BUSINESS REGULATIONS

MODULE 2: CONTRACT LAW

Indian Contract Act 1872- Definition and meaning of Contract, Essentials of valid contract,
Classification of contract, Breach of contract and Remedies to Breach of Contract.

Sale of Goods Act 1930 – Definition of contract of sale, Essentials of contract of sale, conditions and
warrantees, rights and duties of buyer, rights of unpaid seller.

INDIAN CONTRACT ACT 1872

Contract Meaning

A contract is a voluntary arrangement between two or more parties that is enforceable by law as a
binding legal agreement.

Contract law concerns the rights and duties that arise from agreements.

A contract is a legally enforceable agreement between two or more parties. It may be oral or written.
A contract is essentially a set of promises. Typically, each party promises to do something for the other
in exchange for a benefit.

Definition of contract

According to Sir John Salmond defines a contract as, “An agreement creating and defining
obligations between two parties.

According to Sir Fredirck Pollock defines, “Every agreement and promise enforceable at law is a
contract”.

The definition of Contract is given under S.2(h) of the Indian Contract Act, of 1872 which provides
‘a contract is an agreement enforceable by law’. Thus, a contract is an agreement made between two
or more parties which the law will enforce.

According to above definitions it is clear that a contract should consist of two elements

a. Agreement

b. Legal obligation (enforceable by law)

a. Agreement

Agreement is considered to be prime element to form any contract. An agreement is defined u/s 2 (e)
as ‘every promise and every set of promises, forming consideration for each other. When a proposal is

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accepted it becomes a promise. Thus, an agreement is an accepted proposal. Therefore, in order to

form an agreement there must be a proposal or an offer by one party and its acceptance by other party.
In short Agreement = Proposal + Acceptance.

b. Legal obligation (enforceable by law)

An agreement to become a contract must give rise to legal obligation. The second part of the definition
deals with enforceability by law. An agreement is enforceable u/s 10 if it is made by competent parties,
out of their free consent and for lawful object and consideration. Therefore, a Contract = Agreement +
Enforceability. Thus, all contracts are agreements but all agreements are not necessarily contracts.

Essentials elements of a valid Contract

1. Offer and Acceptance:

Basically, a contract unfolds when an offer by one party is accepted by the other party. The accepted
offer should be without any qualification and be definite. An offer needs to be clear, definite, complete
and final. It should be communicated to the offeree. A proposal when accepted becomes a promise or
agreement. The offer and acceptance must be ‘consensus ad idem’ which means that both the parties
must agree on the same thing in the same sense i.e. identity of wills or uniformity of minds.

Example:

A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts this offer, there
is an acceptance.

2. Intention to Create Legal Relationship:

The intention of the parties to a contract must be to create a legal relationship between them.
Agreements of social nature, as they do not contemplate legal relationship, are not contracts. For
instance, if a father fails to give his daughter the promised pocket money, the daughter cannot sue the
father, because it was purely a domestic arrangement. Thus, it is clear that all agreements, which do
not result in legal relations, are not contracts.

Example:

1. A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay. The
son cannot recover as it is a social agreement and does not create legal relations.

2. A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a contract
as it creates legal-relationship between them.

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3. A husband promised to pay his wife a household allowance of 30 pounds every month. Later, the
parties separated and the husband failed to pay. The wife used for allowance. Held that the wife was
not entitled for the allowance as the agreement was social and did not create any legal obligations.

3. Capacity to Contract:

If an agreement is entered between parties who are competent enough to contract, then the agreement
becomes a contract.

Example:

1. M, a person of unsound mind, enters into an agreement with S to sell his house for Rs.2 lac. It is not
a valid contract because M is not competent to contract.

2. A, aged 20 promises to sell his car to B for Rs.3 Lac. It is a valid contract because A is competent
to contract.

4. Genuine and Free Consent:

Free consent is another essential element of a valid contract. An agreement must have been made by
free consent of the parties. The contract would be void in case of mutual mistakes. When consent is
obtained by unfair means, the contract would be voidable.

Example:

1. A compels B to enter into a contract on the point of pistol. It is not a valid contract as the consent
of B is not free.

5. Lawful Object:

Objectives of an agreement should be lawful. It must not be illegal or immoral or opposed to public
policy. It is lawful unless it is forbidden by law. When the object of a contract is not lawful, the contract
is void.

Example:

A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.

6. Lawful Consideration:

Something in return is Consideration. In every contract, agreement must be supported by

consideration. It must be lawful and real.

Example:

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1. A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell the house,
and A’s promise to sell the house is the consideration for B’s promise to pay Rs.10 Lac. These are
lawful considerations.

2. A promise to obtain for B employment in the public service, and B promise to pay 10,000 rupees to
A. the agreement is void, as the consideration for it is unlawful.

7. Certainty and Possibility of Performance:

The agreements, in which the meaning is uncertain or if the agreement is not capable of being made
certain, it is deemed void. T&C of the contract should always be certain and cannot be vague. Any
contract that are uncertain are considered void. The terms of the agreement must also be capable of
performance and should not enforce impossible act.

Example:

1. A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement
is void because the terms are not clear.

2. A agrees to sell B a hundred tons of oil. It is not clear what is the kind of oil. The agreement is void
because of it uncertainty.

3. O agreed to purchase a van from S on hire-purchase terms. The price was to be paid over two years.
Held there was no contract as the terms were not certain about rate of interest and mode of payment.

8. Possibilities of performance

Example:

1. A agrees with B to discover treasure by magic, the agreement is not enforceable.

2. A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible of
performance

9. Legal Formalities: Legal formalities if any required for particular agreement such as registration,
writing, they must be followed. Writing is essential in order to affect a sale, lease, mortgage, gift of
immovable property etc. Registration is required in such cases and legal formalities in the relevant
legislation should be strictly followed.

Example:

1. A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law does not
require it to be in writing.

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2. A verbally promises to sell his house to B it is not a valid contract because the law requires that the
contract of immovable property must be in writing.

Classifications of Contract

1. Contracts on the basis of creation:

a) Express contract: Express contract is one which is made by words spoken or written.

Example No. 1: X says to Y, will you buy a car for ₹. 100000? Y says to X, I am ready to buy your car
for ₹. 100000. It is an express contract made rally.

Example No. 2: X writes a letter to Y, I offer to sell my car for ₹. 100000 to you. Y send a letter to Y, I
am ready to buy your car for ₹. 100000. It is an express contract made in writing.

b) Implied contract: An implied contract is one which is made otherwise than by works spoken or
written. It is inferred from the conduct of a person or the circumstance of the particular case.

Example: X, a coolie in uniform picks up the bag of Y to carry it from railway platform to the ------
without being used by Y to do so and Y allow 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 is bound to pay for the services of the coolie.

c) Quasi or constructive contract:

It is a contract in which there is no intention either side to make a contract, but the law imposes contract.
In such a contract eights and obligations arise not by any agreement between the practice but by
operation of law.

Example: where certain books are delivered to a wrong address the addresses is under an obligation
to either pay for them or return them.

2. Contracts on the basis of execution:

a) Executed contract: It is a contract where both the parties to the contract have fulfilled their
respective obligations under the contract.

Example: X offer to sell his car to Y for ₹. 1 lakh, Y accepts X offer. X delivers the car to y and Y pays
₹. 1 lakh 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
respective obligations.

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Example: X offers to sell his car to y for ₹ . 1 lakh. Y accepts X offer. It the car has not yet been
delivered by X and the price has not yet been paid by Y, it is an Executory contract.

c) Partly executed and partly executory contract: It is a contract where one of the parties to the
contract has fulfilled his obligation and the other party has still to perform his obligation.

Example: X offers to sell his car to y for ₹. 1 lakh on a credit of 1 month. Y accepts X offer. X sells the
car to Y. here the contract is executed as to X and Executory as to Y.

3. Contracts on the basis of enforceability:

a) Valid contract: A contract which satisfies all the conditions prescribed by law is a valid contract.

Example: X offers to marry y. y accepts X offer. This is a valid contract.

b) Void Contract: the term void contract is described as under section 2(j) of I.CA, 1872, A contract
which cases to be enforceable by law becomes void when it ceases to be enforceable. In other words,
a void contract is a contract which is 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 marry Y, Y accepts X offer. Later on, Y dies this contract was valid at the time of
its formation but became void at the death of Y.

c) Void Agreement: According to Section 2(g), an agreement not enforceable 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: in 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.

d) Voidable contract: According to section 2(i) of the Indian contract act, 1872, arrangement 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 other, is a voidable contract. In other words, A voidable contract is one which can be set aside
or avoided at the option of the aggrieved party. Until the contract is set aside by the aggrieved party,
it remains a valid contract. For e.g. a contract is treated as voidable at the option of the party whose
consent has been obtained under influence or fraud or misinterpretation.

Example: X threatens to kill Y, if the does not sell his house for ₹. 1 lakh to X. Y sells his house to X
and receives payment. Here, Y consent has been obtained by coercion and hence this contract is void
able at the option of Y the aggrieved party. If Y decides to avoid the contract he will have to return ₹.
1 lakh which he had received from X. If Y does not exercise his option to repudiate the contract within

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a reasonable time and in the meantime Z purchases that house from X for 1 lakh in good faith. Y cannot
repudiate the contract.

e) Illegal Agreement: An illegal agreement is one the object of which is unlawful. Such an agreement
cannot be enforced bylaw. Thus, illegal agreements are always void – ab- initio (i.e. void from the very
beginning)

Example: X agrees to y ₹. 1 lakh Y kills Z. Y kill and claims ₹. 1 lakh. Y cannot recover from X because
the agreement between X and Y is illegal and also its object is unlawful.

f) Unenforceable contract: It is contract which is actually valid but cannot be enforced because of
some technical defect (such as not in writing, under stamped). Such contracts can be enforced if the
technical defect involved is removed.

4. Classification of Contracts according to performance

According to the extent of performance of contracts, contracts may be classified as

1. Unilateral Contract

It is also called as one-sided contract. In a unilateral contract, only one party has to satisfy his obligation
at the time of the formation of it, the other party having fulfilled his obligation at the time of the
contract or before the contract comes into existence.

For example, A takes a public auto to go to Mount Road. A contract comes into existence as soon as
A was dropped in Mount Road. By that time, auto man has fulfilled his obligation, only A has to fulfil
his obligation i.e. paying the auto- man.

2. Bilateral Contract

A contract is said to be a bilateral contract where the obligations of both the parties to the contract are
pending at the time of formation of the contract. In this type of contract, a promise on one side is
exchanged for a promise on the other.

For example, A promises to stitch a shirt and B promises to pay Rs.750. Here A promises to stitch the
Shirt and B promises to pay. Thus, each party is both a promisor and a promisee.

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BREACH OF CONTRACT

What do you mean by breach of contract?

When any party to a contract, whether oral or written, fails to perform any of the contract’s terms, they
may be found in breach of contract. While there are many ways to breach a contract, common failures
include failure to deliver goods or services, failure to fully complete the job, failure to pay on time, or
providing inferior goods or services. In other words, a breach of contract is a broken promise to do or
provide something. To explore this concept, consider the following breach of contract definition.

Definition of Breach of Contract

1. An unjustifiable failure to perform terms of a contract.

2. A violation of contract through failure to perform, or through interference with the performance of
the contractual obligations.

Different ways to breach a contract

Types of Breaches

There are four different types of breaches of contract:

1. Actual Breach

Most breaches of contracts are one of two types: actual or anticipatory. Actual breaches occur when a
party fails to fulfil her obligations on the date performance is due, or when a party performs her
obligations and the other party refuses to perform.

2. Anticipatory Breach

Anticipatory breach occurs when a party refuses to perform her obligations under the contract before
the due date of performance. For example, if a party agrees to sell her car to a buyer in five days, but
then reneges on day three, she is anticipatorily breaching the contract.

3. Minor Breach

A contract breach can either be minor or material. A minor breach, also known as a partial breach, is
a failure to complete a minor, non-essential part of a contract. Although it is technically a breach, the
contract can still be completed.

4. Material Breach

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A material breach, on the other hand, is a substantial breach in contract terms usually excusing the
non-breaching party from performing and giving her the right to sue for damages. For example, in a
home purchase contract, a seller refusing to give the buyer the keys to the home after the buyer has
completed all contract terms is a material breach.

Remedies for breach of contract

1. Compensatory damages:

This is the most common breach of contract remedy. When compensatory damages are awarded, a
court orders the person that breached the contract to pay the other person enough money to get what
they were promised in the contract elsewhere.

For example, suppose you hire and pay someone to clean your house for $100, but he is unable to do
it. You search for a new cleaning service, and the cheapest one you find will clean your house for
$150. If this cost is found to be reasonable, your first cleaner would have to pay you $150 in
compensatory damages, allowing you to get your house professionally cleaned as the contract
intended.

2. Restitution:

When a court orders restitution, they tell the person that breached the contract to pay the other person
back. In the example above, the court would order the first cleaner to pay you back $100, since that's
what you paid him to clean your house.

3. Punitive damages:

This is a sum of money intended to punish the breaching party, and is usually reserved for cases in
which something morally reprehensible happened, such as a manufacturer deliberately selling a retailer
unsafe or substandard goods.

4. Nominal damages:

A court awards nominal damages when there has been a breach of contract but no party to the contract
suffered any harm.

5. Liquidated damages:

These are damages that the parties agree to pay in the event a contract is breached.

6. Quantum Meruit:

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A court can award one party payment for what they deserve for any work that she performed before
the other party breached the contract. For example, if the cleaner in the example above had cleaned
half the house, and then you decided you didn't want him to finish, he can demand $50 as quantum
meruit. Translated from Latin, the term means "as much as he deserved."

7. Remedies in Equity

A remedy in equity is when the court orders someone do something. This can also be called "injunctive
relief." In breach of contract cases, this can look like any of the following:

a. Cancellation: The court cancels the contract and decides that the parties are no longer bound
by it.

b. Specific Performance: This is when the court forces the breaching party to perform the
service or deliver the goods that they promised in the contract. This is typically reserved for cases
when the goods or services are unique and no other remedy will suffice.

CASE STUDY ON BREACH OF CONTRACT

Nike Drags Virat Kohli To Court for Breach of Contract

Aug 21, 2013, 19:19 IST | Agencies

In Its Suit, The Sports Giant Has Claimed That Team India's Rising Star Virat Kohli Breached
Their Contract by Disagreeing to Continue as Its Brand Ambassador Till 2014.

The Karnataka High Court on Wednesday ordered issuance of emergent notice to cricketer Virat Kohli
on a suit filed by sports giant Nike accusing him of breach of an endorsement contract with it.

Justice Huluvadi G Ramesh directed Kohli to maintain status quo for the next four weeks regarding
endorsement deal signed with Nike and adjourned the case.

In its suit filed on Tuesday, Nike claimed Kohli had breached the contract by disagreeing to continue
as its brand ambassador till 2014. The five-year contract from 2008 was extendable by one year. Virat
Kohli in legal trouble.

nd a media report says that Nike entered into a contract with Virat Kohli from January 1, 2007 to
December 31, 2007. The deal was renewed for the period between August 1, 2008 and July 31, 2013
for exclusive endorsement rights.

According to The Hindu, Kohli was paid Rs.1.42 crore for the contract that carried a clause for
extension for another year i.e. till 31 July, 2014 with certain conditions.

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Nike, in its suit, has pleaded with the court to restrain Kohli from entering into or negotiating any
endorsement deal with any third party until the expiry of the deal, company counsel Aditya Sondhi
said.

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SALE OF GOODS ACT 1930

Till 1930, transactions relating to sale and purchase of goods were regulated by the Indian Contract
Act,1872.

In 1930, Sections 76 to 123 of the Indian Contract Act, 1872 were repealed and a separate Act called
‘The Indian Sale of Goods Act,1930 was passed.

It came into force on 1st July, 1930.With effect from 22ndSeptember,1963, the word ‘Indian ‘was also
removed. Now, the present Act is called ‘The sales of goods act,1930’. This Act extends to the whole
of India except the State of Jammu and Kashmir.

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’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.”
‘Contract of sale’ is a generic term which includes both a sale as well as an agreement to sell.

Meaning and Definition of contract of sale

What is Contract of Sale of goods?

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 can be a contract of sale between one part-owner and another.

In other words, under a contract of sale, a seller (or vendor) in the capacity of the owner, or part-owner
of the goods, transfers or agrees to transfer the ownership in goods to the buyer (or purchaser) for an
agreed upon value in money (or money equivalent), called the price, paid or the promise to pay same.

A contract of sale may be absolute or conditional depending upon the desire of contracting parties.

Definition

According to Section 4 of the Sale of Goods Act a contract of the sale of goods is a contract whereby
the seller transfers, or agrees to transfer, the property in (i.e., ownership of) goods to the buyer for a
price.

Essentials elements of a Contract of Sale

The following six features are essential elements of any contract of sale of goods.

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▪ Goods

▪ Price

▪ Two parties

▪ Transfer of ownership

▪ All Essentials of a Valid Contract of Sale

▪ Includes both a ‘sale ‘and ‘an agreement to sell ‘

1. Two Parties:

A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from one
party to another. One cannot buy one’s own goods.

For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale)
to his family, it does not amount to a sale and there is no contract of sale. This is so because the seller
and buyer must be two different parties, as one person cannot be both a seller as well as a buyer.
However, there shall be a contract of sale between part owners.

Suppose A and B jointly own a television set, A may transfer his ownership in the television set to B,
thereby making B the sole owner of the goods. In the same way, a partner may buy goods from the firm
in which he is a partner, and vice-versa.

However, there is an exception against the general rule that no person can buy his own goods. Where
a Pawnee sells the goods pledged with him/her on non-payment of his/her money, the pawnor may buy
them in execution of a decree.

2. Goods:

The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable claims and money is regarded as ‘goods’. Contracts relating to services are not considered
as contract of sale. Immovable property is governed by a separate statute, ‘Transfer of Property Act’.

3. Transfer of ownership:

Transfer of property in goods is also integral to a contract of sale. The term ‘property in goods’ means
the ownership of the goods. In every contract of sale, there should be an agreement between the buyer
and the seller for transfer of ownership. Here property means the general property in goods, and not
merely a special property.

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Thus, it is the general property, which is transferred under a contract of sale as distinguished from
special property, which is transferred in case of pledge of goods, i.e., possession of goods is transferred
to the pledgee or Pawnee while the ownership rights remain with the pledger. Thus, in a contract of
sale there must be an absolute transfer of the ownership. It must be noted that the physical delivery of
goods is not essential for transferring the ownership.

4. Price:

The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of
goods’. Accordingly, consideration in a contract of sale has necessarily to be in money. Where goods
are offered as consideration for goods, it will not amount to sale, but it will be called barter or exchange,
which was prevalent in ancient times.

Similarly, if a person offers the goods to somebody else without consideration, it amounts to a gift or
charity and not sale. In explicit terms, goods must be sold for a definite amount of money, called the
price. However, the consideration can be partly in money and partly in valued up goods. Furthermore,
payment is not necessary at the time of making the contract of sale.

5. All essentials of a Valid contract:

A contract of sale is a special type of contract, therefore, to be valid, it must have all the essential
elements of a valid contract, viz., free consent, consideration, competency of contracting parties, lawful
object, legal formalities to be completed, etc. A contract of sale will be invalid if important elements
are missing. For instance, if A agreed to sell his car to B because B forced him to do so by means of
undue influence, this contract of sale is not valid since there is no free consent on the part of the
transferor.

6. Includes both a ‘Sale’ and ‘An Agreement to Sell’:

The ‘contract of sale’ is a generic term and includes both sale and an agreement to sell. The sale is an
executed or absolute contract whereas ‘an agreement to sell’ is an executory contract and implies a
conditional sale.

A contract of sale can be made merely by an offer, to buy or sell goods for a price, followed by
acceptance of such an offer. Interestingly, neither the payment of price nor the delivery of goods is
essential at the time of making the contract of sale unless otherwise agreed.

Subject to the provisions of the law for time being in force, a contract of sale may be made either orally
or in writing, or partly orally and partly in writing, or may even be implied from the conduct of the
parties.

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Conditions & Warranty

Meaning of Conditions [Section 12(2)]

A condition is a stipulation

1. Which is essential to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty [Section 12(3)]

A warranty is a stipulation

1. Which is collateral to the main purpose of the contract

2. The breach of which gives the aggrieved party a right to claim damages but not a right to reject
goods and to terminate the contract.

Distinguish Between Conditions and Warranties

Sl no Basis Condition Warranty

1 Meaning A requirement or event that should A warranty is an assurance given

be performed before the by the seller to the buyer about the
completion of another action, is state of the product, that the
known as Condition. prescribed facts are genuine.

2 In the case of The party can bring the contract to The party can only claim damages.
an end.
Breach

Condition/Warr
anty

3 What is it? The party can only claim damages. It is a subsidiary provision related
to the object of the contract.

4 Superiority of A condition has a direct link with A breach of warranty may not be
Condition: the essential party of the contract. treated as a breach of condition.

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5 Violation Violation of condition can be Violation of warranty does not

regarded as a violation of the affect the condition.
warranty.

6 Basic difference A breach of condition can also be A breach of warranty cannot be

considered as a breach of warranty. considered as a breach of condition.

Types of Conditions and Warranties

1. Express Conditions & Warranties: -

Conditions and warranties are those which are included in clear words and all parties are agree at the
time of contract.

Example

These are expressly provided in the contract. For example, a buyer desires to buy a Sony TV Model
No. 2020.Here, model no. is an express condition. In an advertisement for Sony TV for 5 years is an
express warranty.

2. Implied conditions: -

Those conditions are not included in the contract but the law presumes their existence in the contract
are called implied conditions.

1. Condition as to title {sec. 14(a)} or Right to sell. This right is considered as an implied condition
in every sale contract. It is presumed that he can sell the goods and he can enter in sale agreement.

2. Sale by Description {sec 15} In this case implied condition is that goods shall the correspond with
the description. A buyer can reject if the goods if these are not according the description.

3. Sale by Sample {sec 17} In this case goods must be supplied according the sample agreed upon
condition.

i. The buyer may be able to compare the sample with the bulk.

ii. The goods should be free from any defect.

iii. The bulk should match with the quality of the sample.

4. Sale by Sample & Description {sec 15} In this case goods supplied must correspond with sample
and description both. So there is implied condition in it that if bulk does not match with one even then
buyer may reject the goods.

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5. Condition of Merchantable Quality {sec 16 (2)} Merchantable quality means that the goods must
be sale able in the market as goods of that description are sold. In case of any defect a seller must
inform the buyer. It is implied condition.

6. Conditions as Quality to Fitness {16 (1)} Sometimes buyer informs the seller that he wants to
purchase the goods for particular purpose. It is implied condition that goods shall serve the purpose of
buyer. As the buyer relays on the seller’s skill then seller should provide the goods according the
description.

7. Wholesomeness Condition

It means conductive to health. When someone makes a sale of contract about the eatable goods this
condition is applied. If someone supply the goods and it damages to health then supplier will be liable
for damages.

Example: - Sam’s Food Company supplied food on the marriage party of Mr. Vicky. After eating the
food people were infected and died. The company was held liable in damages.

8. Conditions implied by custom [Section 16(3)]

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

2 (A) Implied warranties

1. Possession of Goods {sec 14(b)} It is an implied warranty on the part of the seller that buyer shall
enjoy the quiet possession of goods sold to him without any disturbance. In case of any disturbance a
buyer can claim the damages from the seller.

2. Dangerous Nature Must Be Disclosed It is necessary that seller should disclose the dangerous
nature of the good sold to the buyer. If he does not disclose then any type of loss suffered by the buyer
will be compensated by the seller.

Example: - Mr. Noor sold the camel to Mr. Naveed which is very dangerous. But he did not tell about
the nature of the camel. The camel killed to Mr. Baqir son of Mr. Naveed due to the ignorance of the
nature of camel Mr. Noor will be liable to compensate Mr. Naveed.

3. Burden on Property or Warranty of freedom from encumbrances [Section 14(c)] Before selling
the goods, it is necessary that these should be free from any charge or encumbrance from any third
party. If a seller does not tell about such burden on the goods to the buyer and later on the buyer suffers
a loss. The buyer can claim such damages from seller.

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Example: - Mr. Khaliq the owner of a horse, pledges it with Mr. Karim. After a month, Mr. Khaliq
obtains possession of the horse from Mr. Karim for some purpose and sells it to the Mr. Jawad. Mr.
Karim goes to Jawad and tells him the pledge story. Mr. Jawad has to make the payment of pledged
amount to Mr. Karim. In this case of breach of warranty and Mr. Jawad is entitled to claim
compensation from Mr. Khaliq.

Rights of an unpaid seller

What are the Rights of Unpaid Seller?

The seller who has not received price of goods sold or the seller who has got his negotiable instrument
dishonoured will become Unpaid Seller. Sale of goods act, 1930 Section 45 to 55 read about the rights
of Unpaid Seller. Those rights can be classified into two groups. They are as follows.

1. Rights of unpaid seller against Goods

2. Rights of unpaid seller against Buyer

1. What are the Rights of Unpaid Seller against Goods

When goods are in existence and title has not gone to buyer, Unpaid Seller can exercise the rights
against goods. These rights are categorized into three types. They are as follows.

a. Right of lien

b. Right of stoppage in transit

c. Right to Re-Sell

a. Right of lien

Right to retain goods by unpaid seller till amount is recovered is called right of lien. If unpaid seller
wants to exercise right of lien, he has to fulfil the following conditions.

• He must be unpaid seller

• There should be no credit terms in the Contract of Sale.

• After completion of credit period, right of lien can be exercised.

• The unpaid seller should have obtained those goods lawfully.

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• Amount must be due on those goods only against which right of lien is decided.

b. Right of stoppage in transit

Unpaid Seller has right to stop the goods in the transit itself. To exercise this right the following
conditions are to be fulfilled.

• He must be unpaid seller.

• Buyer must be insolvent.

• There should be no credit terms in the Contract of Sale. After expiry of Credit period, this right can
be exercised.

• Amount must be due on those goods only against which this right is desired.

At times the transport company may refuse to deliver the goods to buyer due to any reason. Then the
goods are said to be in transit. At times, the buyer may retain the goods at the transport company. Then
the goods are said to be not in transit.

c. Right to re-sale

The unpaid seller can re-sell the goods for non-payment of price by buyer. He can exercise this right
when the goods are of perishable nature while doing so it is beneficiary to the seller to give a notice to
buyer with regard to resale. If such notice is given seller can claim loss. If any on resale from the buyer.
On the other hand if there is profit on resale the former buyer cannot claim that profit. If notice is not
given the seller has to face adverse consequence. If there is any loss on re-sale, that loss cannot be
recovered from buyer. But in case of profit, seller has responsibility to pay that amount of profit to
buyer.

2. What are the Rights of Unpaid Seller against Buyer

At times it becomes inevitable choice to exercise rights on buyer for non-payment of price. The unpaid
seller can file suits against the buyer as explained below.

a. Right to sue for price

It is fundamental right of buyer to file a suit for recovery of unpaid price. In the case of sale. Suit will
be made for price balance, but not for compensation.

b. Right to sue to interest

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If the buyer makes unreasonable delay for making payment, the seller has right to claim interest also.

c. Right to sue for compensation

When an agreement to sell is breached, the seller can see only for compensation for the breach of
Contract. Under such circumstances he cannot sue for price.

d. Right to Sue for anticipatory contract

When an agreement to sell is breached by buyer before date of performance. It is called anticipatory
breach. Then also seller can sue for compensation.

Rights of the Buyer:

1). Right to have delivery of goods:

It is the basic right of the buyer to take the delivery of goods from the seller after payment of
consideration.

2). Right to Reject:

It is the right of the buyer to reject the goods if it is found that the seller has delivered him the goods
of other quantity or quality or if the buyer notices any defects in the goods he may also refuse to take
those defective goods.

3). Right to Cancel:

It is another right of the buyer to cancel the contract if the seller does not perform his part in the
stipulated time or otherwise, if the seller commits any negligence as to the performance of a contract
in that situation it is the right of the buyer to cancel the contract.

4). Right to claim damages:

If there is any defect in the Goods which may cause loss to the buyer or if due to the negligence of a
seller. The buyer sustains a loss, in such circumstance or eventuality, it is the right of the buyer to be
compensated or the buyer may claim damages.

5). Right to Examine:

It is the right of the buyer to examine the goods before their purchase and to duly satisfy himself as to
be quality of goods.

6). Right to sue for performance:

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If the seller refuses to obey the terms and conditions of the contract which gives irreparable loss to the
buyer, the buyer has the right to knock or approach the competent court of law to compel the seller for
specific performance.

7). Right to take insurance:

It is the duty of the seller to give notice to the buyer to be ensured the goods if the seller delivers in a
good way whether by sea or by any other method/means due to which apprehension that the goods
may be destroyed then it is the right of the buyer to ensure the goods before its delivery.

8). Right to sue for recovery of price:

It is the right of the buyer to file a suit for recovery of the price which he has already paid to the seller
but even then, the seller refuses to perform his part.

9). Right to claim interest:

It is the right of the buyer to claim an interest in the situation if the delay is caused by the seller in the
delivery of goods.

Duties of Buyer:

1). Duty to accept goods:

After the execution of the agreement if the seller delivers the goods to the buyer to accept the goods
without any delay. If the buyer refuses to take the goods from the seller and the goods sustain any
damage, the seller cannot be held responsible for the same.

2). Duty to pay the consideration:

It is the basic duty of the buyer to pay the agreed consideration to the seller on time.

3). Duty to pay damages:

It is the duty of the buyer to pay damages to the seller if due to the refusal of buyer receives goods
from the seller and the seller sustains any injury or for maintenance if the seller incurs any cost over
the goods.

4). Duty to perform agreement:

It is the duty of the buyer to perform his part/obligation in true spirit as agreed between buyer and
seller and in case of his non-performance, the buyer can be held liable for any loss to the seller.

5). Duty to apply for goods:

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It is another duty of the buyer to apply for delivery of goods to the seller. If it was agreed that the seller
would only deliver the goods if the buyer applies for its delivery.

IMPORTANT QUESTIONS

Two Marks Questions

1. What is an Agreement?
2. Define ‘Sale’ under Sale of Goods Act.
3. What is Free Consent ?
4. What is Nominal Damages?
5. Define Consideration.
6. Give the meaning of Quasi Contract.
7. What is Price as per Sale of Goods Act.
8. Give any two examples of Void Agreements.
9. What is Coercion?
10. Who is Minor?
11. Give the meaning of “Quantum Meruit”.
12. What do you mean by Offer?

Four and Twelve Marks Questions

1. What do you mean by Breach of Contract? Explain the remedies available to the aggrieved
party in case of breach of a contract.
2. Define Contract. Discuss the Essential elements of a Valid Contract.
3. Explain the rights and duties of the buyer under Sale of Goods Act, 1930.
4. Explain various implied Conditions and Warranties.
5. Who is an Unpaid Seller? Explain the Rights of an Unpaid Seller.
6. Distinguish between Condition and Warranty.
7. Explain the Classifications of Contract.

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