Sale of Goods Contracts

IIM Calcutta
 Sale of Goods
 Specialized branch of general law of
contracts
 A contract of sale of goods is a contract
whereby the seller transfers or agrees to
transfer the property (ownership) in
goods to the buyer for a price. Sec.4(1),
Sale of Goods Act, 1930
 A contract of sale may be absolute or
conditional.
 Sale and agreement to sale
 When property is transferred from seller
to buyer at the time of formation of
contract, an absolute Sale occurs.
 When property in the goods is to be
transferred at some future date and not at
the time of contract, the contract of sale is
termed as an agreement to sell.
 Essentials of contract of sale
 A contract (all essentials of valid contract
applicable)
 between two parties
 to transfer or agree to transfer the property
 in goods (subject matter)
 for a price, i.e. the consideration is money.
 Transfer of property
 Transfer of property means transfer of
ownership. Mere transfer of possession can
not be termed as a sale.
 Eg: A buys a car from B who resold it to C. The car was
impounded as it was stolen from Z and sold to B who
bought in good faith. Can C claim ownership?
 Nemo Dat Quod non habet – no one can
transfer a better title than he himself has
 An article may belong to A, although it may not be
in his possession. B may be in possession of that
article though he is not its owner.
 Few more examples
 P took a car from a motor car dealer on installment
(hire purchase). During the course of hire purchase, P
sells the car to X. Has the ownership passed?
 X selects 5 books and pays for the same. X tell the
cashier to keep the books and would come back after
one hour. Fire destroys the bookstore and the book. X
is now demanding to give the 5 books.
 X sells Y an AC for 25000. Purchase order provides
that full amount was paid in advance and ownership
of the AC was to pass to Y only after X had installed it
at Y’s premises. AC got damaged during installation.
Has the ownership passed and who would bear the
loss?
Importance of passing of ownership
It is important to know the precise moment of
time at which property in goods passes from the
seller to the buyer for these reasons:
 i) Risk follows ownership- Unless otherwise
agreed, risk follows ownership whether
delivery has been made or not and whether
price has been made or not.
 ii) 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.
 iii) Insolvency of the seller or the
buyer- In the event of insolvency of either
the seller or the buyer, the question
whether the official receiver or assignee can
take over the goods or not depends on
whether the property in the goods has
passed from the seller to the buyer.
 iv) Suit for price- The seller can sue for
the price, unless otherwise agreed only if
the goods have become the property of the
buyer.
 Ascertaining Passing of Property…
The primary rules for ascertaining when the property in goods passes to
the buyer is:
 Goods must be ascertained- When 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.
Example: A owns 50 cars, and agrees to sell any one of them –
contract to sell unascertained goods.
 Intention of the parties- Where there is a
contract for the sale of specific or ascertained of
goods, the property in them passes to the buyer
at the time when the parties intend it to pass.
 Vasantha v. VK Elayalar (SC 2001)
 Case
 KMC contract with M/s Spence Ltd to buy a
tractor on the condition that if the
municipality was not satisfied it would reject
the tractor. KMC took possession of the
tractor and after using it for 1.5 months it
rejects it. The suit was filed upon the
unwillingness of the tractor co. to accept it.
 KMC had not only use the tractor but also a
reasonable time had lapsed.
 Vasantha v. VK Elayalar (SC 2001)
 Vasanta owns 19 buses. Agrees to sell 5 buses with
route permit to VKE as there was apprehension that TN
Govt. would put a ceiling of 10 buses an individual could
own/permit. – RTA denies transfer as TN ordinance
require surrender of excess permits. VKE went to the HC,
which held the Ordinance unconstitutional. RTA
transferred the bus permits in VKEs name. Price was to
be paid after setting the scheme for transfer.
 Vasantha was not keen to sell the bus as the law was
made unconstitutional. VKE claimed ownership of the
buses as the permits were transferred in his name. With
the help of police he got possession of the busses.
Vasantha claimed that ownership has not been
transferred – Decide
 INCOTERMS
 Incoterms are standard trade definitions most
commonly used in international sales contracts.
Devised and published by the International
Chamber of Commerce (ICC), they are at the
heart of world trade.
 Updated every ten years: Incoterms 2010
 Use of Incoterms goes a long way to providing the
legal certainty upon which mutual confidence
between business partners must be based.
 EXW - Ex-Works: seller delivers when he places the
goods at the disposal of the buyer at the seller’s premises
or another named place. not cleared for export and not
loaded on any collecting vehicle.
International Carriage NOT paid by Seller
 FCA - Free Carrier

 FAS - Free Alongside Ship

 FOB - Free On Board vessel

 FOB means that the seller delivers when the goods
pass the ship’s rail at the named port of shipment.
This means that the buyer has to bear all costs and
risks of loss of or damage to the goods from the
point.
International Carriage Paid by the Seller
 CFR - Cost and Freight

 CIF - Cost, Insurance and Freight

 CPT - Carriage Paid To

 CIP - Carriage and Insurance Paid To

Arrival At Stated Destination

 DAF - Delivered At Frontier

 DES - Delivered Ex-Ship

 DEQ - Delivered Ex-Quay

 DDU - Delivered Duty Unpaid

 DDP - Delivered Duty Paid

 M/s Marwar Tent Factory v. UoI
AIR 1990 SC 1753
 Free on Rail (FOR) contract.
 1500 tents were put on rail at jodhpur bound to
Kanpur. “F.O.R. Jodhpur”. Due to pilferage in
transit, the Defence establishment got on 1276
tents. Refusal to pay for 224 tents
 Held: the time of delivery F.O.R. fixes the point at
which property and risk pass to the buyer and the
price become payable… the property in goods
passes immediately on delivery of goods and loading
the same in the railway wagon at Jodhpur
 Subject matter of contract of sale-
Goods
 ‘Goods means every kind of movable
property other than actionable claims and
money, and includes stock 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
contract of sale.’ Sec.2(7).
 Goods…
Future goods- which do not exist with the seller
at the time of sale. the contract thus is an
agreement to sell.
 Eg: An agreement to sell future crops of a particular field
implies an agreement to sell future goods.
Contingent goods – a type of future goods, the
acquisition of which depends upon a
contingency which may or may not happen.
 Eg: A agree to sell to B a certain painting, only if C, its
present owner sells it to A. This painting is classified as
contingent goods.
 Price consideration
 The consideration for the contract of sale
must be money. If goods are exchanged
against goods the transaction is barter and
not covered by the act.
 However consideration may be partly in
money and partly in goods.
Condition and Warranty (s 12(1)
 Nature, Quality and feature of the goods.
 A condition is a stipulation essential to the
main purpose of the contract, the breach of
which give raise to a right to treat the contract
as repudiated
 A warranty is a stipulation collateral to the
main purpose of the contract, the breach of
which gives rise to a claim for damages but not
a right to reject the goods and treat the
contract as repudiated.
 Car not suitable for ‘touring purpose’?
 Express and implied conditions
and warranties
 Express conditions and warranties are
those, which are expressly provided in the
contract.
 Implied conditions and warranties are
those, which the law implies into the
contract unless the parties stipulate to the
contrary.
 Implied conditions
 Condition as to title - There is an implied
condition on the seller that: a) in the case of
a sale, he has a right to sell the goods
(ownership), and b) in the case of an
agreement to sell, he will have a right to sell
the goods at the time when the property is to
pass
 Eg: R bought a car from D (which was stolen) and used
it for four months. D had no title to the car and
consequently R had to hand it over to the true owner. R
could recover the price paid.
 Sale by description –Where there is a contract
for the sale of goods by description, there is an
implied condition that the goods shall
correspond with the description.
 Advertisement describing a car.
 In case of sale by sample: (a) Bulk to
correspond with sample; (b) Buyer to have
reasonable opportunity to compare the bulk
with sample; (c) Goods to be of merchantable
quality
 A manufacturer supplied 600 horns under a contract. The
horns were found to be dented, scratched and therefore
the seller’s suit for price was dismissed