Welcome to Contract law II

Law of Sale of goods 1.1 (Definition & formation)

Maxime Chevalier (Lecturer, JGLS)

LL.M. International Arbitration (Stockholm University)
M.A Common law (Université de Paris V – Descartes)
 International Sale of goods

Which court is competent

Which law is applicable?

Elements that will determine the applicable law/competent court

- parties’ express choice of law

- law of the place of making the contract (lex loci contractu)
- law of place where the contract is to be performed (lex loci solutions)
International instruments

United Nations Convention on Contracts for the International Sale of Goods (CISG) Not ratified by India

(1) This Convention applies to contracts of sale of goods between parties whose places of
business are in different States:
(a) when the States are Contracting States; or
(b) when the rules of private international law lead to the application
of the law of a Contracting State.

Convention for the Unification of Certain Rules for International Carriage by Air 1999 (Montreal Convention) 
Customs Convention on the International Transport of Goods under Cover of TIR Carnets 1975 (TIR
Convention)

International Chamber of Commerce international commercial terms (Incoterms) 2020

Parties expressly opt for incoterms Ex: DDP, EXW

Definitions

See SOG Act S-2

3. Application of provisions of Act 9 of 1872.—The unrepealed provisions of the Indian Contract Act,
1872, save in so far as they are inconsistent with the express provisions of this Act, shall continue to
apply to contracts for the sale of goods.

Contract law mechanism still apply

But not if inconsistent with the SOG Act 1930

What is a Sale of goods ?

The contract needs to qualify as Sale of goods to be governed by the SOG Act 1930

Courts are not bound by the qualification given by the parties

It is the substance of the transaction evidenced by the agreement which must be looked at
[Khedut Sahakari Ginning & Pressing Society v State of Gujarat]

The substance of the matter must be ascertained by a consideration of the rights and liabilities of
the parties to be derived from a consideration of the whole of the agreement.
[Helby v Matthews]
A/ Definition of a Sale of goods contract

4. 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.

Difference between Delivery & Transfer of property

 1. Goods

Section 2 Definition
(7) “goods” means every kind of moveable 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;

Movable property” is defined in the General Clauses Act, 1897, section 3(34) as property of every
description except immovable property

What are goods

A share represents a bundle of rights which includes, inter alia, the rights (i) to elect directors;
(ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company, if
and when dividend is declared and distributed; and (iv) to share in the surplus, if any, on
liquidation [Hindustan Lever Employees’ Union v Hindustan Lever Ltd]

things attached to immovable property would be movable property where they are agreed to be
severed from the land or immovable property before sale.
What are not goods

Electricity.—Gas and electricity are not goods Contradictory view from Culcutta High Court
[Associated Power Co Ltd v Ram Taran Roy]

Actionable claim. – where a person has not the enjoyment of the thing, but merely a right
to recover it by a suit or action. Money due from a party is a thing in action or an actionable
claim. It is, therefore, not “goods”

“Money” means current money. Current money is not “goods”

Goods incorporated in a construciton contract

 Unascertained vs Specific goods

“If the goods are identified at the time of sale, they are specific goods; if
the goods are not identified at the time of the sale, they are unascertained
goods.” [Mulla book]

Specific goods Unascertained goods

- 10 kg of tomato out of the 100kg I have

- My blue car registered n°5927BH
- Motorcycle in a shop containing different models
- The 4 blue chairs size 20x50 that are in my house
- 50% of the production of my farm
- My motorcycle
- The entire production of my farm

The identification of “this particular good” means that it is ”specific good’

2. Transfer of property

Absolute and conditional contracts of sale

Sale and contract of Sale

Contract of sale and contract of work/labour

Contract of sale and contract of work/labour

“If a contract involves the sale of movable property as movable property, it would constitute a contract for
sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service
and the use of materials is incidental to the execution of the work, the contract would constitute a contract
of work and labour.” [Mulla Book]

Contract of sale vs contract of work

! The main purpose of the contract should be the transfer of property

So a contract for supply of an Air Conditioner may provide that a supplier of an Air Conditioner will fix it up in
the buyer’s premises. Such a contract would be a contract for sale as the work of fixing it up would be
incidental to sale [Sentinel Rolling Shutters & Engineering Co Pvt Ltd v The Commr]

A requiring new motor tyres for his car goes to a dealer and asks for tyres. Though fixing of
tyres to the car may not be an easy operation and may require an expert hand, yet it is a
contract of sale of goods. [Patnaik & Co v State of Orissa]
Rule: it depends on construction of a contract which has to be made by ascertaining the
real intention of the parties to be gathered by looking at their contract as a whole

A building contract involves a composite transaction of supply of goods and services. It is indivisible and
there involves no sale of goods [Gannon Dunkerley and Co v State of Rajasthan]

Goods provided in rendering medical service do not qualify as “sale” [Tata Main Hospital
v The State of Jharkhand, 2008]

- Contract for the assembling and installing machineries, plants and accessories
for a coke oven, battery and by-products plant at Sindri in the State of Bihar for
Rs 2,31,50,000.
- Goods provided by the constructor
- Goods were becoming the property of the client only at the end of the
construction
- The constructor was liable in case of any damage to the goods during the
construction
= the court opined that it was a contract for construction of specified works for a
lumpsum and not a contract of sale. [Carl Still v State of Bihar]
Absolute and conditional contracts of sale

4. Sale and agreement to sell.—

(2) A contract of sale may be absolute or conditional.

“A contract of sale may be absolute or conditional. It is absolute when it is a sale pure and simple, transferring
the property absolutely to the buyer. It is conditional if there are conditions annexed to the contract by the
parties.”

The contract is under condition that a specific event happens, ex:

- the boat reaches the port
- the maket price of the share gets over 100 USD within one month
- once the goods are manufactured

The contract can refer to a certain period of time:

- The contract will take effect in one month
- I will sell you my house in 1 year
- After the death of my uncle, the car will be yours against 1.000 USD etc.
Absolute and conditional contracts of sale

4. Sale and 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.

Then the Agreement to sell becomes a Sale

 Sale and contract of sale (or agreement to sell)

S. 4. Sale and agreement to sell.-

(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.

Immediate transfer of property = Sale

Transfer of property happening later = Contract for sale

The essential feature that distinguishes the contract of sale from an agreement to sell is that in a contract of
sale the property in the goods is transferred from the seller to the buyer immediately whereas in an
agreement to sell property is transferred on a future date/dates. An agreement to sell becomes a sale on
fulfilment of the conditions or when the time provided in the agreement elapses. [State of Uttaranchal
(now known as State of Uttarakhand) v Khurana Brothers]
Sale
“When under a contract of sale the property in the goods is transferred from the seller to the buyer, so that the
seller ceases to be the owner of the goods and the buyer becomes the owner, the contract of sale is called a
sale.

Agreement to sell
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.” [Pollock Book]
Practical consequence of the distinction

(1) The Sale, due to the transfer of property, creates a right on the goods (jus in rem) while
Agreement to sell gives either party a remedy against the person (jus in personam)

(2) If there has been a sale, and the buyer fails to pay for the goods, the seller may sue for the
price. Where there is merely an agreement to sell, and the buyer fails to accept and pay for the
goods, the seller can only sue for damages.

(3) If there is an agreement to sell, and the seller commits a breach, the buyer has only a
personal remedy against the seller, namely, a claim for damages. The goods are still the
property of the seller, and he can dispose of them as he likes. But if there has been a sale, and
the seller commits a breach, the buyer has not only a personal remedy against the seller, but
also the remedies which an owner has in respect of the goods themselves.

(4) If there is an agreement to sell, and the goods are destroyed, the loss (unless otherwise
agreed) falls on the seller, while, if there has been a sale, the loss (unless otherwise agreed)
falls upon the buyer, though the goods may never have come into his possession
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 Moot Problem explanation

CLAIMANT RESPONDENT

Principal Third Party

Michael Stanley
Dunder company Jim
Scott

Agent
Sub Agent

SOG Contract
B/ Formation of Sale of goods contract

S. 5. Contract of sale, how 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.

(1) Substance
(2) Form
4 substantive conditions

The expression “sale of goods” is a composite expression consisting of various ingredients or

elements. There are the elements of a bargain or contract of sale, the payment or promise of
payment of price, the delivery of goods and the actual passing of title and each one of them is
essential to a transaction of sale though the sale is not completed or concluded unless the
purchaser becomes the owner of property”. [Poppatlal Shah v State of Madras]

According to the law both of England and of India, in order to constitute a sale it is necessary that there should
be an agreement between the parties for the purpose of transferring title to the goods which, of course,
presupposes capacity to contract, that it must be supported by money consideration and that as a result of the
transaction property must actually pass in the goods. Unless all these elements are present, there can be no
sale” [State of Madras v Gannon Dunkerley & Co]

The price is an essential element of the transaction

Contract law requirements (offer/acceptation/intention/consideration…)

Delivery of Goods

Price

Transfer of property
Modalities of the contract

S- S. 5. Contract of sale, how made

“…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."

(i) Provision for delivery of goods./Delivery may be immediate, simultaneous, by instalments or in future.

(ii) Provision for payment of price. Payment of price may be immediate, simultaneous, by instalments or
in future.
 Formal conditions: no formal requirement

S. 5. Contract of sale, how made.-

(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.

(i) May be in writing.

(ii) May be by word of mouth.
(iii)  May be partly in writing and partly oral.
(iv)  May be implied from the conduct of parties or by course of their
business.
(v) In case of Government and certain statutory corporations, law provides for formal written
instruments under seal. This category is covered by words “subject to the provisions of any law for
the time being in force.
 There is no need for a writting

State of UP v Combined Chemicals Co Pvt Ltd

- Offer From one party

- The other party sent back a “letter of acceptance” referring to general conditions
- The formalities of the contract were then performed by parties

Thus, a contract had come into existence between the parties and the fact that the Director
of Agriculture did not sign the formal agreement sent by the respondent could not lead
to an inference that the contract had not been executed.
Some Sale of goods contracts provide for EarnestEarnest

A part of the price is paid in avance like a “deposit”

if the purchase is carried out, it goes in part payment of the price

if the purchase is not carried out because of the failure of the seller, the seller
is bound to pay it to the purchaser

if the purchase had fallen through by reason of the fault of the purchaser, the earnest is
forfeited to the seller who is entitled to retain the same
 Main elements of the SOG to be determined by the parties are:

1/ The Goods AGREEMENT 2/ The price

Which goods? What is the good’s value?

What quantity? How much should buyer pay?
What quality?
1/ The subject-matter of the contract (the goods)

What if the goods don’t exist/anymore ?

Yes

Futur goods
Existing goods

No before making the contract

Good that perished

before sale but after agreement to sell

S. 6. Existing or future goods.-
1. 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.

2. 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.

3. 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.
Futur goods

Section 2 (6)  “future goods” means goods to be manufactured or produced or acquired by the seller
after the making of the contract of sale;

”Goods again may be future goods, as where they do not exist at the time of the contract, but are to be
manufactured or produced or acquired by the seller after the making of the contract of sale.” [Mulla book]

Example: There is certainty as to their existence

- Car yet to be manufactured
- Vegetable that are still growing at the farm
- Animals that are not yet born
Seller might be liable is he does not deliver
- Etc…
Futur goods

(3) 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.

“The transaction is not a sale, but an agreement to sell. The reason is that “a man cannot in equity, any more
than at law, assign what has no existence.” But a man can agree to assign property which is to come into
existence in the future. Such a contract at law creates only a personal obligation to pass the property; it does not
create any real right or jus in rem.” [Mulla]

The buyer gets right against the Seller, but not over the goods

When the goods come into existence, give him a good title thereto against all persons excepting
anyone who, in the meantime and bona fide, may have had the property transferred to him.
Acquisition of goods depending on a contingency

S. 6. Existing or future goods.-

(2)  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.

This is a conditional contract, the Seller will not be liable if the even does not happen

A will sell the goods to B “if the goods arrive at the port”: the seller is not liable if the goods never arrive
[Boyd v Siffkin]

A will sell the goods to B “when the boat arrives at the port”: the seller is liable if the boat arrives at the port
but without the goods [Hale v Rawson]
Here the seller takes the risk of selling goods which might not exist
 Goods perishing before making of contract
7. Goods perishing before making of contract. — 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 in the contract.

CONDITIONS EFFECT

1. Specific goods Contract is void

2. Perished/damaged at the time the contract was made
3. Without knowledge of Seller

This principle is based on common mistake

on facts essentials to the contract
Specific goods

This section is confined to the case of specific goods. Specific goods mean goods identified and agreed upon
at the time a contract of sale is made.

It does not apply to unascertained goods

Ex: A agrees to sell to B 50 bales of Bengal cotton out of 3,000 bales in his godown. The godown
had, at the time of the contract, been destroyed by fire unknown to A. Here the sale is not of
specific goods, but of a certain quantity of unascertained goods. The contract is not void, and A
must procure 50 bales of Bengal cotton elsewhere or pay damages for the breach.
Where goods have become damaged

…perished or become so damaged as no longer to answer to their description in the contract…

If the goods do not correspond anymore to the contract, then the contract is void [Couturier v Hastie]

But if the goods, though damaged, answer to the description, the buyer must, apart from the warranty express
or implied, take the risk as to their quality and condition and must pay the price. The contract is not void in
such a case [Barr v Gibson]
The condition is fulfilled even if a part of the goods perished (not all of them)

Thus, if A agrees to sell to B a parcel of 700 bags of groundnuts lying at a particular place, and at the date of the
contract there were not 700 bags in the parcel but only 591 bags, the remaining 109 bags having been abstracted by a
third party before the date of the contract without the knowledge of the seller, the contract is void under this section.
[Barrow, Lane & Ballard, Ltd v Phillip Phillips & Co]

Ex: if the sale is for 1kg of gold but 0.5 disapeared, the whole transaction is void
Without knowledge of the Seller

This applies to the seller only, it does not matter if the buyer knows about it

If the Seller knew about it, the contract is not void and therefore, the Seller will be liable
[McRae v Commonwealth Disposals Commission]
8. 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.

Section 7 applied before the contract was made (contract void ab initio)

Seciton 8 applies one the contract is made, be before the Sale, hence before the passing of the risks

Contract not void ab initio but avoided (impossibility of performance)

Conditions Effect

1. Specific goods (if unascertain good, it does not releive Seller) The contract can be
2. Perished/damaged after the contract but before the Sale avoided
(impossibility to
3. Without the fault of any of the parties perform)
4. Risks have not yet passed to the Buyer
2. The price

By the parties

How is the price to be determined?

By reference to third party

! Price (money) is a NECESSARY component of SOG

However parties can leave its determination to a later moment

An agreement which provides for the future fixation of price either by the parties themselves or by a third
party is capable of being made certain and is not invalid as provided under section 29 of the Indian Contract
Act, 1872 [MS Madhusoodhanan v Kerala Kaumudi Pvt Ltd]

Determination of price by expert is possible 29. Agreements void for uncertainty.—

Agreements, the meaning of which is not
certain, or capable of being made certain,
are void.
 Determination according to parties’ intention
9. Ascertainment of price.—
(1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in manner thereby
agreed or may be determined by the course of dealing between the parties.

(2) Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the
seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances
of each particular case.

How can parties determine the price in their SOG contract?

Price fixed in the contract

Price left to be fixed at a manner tereby agreed

By the course of dealing between the parties

Price left to be fixed at a manner tereby agreed

The parties will agree as to what reference or what process/calculation method should be folowed
in order to detemrine the price

Example

- The price of the Shares will correspond to their value on the Stock Market at a specific date

- The price of the Goods will be indexed in the price of gold at the time of the sale (usually they take a reference
from their particular industry)

- The price of the rent will correspond the the medium rent on the neighbourhood + 20%

- The price of the gas will be: (price of gold) x (0.5827 – national index/2) / (precedent oil industry cashflow x 0.982)
 By the course of dealing between the parties

You take some aspects of the relationship as reference

Ex: Every Monday we make a SOG for 1kg of tomatoes at 10 INR/kg.

 If next Monday I forgot to put the price in the contract, our course of dealing shows that our “usual price” is 10
INR/kg
Determination of the price by “reasonable price”

Reasonable price

9. Ascertainment of price.—
(2) Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller
a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each
particular case.

The “reasonable price”is not defined. The statute gives a flexible definition

“a question of facts dependent on the circumstances of each particular case”

 Price according to valuation

The parties agree, from the beginning, that the price will be assessed by a third party

Example of such clause

“ Price: the price of the shares will be determined by an expert folowing the
signature of the agreement to sell”

Situation 1 Situation 2 Situation 3

The expert can determine the price The expert cannot/does not The expert cannot/does not
determine the price determine the price

But goods already

The “Agreement to sell”
becomes a “Sale” at the price
determined by the expert
The agreement to sell can be avoided
delivered/appropriated
The “Agreement to sell”
becomes a “Sale”, buyer mus
pay reasonable price
10. 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.

The contract is void if the expert does not/cannot determine the price

Unless the goods have already been delivered/appropriated

Obligation to pay “reasonable price”

(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.

Condition Effect

One party prevent the expert from doing valuation Such party is liable to pay damages

PRICE DAMAGES

THEY ARE NOT THE SAME THING

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