Formation of a Contract of Sale

Conditions and Warranties: Explained Simply

The Sale of Goods Act, 1930 discusses conditions and warranties in contracts of sale. These terms are important because they determine the rights and duties of the buyer and seller. Let’s understand them step by step.

What are Conditions?

A condition is a term or promise in the contract that is very important. It forms the foundation of the agreement. If this promise is not fulfilled, the buyer can cancel the entire contract.

Key Features of a Condition:

• Essential to the Contract: Without it, the purpose of the contract cannot be achieved.
• Repudiation (Cancellation): If the condition is broken, the buyer can cancel the contract.
• Examples: If a seller promises to deliver a specific brand of product and delivers something else, the buyer can reject the goods.

What are Warranties?

A warranty is a less important term in the contract. It is more like an additional promise. If it is broken, the buyer cannot cancel the contract but can claim compensation for any loss.

Key Features of a Warranty:

• Not Essential: It doesn’t affect the main purpose of the contract.
• Claim for Damages: The buyer can only ask for money (damages) if a warranty is broken.
• Examples: A seller promises that a product will last for two years but it fails earlier. The buyer cannot cancel the contract but can demand compensation.

Difference Between Conditions and Warranties

When a Condition Becomes a Warranty

In some cases, even if a condition is broken, it may be treated as a warranty. This happens when:

• The Buyer Accepts the Goods: If the buyer decides to keep the goods despite the breach, they can only claim damages.
• Waiver by the Buyer: The buyer can waive (give up) their right to cancel the contract.

Implied Conditions

The law assumes certain conditions are part of every sale, even if they are not written in the contract. These are called implied conditions:

• Condition as to Title: The seller must have the right to sell the goods.
• Condition as to Description: The goods must match the description given by the seller.
• Condition as to Sample: If goods are sold by showing a sample, the bulk must match the sample.
• Condition as to Merchantable Quality: The goods should be fit for sale in the market.
• Condition as to Fitness for Purpose: If the buyer tells the seller why they need the goods, the goods must serve that purpose.

Implied Warranties

Similar to implied conditions, there are implied warranties:

• Warranty of Quiet Possession: The buyer should be able to use the goods without disturbance from others claiming ownership.
• Warranty Against Encumbrances: The goods should not have any legal issues or unpaid dues.
• Warranty to Disclose Dangerous Goods: If the goods are hazardous, the seller must inform the buyer.

Example to Understand

Imagine you buy a smartphone:

• Breach of Condition: If it’s not the brand you ordered, you can return it.
• Breach of Warranty: If it’s the right brand but has a minor defect, you can ask for compensation.

Conclusion

Understanding conditions and warranties helps buyers and sellers know their rights and responsibilities. Conditions are critical promises, while warranties are supportive ones. The law also provides protection through implied conditions and warranties, ensuring fair treatment in every sale.

Effects of Contract of Sale

The Sale of Goods Act, 1930 outlines the effects of a contract of sale, focusing on how ownership, risk, and responsibilities change between the seller and the buyer. These effects are essential to understanding the rights and duties of both parties.

1. Transfer of Ownership (Property)

Ownership of the goods transfers from the seller to the buyer according to the terms of the contract. The timing of this transfer has important consequences.

Key Points:

• Specific Goods:
  • If the goods are clearly identified and ready for delivery, ownership passes immediately upon making the contract.
  • If something needs to be done (e.g., weighing, packing), ownership passes only after that is completed.
• Unascertained Goods: Ownership passes only when the goods are made specific (e.g., 50 kg of rice selected from a larger stock).
• Future Goods: Ownership passes when the goods come into existence and are appropriated to the contract.

2. Passing of Risk

The rule is simple: risk follows ownership. Whoever owns the goods bears the risk of their loss or damage.

Key Points:

• Before Ownership Transfers: The seller bears the risk if the goods are damaged or destroyed.
• After Ownership Transfers: The buyer bears the risk, even if the goods are still in the possession of the seller.
• Exceptions:
  • If there is an agreement to the contrary.
  • If delivery is delayed due to either party's fault, the party at fault bears the risk.

3. Transfer of Title

The principle of ownership transfer is governed by the legal maxim “Nemo dat quod non habet,” meaning no one can give better ownership than they have.

Key Points:

• A buyer can only acquire ownership if the seller has the legal right to sell the goods.
• Exceptions:
  • Sale by a mercantile agent.
  • Sale by a person in possession of goods under a voidable contract.
  • Sale by a seller in possession after sale.
  • Sale by a co-owner or unpaid seller.

4. Effect of Perishing Goods

Key Points:

• Before the Contract: If specific goods are destroyed without the seller's knowledge, the contract is void.
• After the Contract: If specific goods perish without fault of either party before delivery, the contract becomes void.

5. Delivery of Goods

Key Points:

• Delivery can be actual, symbolic, or constructive.
• The place, time, and manner of delivery are determined by the contract.
• The buyer can reject goods if they do not match the agreed terms.

6. Payment and Price

Key Points:

• Payment is usually made at the time of delivery unless agreed otherwise.
• If the buyer fails to pay, the seller can sue for the price or claim damages.

7. Unpaid Seller’s Rights

• Right of Lien: The seller can retain possession of the goods until payment is made.
• Right of Stoppage in Transit: If the goods are in transit and the buyer becomes insolvent, the seller can stop delivery.
• Right of Resale: The seller can resell the goods if the buyer fails to pay.

8. Buyer’s Rights

• Right to Reject Goods: If goods do not match the description, quantity, or quality, the buyer can refuse delivery.
• Right to Claim Damages: If the seller fails to deliver, the buyer can sue for compensation.

Example to Understand

Imagine you buy a laptop:

• Ownership: Passes when you receive the laptop and pay for it.
• Risk: If the laptop is damaged during delivery and ownership hasn’t transferred yet, the seller bears the loss.
• Payment: If you don’t pay, the seller can withhold delivery or take legal action.

Conclusion

The effects of a contract of sale define the legal and practical relationship between the seller and the buyer. Understanding these effects ensures both parties fulfill their responsibilities and exercise their rights properly.

Rights of an Unpaid Seller: Explained Simply

The Sale of Goods Act, 1930 provides specific rights to an unpaid seller. A seller is considered unpaid if the buyer fails to pay the full price, or if payment via a negotiable instrument (like a cheque) is dishonored.

The rights of an unpaid seller can be divided into two categories:

1. Rights Against the Goods

These rights allow the seller to take actions directly related to the goods sold.

(a) Right of Lien (Section 47)

• The seller can retain possession of the goods until the price is paid.
• This right applies when:
  • Goods are sold without credit terms.
  • The credit period has expired.
  • The buyer becomes insolvent.
• The seller loses this right if:
  • Goods are delivered to a carrier without reserving the right of disposal.
  • The buyer or their agent lawfully takes possession.

(b) Right of Stoppage in Transit (Section 50)

• If the goods are in transit, the seller can stop them and regain possession.
• This right applies if the buyer becomes insolvent after the goods have been dispatched but before delivery.
• The seller must notify the carrier or the person in possession of the goods to stop the transit.

When Transit Ends:

• When the buyer or their agent receives the goods.
• When the carrier acknowledges holding the goods on behalf of the buyer.

(c) Right of Resale (Section 54)

• The unpaid seller can resell the goods under certain conditions:
  • If the goods are perishable.
  • If the seller notifies the buyer of their intent to resell, but the buyer still fails to pay within a reasonable time.
  • If the right of resale is expressly reserved in the contract.
• Effect of Resale:
• The original buyer is responsible for any loss suffered by the seller.
• If the seller profits from the resale, the original buyer is not entitled to the profit.

2. Rights Against the Buyer

These rights allow the seller to take legal action against the buyer.

(a) Right to Sue for the Price (Section 55)

• If the property (ownership) of the goods has been transferred, and the buyer refuses to pay, the seller can sue for the price.
• If the payment is due on a specific date and the buyer fails to pay, the seller can sue regardless of whether the goods were delivered.

(b) Right to Sue for Damages (Section 56)

• If the buyer refuses to accept the goods or pay for them, the seller can claim damages for the loss incurred.

(c) Right to Repudiate the Contract

• If the buyer breaches a significant term of the contract, the seller can cancel the agreement and recover damages.

Summary of Rights

Example to Understand

Imagine a farmer sells a truckload of wheat:

• Right of Lien: If the buyer doesn't pay, the farmer can keep the wheat.
• Right of Stoppage in Transit: If the wheat is being transported and the buyer goes bankrupt, the farmer can stop the truck.
• Right of Resale: If the wheat starts rotting and the buyer hasn't paid, the farmer can sell it to someone else.

Conclusion

The rights of an unpaid seller ensure they are protected if the buyer fails to fulfill their obligations. These rights balance the interests of both the seller and the buyer while maintaining fairness in commercial transactions.

Landmark Case Laws on Sale of Goods Act

R.D. Saxena v. Balaram Prasad Sharma, AIR 2000 SC 2912

Key Point: Advocates cannot retain client files as security for unpaid fees, as legal files are not "goods."

What Happened:

• R.D. Saxena, an advocate, refused to return the bank's case files, demanding payment for his fees.
• The bank filed a complaint, accusing him of professional misconduct.

Judgment:

• The Supreme Court held that legal files are not "goods" under the Sale of Goods Act, 1930.
• Advocates have no right of lien on client documents and must return them promptly.

Conclusion:

R.D. Saxena was found guilty of professional misconduct for withholding the files. Advocates must resolve fee disputes separately without harming the client’s case.

Commissioner Of Sales Tax, Madhya Pradesh vs Madhya Pradesh Electricity Board

Key Points:

• Electricity is considered "goods" for sales tax purposes.
• The Madhya Pradesh Electricity Board is a "dealer" under sales tax laws.
• Steam supplied by the Electricity Board to a mill was treated as a labor contract, not a sale.

What Happened:

• The Madhya Pradesh Electricity Board generated, distributed, and sold electricity.
• It also sold coal ash, supplied tender forms, and provided steam to a mill.
• The board argued it wasn’t a "dealer" and claimed electricity and steam weren’t taxable as "goods."

Judgment:

• Electricity as Goods: Electricity qualifies as "goods" as it is movable property.
• Steam Supply as Labor Contract: Steam supply was a labor contract, not a sale.
• Dealer Status: The board was recognized as a "dealer" for conducting transactions involving goods.

Conclusion:

Electricity is taxable as "goods," and the board is liable for sales tax on such transactions. The steam supply arrangement was not subject to sales tax.

The State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.

Key Points:

• Construction materials are not "goods" for sale under the Sale of Goods Act.
• The legislature cannot expand taxation beyond the definition of "sale of goods."

What Happened:

• The Madras General Sales Tax Act sought to tax materials used in construction contracts.
• The company challenged this, arguing no sale occurred as materials were only used for construction.

Judgment:

• A sale requires an agreement to sell and actual transfer of goods.
• Materials used in construction are consumed for work and do not qualify as "sale of goods."
• The amendment imposing tax on construction materials was declared ultra vires.

Conclusion:

The Supreme Court dismissed the appeal, holding that tax can only be imposed on actual sales of goods, not on materials used in construction.

Vishnu Agencies (Pvt.) Ltd. vs Commercial Tax Officer & Ors.

Key Point: The case examines whether transactions under regulatory statutes qualify as "sales" under sales tax laws.

What Happened:

• Vishnu Agencies challenged the imposition of sales tax on cement transactions regulated under the West Bengal Cement Control Act, 1948.
• They argued the transactions lacked consensuality as they were entirely governed by statutory mandates.

Judgment:

• The Supreme Court held that such transactions are taxable as sales since mutual assent can be inferred from conduct.
• Even under regulatory constraints, the transactions retained elements of choice and consensuality.

Conclusion:

The appeal was dismissed, and the transactions were deemed liable to sales tax.