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Sale of Goods Act, 1930• Module II: Sales of Goods Act 1930 • Newsyllabus:• Sale and Agreement to Sell, Hire Purchase –Pledge, Mortgage—

Hypothecation and Lease of Goods—Different types of Goods, Passing Property in Goods, Conditions and Warranties, Doctrine of Caveat Emptor, Rights of an unpaid Seller.

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Formation of contract of saleFormation of contract of sale:• Indian Contract Act 1872 Chapter VII was in vogue before the Sale of

Goods Act 1930 was enacted. The general provisions of the Indian Contract Act continue to apply for the sale of goods as long as they are not inconsistent with the Express provisions of Sale of Goods Act.

• A contract of sale of goods is a contract whereby the seller TRANSFERS or AGREES TO TRANSFER the property to goods to the buyer for a price.

• A contract of sale may be absolute or conditional. It includes both a sale and an agreement to sell.

• “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 severed before sale or under the contract of sale. Trade marks, copyrights, patent rights, goodwill, electricity, water, gas are all goods.

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Formation of contract of saleSale and Agreement to sell:• SALE: Where the property in the goods is transferred from the

seller to the buyer, it is a SALE• AGREEMENT TO SELL: Where the transfer of property in the

goods to take place at a future time or subject to some conditions to be fulfilled thereafter, it is an AGREEEMENT TO SELL.

• An AGREEMENT TO SELL becomes a SALE when the time elapses or the conditions subject to which the property in the goods is to be transferred are fulfilled.

• “TRANSFER OF PROPERTY” is the catch-point phrase. When the transfer of property takes place, ownership is transferred from the seller to the buyer.

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Formation of Contract of SaleEssentials of a Contract of Sale:• Two parties • Goods (movable goods)—Immovable properties are covered

under the Transfer of Property Act• Price-money (consideration for the contract); barter is not a

sale, However, consideration may be partly in money and partly in kind.

• Transfer of general property ( special property means where there is already a charge like pledge)

• Essential elements of a valid contract must be present in a contract of Sale also.

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Sale and an Agreement to SellSALE• Immediate transfer of property

• Specific and Existing Goods

• Risk of Loss falls on buyer though seller has possession

• In case of breach seller can sue for the price though he continues the possession

• Seller cannot re-sell ( except sale by a seller in possession or sale by an unpaid seller. The subsequent buyer does not acquire title.

Agreement to Sell• Transfer of property at a later date

(subject to certain conditions)• Unascertained existing goods, future

goods and contingent goods• Risk of loss is on the seller though

buyer has possession• The seller can only sue for damages

and not for the price though the possession is with the buyer

• A buyer in case of resale having no knowledge of the prior agreement gets good title.

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Sale and Agreement to Sell

SALE• Sale is a contract PLUS conveyance

ABSOLUTE.

• In case buyer becomes insolvent before paying the price, the seller, in the absence of a lien on the goods MUST RETURN THE GOODS TO the OFFICIAL RECEIVER. He can claim a rateable dividend on the price.

• If the seller becomes insolvent, the buyer being the owner is entitled to recover the goods from the Official Receiver or Assignee.

Agreement to Sell• An agreement is merely a contract,

pure and simple and gives the right to the buyer only to sue for damages.

• In case buyer becomes insolvent before paying the price, the seller is not bound to part with the goods until he is paid for

• If the seller becomes insolvent, he can only claim a rateable dividend and not the goods because the property has not yet passed.

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Hire Purchase Agreement• A hire purchase agreement is a contract whereby the owner of the

goods lets them on hire to another person called the hirer or hire purchaser on payment of rent to be paid in instalments and upon an agreement that when a certain number of such instalments is paid, the property in the goods will pass to the buyer.

• Buyer may return the goods any time without any obligation to pay the balance rent.

• Hire purchase contract is not a contract of sale but only A BAILMENT and the property in the goods remain in the owner during the continuance of the bailment. It is a BAILMENT PLUS AN AGREEMENT TO SELL.

• Where the buyer has no option to terminate the agreement and is bound to pay the price, the agreement is a contract of sale and not a hire purchase.

• Hire Purchase is governed by the Hire Purchase Act 1972.

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Sale and Hire Purchase Agreement

SALE• Ownership transferred from seller

to the buyer immediately

• Buyer is the owner• Buyer cannot terminate the

contract and he is bound to pay the price

• Where the sale is by instalments, the buyers’ liability in terms of amount gets reduced.

HIRE PURCHASE• Ownership is transferred only

when a certain agreed number of installments is paid

• The hirer is only a BAILEE• Hirer can terminate the contract

at any stage and cannot be forced to pay any further installments.

• Installments are treated as hire charges until the hirer uses the option of purchase.

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Pledge, Mortgage, Hypothecation and Lease of GoodsSALE IS DIFFERENT FROM PLEDGE, HYPOTHECATION AND LEASE OF GOODS. In Sale,

possession and ownership (property in goods) passes on to the buyer. PLEDGE ALREADY COVERED IN MODULE 1 IN DETAILHYPOTHECATION: • Hypothecation refers to creation of securities of movable goods, where the

borrower continues in possession of goods and uses the goods for his business. • A hypothecation agreement (letter of trust) is made in favour of the creditor where

the creditor step into the shoe of the borrower in case of default. • The creditor can seize and sell the goods in case of default.• Normally, stock-in–trade and vehicles are being HYPOTHECATED. • Stock in Trade: The security is not the particular goods, but stock in trade not

exceeding a determined commercial value. • Vehicles: As vehicles require RTO registration, the transfer takes place only when

there is change of ownership. Creditor can get the vehicle transferred in his name and sell them when the borrower makes a default. Prompt borrowers continue to enjoy the possession and use of the vehicles. Innumerable vehicles are plying on the roads nationwide.

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Pledge, Mortgage—Hypothecation and Lease of Goods

MORTGAGE: • Mortgage relates to creation of security for purpose of obtaining loan

against IMMOVABLE PROPERTIES. • Pledge refers to movables. Both pledge and mortgage refers intention to

create securities. • In case of pledge, the goods being movable, the possession passes on to

the lender though the ownership remains with the borrower. • In MORTGAGE, the goods being IMMOVABLE, the possession continues

with the borrower but a constructive and conditional transfer of certain rights in favour of the creditor is made. Immovable properties are Lands, Buildings, Commercial complexes, Highways, Railway Tracks etc.

• Creditors have to exercise two rights– one, a personal remedy of filing suit and another, a remedy against security, enforcement of securities.

• In case of Bank loans against Mortgages, the law relating to Securities Enforcement regulations are applicable.

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Pledge, Mortgage—Hypothecation and Lease of Goods

LEASE OF GOODS:• Lease is different from Sale, Hire Purchase. • Lease refers to letting goods to be used on a rental basis. • Ownership continues with the LESSOR.• Lessee gets possession immediately and use them on rent.• No opportunity to purchase as available in HIRE PURCHASE CONTRACT.• The lease rental depends on the agreement among the parties and the life

of the goods or equipments.• Normally, equipments, machineries are given on lease basis.• There is no transfer of goods as a security. It is a transaction of use of

goods on rent. • Lessee, however, has to take proper care of the goods as a man of

ordinary prudence.

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Formation of Contract of SaleSale and Barter or Exchange

• Exchange of goods for goods is BARTER

• Exchange of goods for money is SALE

• Exchange of money for money is known as EXCHANGE

• If the Consideration for the transfer of property in goods is partly in goods and partly in money, it is SALE

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Subject matter of Contract of Sale• Goods is the subject matter—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 severed before sale or under the contract of sale. Trade marks, copyrights, patent rights, goodwill, electricity, water, gas are all goods.

• Actionable claim means a claim to a debt or any beneficial interest in movable property not in possession (which can be enforced by action in a court. A debt from one person to another is an actionable claim and cannot be bought or sold as goods but they can only be assigned. ( UNDERSTAND THE WORDS FACTORING AND FORFAITING—HERE)

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Subject matter of Contract of Sale—Different types of Goods

• Classification of Goods—Existing Goods (Specific Goods, Ascertained goods, unascertained goods or generic goods); Future Goods; Contingent Goods and contingent and future goods.

• Document of title to goods: Document is the proof of title to the goods—proof of possession and ownership. The documents can be endorsed or simply delivered to transfer the property (depending on the nature of contract)

• Important documents of title to goods: Bill of Lading; Dock Warrant, Warehousekeeper’s or Wharfinger’s Certificate (dockside), Railway Receipt, Lorry Receipt, Airway Bill, Delivery order.

• Other terms of Sale are the Price (ascertainability and agreement to sell at valuation) and Stipulation as to time (time of delivery and time of payment)

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Passing of Property in Goods• A contract of sale is complete when: a) when there is Transfer of property ,

b) when there is a transfer of possession and c) when there is a transfer of the risk.

• “Property in goods” refers to ownership of goods which implies Right, Title and Interest. Risks are associated with the ownership

• Property in goods remain with one person though the possession may be with another person depending on the nature of contract.

Rules relating to PASSING OF PROPERTY IN GOODS a) Goods must be ascertainedb) Intention of the parties

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Passing of Property in Goods• Passing of property in SPECIFIC GOODS can be made: a) at the time of the

contract itself (payment and/or delivery pending)—property passes immediately; b) beyond the date of the contract—where the goods are not in a deliverable state or when the price is to be ascertained by weighing or doing some other activity ( like INCOTERMS IN international trade) the property passes subsequently

• Passing of property in UNASCERTAINED GOODS or FUTURE GOODS: The property passes only when the goods are ascertained. Until the goods are ascertained, they are merely agreements to SELL. In case of Future goods, they should have been appropriated to the specific contract. Delivery to the carrier is an unconditional appropriation by the seller when he delivers to the buyer, carrier or bailee for purpose of transmission to the buyer.

• Property in GOODS SENT ON APPROVAL passes on to the buyer when he signifies his approval or acceptance to the seller or when he does any other act adopting the transaction.

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Sale by non-owners• “Nemo Dat Qui Non Habet”—No one can give that which one

has not got• A thief cannot pass a better title to his buyers than what he

himself has. It is only the owner• Sometimes, persons other than owners can pass on good title: a)

Title by estoppel (where the owner by his conduct or silence leads the buyer to believe that the seller has authorised); b) Sale by mercantile agent (agency in the ordinary course of business); c) Sale by one of the joint owners; d) Sale by a person in possession under a voidable contract; e) Sale by seller in possession after sale (buyer has to buy in good faith); f) Sale by buyer in possession after having bought or agreed to buy; g) Sale by unpaid seller; and h) Sale by finder of lost goods; Sale by pawnee or pledgee; Sale by Official receiver or Assignee; Sale in Market by enforcement

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Conditions and WarrantiesConditions and warranties • A condition is a stipulation which is essential to the main

purpose of the contract. Non-performance of the condition is non-performance of the contract

• A warranty is a stipulation which is collateral to the main purpose of the contract. Though it must be performed, the failure may lead to breach of warranty and not breach of contract. The affected party may only claim damages and cannot repudiate the contract. ( Eg sale of consumer goods, vehicles –some minor parts—may be replaced when defects are noticed but the vehicle itself cannot be replaced)

• Breach of condition is a breach of warranty. A breach of warranty is not a breach of condition

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Conditions and Warranties

When condition can be treated as a warranty:a) Voluntary waiver of condition by the buyerb) Voluntary treatment by the buyer that the breach of

condition would be treated as warranty. He cannot change mind again

c) Where a contract of sale is not severable and the buyer has accepted the goods wholly or in part , the breach of condition could only be treated as breach of warranty.

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Conditions and Warranties

Express and Implied Conditions and Warranties:

• Express conditions and warranties are those which are expressly declared or specified in the contract ( Eg Price, Time and place of delivery, etc)

• Implied conditions and warranties are those which are implied by the Law unless the parties stipulate otherwise. An express warranty or condition does not negate the implied unless the condition or warranty is inconsistent

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Conditions and WarrantiesImplied conditions• Conditions as to title: The seller is supposed to have good title

unless contrary is proved• Sale by description: Sale by description and specification—the

goods would conform to the description and specification• Sale by description as well as by sample—The entire goods

shall match with the sample – no justification to say the bulk of the goods match with the sample

• Condition as to quality or fitness: Fitness for a particular purpose: For Eg, Payloaders, JCBs, Heavy Traffic Vehicles, laptop, gas stoves

• Condition as to merchantability: Goods are commercially saleable with the description commonly known.

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Conditions and WarrantiesImplied conditions (contd..)• Condition by custom: quality or fitness of the goods for a

particular purpose Eg a Pressure cooker, Milk Cooker, Hot water bottle

• Sale by Sample: Bulk of the goods must match with the sample and the buyer has reasonable opportunity of comparing the bulk with the sample

• Condition as to wholesomeness: Foodgrains and eatable items. A piece of bread containing a stone damaging the teeth is not wholesome

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Conditions and Warranties

Implied warranties• Warranty of quiet and peaceful possession• Warranty of freedom from encumbrances• Warranty as to quality or fitness by usage of trade• Warranty to disclose dangerous nature of goods ( Crackers,

Acids, Phenyl, Pesticides, Fungicides)etc

IMPORTANT NOTE: Implied conditions or warranties may be negatived or varied by specific contracts by the seller and the buyer or by normal dealing or by customs and practices.

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Rule of Caveat Emptor(page 240)“ Caveat Emptor” means LET THE BUYER BEWARE.• In a contract of sale, the seller is not duty bound to disclose all

the truth about the goods. Buyers should thoroughly examine before them. They may ask the seller all the clarifications required. If the seller shows the sample and the goods corresponds to the sample, the buyer cannot blame the seller anytime thereafter. In sale of goods on “as is where is” basis, buyer will not have any subsequent claims

• Exceptions to the above rule: a) Fitness for buyer’s purpose(expressly or by implication) ; b) sale under a patent or a trade name; c) Merchantable quality ( if the buyer has examined the goods); d) Usage of Trade; and e) Consent by fraud

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Rights of an unpaid sellerRights of unpaid seller:An unpaid seller is one a) who has not been paid/tendered the price b) A bill of exchange or other negotiable instrument received

but dishonoured or otherwise irregularc) Who has got a court decree but not yet satisfied ( or

executed)d) Any person who is in the position of the seller ( agent or a

consignee who had paid for the goods and responsible for the price

An unpaid seller has an immediate right of action for the price.

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Rights of an unpaid sellerUnpaid seller has two kinds of rights:a) Against the goodsb) Against the buyer personally

Right against the goods

–a) when the property in goods has passed: Lien, Stoppage in Transit and Re-sale

--b) when the property in goods has not passed: Withholding delivery and Stoppage in Transit

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Rights of an unpaid seller

Right against the buyer personally

a) Suit for the priceb) Suit for damagesc) Repudiation of the contractd) Suit for interest

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Rights of an unpaid sellerRight of Lien:• A lien is a right to retain the possession of the goods until the

price is paid. This right is immediate in case of cash sales. In case of credit sales it is after the expiry of the credit period. The right is also available when the buyer becomes insolvent at any time.

• Lien depends on actual possession and not on title whether as seller or as his agent or as bailee for the buyer

• Possession of the goods by the seller must not expressly exclude the right of lien

• Lien can be exercised only for the price and not for other charges ( like taxes, duties)

• Seller having made part delivery of the goods may exercise lien on the remainder (unless there is a condition to waive the lien)

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Rights of an unpaid sellerRight of stoppage in transit:• This right is available: a) when the buyer becomes insolvent and b) when

the goods are in transit.• Insolvency means failure to pay them on the due date whether he has

committed an act of insolvency or not• This right is an extension of the right of lien• The carrier may hold goods as an agent of the seller• If the carrier is holding goods as an agent of the buyer, seller cannot

exercise the right of stoppage in transit• If the carrier is holding goods in an independent capacity, the seller has the

right of stoppage.• Stoppage can be effected by taking possession or by giving notice of

stopping• Right of lien or stoppage in transit is not affected by any sale or pledge

which the buyer would have made unless the seller has assented to the same.

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Rights of an unpaid sellerRight of Resale • When the goods are perishable• When the notice of resale is given to the buyer but buyer

does not respond by payment /tender of price within a reasonable time

• In case of loss in a resale, seller can claim it from the buyer as damages for breach of contract

• In case of surplus the seller is not bound to hand it over to the buyer (buyer cannot benefit from his own wrongs)

• Notice is a must or there should be clause in the sale contract expressly reserving the seller’s right of re-sale

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Rights of an unpaid seller

Right of withholding delivery:• Where the property in goods has not passed to the buyer, the

unpaid seller has a right of withholding delivery • This right is co-existent with the right of lien and stoppage in

transit

Rights of the Unpaid seller against the buyer personally:a) Suit for the Price; b) Suit for damages for non-acceptance; c)

Repudiation of the contract before due date and d) Suit for interest