Dr.

RAM MANOHAR LOHIYA NATIONAL

LAW UNIVERSITY

2019-2020
Law of Contracts Project
On
Elaborate Upon The Supply Of Goods By Virtue Of A Statutory
Obligation Under Sale Of Goods Act' in the Light of Relevant
Provisions And Judicial Pronouncements.

Submitted to Submitted by

Dr. Visalakshi Vegesna Aayaksh Chadha

Associate Professor (Law), HOD Enrollment no. 180101003
(Department of Legal Studies) Section A
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ACKNOWLEDGEMENT

I owe a great many thanks to a great many people who helped and
supported me during the making of this project.

Words are inadequate in offering my deep sense of gratitude to my

Professor for her precious guidance.

With her enthusiasm, her inspiration and her great efforts to

explain things clearly and simply, she helped throughout my
analysis of work with lots of encouragement, sound advice, and good
innovation.

I would also like to thank the librarians of Dr. Madhu Limaye

Library who extended their assistance to me by helping me out
consult the relevant books.

I know that despite my best efforts, some discrepancies might have

crept in which I believe my humble Professor would forgive.

Thanking You All.

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Table Of Contents
1. Sale of goods and its essential features
2. What are statutory obligations?
3. Statutory obligations in government contracts
4. Case laws
a. The State Of Madras vs Gannon Dunkerley & Co.,(Madras)
on 1 April, 1958
b. New India Sugar Mills Ltd vs Commissioner Of Sales Tax,
Bihar on 26 November, 1962
c. Salar Jung Sugar Mills Ltd. Etc vs State Of Mysore & Ors on
1 November, 1971
d. The Coffee Board vs Commissioner Of Commercial Taxes ...
on 16 August, 1985
e. Andhra Sugars Ltd. & Anr. Etc vs State Of Andhra Pradesh
& Ors on 29 September, 1967
f. Vishnu Agencies (Pvt) Ltd. Etc vs Commercial Tax Officer
& Ors. Etc on 16 December, 1977
g. Indian Steel & Wire Products Ltd vs State Of Madras on 11
September, 1967
5. conclusion
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Sale of goods
Contract of Sale

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.

A contract of sale may be absolute or conditional. 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.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.

Essential elements of contract of sale

Two parties: there must be 2 distinct parties i.e. a buyer and a seller, to
affect a contract of sale and they must be competent to contract. ‘Buyer’
means a person who buys or agrees to buy goods [Sec. 2(1)]1. ‘Seller’
means a person who sells or agrees to sell goods [Sec. (13)]2.

Goods: there must be some goods the property in which is or is to be

transferred from the seller to the buyer. The goods which form the
subject-matter of the contract of sale must be movable. Transfer of
immovable property is not regulated by the Sale of Goods Act.3

Price: Price is an essential ingredient for all transactions of sale and in

the absence of the price or consideration, the transfer is not regarded as a
1
Section 2(1) of sales of Goods Act 1930
2
Section 2(13) of Sales Of Goods Act 1930
3
Section 2(7) of Sales Of Goods Act 1930
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sale. The transfer by way of sale must be in exchange for a price. It has
been held that price normally means money. The price can be paid fully
in cash or it can be partly paid and partly promised to be paid in future.
The price can be fixed by the agreement between the parties before the
conveyance of the property4

Transfer of general property: There must be a transfer of general

property as distinguishes from special property in goods from the seller
to the buyer. For e.g. if A owns certain goods he has general property in
the goods. If he pledges them with B, B has a special property in the
goods.

Essential elements of a valid contract: All essential elements of a valid

contract must be present in the contract of sale.5

What are statutory obligations?

Statutory obligations are those obligations that do not arise out of a
contract, but are imposed by law.

According to Potheir the contract of sale is “consensual, bilateral and

commutative”.6

This implies that a contract agreement is based on the principle of free

consent. But statutory obligations go against the principle of ‘contractual
liberty’ as given in section 62 of Sale of Goods Act 1930.

Section 62 - Exclusion of implied terms and conditions​.7—Where any

right, duty or liability would arise under a contract of sale by implication
of law, it may be negatived or varied by express agreement or by the

4
Section 2(10) of Sales of Goods Act 1930
5
Section 3 of Sales Of Goods Act 1930
6
Robert Joseph Pothier, A Treatise on the Law of Obligations, Or Contracts
7
Section 62 of Sales of Goods act 1930
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course of dealing between the parties, or by usage, if the usage is such as

to bind both parties to the contract.

This law traces its origins from 2 maxims -​“Expressam facit cessare
tacitum” ​which means that “the express mention of one thing implies
the exclusion of another” thus sanctifying the principle of contractual
liberty which allows parties to the contract to add any number of
conditions in their agreement. The other is ​“Modus et convenitio
vincunt legem” ​which means that “the form of agreement and the
convention of parties overrule the law”. This maxim also strengthens the
principle of contractual liberty by approving the principle of parties’
autonomy in making laws for themselves.

Statutory obligations go against this as it is not in accordance with these

principles but rather it is the antithesis of contractual liberty because one
important factor of contract of sale is that parties must be free to set any
number of terms and conditions for themselves but in statutory
transaction this is not available to the parties.

The Indian Contract Act, 1872 predicates free consent as the basis of a
contract. Free consent as defined in Section 14 means that consent is free
when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake as defined in Sections 15 to 18. Since
compulsion of law cannot be coercion within the meaning of section so
the consent to the agreement entered into was free within the meaning of
section. Secondly, in the public interest, persons exercising certain
callings or having monopoly or near monopoly powers should
sometimes be charged with the duty to serve the public.

There must be mutual assent between the contracting parties, in the

objective sense in which this expression is always understood in the law
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of contract, to all the elements which make up a sale. The seller must
agree to transfer the property and the buyer must take it. There must be
an agreement to do so in return for money which is paid and received for
the price of goods. Where the consent of the parties does not extend or
does not exist at all, there is no sale and the Sale of Goods Act shall not
be applicable to such transactions. Judicial favour of public policy as a
means for interfering with objectionable contracts is cogent evidence of
doubt as to how far contractual freedom should be sanctified.

One of the most distinguishing features of statutory transaction is the

absence of bargain element along with no option but to conform to the
terms in the contract under the statute or the order. In case of statutory
transaction, this transaction is not necessarily a consensual transaction
the limitations on the normal rights of dealers and consumers to supply
and obtain the goods, the obligations imposed on the parties and the
penalties prescribed by the control order converts the contract of sale in
to statutory transaction thus leaving no scope for parties to make terms
and conditions for themselves and thus eradicating the principle of
contractual liberty.

Whether statutory transactions amount to a sale or not in the eyes of law

or not, depends on whether the liberty to contract in relation to
fundamentals of the transaction is completely excluded by the provision
of the statute or order. Therefore, the question to be determined in the
cases of statutory transaction is whether freedom of consent or
consensual liberty was available to the contracting party other than the
contracting party under the statute or order.

In order to see whether there was any agreement or consensuality

between parties, regard must be had to their conduct at or about when
the goods changed hands. Since it is not obligatory on a trader to deal in
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such essential commodity nor on any one to acquire it, the primary fact
is that the decision of the trader to deal in the essential commodity
strictly in terms of the control orders is volitional and the consumer too
on his own volition decides to obtain the commodity on the terms of the
permit or the order of allotment issued in his favor. The parties enter into
such transactions with their free consent.

Statutory obligations in government contracts

The Government’s object in contracting is to procure its requirements as
cheaply as possible, consistently with securing the desired quality of
goods or services. The Government’s interest in cheap procurement has
to be reconciled with the contractor’s interest in profit, and also with the
need to keep in existence a sufficient number of firms with the
willingness and capacity to do the Government’s work.The delicate
balance that must be struck between the provision of reasonable profits
to contractors and the limitation of cost to the Government calls for the
use of different forms of contract that are appropriate to different
contracting situations.

There is no question that the Government contract, with rare exceptions,

is a contract of adhesion, that is, a standard form, prepared by one party
and required of the other, designed to fit a wide variety of situations by
the filling in of appropriate blanks or the annexing of detailed technical
specifications, and with very little opportunity for variation. Such
contracts of adhesions have become common in private dealings. The
contracts with the Government offer very little scope for variation or
change in terms of the contract as the party other than the Government is
compelled to enter into the contract under a statute or an order. The
contract is one that falls under the purview of statutory transactions.
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In government contracts, the outward form is that of contract; the

substance, however, is not free bargaining, but submission to a process
of private legislation. While in, and in contract law, complete freedom
remains in that the other party has the alternative of not entering into the
agreement, in practical effect that choice turns out to be no choice at all.
The weaker party, with a need for the goods or services, cannot go to
another source. Either he is faced with a monopoly (as in a public
utility), or he finds that all competitors use substantially the same
clauses and do business in substantially the same way. The act of
submission in the relationship of power finds little recognition in
contract law, which is still based on notions of equality of bargaining
position.A businessman seeking Government contracts has only an
illusory freedom of choice. To the extent that his economic health
depends on receiving either Government contracts or subcontracts from
other Government contractors, he has no feasible alternative but to
submit to the attachment of conditions having no relation to the buying
and selling function.

State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.8

Various orders were issued under the Essential Commodities Act, 1955
to make the goods available to the consumers at a fair price in the event
of a shortage in supply. The vexed question that arose in this case was
that whether a transaction under such an order for controlled price
amounts to a sale in the language of the law and the controversy whether
what is conveniently though loosely called, a ‘Compulsory sale’ is
eligible to sales tax.

8
The State Of Madras vs Gannon Dunkerley & Co.,(Madras) 1958 AIR 560, 1959 SCR 379
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It was observed that in order to see whether there was any agreement or
consensuality between the parties, regard must be had to their conduct at
or when the goods changed hands. The parties enter into such
transactions with their free consent. When the allottee present his permit
to the dealer, he signifies his willingness to obtain the commodity from
the dealer on the terms stated in the permit. And when upon the
presentation of the permit, the dealer acts upon it, he impliedly agrees to
supply the commodity to the allottee on the terms by which he has
voluntarily bound himself to trade in the community. His conduct also
reflects his consent. Thus, though both the parties are bound to comply
with the legal requirements governing the transaction, they agree as
between themselves to enter into the transaction on statutory terms, one
agreeing to supply the commodity to the other on those terms and the
other agreeing to accept it from him on the very terms. It is therefore not
correct to say that the transactions between the dealers and the allottees
are not consensual.

New India Sugar Mills Ltd. V. Commissioner of Sales Tax Bihar

(1963 AIR 1207)9

The Supreme Court was considering a case under the Sugar Products
Control Order 1946. The order prohibited the producers of sugar from
disposing of or agreeing to dispose of or to make delivery to anyone
except to or through a recognized dealer.Under clause 5 of the said
order, every purchaser or dealer was required to comply with directions
regarding production, sales, stock or distribution as may be given from
time to time by the controller. The contravention of any provisions of the
order was made penal. Under the said order , the controller made
9
New India Sugar Mills Ltd. V. Commissioner of Sales Tax Bihar (1963 AIR 1207)
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allotments to the various states and addresses orders to factory owners to

supply sugar to the states in accordance with the instructions received
from the state government. New India sugar mills having supplied sugar
under the said order to the state of Madras , the state of Bihar attempted
to tax the transaction as a sale.

The majority judgement was that the contract of sale postulated the
exercise to volition on the part of the contracting parties, and there was
no such volition in complying with the orders passed by the controller.

The majority, through Justice Shah, held that on the basis of definition
of sale in Section 4 of Sale of Goods Act, 1930, a contract for sale
between the parties is a prerequisite to a sale. The execution of binding
order by the Mills provided no opportunity of any offer and acceptance
between the dealers and the buyers. The Controller was not acting as
agent of the sellers and the buyers so as to communicate their offer and
acceptance to each other and hence no contract ever existed so as to
constitute a sale.

Justice Hidayatullah,​ in a brave dissent, held that: “​So long as the

parties trade under controls at affixed price and accept these as any
other law of the realm because they must, the contract is at the fixed
price both sides having or deemed to have agreed to such a price.
Consent under the law of contract need not be express, it can be implied
… The present is just another example of an implied contract with an
implied offer and implied acceptance by the parties.​ ”

This dissenting opinion of Justice Hidaytullah is very important in the

field of statutory transaction as it is not the majority judgment which has
been followed by cases which were decided after this but many
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judgment has taken as principle the minority view of Justice

Hidaytullah.

Salar Jung Mills Ltd. v. State of Mysore​ (1972 AIR 87)10

This judgement tried to breathe in the concept of freedom of contract to

justify the contractual underpinnings of statutory sales. In this case, the
levy of tax on purchase of sugarcane was challenged on the ground that
on account of the Central and State Control Orders applicable to the
transaction, there was no mutual assent between the purchasers and the
growers of sugarcane in regard to the transaction and therefore, they did
not amount to sales.

It was held that it was established that statutory orders regulating the
supply and distribution of goods by and between the parties under the
Control Orders did not absolutely impinge on freedom to enter into
contract. Legislative measures or statutory provisions regulating the
price, delivery and supply restricting areas for transactions are all within
the realm of planning economic needs, ensuring production and
distribution of essential commodities and basic necessities of the
commodity. A factory could reject the goods after inspection which
indicated not only freedom in the formation but also in the performance
of the contract.

These features indicated with unerring accuracy that parties entered into
an agreement with mutual assent and with volition for transfer of goods
in consideration of price. The transaction under the preset case was,
therefore, held to be a sale within the meaning of the definition under
Sale of Goods Act, 1930.

10
Salar Jung Mills Ltd. v. State of Mysore (1972 AIR 87)
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Coffee Board, Karnataka, Bangalore v. Commissioner of

Commercial Taxes ​(ILR 1986 KAR 1365)11

This case added a new dimension to the ongoing debate about the
freedom of contract and law’s power to regulate it. The main issue that
arose in this case was that under S. 25 of the Coffee Act, 1942, coffee
growers were required to sell all the coffee grown by them only to the
Coffee Board. The Supreme Court held that this was not compulsory
acquisition of the coffee grower but a sale since it included all the four
essential elements of a sale namely:

1. Parties competent to contract;

2. Mutual consent although restricted;
3. Transfer of property in the goods;
4. Payment of price although deferred.

The court also observed that offer and acceptance need not always be in
an elementary form, nor does the law the law of contract of sale of goods
require that consent to a contract must be expressed. Offer and
acceptance can be spelt out from the conduct of the parties which cover
not only their acts but omissions as well. The limitations imposed by the
Control Oder on the normal rights of the dealers and consumers to
supply and obtain the goods, the obligations imposed on the parties and
the penalties prescribed by the order do not militate against the position
that eventually, the parties must be deemed to have completed the
transaction under an agreement by which one party binds itself to supply
the stated quantity of goods to the other at a price not higher than the
notified price and the other party consents to accept the goods on the

11
Coffee Board, Karnataka, Bangalore v. Commissioner of Commercial Taxes (ILR 1986 KAR 1365)
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terms and conditions mentioned in the permit or in the order of allotment

issued in its favour by the concerned authority.

The cases discussed above show that statutory transaction under Indian
Law are considered to be a sale as the parties to the contract are aware of
the terms and conditions of the agreement and they purport to enter into
such agreements with their own will. Therefore, it cannot be said that
there was an absence of the consensual element in such transactions.
Only after full knowledge of the statutory terms of the contract, do the
parties decide to accept the contract or not.

Andhra Sugar ltd v. State of U.P. ​(1968 AIR 599)12

In this case under A.P. sugarcane (Regulation of supply and purchase)

Act 1961 the sugarcane grower was free to make or not to make an offer
of sale of sugarcane to occupier of the factory but latter was bound to
accept the offer, if made by sugarcane grower. In spite of such legal
compulsion upon occupier of factory to enter into an agreement, their
agreement, according to the supreme court was valid and enforceable as
the consent of the occupier of the factory is not vitiated by any of the
vitiating elements .

To constitute a sale under the sale of goods act there must be an

agreement for sale of goods for a price and the passing of property
pursuant to an agreement which conditions were satisfied in the facts of
Andhra sugar case

12
Andhra Sugar ltd v. State of U.P. (1968 AIR 599)
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The Supreme Court emphasized that unlike New India sugar mills case
here the cane grower directly made an offer to director of factory
directly and the latter accepted though under compulsion of law but a
direct privity between parties was established.

Thus this case followed dissenting opinion of Hidayatullah J.

Vishnu agencies (pvt) Ltd V. commercial tax officers & ors. ​(1978
AIR 449)13

In this case the Supreme Court held that a transaction which is effected
in compliance with the obligatory terms of statute may be a sale if
mutual assent, express or implied, is not totally excluded . So in that
case an act of appellant to supply cement to various allotters in
pursuance of allotment order issued by appropriate authority was held to
be a sale.

Indian Steel and Wire Products Ltd V. State of Madras ​(1968 AIR
478)14

The Supreme court was concerned with the Iron And Steel ( Control of
Production and Distribution) Order 1941. Under the said order, steel
products were supplied to various persons in the state of madras
pursuant to the directions of the steel controller. The court there
observed that although the area within which there could be bargaining
between the prospective buyer and an intending seller was greatly
reduced, the company could supply goods in question at its convenience.
Audit was open to the company to agree with the customers as to the
date on which the goods were to be supplied.

13
Vishnu Agencies (Pvt.) Ltd. Etc vs Commercial Tax Officer & Ors. Etc (1978 AIR 449, 1978 SCR (2)
433)
14
Indian Steel and Wire Products Ltd V. State of Madras (1968 AIR 478)
 15

The orders booked were subject to the company’s terms of business and
general understanding in force at the time of booking the orders and
dispatch the goods . It was also open to the company to fix any mode of
payment of the price. The court held that due to change in political
outlook and as a result of economic compulsions, the freedom of
contract was being confined gradually to narrower and narrower limits.
So long as mutual assent was not completely excluded in any dealings in
law ,it was a contract. The courts held that the transaction was a sale.
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Conclusion
The dissenting opinion of Justice Hidayatullah in the case of New India
Sugar Mills Ltd. vs Commissioner of Sales Tax, Bihar lays the
appropriate foundation for the validity of Statutory Obligations. The
statement is as follows -“Consent under the law of contract need not be
express it can be implied. There are cases in which a sale takes place by
the operation of law rather than by mutual agreement, express or
implied.” He observed that a sale under compulsion is still a sale. Sales
may often take place without volition on part of the parties and
mutuality is not essential for a sale to take place.

This means that offer and acceptance can be understood by the conduct
of parties which not only takes into account their acts but omissions as
well.

As we can see in the New India Sugar Mills case the acquisition of sugar
by the government was not compulsory and the mills also did not make a
gift as there was a price consideration. The transaction can also not be
termed as a barter or exchange. The transaction can be termed as a sale
as there is a transfer of property between 2 parties for a monetary price.

The conclusion we can infer from the above cases is that a transaction
where one of the parties is compelled by law to transfer property in
goods to the other party is still a sale, contractual in nature and hence
governed by the Sale of Goods Act, 1930. Compulsion of one of the
parties is in the form of regulation. Justice Hidayatullah struck the new
path in his dissenting opinion in the case and this is what has given us a
new way of looking at contractual transactions.
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