Sale of Goods - Chapter 2 - Formation of The Contract

CHAPTER II of the Act speaks about the formation of the contract. It consists of sections from 4 to 17. Here, we will be discussing various aspects of the contract. Section 4 of the Act tells about sale and agreement to sell. It is as follows:—

"(1) 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. There may be a contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) 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."

1. Essentials of Sale

In a "contract of sale", the main object is the transfer of property and delivery of possession of the property, whereas the main object in "contract for work" is not the transfer of property but it is one for work and labour. In judging whether a contract is for a "sale" or for "work or labour", the essence of contract of the reality of transaction as a whole has to be taken into consideration. The predominant object of the contract, the circumstances of the case and the custom of the trade provide a guide in deciding whether transaction is a "sale" or a "works contract". It is well-settled law that the substance and not the form of contract is material in determining the nature of transaction; State of Andhra Pradesh v. Kone Elevators (India) Ltd., MANU/SC/0118/2005 : (2005) 3 SCC 389.

2. Bilateral Contract

Q. Define sale with the help of relevant cases

In the case; Agricultural Market Committee v. Shalimar Chemical Works Ltd., (1997) 5 SCC 516: AIR 1997 SC 2502, the Supreme Court observed that a contract of sale, like any other contract, is a consensual act inasmuch as the parties are at liberty to settle for themselves the term of their bargain. A sale has two poles—one buyer and another seller. One has to give and another has to accept. The giver has ofcourse to receive a sum, i.e. negotiated upon, in lieu of the `goods' given by him or sold by him.

No one can sell his own goods to himself. In; CIT v. Hind Construction Ltd., (1972) 4 SCC 460, it was held that if a person revalues his goods and shows a higher value for them in his books of account then he can't be considered as having sold these goods and made profits therefrom. But, a man can sell his goods to his farm as it was held in; R v. England, (1864) 4 B&S 782: 33 LJQB 145 "where a man's goods are sold under an execution, he may himself buy them".

A sale is considered to be a sale when it is fair and consensual i.e. both the parties should agree with their free consent. When sale is enforced then such procurement is an acquisition and not a sale.

In Benjamin's Sale of Goods,1 sale has been defined as—

"A sale is always a consensual transaction; even when the word `sale' is used in the narrower sense of a pure conveyance, there is necessarily an antecedent or contemporaneous agreement to sell. There must be mutual assent, in the objective sense in which this expression is always understood in the law of contract, to all the elements which make up a sale. The seller must agree to transfer the property and the buyer to take it, and they must agree to do so in return for money which is paid and received as the price of goods. Where the consent of the parties does not extend so far, or does not exist at all, there is no sale. Such transactions or events are sometimes termed as quasi-contracts of sale or implied contracts of sale; but there is no true analogy with a contract of sale properly so called and the Sale of Goods Act is not applicable to them.

In the case; Pfizer Corpn. v. Ministry of Health, (1857) 7 E&B 885: 26 LJ QB 296, drugs and appliances were supplied to a member of the public under the national health service scheme. Lord Reid held that whether it is supplied by a hospital or a pharmacist, and although for a charge, this is not a sale. Lord Reid said as—

"……in my opinion there is no sale in this case. Sale is a consensual contract requiring agreement, express or implied. In the present case there appears to me to be no need for any agreement. The patient has a statutory right to demand the drug on payment of two shillings. The hospital has a statutory obligation to supply it on such payment, and if the prescription is presented to a chemist he appears to be bound by his contract with the appropriate authority to supply the drug on receipt of such payment. There is no need for an agreement between the patient and either the hospital or the chemist and there is certainly no room for bargaining".

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1. 4th Edn., 1992, p. 56.

3. Money consideration

Q. What do you mean by money consideration?

The consideration for sale of any goods is always money i.e. price of goods. If there is any other consideration for sale in place of money then it would be called as barter or exchange of goods and not a `sale'.

But, if some goods are sold with the estimation of its value to be given in terms of some goods and differences (in value) in terms of cash then, it is a sale. Some examples are as follows:—

(i) Aldridge v. Johnson, (1857) 26 LJQB 296.—In this case, fifty two bullocks, fixed at £ 6 a piece, were exchanged for 100 quarters of barley at a different price per quarter, the difference to be made up in cash and this contract was treated as one of sale.

(ii) An old car was returned to the dealer for exchange with a new car and the difference was paid in cash—it was considered as a sale.

Some important points regarding sale—

(i) a gift is not a sale because it is without consideration, and

(ii) a sale is different from an appointment of an agent for sale since appointment of an agent requires no consideration.

4. Sale and Contract for Work and Material

Sale and contract for work and material are different but dividing line between these two are not very distinct. Some of the tests suggested to distinguish these two are as follows:

(i) If the goods to be delivered has its own existence i.e. individuality in its existence before its delivery as the sole property of the party, who is to deliver it, then it is a sale otherwise not;

(ii) If, transfer of property from A to B for a price constitutes the main object of the contract, then it is a contract of sale;

In the case; Lee v. Griffen, (1861) 30 LJ QB 252.—A lady engaged a dentist to make two sets of false teeth "to be fitted into her mouth". Before the work could be completed, the lady died. The doctor brought an action to recover his charges and the contract was held to be one of sale. The rule established in this case was as—`if the contract is intended to result in transferring for a price from B to A, chattel in which A had no previous property, it is a contract for sale of chattel.

5. Goods

Q. Write note on `goods'

Goods has been defined in section 2(7) of the Act as follows:

"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 the contract of sale.

From this definition, we can say that Goods means every kind of movable property other than actionable claims and money. In the case, R.D. Goyal v. Reliance Industries Ltd., MANU/SC/1025/2002 : (2003) 1 SCC 81, under the category of goods, thing like goodwill, copyright, trademark, patents, motor vehicles, ships, water, oil, air, gas may be considered as goods for a contract of sale.

In Benjamin's Sale of Goods,1 the position in relation to human body has been stated as follows:

The law recognizes no right of property in a dead body or any part thereof and for this reason human remains cannot be considered "goods" capable of being bought and sold. But it is doubtful whether there is any universal rule to this effect: for in practice skeletons are commonly bought and sold by medical students.

Relevant cases:

1. Williams v. Williams, (1882) 29 Ch D 659 (664-665).

2. Bourne v. Norwich Crematorium Ltd., (1967) 1 WLR 691.

3. Doodeward v. Spence, (1908) 5 CLR 406.

Today medical science has advanced to a stage where it was never before on the horizon of transplantation of different organs in human beings. It has also encouraged illegal trading in human tissues and organs for this purpose. Especially kidney transplant and bodily products e.g. hair, blood, urine and genetic materials e.g. sperm, ovum and embryos related laws have developed.

In an American case, it was held that blood supplied by a blood bank is a contract for the supply of services and there is authority also that blood supplied by a blood bank is a sale of goods.

Although, the sale of human organs and other commercial dealing in such organs is prohibited under the Human Organ Transplants Act, 1989.

6. Sale and Agreement to Sell

Q. Distinguish between sale and agreement to sale

An agreement to sell is a contract which is simple as well as pure whereas a sale is a contract plus conveyance. If, goods have been sold but the buyer makes a default then the seller may sue for the contract price in the court for "goods bargained and sold". But, in case, if a party makes an agreement to buy, but it's broken then the seller has a normal remedy for an action for unliquidated damages.

But, where a seller reverts from his promises by breaking the agreement to sell then the buyer has only a personal remedy against the seller. The buyer has also got proprietary remedies. In agreement for sale, if, somehow the goods get destroyed, the loss as a rule falls on the seller but if there is a sale and the goods are destroyed then the loss as a rule falls on the buyer though the goods have never come into his possession; [Instalment Supply Ltd. v. STO., (1974) 4 SCC 739].

7. Sale and Hire Purchase

Q. What is the difference between sale and hire purchase?

A sale is different from hire purchase as the sale gives complete authority to buyer to use or dispose off the goods on his own will. But, a hirer gets only possession of goods. He cannot pass the title of goods to any buyer. Secondly, sale tax is not leviable on hire purchase unless and until it is converted into a sale.

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1. 69 (4th Edn., 1992).

If the hirer does not have the option to return the goods to its owner then it will be an agreement to buy and not a hire purchase.

The hirer cannot be compelled to buy as observed by the Supreme Court in the case; K.L. Johar & Co. v. Dy. CTO, MANU/SC/0348/1964 : AIR 1965 SC 1082, Wanchoo J. said—

The essence of sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments. On the other hand, a hire purchase agreement has two aspects. There is first an aspect of bailment of goods subject to the hire purchase agreement and there is next an element of sale which fructifies when the option to purchase is exercised by the intending purchaser.

It was further added—

"Coming into being of sale is a question of fact and it takes place when the hirer exercise the option. It cannot be said that merely because the hire purchase agreement stipulates a particular period for the total payment of the consideration and for the purchaser to exercise the option to purchase at the end of the said period, the sale does take place at the end of that period willy-nilly. There may be cases where the hirer may default in paying the amount within the stipulated period, he may ask for extension and the dealer may grant it. In such cases, the sale obviously takes place only when the purchaser exercises the option to purchase after fully paying the agreed amount."

We can take another example of the case; Lee v. Butler, (1893) 2 QB 318: (1893) 62 LJ QB 591, where a lady hired certain furniture from the plaintiff for which the price was to be paid in two instalments. The condition was also there that in case the lady fails to give instalsments, the plaintiff had right to take the furniture back. But, before the last instalment was paid, the furniture was sold by the lady to defendant.

The Court held that the defendant had acquired a good title, the lady being in possession of the furniture under an agreement to buy. She did not have the option to return but was compellable to buy.

8. Formalities of the Contract

Section 5 of the Act explains about the formalities which are required to be fulfilled before undergoing a contract. This section lays down the formalities as follows:—

"5. Contract of sale how made.—

(1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed.

(2) Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties."

9. Subject-matter of Contract

It has been given in section 6 as follows:

"6. Existing or future goods.—

(1) The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or future goods.

(2) There may be a contract for the sale of goods the acquisition of which by the seller depends upon a contingency which may or may not happen.

(3) Where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods."

It says that the subject-matter of a sale under the provision of this Act is `goods'. It may be existing goods, owned or possessed by the seller or future goods.

Future goods means those goods which have not been yet acquired and its acquisition depends upon certain contingencies. It has also been defined in the Act as "goods to be manufactured or produced or acquired by the seller after the making of the contract of sale".

10. Effect of Damage

Q. What do you mean by effect of damage? Discuss it in light of the provision given in section 7 of the Act.

If the goods without the knowledge of the seller already perished or become so damaged as no longer to answer their description in the contract then such contract for sale of specific goods is void. Section 7 explains it as follows:

Q. What are the effects on contract if goods perish before making the contract?

"7. Goods perishing before making of contract.—

"Where there is a contract for the sale of specific goods, the contract is void if the goods without the knowledge of the seller have, at the time when the contract was made, perished or become so damaged as no longer to answer to their description contract."

Sometimes, it happens that the goods for which contract has been made, has not been destroyed completely but only some part of it, then the such circumstances make the rest of goods useless for the buyer. In the case; Barrow Lane and Ballard v. Phillips, (1929) 1 KB 574, the fact was as—

Facts.—There was a contract for the sale of a parcel of 700 bags of Chinese groundnuts. It was not known to the seller at the time of contract that out of 700, 109 bags have been stolen. The seller tried to deliver remaining 591 bags to the buyer but he refused to take the delivery. On buyer's refusal, the seller brought an action against him for the price.

Observation.—It was observed by the court that the buyer was not liable to take the goods and pay the price. The buyer had contracted to buy a certain quantity of goods and buyer can't be forced to accept the lesser quantity of goods. The contract is void due to loss of goods.

Perishing of goods doesn't include only loss due to theft but also the goods which have lost its commercial value.

In the case; Asfar & Co. Ltd. v. Blundell, (1896) 1 QB 123—

Facts.—A cargo of dates was sold. The dates were not worth consumable since it was contaminated with sewage but they could be used for making spirits.

Observation.—It was held that the contract was void as the goods no longer answered their description in the contract. Lord Esher M.R. said:

"The first point taken on behalf of the defendant is that there has been no total loss of the dates. The ingenuity of the argument might commend itself to a body of chemists, but not to businessmen. We are dealing with dates as a subject-matter of commerce and it is contended that, although these dates were under water for two days, and when brought up were simply a mass of pulpy matter impregnated with sewage and in a state of fermentation, there had been no change in their nature and they were still dates. There is a perfectly well-known test which has for many years applied to such cases as the present _ that test is whether, as a matter of business, the nature of the thing has been altered."

11. Goods perishing before Sale but after Agreement to Sell

If, there is no fault of either buyer or seller and the goods get perished or so damaged as no longer to answer their description in the agreement to sell then such agreement becomes void. Section 8 of the Sales of Goods Act says as—

Where there is an agreement to sell specific goods, and subsequently the goods without any fault on the part of the seller or buyer perish or become so damaged as no longer to answer their description in the agreement before the risk passes to the buyer, the agreement is thereby avoided.

12. Price

Q. Discuss the determination of price with the help of relevant case.

For determination of price there are two principles as given in section 9—

"9. Ascertainment of price.—

(1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties.

(2) Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case."

Price can be fixed in terms of money which may be either paid or promised. In the case; M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd., AIR 2004 SC 909: (2004) 9 SCC 204: (2003) 117 Comp Cas 19—Certain shares were transferred for a consideration which was left to be determined at a later stage and it was the observation of the Hon'ble Supreme Court that such transfers were not void by reason of any uncertainty. This is permissible under this section. The Court observed—

Discuss the determination of price with the help of relevant case. "The express intention in this case was to effect an immediate transfer of the shares and to agree upon the consideration later. The first stage of the agreement for the immediate transfer of shares was executed. The question as to what would be the reasonable price for the shares, the mode of its determination and whether any consideration has already been paid by the transferee to the transferor were to be considered subsequently and the section 9 of the Act permits it."

As far as reasonable price of any commodity or goods is concerned, it varies, place to place one goods to another and also depends on circumstances. Under contract, if the goods have already been delivered and accepted, reasonable price would be paid. Reasonableness may be at variance with market. In the case; Sudbrook Trading Estates Ltd. v. Eggleton, (1983) 1 AC 444: (1982) 3 WLR 315, it was held that if the price is agreed to be fixed by a valuer and there is either failure to appoint a valuer or valuer has not done his duty then the doctrine of reasonableness will take over the situation.

13. Agreement to Sell at Valuation

If there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party.

Section 10 gives the provision as:

"(1) Where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party and such third party cannot or does not make such valuation, the agreement is thereby avoided:

Provided that, if the goods or any part thereof have been delivered to, and appropriated by, the buyer, he shall pay a reasonable price therefor.

(2) Where such third party is prevented from making the valuation by the fault of the seller or buyer, the party not in fault may maintain a suit for damages against the party in fault."

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