Mercantile Law (Sale of Goods Act)

1. Contract of Sale of Goods

DEFINITIONS AND SCOPE

DEFINITIONS [2]The Sale of Goods Act, 1930 defines various terms used in the Act as given below:

means every moveable property other than actionable claims and money,and includes electricity, water gas, stock and shares, growing crops,

goods

specificgoodsfuturegoodsdeliverydeliverable state

document

to title ofgoods

pricepropertyquality of goodsbuyerseller

insolvent

mercantile agent

fault

grass, and things attached to or forming part of the land which are agreedto be served before sale or contract of sale.means goods identified and agreed upon at the time a contract of sale is made.means goods to be manufactured or produced or acquired by the seller after making the contract for sale.means voluntary transfer of possession from one person to another. goods are under deliverable state when buyers would be bound to take delivery of them under contract.includes a bill of lading, dock-warrant, warehouse keeper’s certificate, wharfingers’ certificate, railway receipts, warrant or order for delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.means the money consideration for a sale of goods.means the general property in goods, and not merely a special property. includes their state or condition.

means a person who buys or agrees to buy goods.means a person who sells or agrees to sell goods.means a person who has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of insolvency or not.means a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.means wrongful act or default.

All other expressions shall have the same meanings as defined under Contract Act, 1872.

APPLICATION OF CONTRACT ACT [3] The provisions of Contract Act, 1872 shall continue to apply to firms so far as they are not inconsistent with the provisions of Sale of Goods Act, 1930.

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FORMATION OF CONTRACT

CONTRACT OF SALE [4] It is a contract where:

(a) the seller;(b) transfers or agrees to transfer;(c) the property in goods;(d) to the buyer;(e) for a price.

The term contract of sale includes both “sale” and “agreement to sell”.

The contract of sale may be absolute or conditional and there may be a contract of sale between one part-owner and another.

SALE AND AGREEMENT TO SELL [4]The contract in which property in goods is transferred from seller to buyer is called “sale”.

Where the transfer of property is to take place in future or subject to some condition to be fulfilled in future is called “agreement to sell”.

Illustration

Facts: On 1st January 2007, Anwar agrees with Babar that he will sell Babar his motorbike

on 15th January 2007 for a sum of Rs.30,000/-. Is it sale or agreement to sell?

Solution: It is agreement to sell since transfer of ownership shall take place at a future time.

1.

2.

3.

4.

DIFFERENCETransfer ofproperty(ownership)

Risk of loss

Consequences of breach

Right of resale

SALEThe property in goods passes to the buyer immediately at the time of making the contract.The risk of loss is that of buyer because the risk of loss prima facie passes with property.In case buyer makes default in payment, the seller can sue for price even if the goods are in his (seller) possession.

The seller in possession of goods after sale cannot resale the goods. If he does so, the subsequent buyer having knowledge of the previous sale does not acquire a title to the goods.

AGREEMENT TO SELLThe seller remains the owner of goods until the agreement to sell becomes sale.The risk of loss remains that of seller as he is still the owner of goods.If buyer makes default in payment, the seller can sue only for damages and not for price, even though thepossession has beentransferred to the buyer. The property in the goods remains with the seller and as such he can dispose of the goods as he likes and the original buyer can sue him for the breach of contract only.

Mercantile Law (Sale of Goods Act)

5.

6.

Insolvency ofbuyer

Insolvency of seller

If the buyer is adjudged insolventbefore he pays for the goods, the seller (unless he has right of lien) must deliver the goods to official assignee. The seller is entitled only to a ratable dividend for the price of goods.The buyer is entitled to receive goods from official assignee if he has paid for the goods.

If the buyer is adjudgedinsolvent before he pays for the goods, the seller may refuse to deliver the goods tothe official assignee unless paid for.

If buyer has paid the price, he shall be entitled to ratable dividend as a creditor only.

An “agreement to sell” becomes a “sale” when time elapses or conditions mentioned above are fulfilled.

Illustration Facts: Jazib agrees to purchase Anthony’s car for Rs.500,000/- provided Anthony stands surety for him with Salman. Is it sale or agreement to sell?

Solution: It is an agreement to sell. It becomes the sale when the condition is fulfilled by Anthony.

CONTRACT OF SALE HOW MADE [5] A contract for sale is made by an offer and acceptance to buy or sell. The contract may provide for: (a) immediate delivery of goods or payment of price or both;(b) delivery or payments by installments; or(c) postponement of delivery or payment or both.

Illustration Facts: A dealer in televisions gives a ‘Sony’ TV to a customer on the terms that Rs.100/-should be paid by him immediately and Rs.200 more in two monthly equal installments. It was further agreed that if the TV is found defective the customer may return it within a week but not later. The customer makes default in paying the last installment. Can the TV dealer take back the TV on his default?

Solution: No, the TV dealer cannot take back the TV on default by the customer because it is contract of sale (the property in goods have been transferred) and not of hire purchase.

Subject to any other law in force, a contract may be: (a) written or oral;(b) partly written and partly oral; or(c) implied from the conduct of parties.

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SUBJECT MATTER OF CONTRACT

KINDS OF GOODS The following are two main kinds of goods:

(a) existing goods (which may be specific or unascertained); and(b) future goods (which may be certain or contingent).

EXISTING OR FUTURE GOODS [6]The goods which are subject matter of contract may be existing (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 affect the present sale of future goods, the contract operates as an agreement to sell.

GOODS PERISHING BEFORE MAKING OF CONTRACT [7]Contract of sale of specific goods is void if at the time of making the contract without the knowledge of the seller goods perish or become so damaged as no longer to answer to their description in the contract e.g. where cement is spoiled by water and becomes almost stone and cannot be used as cement. The perishing also includes loss by theft and lawful requisition of goods by the government.

IllustrationFacts: Anwar agrees to sell to Babar a certain horse. It turns out that the horse was dead at the time of bargain, though neither party was aware of the fact. Discuss the validity of the contract.

Solution: The agreement is void.

In case part of goods is perished, the following rule applies:(a) if contract is indivisible, it shall be void; and(b) if contract is divisible, it will not be void and the part available in good condition must

be accepted by the buyer.

IllustrationFacts: There was a contract for the sale of a parcel containing 50 bags of spices of various qualities. Unknown to the seller, 10 bags had been stolen at the time of the contract. The seller delivered the remaining 40 bags and on refusal of buyer to take them, brought an action for the price. Discuss the validity of the contract.

Solution: The contract, being indivisible, had become void by reason of loss of goods. However, if there had been all bags of same weight and quality for certain price per bag, the contract would have been divisible.

Mercantile Law (Sale of Goods Act)

PERISHING BEFORE SALE BUT AFTER AGREEMENT TO SELL [8] When goods which are subject matter of an agreement to sell perish or damaged subsequently before the risk passes to buyer the agreement is avoided if there is no fault of buyer or seller.

IllustrationFacts: A buyer took a horse on a trial for 10 days on condition that if found suitable for his purpose the bargain would become absolute. The horse died on 5th day without any fault of either party. Discuss the position of both parties.

Solution: The contract, which was in the form of an agreement to sell, becomes void and the seller shall bear the loss.

Illustration Facts: Zafar had contracted to erect machinery on Basher’s premises; the price was to be paid on completion. During the course of work, there was a fire which completely destroyed the premises and machinery. Discuss the rights and liabilities of both the parties.

Solution: Both the parties are excused from performance and Zafar is not entitled to any payment as the price was payable on the completion of entire work.

If only part of goods agreed to be sold perish, the contract becomes void if it is indivisible.

THE PRICE

ASCERTAINMENT OF PRICE [9] The price may be: (a) fixed by the contract;(b) left to be fixed in an agreed manner;(c) determined by course of dealing between the parties.

Where the price is not determined as above the buyer shall pay a reasonable price determined on circumstances of particular case. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

AGREEMENT TO SELL AT VALUATION [10] When under agreement to sell price is to be set as per valuation by third party and such third party cannot or does not make such valuation, the agreement is avoided. However, the buyer shall pay a reasonable price for the goods or part of goods received and appropriated by him.

Illustration Facts: Kamran agrees to sell to Jazib on the terms that the price was to be fixed by Ghalib. Jazib takes the delivery of one car immediately. Ghalib refuses to oblige Kamran and Jazib and fixes no price. Kamran asks for the return of the car already delivered whereas Jazib

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insists on the delivery of the second car to him for the reasonable price of both the cars. Decide the case.

Solution: As regards the car already delivered, Kamran cannot ask for its return and must accept a reasonable price for that. As regards the second car, Jazib cannot insist on its

delivery to him since the contract has become void.

Where third party is prevented from valuation by the fault of buyer or seller, the party not in default may maintain a suit for damages against the party in default.