Amity mba ii sem legal aspects of business module ii

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.

1

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.

2

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.

3

Formation of Contract of Sale

Essentials 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.

4

Sale and an Agreement to Sell

SALE• Immediate transfer of property

• Specific and Existing Goods

• Risk of Loss falls on buyer thoughseller has possession

• In case of breach seller can sue forthe price though he continues thepossession

• Seller cannot re-sell ( except sale bya seller in possession or sale by anunpaid seller. The subsequent buyerdoes not acquire title.

Agreement to Sell• Transfer of property at a later date

(subject to certain conditions)

• Unascertained existing goods, futuregoods and contingent goods

• Risk of loss is on the seller thoughbuyer has possession

• The seller can only sue for damagesand not for the price though thepossession is with the buyer

• A buyer in case of resale having noknowledge of the prior agreementgets good title.

5

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 ratable 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.

6

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.

7

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.

8

Pledge, Mortgage, Hypothecation and Lease of Goods

SALE IS DIFFERENT FROM PLEDGE, HYPOTHECATION AND LEASE OF GOODS. InSale, 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 hisbusiness.

• A hypothecation agreement (letter of trust) is made in favour of the creditorwhere 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 inhis name and sell them when the borrower makes a default. Promptborrowers continue to enjoy the possession and use of the vehicles.Innumerable vehicles are plying on the roads nationwide.

9

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 tocreate securities.

• In case of pledge, the goods being movable, the possession passes on tothe lender though the ownership remains with the borrower.

• In MORTGAGE, the goods being IMMOVABLE, the possession continueswith the borrower but a constructive and conditional transfer of certainrights 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 suitand another, a remedy against security, enforcement of securities.

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

10

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.

11

Formation of Contract of Sale

Sale 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

12

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)

13

Subject matter of Contract of Sale—Different types of Goods

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

• Document of title to goods: Document is the proof of title to thegoods—proof of possession and ownership. The documents can beendorsed or simply delivered to transfer the property (dependingon the nature of contract)

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

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

14

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 ascertained

b) Intention of the parties

15

Passing of Property in Goods

• Passing of property in SPECIFIC GOODS can be made: a) at the time of thecontract itself (payment and/or delivery pending)—property passesimmediately; b) beyond the date of the contract—where the goods arenot in a deliverable state or when the price is to be ascertained byweighing or doing some other activity ( like INCOTERMS IN internationaltrade) the property passes subsequently

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

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

16

Sale by non-owners

• “Nemo Dat Qui Non Habet”—No one can give that which one hasnot got

• A thief cannot pass a better title to his buyers than what he himselfhas. 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 leadsthe buyer to believe that the seller has authorised); b) Sale bymercantile agent (agency in the ordinary course of business); c) Saleby one of the joint owners; d) Sale by a person in possession undera voidable contract; e) Sale by seller in possession after sale (buyerhas to buy in good faith); f) Sale by buyer in possession after havingbought or agreed to buy; g) Sale by unpaid seller; and h) Sale byfinder of lost goods; Sale by pawnee or pledgee; Sale by Officialreceiver or Assignee; Sale in Market by enforcement

17

Conditions and Warranties

Conditions 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

18


When condition can be treated as a warranty:

a) Voluntary waiver of condition by the buyer

b) 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.

19


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

20


Implied 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.

21


Implied 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

22


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.

23

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 allthe truth about the goods. Buyers should thoroughly examinebefore them. They may ask the seller all the clarificationsrequired. If the seller shows the sample and the goodscorresponds to the sample, the buyer cannot blame the selleranytime 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’spurpose(expressly or by implication) ; b) sale under a patentor a trade name; c) Merchantable quality ( if the buyer hasexamined the goods); d) Usage of Trade; and e) Consent byfraud

24

Rights of an unpaid seller

Rights 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 irregular

c) 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.

25


Unpaid seller has two kinds of rights:

a) Against the goods

b) 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

26


Right against the buyer personally

a) Suit for the price

b) Suit for damages

c) Repudiation of the contract

d) Suit for interest

27


Right 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)

28

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.

29


Right 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

30


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

31