contract. The contract specifies the amount of notice period that is to be given in case of termination. It also mentions under what circumstances the contract may be terminated. All sales contracts need to have a termination clause. It is usually standard and doesn’t require much customisation. The consequences and the cost of termination are specified in this part of the sales contract. It provides an emergency exit for both parties while also maintaining peace between them; it also reduces conflict.  

The dispute resolution clause states the proper procedure that is to be followed in case of a disagreement. Different methods of dispute resolution can be specified according to the convenience and preferences of both parties. The commonly chosen methods of dispute resolution are –

  • Negotiation–  It is one of the most informal methods of dispute resolution. It allows the parties to reach an agreement on their own. Usually, a neutral third party, also known as a negotiator, helps the parties come to a consensus. 
  • Mediation– This method of dispute resolution, when mentioned in a sales contract, signifies that both parties are open to the mediation process, eradicating the need to force one party. 
  • Arbitration– This clause essentially means that the parties to the contract are required to submit to arbitration instead of litigation when there are disputes. In this case, the third party, instead of acting as a neutral body, reviews the contract and the dispute and then makes a binding decision. It provides a faster and cheaper way of dispute resolution. 

A good dispute resolution clause clearly defines the rights and obligations of both parties, specifying the process that needs to be followed. When and how the clause will be initiated should be mentioned. It also provides for the ongoing performance of the obligations as per the contract during the process of dispute resolution. There should be a clause that defines what would happen if the decided dispute resolution process doesn’t work and the dispute resolution clause would survive if the contract itself was terminated.

Confidentiality and intellectual property

This clause in a sales contract outlines the obligation of the parties to the contract to maintain secrecy regarding certain sensitive aspects of the transaction and of the goods or services that are being transferred/offered. The clause must specify what would be considered confidential or intellectual property. This information may be trade secrets, proprietary data, customer lists, patented technologies, etc. The clause should specify how the intellectual property should be used, stored and protected to safeguard it from unauthorised use. Ownership of the intellectual property can be clarified in this clause. It may also include provisions for licencing intellectual property rights between parties. The clause could also specify information regarding royalties, fees and other compensations. Remedies for breaching this particular clause can be mentioned in the clause itself.

Indemnification clause

This clause in a sales contract aims to allocate risks between the buyer and the seller. Contracts for indemnification are governed by Section 124 of the Indian Contracts Act 1872. According to the said section, there must be a loss and the loss must be caused either by the promisor or by any other party. If both of these conditions apply, the indemnifier (the party who agrees to compensate) promises the indemnity holder (the party getting compensated) to save his/her losses. For buyers, the indemnity clause is mostly to protect against defective goods or poor quality, while for sellers, it is usually protection against breach of contract. The subjects of an indemnity clause are much wider than expressed in the above section, as it deals with only one particular kind of indemnity.

In some cases, the right to be indemnified arises out of operational law, that is, if it is provided in legislation. However, most rights arise when they are expressed or implied in the contract. An indemnity outlines the indemnifier’s obligations towards the indemnity holder. The specific events in which the indemnity clause would apply are also mentioned. It must mention in what cases or losses indemnification will not apply. The clause should include limitations and the extent of indemnification, such as caps on liabilities. The timeframe within which a notice of indemnifiable contracts should be issued must also be mentioned in the contract. It includes the timeframe that should be provided to the indemnifier in cases of any lawsuits or claims made against him/her. In the case of third-party beneficiaries, the details and terms should also be specified. 

Force majeure

Section 56 of the Indian Contracts Act of 1872 talks about the force majeure clause of a contract. The law allows parties to make their own provisions in cases where the contract becomes impossible to perform.  It is a clause that addresses what is to be done in case the contract is affected by an unforeseen and unavoidable event. For an event to fall under this clause of a contract, it has to be out of the control of the parties. Examples of events that fall under this category are strikes, wars and pandemics. These events can be classified under a force majeure clause. This section deals with events that are outside the scope of the contract. If a force majeure event is explicitly or implicitly mentioned in the contract, then it is governed by Section 32 of the Indian Contract Act of 1872. In this clause, the parties should mention how the happening of the event will be notified and verified; it should also discuss how such an event will affect the duties and obligations of both parties. It allows flexibility for the parties and helps mitigate potential risks. 

Boilerplate clauses

These are also known as standard or miscellaneous clauses. They are predefined and non-negotiable conditions in a sales contract. These are usually readymade clauses, which are standard for almost all types of contracts. They just have to be inserted as per the needs of particular contracts and do not need many amendments and customisations. They receive very limited attention but play a crucial role in clarifying legal rights, procedures and obligations during disputes. It includes provisions about things like how official communications and notices should be delivered and severability. It also sometimes mentions which laws will govern the contract and which courts will have jurisdiction over any arising dispute. No waiver clauses are also included in these clauses, which assert that failure to enforce any rights or provisions does not mean a waiver of these rights. 

Performance of the contract of sales 

Chapter IV, Sections 31–44 of the Sale of Goods Act of 1930, deals with the performance of the contract. 

  • Section 31 of the Sale of Goods Act of 1930 discusses the duties of the seller and buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale.
  • Section 32 of the Sale of Goods Act of 1930 describes the delivery of the goods and payment as concurrent conditions. This means that the seller must be ready to sell and the buyer must be ready to pay in exchange for possession of the goods. This ensures that the exchange is fair and balanced so that no party is unduly unburdened. 
  • Section 33 of the Sale of Goods Act of 1930 talks about the delivery of the goods. Delivery may be in any form agreed upon by the parties. The delivery must be made to the buyer or the authorised representative of the buyer. 
  • Section 35 of the Sale of Goods Act of 1930 addresses when the seller is bound to deliver the goods. The first, according to the contract, is that it only applies to contracts where there is no explicit provision to contradict this section. Basically, the terms of particular contracts supersede the provisions of this section.
  • Section 36 of the Sale of Goods Act of 1930 stipulates what is to be done in cases where the contract doesn’t expressly or implicitly state if the buyer is supposed to collect the goods or the seller is supposed to send them. In such a case, according to the Sales of Goods Act, goods sold are to be delivered at the place at which they are agreed to be sold at the time of the sale or the place where they are manufactured or produced. In case the date or time of delivery is not specified, it is supposed to be delivered within what will be considered a reasonable time. The default responsibility for bearing the cost of delivery lies with the seller unless explicitly stated otherwise in the contract.

When the seller is expressly responsible for the delivery

Section 39 of the Sale of Goods Act of 1930 deals with scenarios where the seller, through a provision in the contract, is tasked with delivery either by a carrier or wharfinger. A wharfinger is the owner of a wharf who, in exchange for payment, receives and ships goods. They normally operate at places like ports, harbours, etc. In these kinds of contracts, the seller is said to have delivered the goods as soon as the goods are delivered to a carrier for transmission or to the wharfinger for safekeeping. It is important for the seller to ensure that the arrangements with the carrier are made keeping in mind the nature of the goods. In case the goods are not delivered or delivered damaged to the buyer, the buyer has two options. One is to reject the goods and sue the carrier. The other option is to sue the seller for the damages incurred in transit. 

Partial delivery of goods

Section 34 of the Sale of Goods Act, 1930, talks about part delivery. If a seller delivers only a part of the goods with the intention to deliver the rest later, the act considers this partial delivery as equivalent to delivering the entire quantity of goods. Transferring ownership with partial delivery transfers the ownership of the goods It gives the buyer some rights before even receiving the complete delivery. However, if the seller delivers a portion of the goods, separating it from the remaining portion, then it does not have the effect of transferring the rest of the goods. In a case like this, only the goods that are physically handed over are considered delivered.  The ownership of the remaining goods remains with the seller. This ensures that there is no manipulation of partial deliveries to retain control over the entirety of the goods. 

Delivery of wrong quantity of goods

Section 37 of the Sale of Goods Act, 1930, deals with the delivery of the wrong quantity or wrong goods mixed with the right ones. The provisions in this section are subject to special agreements that supersede the default rules established in Section 37. The default rules state that in cases where the seller delivers fewer goods, the buyer has the right to reject all the goods. However, if they do accept it, they would have to pay the contract rate that was agreed upon. Conversely, if the quantity delivered by the seller exceeds the agreed-upon quantity, the buyer also has the option of rejecting or accepting the delivery. However, in this case, too, the payment would be at the contract rate. This ensures that the seller is compensated even if the quantity is exceeded. In the case of mixed goods, the buyer has the option of accepting the right goods and rejecting the rest.

Acceptance of the goods 

Section 42 of the Act talks about acceptance of the goods. It states that acceptance occurs in the following cases. 

  • When the buyer communicates to the seller his/her acceptance. 
  • When the buyers perform actions with the goods that are inconsistent with the seller’s ownership, for example, using or reselling the goods. 
  • When the buyer retains the goods without communicating the rejection for a long period of time, this can be considered unreasonable. 

Section 41 of the Sales of Goods Act 1930, talks about the right of the buyer to examine the delivered goods. It states that in cases where the goods were not examined by the buyer previously, the acceptance will not be complete until the buyer has had the chance to examine them. It also talks about the seller’s obligation to provide the buyer with a fair chance of examination. 

Refusal to accept the goods

In cases where the buyer refuses to accept the delivered goods, Sections 43 and 44 of the Sale of Goods Act, 1930, apply. If the buyer has the right to refuse the goods after delivery, he/she is not bound to return them to the seller. It would be sufficient for them to communicate the refusal to the buyer. The buyer will be held liable for any losses suffered by the seller in case he/she neglects or refuses the delivery. Neglect in this scenario would be if the buyer, even after requests from the seller, doesn’t take the delivery even though enough time has been provided to them.

Breach of contract of sales and its remedies

Sections 55 to 61 of the Sale of Goods Act 1930 deal with the suits for breach of contract. They primarily deal with the remedies that either the seller or the buyer has in case of a breach. The following are the provisions for remedies for different kinds of breaches. 

  • Section 55 of the Sale of Goods Act 1930 deals with cases where the goods have been delivered to the buyer and accepted by them, but the buyer neglects to or refuses to pay the seller. In cases where the date of payment is decided upon in the contract, it is immaterial whether the goods are delivered before or on that date or not. The seller can sue the buyer even though the goods’ possession hasn’t been transferred. 
  • Section 56 of the Sale of Goods Act 1930 deals with buyers’ wrongful rejection or neglect leading to sellers’ losses. It gives the seller the right to sue for damages for non-acceptance. 
  • Section 57 of the Sale of Goods Act, of 1930, is about damages for non-delivery of goods. In cases where the seller neglects or refuses to sell the goods, the buyer has the right to sue the seller. 
  • Specific performance is mentioned in Section 58 of the Sale of Goods Act 1930; if the seller does not deliver the goods or deliver some other wrongs, then the court can ask the seller to fulfil the contract and deliver the agreed-upon goods to the buyer. In this case, the courts do not allow the defendants to keep the goods by paying damages to the plaintiff. 
  • Section 59  of the Sale of Goods Act 1930 talks about the remedy for breach of warranty. If there is a breach of warranty by the seller or the buyer elects to treat a breach of condition as a breach of warranty, the buyer has two options. The buyer cannot automatically reject the goods delivered; either he can set up a breach of warranty to reduce the price or sue the seller for damages that were caused by the breach of warranty. 
  • Section 60 of the Sale of Goods Act, of 1930, deals with the remedy for repudiation of the contract before the due date. Repudiation of the contract refers to a scenario where one party clearly indicates that they do not have any intention of fulfilling their end of the contract. In cases where the repudiation happens before the due date, the other party can either treat that contract as still valid, wait for the due date, and then sue, or they can treat the contract as rescinded and sue for damages. 

Relevant case laws surrounding sales contract

M/S. T. V. Sundram Iyengar & Sons vs. the State Of Madras (1974)

Facts

The government called for tenders from people who were willing to construct bus bodies on the chassis supplied by the government itself. The government had accepted TV Sunderam Iyengar’s tender. Accordingly, the assessee and the government entered into an agreement. The essence of the agreement was the terms and conditions on which the tender was being accepted.

Issue

Whether the supply of the bus body after constructing and fitting the same to the chassis provided by the government in pursuance of a sale or a work contract?

Decision

In M/S. T. V. Sundram Iyengar & Sons vs. The State of Madras (1974) the Supreme Court clarified that a contract of sale is a contract whose main object is the transfer of the property and the delivery of the possession of a chattel as a chattel to the buyer. In essence, the purpose of a sales contract is to transfer ownership and possession of the movable property to the buyer. The Supreme Court in this case also specifies what a contract of work is, where the main object of the work undertaken by the payee for the price is not the transfer of a chattel qua chattel; the contract is one for work and labour. This essentially means that a contract of work primarily focuses on providing services, skills or labour for the performance of a service or the creation of a customized product. 

There is no transfer of chattel; if a product is readymade or made as per the specifications of the buyer, it plays no role in determining if a contract is a sales contract or a contract for work. The transfer of chattel is the crucial factor. Each case must be examined independently to ascertain whether a contract constitutes a sale of goods or a contract for work and labour. Merely considering ownership of materials is not enough. Ultimately, the court held that the supply of bus bodies after fitting them to the chassis amounts to the sale of goods and the assessee would be liable to pay sales tax. 

State Of Andhra Pradesh vs. M/S Kone Elevators (India) Ltd, 2005

Facts

In the  State of Andhra Pradesh v. M/S Kone Elevators (India) Ltd. (2005), the assessee agreed to supply and install a Kone Elevator for a price of Rs. 3,30,000. Under the agreement, it was agreed that the customer shall approve the drawings and shall make sure that the site is ready for the installation of the lift. Under the agreement, it was also agreed that Kone would deliver the lift only after the customer informed them that the site was ready as per the drawings.

Issue

Whether or not a contract entered into by the assessee and Kone Elevators was a contract of sale of a works contract, under the circumstances?

Decision

The Supreme Court stated that there is no standard formula that can help one differentiate between a “contract for sale” and a “works contract”. This question is more factual and depends on the terms of the contract. The factors could be the nature of the obligations to be discharged and the surrounding circumstances. If the intention of the contract is to transfer possession for a price, then the contract is a contract for sale. Ultimately, the true effect should be judged on the basis of intention and not artificial rules. The allocation of materials between the manufacturer and the customer is also one of the determinants of relative importance. If the material constitutes the major component of the end product and skill and labour are used only to convert the material into the end product, then the contract leans towards a sales contract. However, if the primary object of the contract is to avail the skills and labour of the seller and the material is just used in the process, in that case, it is a contract for work and labour. In this case, the court held it to be a contract of sale under the circumstances.

Conclusion

Sales contracts are crucial to ensuring the smooth facilitation of transactions between buyers and sellers. Throughout the article, we have explored what a sales contract is, the essential elements of the contract, how the contract is formed and what its essential clauses are. We have also looked at the performance of a sales contract and what distinguishes a sales contract from a contract of work and labour. Understanding the intricacies of a sales contract can be beneficial to both parties, as it ensures clear communication, fair treatment and proper enforceability. As transactions become more complex in the dynamic business environment, the importance of a well-defined sales contract cannot be overstated. 

Frequently Asked Questions (FAQs)

Can a sales contract be oral?

Yes, a sales contract can be oral; however, for a contract that spans over a longer period of time with detailed specifications, written contracts are better. Since it would be easier to enforce, it would not leave room for ambiguities. 

What do you mean by a sales agreement? How is it different from a sales contract?

An agreement where the possession and ownership of goods are transferred from the buyer to the seller is called a sales agreement. A sales agreement enforceable by law becomes a sales contract. 

What are the benefits of a sales contract?

Preparing a sales contract can be beneficial for both the buyer and the seller. It provides clarity on what will be supplied, the mode of delivery, the delivery dates, etc. It also provides for means to resolve disputes in case they arise, which ensures that both parties are on the same page while entering into the contract. By setting clear expectations and obligations, it ensures a seamless transfer of goods. 

References 

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