The law of Contract is applicable not only to business but also to all day-to-day

personal dealings. In fact, each one of us enter into a number of contracts from
sunrise to sunset.
For example,
. when you purchase a newspaper, you enter intoa contract with the vendor of
newspaper.
2. when you purchase milk, you enter into a contract with the milkman.
3. when you purchase bread and butter, you enter into a contract with the
vendor of bread and butter
4 when you ride a bus, you enter into a contract with the transport company.
The general law of contract relates to the essentials of a valid contract, the rules
for performance and discharge of a contract and the remedies available to the
aggrieved party in case of breach of contract.
1.2 MEANING OF cONTRACTT

According to Section 2(h) of the Indian Contract Act, 1872, "An agreement
enforceable by law is a contract." In other words, an agreement which can be
enforced in a court of law is knovwn as a contract. On analysing this definition of
contract, it appears that a contract must have the following two elements.
(a) An agreement, and
(b) Enforceability of an agreement.
In the form of an equation, it can be shown as under:
Contract An Agreement + Enforceability of an agreement
Now the question arises, "What is an Agreement?" and What is Enforceability of
an agreement?

What is an Agreement
According to Section 2(¢) of the Indian Contract Act, 1872, "Every promise and
every set of promises forming the consideration for each other is an agreement."
Now the question arises, 'what is promise?' According to Section 2(6) of the
Indian Contract Act, 1872, "A proposal when accepted, becomes a promise."
Example x offers to sell his car for Rs 1,00,000 to Y. Y accepts this offer. This offer
after acceptance becomes promise and this promise is treated as an agreement between
X and Y.
In other words, an agreement consists of an offer by one party and its acceptance
by the other. In the form of an equation, it can be shown as under:
Agreement=Offer (or Proposal) + Acceptance of Ofter (or Proposal)
1.4 Business Law
In other words, the
parties to an agreement must be bound to perform their
ises and in case of default by either of
them, must intend to sue e.g. in case of prom-
social
or domestic
agreements, the usual presumption it that the
create legal relations. parties do not intend too

Example X invites his

frlend Y to a dinner and Y accepts the
for dinner, X cannot go to the court invitation. If Y fails to tum up
to claim his loss.
Similarly, in case of domestic arrangements. parties to agreement do not intendd
to sueeach other so as to make such
v. Balfour
agreements unenforceable by law, e.g. in Balfour
(1919) 2 K.B. 571, a promise by the husband to pay his wife £ 30 every
month was held unenforceable as the
parties never intended it to be attended by legal
obligations.
In commercial or business
intend to c.eate legal relations.
agreements the usual presumption is that the parties
Example X offers to sell his car to Y for Rs I,00,000. Y accept this offer. Such an
ment between X and Y is a contract because it
creates legal obligation. In this
agree
if X refuses to sell or Y refuses to agreement,
the breach of the contract.
buy, the other party can file a suit in the court of law for

Thus, in the form of a graphic representation, the contract can be expressed as

under:

Contract
Agreement Enforceability of an agreement
Offer (or proposal) Acceptance of Legal obligation
offer (or proposal) arising out of an
agreement

"The law of contracts is not the whole law of

contracts is the law of only those
agreements." The law of
agreements which create legal obligations (i.e. an
obligation which is enforceable by law). An obligation is the duty to do or not to
do certain act. In other words, the law of contract is
concerned with only those
agreements where the parties have the intention to create legal obligations (i.e. the
parties are bound to do or not to do certain act). In business or commercial agree-
ments, the usual presumption is that the parties intend to create legal obligations.
Example X offers to sell his car to Y for Rs 1,00,000. Y accepts this offer. In this agreement
if there is default by either party, an acton for breach of
contract can be enforoed through
a court of law provided all the essential elements of a
valid contract are present in this
agreement.
The law of contract is not the law of those agreements which do not create
obligations. In other words, the law of contract is not concerned with those agree
legal
ments where the parties do not have the intention to create
legal obligations. In social,
domestic, moral or religious agreements, the usual presumption is that the parties do
not intend to create legal
obligations.
Example X invites Y to dinner. Y accepts the invitation but fails to tum up. Here, X cannot
sue Y for damages because the parties to this agreement do not intend to create legal
obligations.
Thus, the whole position may be summarised as under:

Type of agreement Whether the law of contract

covers such agreements
Agreements where the parties intend Yes
to create legal obligations, e.g.
business agreements
II. Agreements where the parties do not No
intend to create any legal obligation,
e.g. social agreements

Thus, the law of contracts is not the whole law of agreements.

The law of contracts is not whole law of obligations. The law of contracts
is the law of only those obligations which arise out of agreements. The law of
contracts is not concerned with those obligations which do not arise out of agree
ments. For example, obligation to maintain wife and children, obligation arising
from judgment of courts, obligations arising from torts or civil wrong.
Thus, the whole position may be summarised as under

Type of obligation Whether the law of contract

covers such obligations
Obligations which arise out of Yes
agreements
Obligations which do not arise out of No
contract
Thus, the law of contracts is not the whole law of obligations.

Distinction between an Agreement and a Contract

An agreement differs from a contract in the following respects:

A contract
Basis of distinction An agreement
Agreement and its enforcea-
1. What constitute? offer and its acceptance
bility constitute a
constitute an agreement
contract
An agreement may or may A contract necessarily
2. Creation of legal
not create a legal obligation create a legal obligation.
obligation
All contracts are necessarily
3. One in other Every agreement need not

necessarily be a contract agreements

not concluded Contract is concluded
4. Binding Agreement is
or a binding contract and binding on the
concemed parties
1.3 CLASSIFICATION OF CONTRACTS

The various bases on which the contracts can be classified are shown below in
Fig. 1.2.

Basis of Classification of Contracts

Creation Execution Enforceability

Fig. 1.2 Basis of Clasification of Contracts

Contracts on the Basis of Creation

On the basis of creation, the contracts may be classified as under:

(a) Express Contract Express contract is one which is made by words spoken or
written.
ExampleI X says toY "Will you buy my car for Rs 1,00,000 Y says to X 1 am ready
to buy your car for Rs 1,00,000." It is an express contract made oraly.
Example II Xwrites a letter to Y, " offer to sell my car for Rs 1,00,000 to you." Y senda
letter to X. am ready to buy your car for Rs 1,00,000." It is an express contract made in
writing.
(b) Implied Contract An implied contract is one which is made otherwise than by
words spoken or writen. It is inferred from the conduct of a person or the circum
stances of the particular case.
ExampleI A transport company nuns buses on different routes to cary passengers. This
is an implied offer by transport company. X boards a bus. This is an implied acoeptance by
X. Now, there is an implied contract and X is bound to pay the prescribed fare.

Example II X,a coolie in unifom picks up the baggage of Yto camry it from railway platfom
to the taxi without being asked by Y to do so and Y aillows it. In this case there is an implied
offer by the coolie and an implied acceptance by the passenger. Now, there is an implied
contract between the coolie and the passenger and the passenger is bound to pay for the
services of the coolie.

Contracts on the Basis of Execution

On the basis of execution, the contracts may be classified as under:

(a) Executed Contract t is a contract where both the parties to the contract have
fulfilled their respective obligations under the contract.
Example X offers to sell his car to Y for Rs 1,00,000. Y accepts Xs offer. X delivers the
car to Y and Y pays Rts 1,00,000 to X. It is an executed contract

(b) Executory Contract It is a contract where both the parties to the contract have
still to perform their 1espective obligations.
 Example X offers to sell his car to Y for Rs 1,00,000. Y accepts X's ofer. If the car has
not yet been delivered by X and the price has not yet been paid by Y, t s an executory
contract.

(e)Partly Executed and Partly Executory Contract It is acontract where one of

the parties to the contract has fulfilled his obligation and the other party has still to
perform his obligation.
Example Xoffers to sell his car to Yfor Rs 1,00,000 on a credit of one month. Yaccepts X's
offer. X delivers the car to Y. Here, the contract is executed as to X and executory as to Y.

Contracts on the Basis on Enforceability

On the basis of enforceability, the contracts may be classified as under
(a)Valid Contract A contract which satisfies all the conditions prescribed by law
is a valid contract.

Example X offers to mary Y. Y accepts X's offer. This is a valid contract

(b) Void Contract The term "Void Contract' is a contradiction in terms. But
according to Section 2(j) of the Indian Contract Act, 1872, "A contract which ceases
to be enforceable by law becomes void when it ceases to be enforceable." In other
words, a void contract is a contract which was valid when entered into but which
subsequently became void due to impossibility of performance, change of law or
some other reason.
Example X offers to mary Y. Y accepts X's offer. Later on Y dies. This contract was valid
at the time of its formation but became void on the death of Y.

(c)Void Agreement According to Section 2(g). "An agreement notenforceable by

law is said to be void" Such agreements are void-ab-initio which means that they are
unenforceable right from the time they are made.
Example An agreement with a minor or a person of unsound mind is void-ab-initio because
a minor or a person of unsound mind is incompetent to contract.
Thus, a void agreement never matures into a contract.

(d) Voidable Contract According to Section 26i) of the Indian Contract Act, 1872,
an agreement which is enforceable by law at the option of one or more of the parties
thereon but not at the option of the other or others, is a voidable contract. In other
words, "A voidable contract is one which can be set aside or repudiated or avoided at
the option of the aggrieved party." Until the contract is set aside or repudiated by the
aggrieved party, it remains a valid contract. For example, a contract is treated as
voidable at the option of the party whose consent has been obtained by coercion or
undue influence or fraud or misrepresentation.
Example x threatens to kill Y if he does not sell his house for Rs 1.00,000 to X. Y sells
his house to X and receives payment. Here, Y's consent has been obtained by coercion and
hence this contract is voidable at the option of Y, the aggrieved party. If Y decides to avoid
the contract, he will have to return Rs 1,00,000 which he had recelved from X. If Y does not
exercise his option to repudiate the contract within a reasonable time and in the meantime,
Z purchases that house from X for Rs 1,00,000 in good falth, Y cannot repudiate the contract.

mater
1.8 Business Law
Note: In case of voidable contract, if the aggrieved party decides to repudiate the
contract, the party rescinding the contract must restore the benefit received
by him under the contract to the person from whom the benefit was received
and the other party is freed from his obligation to perform the contract.
[Section 64]
Distinction between Void Agreement and Voidable Contract Void agreement
differs from voidable contract in the following respects:

Basis of distinction Void agreement Voidable contract

1. Void ab-initio It is void from the It is valid when made and

very beginning. continues to remain valid
till it is repudiated by the
aggrieved party.
2. Which essential It is void because It is voidable because the
element of contract an essential element consent of a party is not free.
is missing of a valid contract
(other than free consent)
is missing.
3. Enforceability It cannot be enforced It continues to be enforceable
by any party. if the aggrieved party does
not repudiate the contract.
4. Right of third party Third party does not A third party who purchascs
acquire any rights. goods in good faith and for
consideration before the
contract is repudiated, acquires
good title to those goods.
5. Effect of lapse Even on the expiry On the expiry of a reasonable
of reasonable time of a reasonable time, time, it may become
it can never become a valid contract if the aggrieved
a valid contract. party does not repudiate the
contract within reasonable time.
6. Damages The question of damages The aggrieved party can claim
does not arise. damages.
(e)Tllegal Agreement An illegal agreement is one the object of which is unlawful.
Such an agreement cannot be enforced by law. Thus, illegal agreements are always
void ab-initio (i.e. void from the very beginning).
Example X agrees to pay Y Rs 1,00,000 if Y kills Z. Y kils Z and claims Rs 1,00,000. Y
cannot recover from X because the agreement belween X and Y is ilegal as its object is
unlawful.
Efect on collateral agreements In case of illegal agreements, even the collateral
agreements become void.
Example f in the above example, x borrows Rs 1.00,000 from W who is aware of the
purpose of the loan, the main agreement between X and Y s legal and the agreement
between X and W which is collateral to the maln agreement s also vold. Hence, W cannot
recover the monev from X.

Dygtco mater a
Distinction between Vold Agreement and Illegal Agreement Void agreements
differ from the Illegal Agreements in the following respects:

Basis of distinction Void agreement

-
lilegal agreement
1. Voidhillegal All void agreements All illegal agreements are
need not necessarily always void,
be illegal.
2. Effect on collateral The collateral agreements The collateral agreements
agreements do not become void. also become void.
3. Restoration of If a contract becomes void The money advanced or
benefit received subsequently, the benefit thing given can not be claimed
received must be restored back.
to the other party.
() Unenforceable Contract It is a contract which is actually valid but cannot be
enforced because of some technical defect (such as not in writing, under
Such contracts can be enforced if the technical defect involved is removed.
stamped).
Example An oral agreement for arbltration is unenforceable because the law requires that
an arbitratdon agreement must be in writng. If the oral agreement for arbitration is reduced
to writing. it will become enforceable.

1.4 ESSENTIALS OF A VALID cONTRACT

According to Section 10, "All agreements are contracts if they are made by the free
consent ofthe parties competent to contract, for a lawful consideration and witha
lawful object and are not hereby expressly declared to be void."
The analysis of the provisions of Section 10 shows that a valid
contracd must
have certain essential elements. These essential elements have been shown below in
Fig. 1.3.

Essential Elements ofa Valid Contract

2 3 5
Proper Intention Free Capacity Lawful
offer and to create
its Proper
consent to contract
consideration
legal
Acceptance relationship
8 10
Lawful Agreement Certainty Possibility Legal
object not expressly of meaning of performance formalities
declared void

Fig. 1.3 Esential Eements of a Valid Contract

oDyrig mate
Let us discuss these essential elements one by one:

1. Proper Offer and Acceptance There must be at least two parties-one making
the offer and the other accepting it. Such offer and acceptance must be valid. An offer
to be valid must fulfil certain conditions, such as it must intend to create legal relations,
its terms must be certain and unambiguous, it must be communicated to the person to
whom it is made, etc. An acceptance to be valid must fulfil certain conditions, such as
it must be absolute and unqualified, it must be made in the prescribed manner, it must
be communicated by an authorised person before the offer lapses.

2. Intention to Create Legal Relationship There must be an intention among the

parties to create a legal relationship. In case of social or domestic agreements, the
usual presumption is that the parties do not intend to create legal relationship but in
commercial or business agreements, the usual presumption is that the parties intend
to create legal relationship unless otherwise agreed upon.
ExampleX invited Y to a dinner. Y accepted the invitation. It is a social agreement. If X
fails to serve dinner to Y, Y cannot go to the cours of law for enforcing the agreement.
Similarly, If Y tails to attend the dinner, X cannot go to the courts of law for enforcing the
agreement.
But even a business agreement may not be enforceable by law where the agree
ment so provides e.g. in Rose & Frank Co. v. Crompton Bros. (1925) A.C. 445, the
agreement entered into stated that it will not be subject to legal jurisdiction in the law
courts, the agreement was not enforceable by law as the parties never agreed to create
legal obligations despite being a business agreement.

3. Free Consent There must be free consent of the parties to the contract. Accord
ing to Section 14, consent is said to be free when it is not caused by (i) coercion,
(ii) undue influence, (ii) fraud, (iv) misrepresentation, or (v) mistake. If the consent
of the parties is not free, then no valid contract comes into existence.
Example X threatens to kill Y if he does not sell his house to X. Y agrees to sell his house
to X. In this case, Y's consent has been obtained by coercion and therefore, t can not be
regarded as free.

4. Capacity of Parties The parties to an agreement must be competent to contract.

In other words, they must be capable of entering into a contract. According to Section
11 of Indian Contract Act, 1872, "every person is competent to contract who is ofthe
age of majority according to the law to which he is subject and who is of sound mind
and is not disqualified from contracting by any law to which he is subject." In other
words, the person must be major, must be of sound mind and must not be declared
disqualified from contracting by any law to which he is subject. If the parties to
agreement are not competent to contract, then no valid contract comes into existence.
Example X, a minor borowed Rs 8,000 from Y and executed mortgage of his property in
favou of the lender. nis was not a valid contract because X is not competent to contract.
Therefore, the mortgage was not valid and the money advanced to minor could not be
recovered.
 be supported by lawful considera-
5. Lawful Consideration An agreement must
to Section 23 of the Indian
tion. Consideration means something in return. According
Contract Act, 1872, "he consideration is considered lawful unless it is forbidden by
law or is fraudulent or injury to the person or property of another
involves or implies
or is immoral or is opposed to public policy."
Y's promise to pay
Example I X agrees to sell his car to Y for Rs 1,00,000. Here, sell the
X's promise to
Rs 1,00,000 is the consideration for X's promise to sell the car and
car is the consideration for Ys promise to pay Rs 1,00,000.
and
Example Il X promises drop prosecution which he has initiated against Y for robbery
to
consid-
Y promises to restore the value of things taken. The agreement is void because the
eration is unlawful.

6. Lawful Object The object of an agreement must be lawful. According to Section

23 of the Indian Contract Act, 1872, "the object is considered lawful unless it is
forbidden by law or is fraudulent or involves or implies injury to the person or propery
of another or is immoral or is opposed to public policy."
Example X , Y and Z enter into an agreement for the division among them of gains
acquired or to be acquired by them by fraud. The agreement is void because its object is
unlawful.
Example x lets a flat on hire to Y, a prostitute, knowing that it would be used for immoral
purposes. The agreement is void because its object is for immoral purposes.

7. Agreement not Expressly Declared Void The agreement must not have been
expressly declared void under the provisions of Sections 24 to 30 of the Indian Contract
Act, 1872. Under these provisions, agreement in restraint of marriage, agreement in
restraint of legal proceedings, agreement in restraint of trade and agreement by way
of wager have been expressly declared void.
Example x promised to mary none else except Y and in default pay her Rs 1,00,000. X
maried to Z and Y sued X for the recovery of Rs 1,00,000. It was held that Y was not enttled
to recover anything because this agreement was in restraint of mariage and as such void.

Example ll X and Y caried on business in Chandni Chowk area of Delhi. X promised to

stop business in that locality if Y paid Rs 1,00,000. X stopped his business but Y did not pay
him the promised money. It was held that X was not entitled to recover anything because the
agreement was in restraint of trade and as such void.

8. Certainty of Meaning The terms of the agreement must be certain and un-
ambiguous. According to Section 29 of the Indian Contract Act, 1872, agreements
the meaning of which is not certain or capable of being made certain are void.
Example Xa dealer in different types of oils agreed to sell 100 tonnes of oil to Y. This
agreement is vold on the ground of uncertainty because it is not clear what kind of oil is
intended to be sold.
If, however, the meaning of the agreement could be made certain from the
circumstances of the case, it will be treated as a valid contract.
Example X who is a dealer in mustard oil, agreed to sell 100 tonnes of oil to Y. This
agreement is valid because the meaning of the agreement could be easily ascertained trom
the circumstances of the case.
1.12 Business Law
9. Possibility of Performance The terms of the agreement must be such as are
capable of performance. According to Section 56, "an agreement to do an impossible
act is void."
Example X agrees with Y to discover treasure by maglc and Y agrees to pay Rs 1,000
to X. This agreement is void because it is an agreement to do an impossible aL
Example II X agrees with Y to enclose some area between two paralel lines and Y agrees
to pay Rs 1,000 to X. This agreement is void because it is an agreement to do an impossible
act.

10. Legal Formalities The agreement must comply with the necessary formalities
as to writing, registration, stamping etc. if any required in order to make it enforce
able by law.
Example An oral agreement for arbitration is unenforceable because the law requires that
arbitration agreement must be in writing.
ExampleII An oral agreement for sale of immovable property is unenforceable because the
law requires that such agreement must be in writing and registered.

Conclusion All the aforesaid elements must be present in an agreement in order to

create a valid contract. If any one of them is missing or absent, the agreement will not
be enforceable by law.

= PRACTICAL PROBLEMS

1. X invites Y to dinner. Y accepts the invitation but fails to turn up. Can X sue
Y for the damage?
Solution: X cannot claim any damages from Y because the agreement between X
and Y is not enforceable by law. It is a social agreement and the usual presumption
in such agreement is that the parties do not intend to create legal relationship.
2. X makes a promise to his wife Y to give her pocket money of Rs 1,000 per
month. After 6 months, he stops making the payment. Can Y claim damages
from X.
Solution: Ycannot claim any damages from X because the agreement between X
and Yis not enforceable by law. It is a social agreement and the usual presumption
in such agreement is that the parties do not intend to create legal relationship
3. X promises Y to give a diamond ring at the time of his marriage. X fails to
give the ring. Can Y claim the ring?
Solution: Y cannot claim the diamond ring because there is no consideration
from Y.
4. Xpolished Y's shoes without being asked t Yto do so. Ydoes not make any
attempt to stop X trom polishing the shoes. Is Ybound to make payment to X?
Solution: Yis bound t> pay because he has accepted X's implied offer by conduct
(i.e. by not stopping X from polishing the shoes)
5. X agrees to marry Y. Y dies before the marriage takes place. Is it a void
agreement?
opyghtedmat
 LAW OF SALE OF GOoODS

CONTENTS
2.18.1 Essential elements of a contract of sale
2.18.2 Sale and Agreement to sell
2.18.3 Sale and Hire purchase
2.18.4 Sale and Bailment
Check your progress: 18

AIMS AND OBJECTIVES

This unit aims at providing knowledge to the students about contract of sale, agreement to
sell and hire purchase. The students will be able to get a clear idea about
Types of goods
ii. Rights and duties of buyers
ii. Rights of unpaid seller and
iv. The doctrine of caveat emptor
after reading this unit.

INTRODUCTION
The Sale of Goods Act, 1930, extends to the whole of India except the State of Jammu and
Kashmir.
The Sale of Goods Act., 1930
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 [Sec.4]. A contract of sale may be absolute
or conditional.

2.18.1 ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

The essential elements of a contract of sale are as follows:

Essential elements of a contract of sale

Seller and buyer Transfer of general Essential

property elements of a
valid contract

Goods L PPrice
132
Seller and buyer:
There must be a seller as well as a buyer. 'Buyer' means a person who buys or agrees to
buy goods [Section 2 (1)]. "Seller means a person who sells or agrees to sell goods
Section 2(13)]. A person cannot be a seller as well as a buyer as a person cannot buy his
own goods.

Goods:
There must be some goods. 'Goods' means every kind of movable property other than
actionable claims and money and includes stock and shares. growing crops, grass and
things attached to or forming part of the land which are agreed to be severed before sale or
under the contract of sale [Sale 2(7)1. Contracts relating to actionable claims, immovable
property and services are not covered by this Act.

i. The actionable claims' mean a claim which can be enforced through the courts of
law. Eg. a due from one person to another is an actionable claim.
i. The 'money' here means the legal tender (1.e., currency of the country) and not old
coins.
Transfer of F erty:
Property means the general property in goods, and not merely a special property [Section
2(11)]. General property in goods means ownership of the goods. Special property in
goods means possession of goods. Thus, there must be either a transfer of ownership of
goods or an agreement to transfer the ownership of goods. The ownership may transfer
either immediately on completion of sale or sometime in future in agreement to sell.

Price
There must be a price. Price here means the money consideration for a sale of goods.
When the consideration is only goods, it amounts to a 'barter' and not sale. When there is
no consideration, it amounts to gift and not sale. However, the consideration may be partly
in money and partly in goods because the law does not prohibit as such.

Essential elements of a valid contract:

In addition to the aforesaid specific essential elements, all the essential elements of a valid
contract as specified under Section 10 of Indian Contract Act, 1872 must also be present
since a contract of sale is a special type of a contract.

133
2.18.2 SALE AND AGREEMENT TO SELL

The term 'Contract of sale' includes both a 'sale' and 'agreement to sell'.

Distinction between Sale and Agreement to Sell

Basis of distinction Sale Agreement tosell

1 Transfer of ownership Transfer of Transfer of ownership
ownership of of goods is to take place
goods takes place | at a future time or
immediately subject to fulfilment of
Some condition
2 Executed contract
or It is an executed It
is an executor
Executory contract contract because contract because
nothing remains to something remains to be
be done done
3 Conveyance of property Buyer gets a right Buyer does not get such
to enjoy the goods right to enjoy the goods.
against the whole | Tt only creates jus in
world including personam (Right against
seller. Therefore, a the person)
sale creates jus in
rem (Right against
property)
Transfer of risk Transfer of risk of| Transfer of risk of loss
lossof goods takes goodsof does not take
place immediately Place because
because ownership ownership is not
is transferred. As a transferred. As a result,
result, in case of in case of destruction of
destruction of goods, the loss shall be
goods, the loss borne by the seller even
shall be borne by though the goods are in
the buyer even the possession of the
though the goods| buyer.
are in the
possession of the

seller
Rights of seller against the Seller can sue the Seller can sue the buyer
buyer's breach
buyer for the price for damages even
even though the though the goods are in
goods are in his | the possession of the
possession buyer.
134
 Rights of buyer against the | Buyer can sue the | Buyer can sue the seller
seller's breach seller for damages | for damages only.
and can sue
the
third party who
bought those
goods, for goods
Effect of insolvency of Buyer can claim Buyer cannot claim the
seller having possession of | the goods from the | goods even when he has
goods official receiver or Ppaid the price because
assignee because the ownership has not
the ownership of
goods
transferred
to the buyer.
has The buyer who has paid
transferred to the | the price can only claim
buyer rateable dividend
8 Effect of insolvency of the Seller must deliver Seller can refuse to
buyer before paying the | the goods to the deliver the goods unless
price official receiver or he is paid full price of
assignee because the
goods because the
the ownership of ownership has not
goods has transferred to the buyer.
transferred to the
buyer. He can only
claim rateable
dividend for the
unpaid price.

2.18.3 SALE AND HIRE PURCHASE AGREEMENT

Hire-purchase agreement means an agreement under which goods are let on hire and under
which the hirer has an option to purchase them in accordance with the terms of the
agreement and includes the agreement under which:
i Possession of goods is delivered by the owner thereof to a person on condition that
such person pays the agreed amount in periodical instalments;
ii. The property in the goods is to pass to such a person on the payment of the last
instalment; and
iii. Such a person has a right to terminate the agreement at any time before the
property so passes.
2.20.1 CONDITION [SEC. 12 (2)1

A condition is a stipulation which is essential to the main purpose of the contract. It goes
to the root of the contract. Its non-fulfilment upsets the very basis of the contract. It is
defined by Fletcher Moulton L.J. in Wallis vs. Pratt, (1910) 2 K.B. 1012 as an "obligatilon
which goes so directly to the substance of the contract, or in other words, is so essential to
its very nature, that its non-performance may fairly be considered by the other party as a
substantial failure to perform the contract at all." If there is a breach of a condition, the
aggrieved party can treat the contract as repudiated.

2.20.2 WARRANTY [SEC. 12 (3)

A warranty is a stipulation which is collateral to the main purpose of the contract. It is not
of such vital importance as a condition is. It is defined in Wallis vs. Pratt as an "obligation
which, though it must be performed, is not so vital that a failure to perform it goes to the
substance of the contract." If there is a breach of a warranty, the aggrieved party can only
claim damages and it has no right to treat the contract as repudiated.

Whether a stipulation in a contract of sale is a condition or a warranty depends in each

case on the construction of the contract as a whole. The Court is not to be gulded by the
terminology used by the parties to the contracts. A stipulation may be a condition though
called a warranty in the contract (Sec. 12 (4)1.

142

B.B.A. Business Law

Distinction between a condition and warranty:

1. Difference as to value:
A condition is a stip1ulation which is essential to the main purpose of the contract.
A warranty is a stipulation which is collateral to the main purpose of the contract.

2. Difference as to breach:
If there is a breach ofa condition, the aggrieved party can repudiate the contract of
sale.
In case of a breach of a warranty, the aggrieved party can claim damages only.

3. Difference as to treatment:
A breach of condition may be treated as a breach of a warranty. This would happen
where the aggrieved party is contented with damages only.
A breach of a warranty, however, cannot be treated as a breach of a condition.

2.20.3 WHEN CONDITION CAN BE TREATED AS WARRANTY (SEC.13)

1. Voluntary waiver of condition: Where a contract of sale is subject to any condition

to be fulfilled by the seller, the buyer may

(a) Waive the condition, or

(b) Elect to treat the breach of the condition as a breach of warranty ISec. 13 (1)1
If the buyer once decides to waive the condition, he cannot afterwards insist on its
fulfilment.
2. Acceptance of goods bv buver: Where a contract of sale is not severable and the
2.20.4 EXPRESS AND IMPLIED cONDITIONS AND WARRANTIES

In a contract of sale of goods, conditions and warranties may be express or implied.

Express conditions and warranties are those which are expressly provided in the contract.
Implied conditions and warranties are those which the law implies into the contract unless
the parties stipulate to the contrary.

143

B.B.A. Business LawN

Implied Condition:

1. Condition as to title:
In a contract of sale, there is an implied condition on the part of the seller that

(a) In the case of a sale, he has a right to sell the goods, and
(b) In the case of an agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.

2. Sale by description:
Where there is a contract for the sale of goods by description, there is an implied
condition that the goods shall correspond with the description. If the sale is by
sample as well as by description, the goods shall correspond both with the sample
and the description.

3. Condition as to quality or fitness:

The condition as to quality or fitness is implied where
(a) The goods sold are such as the seller deals in the ordinary course of his business
(b) The buyer relies on the seller's skill or judgment as to the fitness of the goods for
any particular purpose, and

(c) The buyer expressly or impliedly makes known to the seller that he wants the goods
for that particular purpose.

Condition as to merchantability:
Where goods are bought by description from seller who deals in goods of that
description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality.

5. Condition implied by custom:

An implied condition as to quality or fitness for a particular purpose may be annexed
by the usage of trade.

6. Sale by sample:
In the case of a contract for sale by sample, there is an implied condition
(a) That the bulk shall correspond with the sample in quality

(b) That the buyer shall have a reasonable opportunity of comparing the bulk with the
sample
(c)That the goods shall be free from any defect, rendering them unmerchantable, which
would not be apparent on a reasonable examination of the sample.
2.19.1 CLASSIFICATION OF GOODS

The goods which form the subject of a contract of sale may be elther existing goods or
future goods or contingent goods.

I. Existing Goods:
These are the goods which are owned or possessed by the seller at the time of sale.
Only existing goods can be the subject of a sale. The existing goods may be-

138

B.B.A. Business Law

a. Specific goods: These are goods which are identified and agreed upon at the time a
contract of sale is made. For example, a specifed watch, dog or horse. Goods are,
however, not specific merely because the source of supply is identified.

b. Ascertained goods: Though commonly used as similar in meaning to specific goods,

these are the goods which become ascertained subsequent to the formation of a
contract of sale.

C. Unascertained or Generic goods: These are the goods which are not identified and
agreed upon at the time of the contract of sale. They are defined only by description
and may form part ofa lot.

Example:X who wants to buy a car set goes to a showroom where four models of
Maruti cars are displayed. He sees the performance of a particular car, which he
agrees to buy. The car so agreed to be bought is a specific car. If he marks a
particular car, the car so marked becomes ascertained. Till this is done, all cars are
unascertained.

II. Future Goods:

These are the goods which a seller does not possess at the time of the contract nut
which will be manufactured or produced or acquired by him after the making of the
contract of sale. A contract of present sale of future goods, though expressed as an
actual sale, purports to operate as an agreement to sell the goods and not a sale. This
is because the ownership of a thing cannot be transferred before that thing comes
into existence.

II. Contingent Goods:

Though a type of future goods, these are the goods the acquisition of which by the
seller depends upon a contingency which may or may not happen.
Example: A agrees to sell specific goods in a particular ship to B to be delivered on
the arrival of the ship. If the ship arrives but with no such goods on board, the seller
is not liable, for the contract is to deliver the goods only if they arrive.
 LESSON-26
RIGHTS OF AN UNPAID SELLER

cONTENTS

2.26.1 Rights against goods

2.26.2 Rights against the buyer personally
Check your progress: 26
Lesson End Activities
Let Us Sum Up

(Unpaid Vendor's Rights)

A seller of goods is deemed to be an unpaid seller when-

1. The whole of the price has not been paid or tendered (offered to be paid)
2. A bill of exchange or other negotiable instrument has been received as a conditional
payment, and the condition on which it was received has not been fulfilled by reason
of the dishonour of the instrument or otherwise.

The following conditions must be fulfilled before a seller of goods can be deemed to be an
unpaid seller:

1. He must be unpaid and the price must be due

2. He must have an immediate right of action for the price
3. A bill of exchange or other negotiable instrument was recelved but the same has
been dishonoured.

When payment is made by a negotiable instrument it is usually a conditional payment, the

condition being that the instrument shall be duly honoured. If the instrument is not
honoured, the seller is deemed to be an 'unpaid seller'. A seller who has obtained a money
decree for the price of the goods is still an unpaid seller if the decree has not been
satisfied.

168
Seller' here means not only the actual seller, but also any person who is in the position of
a seller, eg, an agent of the seller to whom a bill of lading has been endorsed, or a
consignee or agent who has himself paid for the goods or is directly responsible for the
price [Sec, 45(2)1.

Right s of an unpaid seller

Against the goods Against the buyer,

personally

Where the Where the

property in the property in the
goods has passed goods has not
Sec. 46(1) passed [Sec.
46(2)1

Lien Stoppage Withholding8 Stoppage

in transit delivery in transit

Re-sale

Suit for Suit for

price damages

Repudiation Suit
of contract for
interes

169
2.26.1 RIGHTS AGAINST GOODS

Rights of an unpaid seller against the goods:

Where the property in the goods has passed to the buyer, an unpaid seller has the
following rights against the goods:

. Right of lien:
A lien is a right to retain possession of goods until payment of the price. It is available to
the unpaid seller of the goods who is in possession of them where
a. The goods have been sold without any stipulation as to credit

b. The goods have been sold on credit, but the term of credit has expired
C. The buyer becomes insolvent
i. Right of stoppage in transit:
The right of stoppage in transit is a right of stopping the goods in transit after the
unpaid seller has parted with the possession of the goods. He has the further right of
resuming possession of the goods as long as they are in the course of transit, and
retaining possession until payment or tender of the price. It is available to the unpaid
seller-

a. When the buyer becomes insolvent, and

b. When the goods are in transit
The buyer is said to be 'insolvent' when he has ceased to pay his debts in the ordinary
course of business or cannot pay his debts as they become due, whether he as committed
an act of insolvency or not.
The right of stoppage in transit is an extension of the right of lien, but it arises only on the
insolvency of the buyer and when the goods are in transit.
Transit is an intermediate stage. Goods are deemed to be in course of transit from the time
they are delivered to a carrier, or other bailee for the purpose of transmission to the buyer,
until the buyer or his agent takes delivery of them from such carrier or other bailee.
il. Right of Re-sale:
The unpaid seller can re-sell the goods
. Where the goods are of a perishable nature, or
. Where he gives notice to the buyer of his intention to re-sell the goods and the buyer
does not within a reasonable time pay or tender the price.
If, on re-sale, there is a loss to the seller, (i.e., the difference between the contract
price and the amount realised on re-sale of the goods), he can claim it from the buyer
as damages for breach of contract. If there is a surplus on the re-sale, he is not bound
to hand it over to the buyer because the buyer cannot be allowed to take advantage of
his own rong.
170
Where the property in the goods has not passed to the buyer, an unpaid seller has
the following rights against the goods:
iv. Right of withholding delivery
Where the property in goods has not passed to the buyer, an unpaid seller has, in
addition to his other remedies, a right of withholding delivery similar to and co-
extensive with his rights of lien and stoppage in transit where the property has
passed to the buyer.

V.
Right of stoppage in transit:
The right of stoppage in transit is a right of stopping the goods in transit after the
unpaid seller has parted with the possession of the goods. He has the further right of
resuming possession of the goods as long as they are in the course of transit, and
retaining possession until payment or tender of the price. It is available to the unpaid
seller
a. When the buyer becomes insolvent, and
b. When the goods are in transit
The buyer is said to be 'insolvent' when he has ceased to pay his debts in the
ordinary course of business or cannot pay his debts as they become due, whether he
as committed an act of insolvency or not.
The right of stoppage in transit is an extension of the right of lien, but it arises only
on the insolvency of the buyer and when the goods are in transit.
Transit is an intermediate stage. Goods are deemed to be in course of transit from the
time they are delivered to a carrier, or other bailee for the purpose of transmission to
the buyer, until the buyer or his agent takes delivery of them from such carrier or
other bailee.

2.26.2 RIGHTS AGAINST THE BUYER PERSONALLY

Rights of an unpaid seller against the buyer personally:
These are the rights which an unpaid seller may enforce against the buyer personally.
These rights of the seller against the buyer are called rights in personam as against the
rights in rem (i.e., the rights against the goods). and are in addition to his rights against the
goods. The rights in personam are as follows:

. Suit for price;

a. Where property has passed:

Where under a contract of sale the property in the goods has passed to the buyer and
the buyer wrongfully neglects or refuses to pay for the goods, the seller may sue him
for the price of the goods.

171
b. Where property has not passed:
Where under a contract of sale the price is payable on a certa day irrespective of
delivery and the buyer wrongfully neglects or refuses to pay such price, the seller
may sue him for the price. It makes no difference even if the property in the goods
has not passed and the goods have not been appropriated to the contract.

i. Suit for damages:

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the
seller may sue him for non-acceptance.

ii. Repudiation of contract before the due date:

Where the buyer repudiates the contract before the date of delivery., the seller may
either
a. Treat the contract as subsisting and wait till the date of delivery, or

b. He may treat the contract as rescinded and sue for damages for the breach. This rule
is known as the rule of anticipatory breach of contract".

iv. Suit for interest:

Where there is a specific agreement between the seller and the buyer as to interest on
the price of the goods from the date on which payment becomes due, the seller may
recover interest from the buyer. If, however there is not specific agreement to this
effect, the seller may charge interest on the price when it becomes due from such day
as he may notify to the buyer.

In the absence of a contract to the contrary, the Court may award interest to the seller
in a suit by him at such rate as it thinks fit on the amount of the price from the date
of the tender of the goods or from the date on which the price was payable [Girija
Prasad vs. Sardar Labh Singh, A.I.R. (1977) Pat. 241.