Sale of Goods

The sale or purchase of goods is the most common transaction in almost every kind of business. Every now and then, businessmen get involved in the sale & purchase of goods and enter into the contract of sale. These contracts are governed by the Sale of Goods Act, 1930. It is important for every individual, be it a legal professional or a common man who deals in the transaction of sales on a regular basis, to have an understanding of the important terms in the Sale of Goods Act, 1930.

Wed Feb 03 2021 | Business Law | Comments (0)

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The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. It applies to the whole of India except the State of Jammu & Kashmir.
 
The contacts for sale of goods are subject to the general principles of the law relating to contracts i.e. the Indian Contact Act. A contract for sale of goods has, however, certain peculiar features such as, transfer of ownership of the goods, delivery of goods, rights and duties of the buyer and seller, remedies for breach of contract, conditions and warranties implied under a contract for sale of goods, etc. These peculiarities are the subject matter of the provisions of the Sale of Goods Act, 1930.

ELEMENTS OF A SALE, SALE CONTRACT AND GOODS?

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. It thus includes both an actual 'sale' and an 'agreement to sell', which has been distinguished later.

'Goods' means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to or forming part of the land, which are agreed to be served from land before sale, or under for contract of sale.

A 'sale' must be distinguished from an 'agreement to sell' since the legal implications of the two terms are vastly different. A contract wherein, the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of property in the goods is to take place at a future time, or subject to some conditions, thereafter to be fulfilled, it is called an agreement to sell. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

There are various kinds of goods and the parties have various options to agree about the delivery of the goods. What shall be the fate of a contract if the goods are perished or destroyed?

  • Destruction before making of contract-- Where in a contract for sale of specific goods, at the time of making the contract, the goods, without knowledge of the seller, have perished or become so damaged as no longer to answer to their description in the contract, the contract shall become null and void. This is based on the rule of impossibility of performance. Since the subject matter of the contract, which is one of its essential ingredients, itself is destroyed, the contract cannot be carried out.
  • 'Perishing of goods' includes not only complete destruction of the goods when the seller has been irretrievably deprived by the goods or when the goods have been stolen or have in some other way been lost and are untraceable, but also when the goods become un merchantable i.e. when the goods have  lost their commercial value.
  • Destruction After the Agreement to Sell but before Sale—Wherein  an agreement to sell specific goods, if subsequently the goods, without any fault on the part of the seller or buyer, perish or become so damaged as no longer answer to their description in the agreement, the agreement shall become void, provided the goods are perished before the ownership and risk passes to the buyer. This rule is based on the ground of impossibility of performance.

If the title to be goods has already passed to the buyer, he must pay for the goods though the same cannot be delivered.

A document of title to goods is one, which entitles and enables its rightful holder to deal with the goods represented by it, as if he were the owner. It is used in the ordinary course of business as proof of the ownership, possession or control of goods. It authorises the possessor to receive the goods. It also confers a right on the possessor to transfer the goods to another person, by mere delivery or by proper endorsement of the delivery.

Cash memo, bill of lading, dock warrant, warehouse keeper's or wharfinger's certificate, lorry receipt (L/R), railway receipt (R/R) and delivery order are some of the instances of document of title to goods.

Conditions and warranties may be express or implied.

Express conditions and warranties are those which, are expressly provided in the contract. Implied conditions and warranties are those which are implied by law or custom; these shall prevail in a contract of sale unless the parties agree to the contrary.

  • Condition as to title-- In every contract of sale, unless the circumstances of the contract are such that they  show a different intention, there is an implied condition on the part of the seller, that:

         -In case of a sale, he has a right to sell the goods, and

         -In case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass.

  •  The words 'right to sell' contemplate not only that the seller has the title to what he purports to sell, but also that the seller has the right to pass the property. In a contract of sale by description, there is an implied condition that the goods shall correspond with the description. The term ' sale by description' includes the following situation;     

    Where the buyer has not seen the goods and buys them relying on the description given by the seller.          -

    Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of the goods from the description is not apparent.

    Packing of goods may sometimes be a part of the description. Where the goods do not conform to the  method of packing described (by the buyer or the seller) in the contract, the buyer can reject the goods.
  • Condition as to Quality or Fitness-- Where the buyer, expressly or by implication, makes known the seller the particular purpose for which goods are required, so as to show that the buyer relies on the seller's skill or judgment and the goods are of a description which it is in the course of the seller's business to supply (whether or not as the manufacturer or  producer), there is an implied condition that the goods shall be reasonably fit for such purpose. In other words, this condition of fitness shall apply, if:        

          -The buyer makes known to the seller the particular purpose for which the goods are required,

           -The buyer relies on the seller's skill or judgment, the  goods are of a description which the  seller  ordinarily supplies in the course of his business,

           -The goods supplied are not reasonably fit for the buyer's purpose.

  • Condition as to Merchantability-- Where the goods are bought by description from a seller, who deals in goods of that description (whether or not as the manufacturer or producer) there is an implied condition that the goods shall be of merchantable quality.

           Merchantable quality ordinarily means that the goods should be such as would be commercially salable under the description by which they are known in the market at their   full value.    

  • Condition as to Wholesomeness-- In case of sale of eatable provisions and foodstuff, there is another implied condition - that the goods shall be wholesome. Thus, the provisions or foodstuff must not only correspond to their description, but must also be merchantable and wholesome. By 'wholesomeness' it means that goods must be for human consumption.
  • Condition Implied by Custom or Trade Usage-- An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade. In certain sale contracts, the purpose for which the goods are purchased may be implied from the conduct of the parties or from the nature or description of the goods. In such cases, the parties enter into the contract with reference to those known usage. For instance, if a person buys a perambulator or a medicine the purpose for which it is purchased is implied from the thing itself; the buyer need not disclose the purpose to the seller.
  • Conditions in a Sale by Sample-- A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied to that effect. Usually, a sale by sample is implied when a sample is shown and the parties intend that the goods should be of the  kind and quality as the sample is.
  • Conditions in a sale by Sample as well as by Description-- A vast majority of cases where samples are shown, are sales by sample as well as by description. In a contract for sale by sample as well as by description, the goods supplied must correspond both with the sample as well as with the description.

IMPLIED WARRANTIES

A condition becomes a warranty when--

  • The buyer waives the conditions or opts to treat the breach of the condition as a breach of warranty ; or
  • The buyer accepts the goods or a part thereof, or is not in a position to reject the goods.
  • Implied Warranty of Quiet Possession-- In every contract of sale, unless there is a contrary intention, there is implied warranties that the buyer's shall have and enjoy quiet possession of the goods. If the buyer's right to possession and enjoyment of the goods is in any way disturbed as consequences of the seller's defective title, the buyer may sue the seller for damages for breach of this warranty.
  • Implied Warranty of Freedom from Encumbrances-- The buyer is entitled to a further warranty that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to buyer before or at the time when the contract is made. If the buyer is required to discharge the amount of the encumbrance it shall be a breach of this warranty and the buyer shall be entitled to damages for the same.

The goods are said to be transferred from the seller to the buyer when the latter acquires the proprietary rights over the goods and the obligations linked thereto. 'Property in Goods' which means the ownership of goods, is different from ' possession of goods' which means the physical custody or control of the goods.

The transfer of property in the goods from the seller to the buyer is the essence of a contract of sale. Therefore the moment when the property in goods passes from the seller to the buyer is significant for the following reasons:

  • Ownership-- The moment the property in goods passes, the seller ceases to be their owner and the buyer acquires the ownership. The buyer can exercise the proprietary rights over the goods. For example, the buyer may sue the seller for non-delivery of the goods or when the seller has resold the goods, etc.
  • Risk follows ownership-- The general rule is that the risk follows the ownership, irrespective of whether the delivery has been made or not. If the goods are damaged or destroyed, the loss shall be borne by the person who was the owner of the goods at the time of damage or destruction. Thus, the risk of loss prima facie is in the person with  whom the property is.
  • Action Against Third parties-- When the goods are in any way damaged or destroyed by the action of third parties, it is only the owner of the goods who can take action against them.
  • Suit for Price-- The seller can sue the buyer for the price, unless otherwise agreed, only after the goods  have become the property of the buyer.
  • Insolvency-- In the event of insolvency of either the seller or the buyer, the question whether the goods can be taken over by the Official Receiver or Assignee, will depend on whether the property in goods is with the party who has become insolvent.

Essentials for Transfer of Property-- The two essentials requirements for transfer of property in the goods are:

  • Goods must be ascertained-- Unless the goods are ascertained, they (or the property therein) cannot pass from the seller to the buyer. Thus, where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained
  • Intention to PASS Property in Goods must be there-- In a sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be, giving due regard  to the terms of the contract, the conduct of the parties and the circumstances of the case.

There are various types of contracts from the point of view of the delivery of goods.

  • F.A.S. or F.A.R. Contract- F.A.S. stands for 'Free Alongside Ship' and F.A.R. stands for 'Free Along with Rail'. Under FAS or FAR  contracts, the seller is required to deliver the goods alongside the ship or rail named in the contract and to notify the buyer that the goods have been so delivered. The property in the goods passes to the buyer when the seller delivers the goods alongside the ship or rail. Thereafter, it is the buyer's duty to arrange for the contract of affreightment and insurance of the goods while the transit.
  • F.O.B. OR F.O.R Contracts-- F.O.B. stands for 'Free on Board' and F.O.R. stands for 'Free on Rail'. In a F.O.B. (or F.O.R.) contract, the seller is required to deliver the goods on board the ship  (or on rail), named in the contract. Thus, the seller has to bear all expenses upto and including shipment of goods on behalf of the buyer, who is responsible for their freight, insurance and subsequent expenses.

    Thus, as soon as the goods are put on board the ship, the property in them passes to the buyer. This will be so even if the goods are not specific or ascertained. The buyer is liable to pay the price even if the goods are lost in transit. The property in goods shall, however, not pass if the seller reserves the right of disposal.
  • C.I.F. Contract-- The words 'C.I.F.' stand for cost, insurance and freight. A CIF contract is a type of contract wherein the price includes cost, insurance and freight charges. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of the seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The property in the goods passes to the buyer on the delivery of documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods. If in the meantime the goods are lost neither the buyer nor the seller is put to loss, whoever is the owner at the time of the loss can recover it from the insurer.  
  • Ex-ship contracts-- Under an 'ex-ship contract the seller has to deliver  the goods to the buyer at the port of destination. In such contracts, the property in the goods does not pass until actual delivery. The goods are at the seller's risk during the voyage. It is therefore, for the seller to insure the goods to protect his interest. The seller is to pay the freight, or otherwise release the ship owner's lien and to furnish the buyer with a delivery order or an effectual direction to the ship owner to deliver.
  • Where the property in the goods has passed to the buyer.

  • Right of Lien-- 'Lien is the right to retain possession of goods until certain charges in respect thereof are paid. An unpaid seller who is in possession of the goods is entitled to retain them until payment of the price, where --

         - The goods have been sold without any stipulation as  to credit;
         -The goods have been sold on credit, but the term of credit has expired or
         -The buyer becomes insolvent.

         Where the goods have been sold on credit, the right of lien shall remain suspended over the period of credit and shall revive on the expiry of that period.

The right of lien is linked with possession of the goods and not with the title. It is not affected even if the seller has transferred the documents of title till he remains in    possession of the goods. However, if the buyer has further transferred the documents of title to a bona fide purchaser the seller's lien is defeated.

  • Right of Stoppage in transit--The right of stoppage of goods in transit, arises to an unpaid seller after he has parted with the possession of the goods. The seller has the right to resume possession of the goods while they are in the course of transit and to retain them until payment or tender of the price. The right of stoppage in transit is available to an unpaid seller, when the buyer becomes insolvent and the goods are in transit.

    The buyer is said to be 'insolvent' when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they becomes due whether he has committed an act of insolvency or not.
  • Right of Resale-- The rights of lien and stoppage in transit, would not have been of much value if the  seller had no right to resell the goods, because the seller cannot continue to hold the goods indefinitely. Section 54 provides an unpaid seller with a limited right to resell the goods.

An unpaid seller may resell the goods—if it turns out to be defective, the buyer may reject the goods.

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