Sale of Goods Act – Contract of Sale

Sale of Gods Act 1930

English Video

Initially, the Sale of Goods Act 1930 was part of Indian Contract Act in Chapter VII (s. 76 to 123). Later, these sections in Contract Act were deleted, and Indian Sale of Goods Act was enacted in 1930.

Applicability of Sale of Gods Act 1930

Indian Sale of Goods Act came into effect from 1st July, 1930 [s. 1(3)].

It extends to the whole of India, except the State of Jammu and Kashmir [s. 1(2)].

On 22nd Sep1963, the Act was re-named as Sale of Goods Act  1930 (the word Indian was deleted)

Sale of Goods Act 1930, is applicable to movable Goods. Actionable claim and money are excluded from the definition of Goods.

The unrepealed provisions of the Indian Contract Act, 1872, except as they are inconsistent with the express provisions of Sale of Goods Act, 1930, shall continue to apply to contracts for the sale of goods. (s. 3).

Contract of Sale of Goods

English Video

A Contract of Sale is made by an offer to buy or sell goods for a price and the acceptance of such offer.

Contract of Sale – Legal Definition

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” (s.4(1)).

So, a Contract of sale is to transfer (sale) or agreement to transfer (agreement to sell) the property in goods (ownership of goods). The term ‘contract of sale’ includes both ‘sale’ as well as ‘agreement to sell’.

Basic Characteristics of Contract of Sale

  • Mode : The contract of sale may be in writing, or partly in writing and partly by words, either expressed or implied [s. 5(2)].
  • Condition : The contract of sale may be absolute or conditional [s. 4(2)].
  • Delivery : The parties can freely determine the terms of delivery or mode of payment by their mutual consent.
  • Time of Delivery : 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 [s. 5(1)].
  • Ownership :  The seller must be owner (or part owner) of the goods [s. 4(1)]. A sale may even be between one part-owner and another .
  • Transfer of Property : Every Contract of Sale involves transfer of property in goods from the seller to buyer. In case of Sale, the property in goods passes to the buyer immediately, whereas in agreement to sell, the property in goods passes at a future date.
  • Sale :  If the property in goods is transferred immediately on formation of contract of sale, it is called as a sale.

Ex. X sells his watch to B at Rs 1000 and delivers the watch to B. It is sale (even if B has not yet made the payment).

  • Agreement to Sell : Where the property in goods passes after formation of contract of sale (e.g. at a future date or on fulfillment of a condition), it is called as agreement to sell.

Agreement to sale is a pre-stage to sale. Every agreement of sale is intended to be converted to sale later on (on the specified date or on fulfillment of the condition). Thus, the term ‘contract of sale’ includes both ‘sale’ as well as ‘agreement to sell’.

Sale of goods implies transfer of property and not  payment of price. Though payment of money(price) is essential part of sale, but the time of payment is irrelevant. A sale without immediate payment (credit sale) or prior payment (advance payment) is a valid Sale under Sale of Goods Act.

Contract of Sale – Examples

Ex. On 15th Jan, X agrees to sell his Coat to Y at Rs 1000 on 31st Jan (30th Jan being his birthday). This is agreement of sale. On 31st Jan, the Coat is sold to Y (ownership of the coat passes to Y), whether or not  X has delivered the coat to Y, or Y has made any payment for it. The agreement of sale becomes sale.

Ex. On 15th Jan, X agrees to sell his refrigerator to Y at Rs 5000, provided his mechanic checks it and approves it. On 20th Jan, the mechanic checked the refrigerator and found it OK. The refrigerator got sold  to Y, whether or not Y paid for it.

Ex. On 20h Jan, X agrees to sell his computer to Y at Rs 10000, if Y deposits the money to his bank account ,within 31st Jan. As soon as Y deposits the money (within 31st Jan), the computer is sold to Y.

Contract of Sale of Service

 When the main ingredients (goods & materials) are supplied by one, and the party to the contract makes payment principally for work & skill, and not for transfer of goods, it is contract of service, and not a contract of sale.

Ex. X gives a piece of cloth to a tailor B, to make a shirt. This is a contract of service (though the tailor may have provided some materials like thread , lining, buttons etc).

Contract of Sale of Goods with Service

In case of sale of Goods with service, the component of sale of goods must be severable from sale of service, otherwise it would not amount to sale of goods.

Ex: A hotel provides residence and food making a consolidated charge for both the services. No rebate was allowed if food was not taken by the customers. Held, supply of food was not sale of goods but simply a service as the transaction was an indivisible contract of multiple services and did not involve any sale of food. It was observed in this case  the “Position is akin to that of a steamship or airline company which serves food to passengers”.

Ex. X goes to a restaurant and gives order for food. It is contract of sale as he pays mainly for the food, though the restaurant gives considerable service also in the deal.

Components of Contract of Sale

English Video

  • Seller & Buyer in Contract of Sale

There must be a buyer and a seller in a contract of sale who must be competent to enter into contract to effect a contract of sale [s. 2(13)]. ‘Buyer’ means a person who buys or agrees to buy goods [s. 2(1)] and ‘Seller’ means a person who sells or agrees to sell goods.

One person Sale in Contract of Sale

A person cannot trade with himself. Buyer & Seller must be separate person

Ex. A partnership firm was dissolved and the surplus assets including the stock-in-trade were divided among the partners, in specie (in the same form). Held, it was not a sale as the partners themselves were the joint owners of the goods and they could not be both sellers and buyers.

One person Sale in Contract of Sale – Exceptions

However, in the following cases, the same person can be a seller as well as a buyer,

  • Sale by Pawnee:  When the pawnee  (to whom the goods are pledged) sells the goods pledged with him to the pawnor (who pledges the goods) on non-payment of his money.
  • Sale by Part owner : A part owner can also sell his share to the part owner to make the other part owner as the sole owner of the goods.
  • Trade by Partner : A partner can buy from or sell to a firm in which he is a partner.

Transfer of Property in Contract of Sale

In contract of sale,transfer of property in goods must move from one person to another.

The term “Property” refers to the general property in goods and not merely a special property [s. 2(11)].

‘Property’ means ‘ownership’ and ‘General Property’ means ‘full ownership’. Ownership means complete ownership (General Ownership, having all the rights connected with the property. Special ownership (limited ownership like pledge or any other specific right) is not considered as ownership under this act (so pledgee is not owner, and does not have right to transfer ownership).

Transfer of  ownership in Contract of Sale

A mere transfer of possession without transfer of ownership does not   constitute a sale.

Transfer of ‘General Property’ is required to constitute a sale. As general property of goods is not transferred in case of hire, lease, hire purchase or pledge, they cannot be considered as ‘sale’.

Price or Money consideration in Contract of Sale

“Price” means the money consideration for a sale of goods [s. 2(10)].

In case of contract of sale of goods, the consideration should be ‘price’ i.e. money consideration. Where goods are exchanged for goods, it is a barter and not a sale. The consideration may be partly in money and partly in goods also (In Sale, there must be some money transaction).

In case  of gift (even of ‘goods’, like Jewellery), though there is transfer of ownership, it is not considered as sale of goods, as there is no money consideration.

Ex. X agreed to exchange with B 1000 kg of wheat at 20/kg for 500 kg of rice at  30/kg  valued and pay the difference in cash. Held, the contract was a contract of sale. In fact, it is a combination  of two sales transactions (Sale of Wheat and Sale of Rice).

Ex. X agreed to exchange with B 1000 kg of wheat for 500 kg of rice. Held, the contract was not a contract of sale. As there is no transaction of money, it is a barter and not sale.

Mutual Consent Contract of Sale

Contract of sale must be accompanied with mutual consent of the contracting parties. If the contracting parties cannot agree with the terms of sale, contract of sale cannot be formed between them.

Essential Elements of a Contract of Sale

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  • Offer & Acceptance : A contract of sale is formed when an offer is made by one party and it is accepted by the other party. The offer, acceptance or both may be express (i.e., by words spoken or written) or implied from the conduct of the parties and circumstances of the case.
  • Form of Contract:  A contract of sale may be written or oral. However, if for any special type of goods, a particular mode or formality is prescribed by any law, then the contract of sale must fulfill the requirements of such law.
  • Terms of Sale :  The parties to a contract of sale are free to decide the terms of sale. Terms of sale normally include time for delivery of goods, payment of price, time of passing ownership from seller to buyer, the time of passing risk from seller to buyer etc.
  • Delivery : Goods shall be delivered immediately at the time of formation of contract of sale,  at some future date specified in the contract, in parts or installments, as specified in the contract.
  • Payment : Price shall be paid immediately at the time of formation of contract of sale, at some future date specified in the contract, in parts or installments, as specified in the contract.

Example : The following examples show Contract of Sale as Sale. The buyer becomes the owner of sold goods as soon as the contract is made.

  • M sells to N 50 kg. of sugar for Rs.750. The payment made in cash immediately and the sugar is to be delivered immediately.
  • M sells to N 50 kg. of sugar for Rs.750. The payment is to be made after 20 days but the sugar is delivered immediately.
  • M sells to N a sack of 50 kg. sugar for Rs.750. The payment is made in cash immediately and the sugar is to be delivered after 10 days.

Sale vs Bailment – Distinction between Sale & Bailment

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Bailment means temporary transfer of possession of movable goods, without transfer of ownership, while Sale invoves Transfer of Property from one person to another.

BasisSaleBailment
DefinitionSale is defined under  s.4(3) of the Sale of Goods Act, 1930.Bailment is defined under s.148 of the Indian Contract Act, 1872.
Ownership and PossessionIn sale, the ownership of goods passes immediately from the seller to the buyer.  Possession of goods may or may not pass immediately.In bailment, the possession of goods passes immediately from bailer to bailee. However, there is no transfer of property (transfer of ownership). 
Cause of TransferIn sale, the possession is transferred due to transfer of ownership.In bailment, the possession is transferred for accomplishment of some purpose (like safe custody, usage, carriage etc).
Use of GoodsIn sale, the buyer can use the goods in the way he likes.The bailee can use the goods for intended purpose only, according to the directions of the bailor.
ConsiderationIn sale, the consideration is always in terms of money.Bailment may be without consideration (e.g. gratuitous bailment) .
Return of GoodsBuyer is not liable to return the goods to the seller.Bailee must return the goods after the specified time, or accomplishment of the purpose.
Accrual in GoodsIn sale, accrual in goods sold, if any (like calf born to cow), is the property of the buyer.Accrual on goods bailed is the property of the bailer.
Loss of GoodsIn sale, if the goods are lost or damaged, the loss is to be borne by the buyer.  If the goods are lost or damaged, the loss is to be borne by the Bailor. Bailee would be responsible only if he is guilty of negligence and carelessness in taking care of goods bailed.
ExpensesIn sale, expenses of safe keeping of goods by seller, if any, is to be borne by buyer.The bailor has to bear the expenses, if any, for safe keeping of goods by bailee.

Pledge vs Hypothecation – Distinction between Pledge and Hypothecation

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Both Pledge & Hypothecation is done to secure loan from lender. The owner of goods pledges or hypothecates movable goods to a lender (like Banker) to secure loan.

  • Pledge : In Pledge, the lender takes actual possession of movable asset (like Jewellery, Savings certificate). The goods remain with the pledgee until the pledger pays the debt and releases the goods. In case of default, the pledgee may sell the goods and recover the amount due.
  • Hypothecation : Hypothecation means creating a charge on movable asset (like Car, Machinery etc.), but the possession remains with the borrower himself.  In case of default, the lender may take possession of the goods and sell it to recover the amount due.

Sale vs Pledge – Distinction between Sale & Pledge

SalePledge
Consideration : In sale, Price constitutes the consideration.In pledge, Advance of loan and security is the consideration.
Possession : In sale, possession may be transferred immediately or in futureIn pledge, possession of goods is immediately transferred to Pawnee (Lender)
Ownership : In sale, Ownership of goods is transferred immediately to the buyerIn pledge, Ownership remains with the Pawner (Borrower).
Re possession : In sale, the seller can not demand  back the goods soldIn pledge, On repayment of loan, the pawnee (lender) must return the goods the pawner (borrower)

Sale vs Hypothecation – Distinction between Sale & Hypothecation

SaleHypothecation
Consideration : In sale, Price constitutes the consideration.In Hypothecation, Advance of loan and security is the consideration.
Possession : In sale, Possession may be transferred immediately or in futureIn Hypothecation, possession of goods still remains with the hypothecator (owner). Only a charge (right) is created on the goods in favour of the lender.
Ownership : In sale, Ownership of goods is transferred immediately to the buyer.In Hypothecation, ownership remains vested with the original owner (borrower) On default of Payment, the lender can file a suit.

Agreement to Sell under Sale of Goods Act

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A Contract of Sale includes  both ‘Sale’ & ‘Agreement to sell’

  •  ‘A contract of sale is an ‘agreement to sell’ if the property in goods is transferred at a future time specified in the contract of sale; or on fulfillment of some conditions specified in the contract of sale.
  • An “agreement sell’ becomes a ‘sale’ when the future time specified in the contract of sale arrives; or the condition specified in the contract of sale is fulfilled.

In case of an agreement to sell, the goods are at the risk of seller until the agreement to sell becomes a sale. The ownership of the goods remains with the seller, till agreement to sell becomes it becomes sale.

Example:

X agrees with Y to sell his cycle for Rs.200 on Jan. 10. It is an agreement to sell as the cycle is to be transferred on a future date.

Rights of Just in Rem .vs. Just in personam – Sale of Goods Act

In case of sale, buyer has right against whole world (Just in Rem), however, in agreement to sell, the buyer gets right against the person (Just in person).

Let us understand the concept with following example

  • Sale : X sells a Painting to B in his Art Gallery. B Leaves the piece in X’s Gallery to be taken next day. B gets ownership of the Painting. No one else can claim the goods bought by B. X can no more sell the painting to anyone else. Legally, we can say B has the right of the goods against the whole world (Just in Rem)
  • Agreement to Sell : B gives an order to X, to make a painting at a price of Rs 3000. X makes the painting and keeps in his gallery. Meanwhile, another customer  Y comes to the gallery, takes a fancy to the painting. X asks a price of Rs 5000 from Y. Y happily buys it at Rs 5000 and takes the painting. Since the ownership of the painting did not pass to B (as it is agreement to sell), B has no right on the painting (as he is not owner of the painting). His remedy is to claim damages from  X, in person (Just in Personam).

Sale vs Agreement to Sell – Distinction between Sale & Agreement to Sell

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Basis of DistinctionSaleAgreement to Sell
OwnershipIn Sale, the ownership passes from seller to buyer immediately at the time of formation of contract of sale.In Agreement to Sell, the ownership passes from seller to buyer subsequent to formation of contract of sale. Ownership passes at a future date, or on fulfilment of some conditions specified in the contract.
RiskIn Sale, the goods are at the risk of the buyer.In Agreement to Sell, the goods are at the risk of the seller. The risk passes to buyer when agreement to sell becomes a sale.
Buyer’s RemediesIn Sale, the buyer has the legal right to obtain the possession of the goods.In Agreement to Sell, the buyer may claim damages for non-performance of the contract. However, the Court may allow specific performance of the contract considering the facts and circumstances of the case and the provisions of Specific Relief Act, 1963.
Seller’s RemediesIn Sale, the seller has the legal right to sue the buyer for recovery of price of goods.In Agreement to Sell, the seller cannot sue the buyer for recovery of price of goods. But, he can claim damages.
Resale  In sale, the ownership of goods passes on to the buyer. So, the seller has no legal right to resell the goods. However, if the possession of the goods remains with the seller, the seller may resell the goods to a new buyer. If the new buyer knows that the seller has no legal right to resell the goods, he does not become the owner of such goods, but if the new buyer was not aware, he will become the owner of such goods.In Agreement to Sell, the seller should not resell such goods. However, if the seller resells the goods to a new buyer, the new buyer will become the owner of such goods even if he was aware of the original agreement to sell.
Buyers’ InsolvencyIn Sale, on insolvency of buyer, the official assignee shall have a right over the goods. However, the seller may exercise his right of lien, if the possession of the goods is with him, else he can get rateable dividend from official assignee of buyer.In Agreement to Sell, on insolvency of buyer, the official assignee shall have no right over the goods Official assignee does not get the right over goods, even if the buyer has paid for the goods.
Seller’s InsolvencyIn Sale, on insolvency of seller, the buyer, being the owner, is entitled to recover the goods from the Official Receiver.In Agreement to Sell, on insolvency of seller, the buyer, who has paid the price, can only claim a rateable dividend. As the buyer becomes a creditor, the Buyer may Rateable dividend of the price paid from official receiver of seller, but not the goods because property in them has not yet passed to him.
Nature of RightsIn Sale, the buyer gets the rights against the whole world, i.e., just in rem.In Agreement to Sell, the buyer gets the rights only against the seller, i.e., just in personam.
PerformancePerformance of sale is absolute and without any conditions.In Agreement to Sell, Performance is conditional and is to be made in future.
Type of GoodsSale is made only on existing and specific goods.An agreement to sell is normally made on future and contingent goods. Although in some cases, made on unascertained existing goods also.
Type of ContractSale may be an executed contract.Agreement to Sell is an executory contract.

Hire Purchase Agreement under Sale of Goods Act

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Hire Purchase Agreement means a written agreement to use the goods on Payment of Installments, with an option to Buy. Hire Purchase is a kind of bailment (transfer of possession without transfer of ownership)  with option to buy. The hirer is just a Bailee of the goods with right to use the goods.

  • Law : Hire purchase agreements are governed by the Hire Purchase Act, 1972. The Sale of Goods Act, 1930, does not apply to Hire Purchase agreements. But it contains option to buy. So, to that extent, Sale of Goods Act is also relevant for Hire Purchase deals.
  • Parties : There are two parties in a hire purchase agreement, the ‘Hirer’ and ‘Hire Vendor’.
  • Hirer : The person who hires (i.e., uses) the goods by paying hire purchase installments is called the Hirer.
  • Hire Vendor : The person, who lends the goods to the hirer in consideration of hire purchase installments, is called Hire Vendor.
  • Payment : The hirer has to pay hire purchase instalments, at intervals, as specified in the hire purchase agreement.
  • Recovery of Price:The hire vendor cannot sue the hirer for recovery of price.
  • Repossession of Goods : If the hirer fails to pay or decides not to pay any of the further instalments, the hire vendor can repossess the goods as per the terms contained in the hire purchase agreement.
  • Rights of Parties  
  • Rights of Hirer : After full payment of agreed instalments, the Hirer gets an option to buy the goods and become the owner of the goods. The Hirer may, at anytime, decide to return the goods to the Hire Vendor. The Hire Vendor cannot compel the Hirer to pay the balance installment, or any other amount.
  • Rights of Hire Vendor : The Rights of Hire Vendor (seller) is limited to the repossession of goods.
  • Ownership  : The hirer becomes the owner of such goods after payment of last instalment. So, in a hire purchase agreement, the ownership passes only when the last instalment is paid.

Sale vs Hire Purchase – Distinction between Sale & Hire Purchase

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Basis of distinctionSaleHire Purchase
MeaningIn Sale, buyer becomes owner of goods when the contract of sale is made, even before full payment.Hirer gets right to use the goods by paying regular installments, but does not become owner, until all installments are paid. The hirer gets an option to purchase the goods on payment of all the installments.
Type of ContractSale may be an executed contract.Hire Purchase is an executory contract.
Governing Act‘Sale’ is governed by the Sale of Goods Act, 1930.Hire purchase agreement is governed by Hire Purchase Act, 1972.
Parties to  ContractThe parties in a contract of sale are buyer and seller.The parties in a hire purchase agreement are hirer and hire vendor.
Form of ContractA contract of sale can be made orally, implied from the conduct of parties or in writing.A hire purchase agreement can be made only in writing.
OwnershipIn sale, the ownership of goods is transferred to the buyer immediately on Sale.  In Hire Purchase, the ownership is transferred to the hirer on full payment of all installments. Hirer becomes a bailee but not an owner before the full payment is made.
RiskThe goods are at the risk of the buyer after Sale.In Hire Purchase, risk of goods does not pass to hirer, until he becomes owner of goods. Hirer shall not be liable for any loss of goods if he has performed his duties as bailee.
Return of GoodsIn Sale, Buyer does not get rights to return the goods after sale   As the buyer becomes owner after sale, he cannot return the goods. He is duty bound to pay the price of the goods. He has no option to terminate the contract.In Hire Purchase, the hirer may, at any stage, terminate the contract and return the goods to the hire vendor. On return of goods, Hirer shall not be liable to pay the unpaid instalments, whether due, or not yet due.
PaymentsIn Sale, installment payment is regarded as part payment of price. The buyer has to pay the unpaid amount only. In case of default in payment, the seller can demand unpaid amount, but has no right to get back the goods.In Hire Purchase, the installments paid by the hirer are  regarded as hire charges for use of goods. After payment of all the installments, thereby exercising the option to purchase the goods, the hire charges paid by hirer shall be regarded as payment of price of goods. If agreed instalment payments are not made, Hire Vendor can repossess the goods from Hirer.
Sales TaxSales tax is payable as soon as ‘sale’ is made.In Hire Purchase, Sales tax is payable on exercising the option to purchase the goods after paying all the instalments by the hirer.
ResaleIn Sale, Buyer can immediately resell the goods.In Hire Purchase, Hirer cannot resell until the last instalment is paid.
Buyer InsolvencyIn sale, on insolvency of buyer, the seller gets ratable dividend only on the amount due.In Hire Purchase, on insolvency of the hirer, the hire vendor can take re-possession of goods.
WarrantiesSale is subject to the implied condition and warranties.Hire Purchase agreements are not subject to such condition and warranties.

Goods – Meaning under sale of Goods Act

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Goods means “Every kind of a movable property other than actionable claims and money’ (s.2(7)).

Goods 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”

So, even standing trees, grass etc, are goods if they are to be severed from land. Similarly, standing crop (mangoes in mangoe tree) is goods if they are to be severed from the trees (or land). So, Agreement of sale of crop / trees, even at the time when they are not severed, is a contract of sale  of goods, if the agreement specifies them to be severed from the land / trees etc.

Characteristics of Goods under sale of Goods Act

  • Every movable property is Goods. Living Pets are Goods. Stocks and Shares are Goods.
  • Growing crops and grass to be severed (to severe means to cut) from land are goods. Forests are not goods, but forest product when severed from the forest for sale are considered as goods.
  • Actionable claims are not goods because such a claim can only be enforced by action in a Court of Law.
  • Money in current circulation (legal tender) is not goods but old coins or paper money out of circulation, sold or purchased for collection purpose (but not as legal tender) are considered as goods.

Ex. A sells a bundle of One Rupee Note (of 100 pcs) in new  condition, which is legal tender, to B at Rs 120 per bundle (as new  one rupee note is not readily available in market and B needs such notes for gift). Such sale is not considered as sale of goods, as legal currency is not ‘goods’.

Ex. X sells 10 pcs of old one paise copper coin, now out of circulation, to Y (a collector  of coins) at Rs 100 each. It is considered as sale of goods (as old coin, which is out of circulation, is considered goods).

Ex. X contracts to sell mangoes on the trees currently hanging in the trees, to be severed from the tree. This is a contract of sale of goods, as fruits to be severed from tree are considered as ‘goods’

Ex. X executes a sale deed of Sale of Mango orchard with standing trees and fruits. This is not sale of goods as standing trees on land are not Goods.

Ex. X contracts of sale of specific trees to be severed from ground. This is contract of sale of goods as the trees become goods on severance from land.

Ex. Sale of Coal mine, sale of quarry is not sale of goods. However, coal extracted from mine is goods.

Classification of Goods : Based on the state of existence at the time of contract, goods may be classified as i) Existing Goods, ii) Futures Goods, iii) Contingent Goods

Existing Goods – Meaning under sale of Goods Act

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Goods owned and possessed by the seller at the time of making the contract for sales are called Existing Goods (s.6(1)).

Third Party Possession of Goods

Goods which are in possession of others, like goods which have been pledged, let out for hire, or are in the possession of an agent, bailee, servant etc. are included in ‘Existing Goods’.

Classification of Existing Goods

Based on stage of Identification at the time of Contract, Existing Goods can be classified as follows:

  • Specific Goods : Identified at the Time of Contract

Specific goods are distinctly identified from others at the time of contract of sale [s. 2(14)]. In the case of contract for sale of specific goods, the seller has to deliver only the agreed upon goods and not any other goods.

Ex:X agrees to sell Mr. Y a particular car bearing identification number. It will be treated as sale of specific goods.

  • Ascertained Goods : Identified after Contract

Ascertained Goods means goods segregated (separated) / identified in accordance with the agreement after the contract is made. The identification takes place after making the contract of sale.

  • Unascertained Goods : Not Identified at the time of Contract

The goods which are not specifically identified at the time of contract of sales are known as Unascertained Goods. These goods are defined by description or by sample and are not definite and specific.

When the goods are segregated / separated from Unascertained Goods, it becomes ascertained Goods.

Ex:Mr. Kapoor has 5 old cars. He agrees to sell one of these to Mr. Goenka which is to be identified later. It is unascertained goods. But, when Mr. Goenka goes to the garage and identifies (bearing a registration number) one car which he wants to buy, it becomes a specifc good.

Ex. X asks the shopkeeper to buy cake in the shop. The cake is unascertained. When the shopkeeper picks the cake from the tray, it becomes ascertained goods. X asks the shopkeeper to write his son’s name on the cake. On writing the name on the cake, the cake becomes specific goods.

Future Goods – Meaning under sale of Goods Act

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Future goods means goods to be manufactured, produced or acquired by the seller, after formation of the contract of sale (s. 2(6))

  • Possession : Future goods are neither in existence, nor in possession of the seller at the time of contract of sale.
  • Contract of Sale : A contract of present sale of future goods, though expressed as an actual sale, is deemed to be an ‘agreement to sale’ but not a ‘sale’. [s.6(3)]

Ex. X asks a Jeweller to make a necklace of his design. The necklace to be manufactured as per design, is future goods. Sale of necklace to be manufactured and sold is agreement to sell and not sale, even if the buyer has paid money at the time of making the agreement.

Ex. X agrees to sell 10kg of rice. The rice is not in his stock but to be procured from another seller. So, this is agreement to sell.

Contingent Goods – Meaning under Sale of Goods Act

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Contingent Goods are specific type of future goods, acquisition of which by the seller is dependent upon some contingency (s.6(2)).

The contract of sale of contingent goods is treated as an agreement to sell.

Ex. M agrees to sell 100 tons of Basmati rice provided the ship carrying the rice from Bangladesh reaches the country safely. This is a contract for sale of contingent goods.

Ex. X agrees to sell Y, 100 M Tons of Steel, if the Tender of SAIL to sell the Steel, goes to X’s favour and X acquires the materials.

Existing Goods vs Contingent Goods – Distinction between Existing Goods and Contingent Goods

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BasisExisting GoodsContingent Goods
MeaningThe goods that physically exist at the time of formation of contract of sale are called as Existing Goods. The seller is either the owner, or in possession of such goods.Acquisition of Contingent Goods is dependent on contingent event (which may or may not happen)  
ClassificationOn the basis of Identification, of goods at the time of Contract, Existing goods may be classified as 1) Specific 2) Unascertained 3) Ascertained Goods.Contingent goods cannot be classified as such.
Type of AgreementThe ‘contract of sale’ related to existing goods may constitute a ‘sale’ or ‘agreement to sell’.The ‘contract of sale’ related to contingent goods always constitute ‘agreement to sell’, but cannot constitute a ‘sale’.

Future Goods vs Contingent Goods – Distinction between Future Goods and Contingent Goods

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Basis of distinctionFuture GoodsContingent Goods  
MeaningFuture goods do not exist at the time of formation of contract of sale  Acquisition of Contingent goods is dependent on contingent event (which may or may not happen)
ContingencyThe possession of future goods does not depend on any contingency.The possession of contingent goods is dependent upon a contingency specified in the contract of sale.
Effect of ContractOn failure to acquire the future goods, the seller shall be liable to the buyer for breach of contract.On non-happening of contingency, the Agreement to sell of Contingent Goods is discharged and seller shall not be liable to the buyer.  
PerformanceThe Agreement to sell  of Future Goods must be performedPerformance of  Agreement to sell of contingent goods is uncertain event
InclusionFuture goods do not include contingent goods.Contingent goods include future goods.

Destruction of Goods – Meaning under Sale of Goods Act

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Destruction of Goods (technically called Destruction of Subject matter) means the Goods under sale are perished, damaged or destroyed, in such condition so as to no longer answer to their description in the contract.

Characteristics of Destruction of Goods under Sale of Goods Act

  • Physical Destruction : Where the goods are damaged to such an extent that such damaged goods do not correspond to the description as specified in the contract of sale, it is deemed that goods have been destroyed (Toys were crushed)
  • Loss of Commercial Value : Where the damage, though  not resulting in physical destruction but the commercial value of goods is lost, it amounts to destruction of goods (cement becomes wet, a show piece gets a fine crack).

Consequence of Destruction of specific Goods under Sale of Goods Act (s.7) :

In 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 of formation of contract, perish or become so damaged, as no longer to answer to their description in the contract (s.7).  

This rule is based on the rule of impossibility of performance.  No compensation is payable by seller in such situation, if the seller does not have knowledge of destruction of the goods at the time of agreement of sale (if the seller sells with knowledge of destruction, it amounts to fraud and becomes liable to compensation).

This rule is not applicable for unascertained goods, future goods or goods destroyed before formation of contract of sale.

Ex: M agrees to sell a horse to N for the purpose of riding for Delhi immediately. At the time of formation of contract, the horse was not fit for the said purpose. But, M and N are ignorant of this fact. Hence, the agreement is void.

Ex. A cargo of Dates was sold. The Dates were contaminated with sea water so as to be unsaleable as Dates, though they could be used for making spirits. Held, the contract was void as the Dates no longer answered their description in the contract.

Destruction of Goods after Agreement to Sell but before completion of Sale (s. 8)

Where there is an agreement to sell of specific goods, and subsequently the goods are destroyed, without any fault on the part of the seller or buyer, before the risk passes to the buyer, the agreement is void (s.8).

This rule applies  in case of destruction of specific goods after the formation of Contract of Sale (but does not apply for contract for sale of unascertained or future goods), If the title of the goods has already passed to the buyer, the Buyer must pay for the goods, though the goods cannot be delivered.

Ex.: On 5th Oct 2008, K agrees to sell his Toyota car to P for Rs.4,00,000 on 1st Dec 2008. However, On 15 th Oct 2008, the car was burnt without any fault of K or P. The contract of sale between K and P is void and  P cannot be held liable for destruction of car.

Document of Title to Goods

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A document of title is a document, which entitles a person to get possession of goods (like Railway receipt or lorry receipt of goods, delivery order etc). These documents are used to take physical possession of goods and to transfer the ownership of property in the goods.  

The document of title is proof of possession of the goods in the hands of the issuer of the document of Title.

Usage of Document of Title to Goods

Such documents are often used in case of Sale of goods, to be delivered at another place, where the seller cannot directly give possession of the goods to the buyer.

The seller sends the goods through a third party (like goods transporter, normally known as Carrier, like Transport Agency, Railways, Air carriers etc,).

The carrier issues a receipt of goods (called document of title) to the seller. The seller delivers the document of title to the buyer. 

The buyer gets delivery of the goods (actual possession of goods) on delivery of the document of title to the carrier (or his authorised person) at the destination. Thus the buyer gets possession of the goods through carrier.

The Document of Title are normally used in Trade. Sometimes, on taking possession of goods by bailee, a document is issued by bailee, to the bailor of goods, to identify the owner of goods.

For example, when a car is parked in parking lot, or  a traveller deposits luggage at cloak room, the owner of parking lot or the cloak room, issues a receipt of the goods / car, which is to be produced at the time of delivery. But such receipts are not called document of title, as these document cannot be used for transfer of ownership.

Such documents are used to genuinely identify the original bailor and to collect his service fees, but not in course of trade (sale of goods)

Document of Title to Goods – Definition

A Document of Title to goods enables its possessor to deal with the goods described in it as if he were the owner [s. 2(4)].

Characteristics of Document of Title to Goods

  • Evidence : A document of title to goods symbolizes the goods, as proof of the possession or control of goods represented by it.
  • Undertaking : It is an unconditional (without asking for anything else) undertaking (promise) by the holder of goods, to deliver the goods to the holder of the Document of Title, at the specified place.
  • Right to Receive : It authorizes the genuine buyer / holder  to receive goods
  • Further Transfer : It confers a right  on the genuine buyer / holder, to further transfer (normally referred as to negotiate) the document to another, in the ordinary course of business, either by endorsement or by delivery .

Instances of Documents of Title to Goods

  • Bill of lading. It is a document acknowledging receipt of goods on board a ship, signed by the captain of the ship.
  • Dock warrant. It is a document issued by a dock owner certifying that the goods are held to the order of the person named in it or endorsee.
  • Warehouse-keeper’s or wharfinger’s certificate. It is a document issued by a warehouse-keeper or a wharfinger, stating that the goods specified in the document are in his warehouse or in his wharf.
  • Carrier’s receipt. It is a document issued by the Carrier (Railway/ Transport) acknowledging receipt of goods to be delivered at the destination railway station
  • Delivery order. It is a document containing an order by the owner of the goods, to deliver the goods to the person named in the document.

Right of Holder of Document of Title to Goods

A holder of document of title to goods can exercise the following rights:

  • Right to receive the goods represented by it.
  • Right to further transfer the document of title to goods to some other person by delivery or endorsement, who becomes the holder of document.

Price of Goods under Sale of Goods Act

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Price means the money consideration for a sale of goods (s. 2(10))

A contract is valid if  there is consideration. However, Sale of Goods Act recognizes consideration only be in the form of money (agreement with consideration in the form of other than money does not amount to agreement of sale). Hence, payment to the seller is to be made only in the form of money.

Barter or Exchange of Goods

In case of exchange of goods, no party pays any money to the other party. So, it does not amount to a contract of sale. However, if goods are exchanged subject to the condition that one party shall pay some money to the other party, it shall be a contract of sale.

Earnest Money or Deposit in Sale of Goods

The buyer  (or seller) may give money (known as Earnest Money) or other tangible item of value, to the other party, as a guarantee or security, for the due performance of the contract.

  • Contract Performed : If the contract is duly performed, it may be refunded or adjusted against the purchase price.
  • Contract not Performed : If the contract is not performed, the party not in default may forfeit the Earnest money of the other party

Advance Payment / Part Payment in Sale of Goods

If the money is paid by way of advance or part payment, the Buyer is entitled to get back the money (even if the contract is terminated due to fault of Buyer). In case of default by Buyer, the Buyer remains liable to seller for damages sustained due to breach of contract.

Price Fixation in Sale of Goods

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The parties can freely fix the price in the way they like. The court cannot interfere in the adequacy or otherwise admissibility of the price so fixed by the parties.

Mutual Price Fixation by Parties Contract of sale

The Parties may fix the price in the contract itself [s. 9(1)]

Price Fixation Method provided in the Contract of Sale

The contract itself may provide for the manner of fixation of price, like Market Price, Cost based Price, etc.

Ex: A is a wholesale dealer of clothes. He agreed to supply clothes to B at the current prevailing price in the wholesale trade. B is required to pay the prevailing wholesale market price to A.

Price to be determined by the course of dealings between the Parties in Contract of Sale

Price can be determined by the course of dealing between the parties if it is not expressly stated in the contract.

Ex: A is a wholesale dealer of clothes. He agreed to supply clothes to B at the price mutually to be fixed at each deal. B is required to pay at a price mutually agreed upon by them.

Determination of Reasonable Price in Contract of sale

Where price is not determined by any specific method, the buyer shall pay the seller a reasonable price [s. 9(2)] Reasonable price is a question of fact depending upon the circumstances of each particular case (not necessarily the market price).

Ex: S, a dealer in ready-made garments, agrees to sell ready-made garments to T at the same price which others are paying to him at that time. S must mention the price to T which is being paid by others and T is also supposed to pay him accordingly.

Third Party Price fixation in Contract of sale

The parties may agree that the price shall be determined by a third party duly appointed by them (s.10).

Ex: S agrees to sell his Car to T at the price assessed by U, a Car expert. U assessed the price as Rs.1,50,000. T is to pay the price assessed by U.

Failure of Third Party to fix Price

If such third party fails to fix the price, the contract becomes void.

Ex. : S agrees to sell his Car to T at the price assessed by U, a Car expert. U does not assess the price. The contract is void.

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

Ex. S agrees to sell 100 kg of Rice to B, the price is to be fixed by C. The Rice was delivered by S to B and was consumed by B. However, C does not fix the price. B will pay a reasonable price to S.

Third Party prevented to fix price [s.10(2)]

If the third party is prevented (stopped) from fixing price by the fault of the buyer or seller, the party not in fault may maintain a suit for damages against the party in fault.

Ex: A agrees to sell certain goods to B at a price to be fixed by C. If C refuses to value the goods and fix the price, the agreement is void.

If C is willing to value the goods, but is prevented from making the valuation by the wrongful act or fault of A or B, the party in fault is liable in damages to the other party not in fault (in case of A’s fault, A will pay damages to B. In case of B’s fault, B will pay damages to A).

Price Escalation due to statutory levies

If after making the contract, there is any variation in statutory levies (i.e., excise duty, custom duty etc in respect of the goods) the seller may add to / deduct from the contracted price (s.64).

Ex. X agrees to sell CDs at price Rs 106 (price 100 + VAT 6%). At the time of delivery, the VAT increased to 8%. Now the buyer has to pay Rs 108 per CD

Ex. X agrees to sell CDs at price Rs 106 (price 100 + VAT 6%). At the time of delivery, the VAT decreased to 4%. Now the buyer has to pay Rs 104 per CD (price 100 + VAT 4%). If the buyer has already paid @106, he can realize @ 2 per CD, from seller.

Ex. X of Kolkata agrees to sell CD @ 106 per CD to Y of Mumbai. The CDs are to be despatched through Courier. At the time of delivery, the courier charges increased. Y is not to pay extra for increased courier charges, as courier charges in not statutory levies.

Applicability of Other Rules of Contract of sale

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Applicability of Rules of Insolvency

The rules of insolvency relating to contracts for the sale of goods shall continue to apply thereto, notwithstanding anything contained in Sale of Goods Act 1930 (s.66).

Applicability of Rules of Mortgage, Pledge etc

The provisions of Sale of Goods Act 1930, relating to contracts of sale do not apply to a contract of sale in the natures of mortgage, pledge, charge or other security (s.66).

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