UNIT IV

Law Relating to Sale of Goods

 Definition of Contract of Sale
• Sec 4(1) defines contract of sale as under:
A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in the goods to the buyer for a price.
• The essentials to constitute such a contract are:
1. It is a contract between two parties, one known as the seller and the
other the buyer.
2. The subject-matter of a contract is “goods”.
3. The seller should transfer or agree to transfer the property (ownership)
in the goods to the buyer.
4. The transfer of property (ownership) in the goods from seller to the
buyer is for consideration known as “price”.
Sec 4 of Sales of Goods Act defines Sale and agreement to sell.—
(1) 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.
(2) A contract of sale may be absolute or conditional.
(3) 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.
(4) 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.
• To prove valid sale under the Sale of Goods Act,
I. Agreement between the competent parties
II. The price of the goods, and
III. Passing of property in the goods.
Thus, to constitute a transaction of sale of goods the essential
ingredients of sale under the Sale of Goods Act have to be
proved.
 Contract between the seller and
the buyer:
• It is a contract between a seller and a buyer. The seller means a
person who sells or agrees to sell and the buyer means a person
who buys or agrees to buy the goods.
• Seller and buyer should be two different persons.
• Therefore, if a person purchases his own goods, it is not sale.
However, there may be a contract of sale between one part-
owner and another.
Contract under Statutory Compulsion:
• Sometimes a contract may not be entered into by the normal process of
negotiation, but under a statutory compulsion.
• When the goods are supplied under a statutory compulsion whether that
results in sale or not, is the question which has arisen in a number of cases.
• In New India Sugar Mills V. Commissioner of Sale Tax, the majority decision
held that supply of sugar by a sugar factory in compliance with the orders of
the Sugar Controller of India under Sugar and Sugar Products Control Order,
1946 did not result in a contract of sale of goods, and hence that transaction
could not be subject to Sales Tax. However, Justice Hidayatullah, in his
dissenting opinion, observed that in such case there was a implied contract of
sale between the parties. In his view, “a compelled sale is nevertheless a sale”.
• In a later decision in Vishnu Agencies v. Commercial Tax Officer,
the Supreme Court overruled its earlier decision in the New India
Sugar Mills case, and expressed its agreement with the dissenting
judgment of Justice Hidayatullah, and held that the transaction of
supply of cement by a distributor to a permit holder in terms of
the provisions of West Bengal Cement Control Act and the West
Bengal Cement Control Order amounts to sale and the same is
eligible to Sales Tax.
• In Andhra Sugars Ltd. V. State of A.P., it has been held by the Supreme
Court that in case of sale under the compulsion of a statute, the consent
is not deemed to be caused by the coercion, undue influence, fraud,
misrepresentation or mistake. In this case, if any canegrower offered to
sell his sugarcane to a factory in a certain zone, the factory was bound
to accept the offer under the Andhra Pradesh Sugarcane (Regulation of
Supply and Purchase) Act, 1961.
• It was held that in such a case even though there was legal compulsion
for the factory to make the agreement, the validity of the agreement
was not affected on ground of absence of free consent, and such a
agreement being a contract of sale within the meaning of sec 4 of the
Sales of Goods Act, the State could validly impose purchase tax on the
purchase of sugarcane.
Formalities:
• The Sale of Goods Act does not prescribe the observance of any formalities for creating
a Contract of Sale. It rather expressly provides that such a contract may be made either
orally or in writing or partly orally and partly in writing or may be even implied.
•  Sec 5 of Sales of Goods Act states how Contract of sale is made.
1. A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate delivery of the
goods or immediate payment of the price or both, or for the delivery or payment by
instalments, or that the delivery or payment or both shall be postponed.
2. Subject to the provisions of any law for the time being in force, a contract of sale may
be made in writing or by word of mouth, or partly in writing and partly by word of
mouth or may be implied from the conduct of the parties.
Performance:
• The parties are free to provide as to when the performance of the
contract by each side will be made.

• They may provide that the delivery of the goods will be made either
immediately or by instalments or on some future date.

• Similarly, regarding payment of price too, the contract may require

immediate payment, or payment by instalments or payment on some
future date.
 GOODS
• Sec 2 (7) of the Sales of Goods Act defines “goods”.
• It states Goods as 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.
• So this Act deals with sale of movable property.
• Although the term “goods” means every kind of movable property but
certain things have been specifically excluded and certain other things
have been specifically included in the term, by the definition.
• Certain things have been specifically included in the term “goods” by
the Act.
• It 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.
• Sec 3 of Transfer of Property Act, 1882 states that “immovable
property” does not include standing timber, growing crops or grass.
These things are therefore movable property and thus goods.
• Standing timber has to be distinguished from trees, the former being
movable (with the intention of severing them from the land) and the
latter being immovable property.
• It may be noted that the things attached to or forming part of land, though
immovable property fall within the definition of goods, if they are agreed to be
severed before sale or under the contract of sale.
• So trees or doors and windows could be severed from the land and sold as goods.
Water, Electricity and Gas
While defining goods, the Sales of Goods Act does not make any mention about
water, electricity or gas.
In the Commissioner of Sales Tax, Madhya Pradesh v. Madhya Pradesh Electricity
Board, the Supreme Court has held that although electric energy is not tangible or
cannot be touched like a piece of wood or book, it is still “goods” as it can
transmitted, transferred, delivered, stored, possessed in the same way as any other
movable property. Section 2(d) in the Central Sales Tax Act, states that “goods”
includes all materials, articles, commodities and all other kinds of movable
property, but does not include newspapers, actionable claims, stocks, shares and
securities.
 GOODS

Electronic TV Lottery Tickets

Signals are goods (H.Anraj v. Govt. of
T.N.)

Railway Receipts Incomplete Film

Which is held to be (State of T.N. v.
a document of title Thiru Murugan
to goods Bros)
 Actionable Claims and Money
are not Goods
• The definition of the term “Goods” as contained in Sec 2(7) specifically
provides that actionable claims and money are not goods, and therefore,
their transfer is not governed by the provisions of the Sales of Goods Act.
• The transfer of actionable claims has been dealt under the provisions of the
Transfer of Property Act, 1882, and therefore, the transfer of the same has
been specifically excluded by the Sales of Goods Act.
• Sec 3 of the Transfer of Property Act defines actionable claim as: “actionable
claim means a claim to any debt, other than a debt secured by mortgage of
immoveable property or by hypothecation or pledge of moveable property,
or to any beneficial interest in moveable property not in the possession,
either actual or constructive, of the claimant, which the Civil Courts
recognise as affording grounds for relief, whether such debt or beneficial
interest be existent, accruing, conditional or contingent”.
• Money means the recognised currency in circulation, and for obvious
reasons it is not subject-matter of sale of goods.
• Money constitutes consideration for the sale of goods, rather than
itself being goods.
• Old and rare coins however, are goods and they can be sold and
purchased as such.

However, fixed deposit receipt is goods since it may be pledged as collateral

security. If the bank loan is not repaid, the bank may retain it as a collateral
security and file suit for recovery of loan.
 Kinds of Goods
• Existing Goods:
I. Specific goods
II. Unascertained goods

• Future Goods
• Sec 6 of The Sale of Goods Act, 1930 deals with ‘Existing or future
goods.’ It states:
• The goods which form the subject of a contract of sale may be either
existing goods, owned or possessed by the seller, or future goods.
• There may be a contract for the sale of goods the acquisition of which
by the seller depends upon a contingency which may or may not
happen.
• Where by a contract of sale the seller purports to effect a present sale
of future goods, the contract operates as an agreement to sell the
goods.
• Existing goods are such goods as are owned or possessed by the seller at
the time of making of contract.
Example: Seller may agree to sell rice which may be lying in his godown,
such rice would be considered to be existing goods.
• According to sec 2(6), “future goods” means goods to be manufactured
or produced or acquired by the seller after making of the contract of
sale.
Example: An agreement to sell wheat which has yet to be grown, or sell
phone which is yet to be manufactured is a contract in respect of future
goods.
• If the goods are future goods, the buyer cannot become the owner at
the time of making of the contract. Sec 6(3), therefore, provides that
where by a contract of sale, the seller purports to effect a present sale of
future goods, the contract operates as an agreement to sell the goods.
Existing goods may further be classified into:
I. Specific Goods
II. Unascertained Goods
• Section 2(14) in The Sale of Goods Act, 1930 states “specific goods” as
goods identified and agreed upon at the time a contract of sale is made;
and if the exact thing which is the subject-matter of the contract is known
to the parties, it is known as specific goods.
Example:
‘A’ has lots of horses and out of them, he sells his black horse with white
stripes to ‘B’, the particular horse being identified and agreed upon at the
time of contract, the same is considered to be specific goods.
• For specific goods, it is necessary that the goods must be identified and
agreed upon at the time of making of the contract and not subsequently.
• If the goods are not identified and agreed upon at the time of making of the
contract, they are known as unascertained goods.
Example:
‘A’ having 1000 bags of wheat in his godown sells only 100 bags to ‘B’ without
specifying those which he wants to deliver to ‘B’. It is a sale of unascertained
goods.
• It becomes relevant to see whether the goods are specific or unascertained
when one wants to know when the property in the goods pass from the seller to
the buyer.
• In case of specific goods, there is a possibility of the property in the goods
passing to the buyer at the time of making of the contract, whereas in the case
of unascertained goods, the property in the goods does not pass to the buyer
unless and until the goods are ascertained.
• Sec 18 of the Sales of Goods Act states that the Goods must be ascertained.—
Where there is a contract for the sale of unascertained goods, no property in the
goods is transferred to the buyer unless and until the goods are ascertained.
 Transfer of Property in the
Goods
• In every contract of sale there is a transfer of property in the goods from the seller
to the buyer.
• According to Sale of Goods Act, Property denotes ‘General property’ in the goods
rather than mere ‘Special Property’.
• A contract of sale of goods is a contract whereby the seller either transfers the
property (ownership) or agrees to transfer the property in the goods to the buyer.
• Transfer of property, i.e., the ownership in the goods from the seller to the buyer, is
the essence of the contract.
• A contract under which there is neither a transfer of property in the goods nor there
is an agreement to transfer the same cannot be considered to be a contract of sale.
• The transfer of property in the goods may be there either at the time of making of
the contract or at a later time.
 Price
• Consideration for the contract of sale has to be ‘Price’.
• According to Sec 2(10), ‘ Price means the money consideration for a sale of
goods.
• Modes of determination of Price: Price is an essential element in every
contract of sale of goods.
i. It may be fixed by the contract itself.
ii. It may be fixed in accordance with an agreed manner.
Aluminium Industries Ltd v. Minerals and Metals Trading Corpn.,
iii. It may be determined by a course of dealing between the parties.
• If the agreement envisages fixation of the price by the buyer corporation, the price fixed by a
committee of such corporation, the price fixed by a committee of such corporation will be the
price payable by the buyer, and the seller has to accept the same.
• Where the price is not determined according to any of the above stated manner, the buyer
shall pay a reasonable price to the seller. It is not necessary that the prevailing market price
will always be considered to be a reasonable price.
• However, there may be valuation by a third party.
• Section 10 of the Sale of Goods Act, 1930 states Agreement to sell at valuation.
(1) Where there is an agreement to sell goods on the terms that the price is to be fixed by the
valuation of a third party and such third party cannot or does not make such valuation, the
agreement is thereby avoided: Provided that, if the goods or any part thereof have been
delivered to, and appropriated by, the buyer, he shall pay a reasonable price therefor.
(2) Where such third party is prevented from making the valuation by the fault of the seller or
buyer, the party not in fault may maintain a suit for damages against the party in fault.
 Effect of Goods Perishing
1. Goods perishing before making the contract:
• Sec 7 of The Sale of Goods Act deals with Goods perishing before making of
contract.
• It states where there is a contract for the sale of specific goods, the contract is void
if the goods without the knowledge of the seller have, at the time when the
contract was made, perished or become so damaged as no longer to answer to
their description contract.
• Example: If A agrees to sell to B 1000 bags of cement lying in his godown and
unknown to A the whole of the cement has been damaged by rain water, the
agreement is void.
• So when the subject-matter has perished at the time of making of the contract, the
performance of the contract is impossible, and therefore such an agreement is void.
2. Goods Perishing before sale but after agreement to sell:
• Sec 8 of The Sale of Goods Act deals with Goods perishing before sale but
after agreement to sell.
• Where there is an agreement to sell specific goods, and subsequently the
goods without any fault on the part of the seller or buyer perish or
become so damaged as no longer to answer to their description in the
agreement before the risk passes to the buyer, the agreement is thereby
avoided.
• However, if there has been a sale and the goods have passed to the buyer
or the risk has been passed to the buyer, the contract will not be avoided.
 Conditions and Warranties
Sec 12 of Sale of Goods Act states about Condition and warranty.—
1.  A stipulation in a contract of sale with reference to goods which are the
subject thereof may be a condition or a warranty.
2. A condition is a stipulation essential to the main purpose of the contract,
the breach of which gives rise to a right to treat the contract as repudiated.
3. A warranty is a stipulation collateral to the main purpose of the contract,
the breach of which gives rise to a claim for damages but not to a right to
reject the goods and treat the contract as repudiated.
4. Whether a stipulation in a contract of sale is a condition or a warranty
depends in each case on the construction of the contract. A stipulation may
be a condition, though called a warranty in the contract.
 Conditions and Warranties
• In a contract of sale, there may be various terms or stipulations.
• Such stipulations may be either conditions or warranties.
• If the stipulation forms the very basic of the contract, or is the essential
to the main purpose of the contract, it is called a condition.
• If the stipulation is not essential to the main purpose of the contract
but is only of secondary importance, i.e. it is a collateral to the main
purpose of the contract, it is called a warranty.
• Whether a stipulation in a contract of sale is a condition or warranty
depends in each of the construction of the contract.
 Stipulation as to time
• According to Sec 55 of the Indian Contract Act, if the time of the performance of the
contract is of essence of the contract and the promisor makes a delay in the
performance of the contract, the contract is voidable at the option of the promisee.
• On the other hand, if the time of performance is not the essence of the contract, the
delayed performance by the promisor entitles the promisee to claim damages only
for the loss occasioned to him.
• Sec 11 of the Sale of Goods Act states about Stipulations as to time of payment.
Unless a different intention appears from the terms of the contract, stipulations as to
time of payment are not deemed to be of the essence of a contract of sale. Whether
any other stipulation as to time is of the essence of the contract or not depends on
the terms of the contract.
• So the parties are free to express a different intention in their contract.
• A condition is a stipulation essential to the main purpose of the
contract, the breach of which gives rise to a right to treat the contract
as repudiated.
• Warranty is a stipulation collateral to the main purpose of the
contract, its breach is not considered to be serious. Breach of
warranty- entitles the other party to claim damages.
Options to the buyer on breach of condition by the seller
When there is a breach of condition by the seller, the buyer may:
I. Treat the contract as repudiated, or
II. Waive the condition, or
III. Treat the breach of condition as breach of warranty.
 Breach of condition to be treated as a
breach of warranty
• Sec 13 of Sale of Goods Act states when condition is to be treated as warranty.
1. Where a contract of sale is subject to any condition to be fulfilled by the
seller, the buyer may waive the condition or elect to treat the breach of the
condition as a breach of warranty and not as a ground for treating the
contract as repudiated.
2. Where a contract of sale is not severable and the buyer has accepted the
goods or part thereof, the breach of any condition to be fulfilled by the
seller can only be treated as a breach of warranty and not as a ground for
rejecting the goods and treating the contract as repudiated, unless there is a
term of the contract, express or implied, to that effect.
3. Nothing in this section shall affect the case of any condition or warranty
fulfilment of which is excused by law by reason of impossibility or otherwise.
Sec 42 of the act states that the buyer is deemed to have accepted the
goods
• when he intimates to the seller that he has accepted them, or
• when the goods have been delivered to him and he does any act in
relation to them which is inconsistent with the ownership of the seller,
or
• when, after the lapse of a reasonable time, he retains the goods
without intimating to the seller that he has rejected them.
 Remedy for Breach of Warranty
• Sec 59 of the Act states Remedy for breach of warranty.
1. Where there is a breach of warranty by the seller, or where the buyer
elects or is compelled to treat any breach of a condition on the part of the
seller as a breach of warranty, the buyer is not by reason only of such
breach of warranty entitled to reject the goods; but he may
a)  set up against the seller the breach of warranty in diminution or extinction
of the price; or
b)  sue the seller for damages for breach of warranty.
2.  The fact that a buyer has set up a breach of warranty in diminution or
extinction of the price does not prevent him from suing for the same
breach of warranty if he has suffered further damage.
• Sometimes, the Performance may be excused if due to impossibility or
otherwise the fulfilment of a condition or a warranty which is excused by
law, there is no liability for the non-performance of the condition or the
warranty.
Liability of the Seller under Law of Torts
• Apart from the right to reject the goods or to claim compensation under
the Sale of Goods Act for breach of a condition or warranty on the part of
the seller, the buyer has also got a right to claim compensation under the
law of torts if by his(seller) negligence the seller delivers some dangerous
goods to the buyer which causes some harm to him.
• Clarke v. Army & Navy Cooperative Society Ltd.
 Implied Conditions and
Warranties
• Parties may expressly provide any condition or warranties in their
contract.
• Apart from what may be provided by the parties in the contract, certain
conditions and warranties as provided in sec 14-17, are impliedly there in
every contract of sale of goods.
• The implied conditions and warranties provided in the act are binding in
every contract of sale unless they are inconsistent with any express
condition and warranties agreed to by the parties.
 Implied Conditions
1. Implied Condition as to Title- Sec 14(a)
2. Implied condition in sale by description- Sec 15
Varley v. Whipp
3. Implied Condition in sale by sample as well as description- Sec 15
The rule of Caveat Emptor
• The maxim caveat emptor means ‘let the buyer beware’.
• According to this rule, the buyer himself should be careful while
purchasing the goods and he should himself ascertain that the goods
suit his purpose.
• There are two implied conditions which are exceptions to this rule.
4. Implied condition as to quality or fitness- Sec 16(1)
• The first exception to the rule of caveat Emptor.
• General rule- No implied condition or warranty as regards the quality or fitness of
the goods for any particular purpose.
• An exception laid down in sec 16(1) is that
I. where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the
buyer relies on the seller’s skill or judgment, and
II. the goods are of a description which it is in the course of the seller’s business to
supply (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose: Provided that,
in the case of a contract for the sale of a specified article under its patent or
other trade name, there is no implied condition as to its fitness for any
particular purpose.
Raghava Menon v. Kuttappan Nair
5. Implied Condition of Merchantable Quality- Sec 16(2)
• Second exception to the rule of Caveat Emptor.
• Where goods are bought by description from a 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.
• Provided that, if the buyer has examined the goods, there shall be no
implied condition as regards defects which such examination ought to have
revealed.
• Wilson v. Cockerell & Co Ltd.
• Sec 41 of the act states Buyer’s right of examining the goods.
6. Implied Conditions in a Sale by Sample- Sec 17
Sale by sample:—
• A contract of sale is a contract for sale by sample where there is a term
in the contract, express or implied, to that effect.
• 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 reasonable
examination of the sample.
 Implied Warranties
• Implied Warranty of Quiet Possession:-
Sec 14(b) of Sale of Goods Act states that there is an implied
warranty that the buyer shall have and enjoy quiet possession
of the goods.
• Implied Warranty against Encumbrances:-
Sec 14(c) of Sale of Goods Act states that the goods shall be
free from any charge or encumbrance in favour of any third
party not declared or known to the buyer before or at the time
when the contract is made.
 Exclusion of Implied Terms and
Conditions
• Sec 62 of Sale of Goods Act deals with Exclusion of implied terms and
conditions.
• Where any right, duty or liability would arise under a contract of sale
by implication of law, it may be negatived or varied
I. by express agreement or
II. by the course of dealing between the parties, or
III. by usage, if the usage is such as to bind both parties to the
contract.
Parties are free to make any agreement they like and “there is no rule
of la to prevent parties from making any bargain they please”.
•  Sec 16(4) states that an express warranty or condition does not
negative a warranty or condition implied by this Act unless
inconsistent therewith.
Ward v. Hobbs (case relates to pigs sold with all faults)

Sec 55 of the English Sale of Goods Act, 1893 permitted exclusion of

implied terms by an express agreement, course of dealing between the
parties and the usage of trade.
The courts in England devised the following methods to discourage the
exclusion of liability by the seller-
i. By requiring that there should be no fundamental breach of
contract. (Karsales (Harrow) Ltd. V. Wallis)
ii. By strict interpretation of exemption clauses. (Wallis v. Pratt)