International business laws lesson 03

39 Contract of Sale UNIT UNIT II 40 International Business Law LESSON 41 Contract of Sale CONTRACT OF SALE CONTENTS 3.0 Aims and Objectives 3.1 Introduction 3.1.1 3.2 3.3 3.4 Sale and Agreement to Sell Essentials of a Contract of Sale 3.2.1 Goods 3.2.2 Price 3.2.3 Transfer of General Property 3.2.4 Essential Elements of a Valid Contract Conditions and Warranties 3.3.1 Condition Sec 12 (2) 3.3.2 Warranty Sec 12 (3) 3.3.3 Distinction between a Condition and a Warranty 3.3.4 Implied Conditions 3.3.5 Implied Warranties Transfer of Property 3.4.1 Risk Follows Ownership 3.4.2 Action against Third Parties 3.5 Let us Sum up 3.6 Lesson End Activity 3.7 Keywords 3.8 Questions for Discussion 3.9 Suggested Readings 3.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: z Understand the meaning and importance of contract of sale z Write a critical appreciation of sale and agreement to sell z Learn about the concept of conditions and warranties z Study about the performance of contract of sale z Know the rights and duties of buyers and sellers under contract of sale 42 International Business Law 3.1 INTRODUCTION The sale of goods is the most common of all commercial contracts The knowledge of its main principles is of the utmost importance to all classes of the community The law relating to it is contained in the Sale of Goods Act, 1930 Prior to this Act, the law of sale of goods was contained in Lesson of the Indian Contract Act, 1872 The contract of sale of goods are subject to the general legal principles applicable to all contracts, such as offer and its acceptance, the capacity of the parties, free and real consent, consideration, and legality of the object, the general provisions of the Indian Contract Act continue to apply to contracts for the sale of goods in so far as they are not inconsistent with the express provisions of the Sale of Goods Act Contract of sale of goods 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 A contract of sale may be absolute or conditional The term contract of sale is a generic term and includes both a sale and an agreement to sell 3.1.1 Sale and Agreement to Sell 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 conditions thereafter to be fulfilled, the contract is called an agreement to sell An agreement to sell becomes a sale when the rime elapses or the conditions, subject to which the property in the goods is to be transferred, are fulfilled Transfer of property in foods for a price is the linchpin of the definition of contract of sale ‘Property’ means the general property in goods, and not merely a special property In other words, it means ‘the right to ownership’ When we say that the property in goods has passed from the seller to the buyer, it means that the seller ceases to be, and the buyer becomes the owner of the goods Check Your Progress What is the difference between sale and agreement to sale? ……………………………………………………………………………………… ……………………………………………………………………………………… 3.2 ESSENTIALS OF A CONTRACT OF SALE The following essential elements are necessary for a contract of sale: There must be two parties i.e., buyer and seller, to effect a contract of sale and they must be competent to contract ‘Buyer’ means a person who buys or agrees to buy foods ‘Seller’ means a person who sells or agrees to sell foods these two terms are complimentary 3.2.1 Goods There must be some goods the property in which is or is to be transferred from the seller to the buyer The goods which form the subject-matter of the contract of sale must be negotiable Transfer of immovable property is not regulated by the Sale of Goods Act 3.2.2 Price The consideration for the contract of sale, called price must be money When goods are exchanged for goods, it is not a sale but a barter there is however nothing to prevent the consideration from being partly in money and partly in goods 3.2.3 Transfer of General Property There must be a transfer of general property as distinguished from special property in goods from the seller to the buyer If A owns certain goods, he has general property in the goods If he pledges them with B, B has special property in the goods 3.2.4 Essential Elements of a Valid Contract All the essential elements of a valid contract must be present in the contract of sale How to make contract of sale? There is no particular form to constitute a contract of sale It is like any other contract, made by the ordinary method of offer by one party and its acceptance by the other party It may be made in writing or by word of mouth, or partly in writing and partly by word of mouth It may also be implied from the conduct of the parties or from the course of dealing between the parties The contract of sale may provide for the immediate delivery of the goods, or immediate payment of the price or both, or for the delivery or payment by installments or that the delivery or payment or both shall be postponed Transfer of property: In a sale, the property in the goods passes from the seller to the buyer immediately so that the seller is no more the owner of the goods sold In an agreement to sell, the transfer of property in the goods is to take place at a future time or subject to certain conditions to be fulfilled In this sense, a sale is an executed contract and an agreement to sell is an executory contract Type of goods: A sale can only be in case of existing and specific goods only An agreement to sell is mostly in case of future and contingent goods although in some cases it may refer to unascertained existing goods Risk of loss: In a sale, if the goods are destroyed The loss falls on the buyer even though the goods are in the possession of the seller In an agreement to sell, if the goods are destroyed, the loss falls on the seller, even though the goods are in the possession of the buyer Consequences of breach: In a sale, if the buyer fails to pay the price of the goods or if there is a breach of contract by the buyer, the seller can sue for the price even though the goods are still in his possession In an agreement to sell if there is a breach of contract by the buyer, the seller can only sue for damages and not for the price even though the goods are in the possession of the buyer Right to resell: In a sale, the seller cannot resell the goods If he does so the subsequent buyer does not acquire title to the goods In an agreement to sell, in case of resale, the buyer, who takes the goods for consideration and without notice of the prior agreement, gets a good title In such a case, the original buyer can only sue the seller for damages General and particular property: A sale is a contract plus conveyance, and creates jus in rem i.e., gives right to the buyer to enjoy the goods as against the world at large including the seller An agreement to sell is merely a contract, pure and simple, and creates jus in personam, i.e., gives a right to the buyer against the seller to sue for damages 43 Contract of Sale 44 International Business Law Insolvency of buyer: In a sale, if the buyer becomes insolvent before he pays for the goods, the seller, in the absence if a lien over the goods, must return them to the official receiver or assignee He can only claim a ratable dividend for the price of the goods In an agreement to sell, if the buyer becomes insolvent and has not yet paid the price the seller is not bound to part with the goods until he is paid for Insolvency of seller: In a sale, if the seller becomes insolvent, the buyer, being the owner, is entitled to recover the goods from the official receiver of assignee In an agreement to sell, if the buyer, who has paid the price, finds that the seller has become insolvent, he can only claim a ratable dividend and not the goods because property in them has not yet passed to him 3.3 CONDITIONS AND WARRANTIES Before entering into a contract of sale, a seller frequently makes representations or statements with reference to the goods which influence the buyer to clinch the bargain Such, representations or statements differ in character and importance Whether any statement or representation made by the seller with reference to the goods is a stipulation forming part of the contract or is a mere representation forming no part of the contract, depends on the construction of the contract If there are no such representations, the ordinary rule of law “let the buyer beware” applies This means the buyer gets the goods as they come and it is no part of the seller’s duty to point out the defects in the goods to the buyer The stipulation in a contract of sale with reference to goods which are subject thereof may be a condition or a warranty 3.3.1 Condition Sec 12 (2) A condition is a stipulation which is essential to the main purpose of the contract It goes to the root of the contract Its non fulfillment upsets the very basis of the contract It is defined by Fietcher Moulton as an “obligation which goes so directly to the distance of the contract or in other words it is so essential to its very nature, that its non performance may fairly be considered but the other party as a substantial failure to perform the contract at all.” If there is a breach of a condition, the aggrieved party can treat the contract as repudiated 3.3.2 Warranty Sec 12 (3) A warranty is a stipulation which is collateral to the main purpose of the contract It is defined as an “obligation which, though it must be performed is not so vital that a failure to perform it goes to the substance of the contract.” If there is a breach of a warranty, the aggrieved party can only claim damages and it has no right to treat the contract as repudiated Whether a stipulation in a contract of sale is a condition or a warranty depends in each case in the construction of the contract as a whole The court is not to be guided by the terminology used by the parties to the contract A stipulation may be a condition though called a warranty in the contract 3.3.3 Distinction between a Condition and a Warranty Difference as to value: A condition is a stipulation which is essential to the main purpose of the contract A warranty is a stipulation which is collateral to the main purpose of the contract Difference as to breach: If there is a breach of a condition, the aggrieved party can repudiate the contract of sale; in case of breach of a warranty, the aggrieved party can claim damages only 3 Difference as to treatment: A breach of a condition may be treated as a breach of a warranty This would happen where the aggrieved party is contented with damages only A breach of a warranty, however, cannot be treated as a breach of a condition Express and implied conditions and warranties: In a contract of sale of goods conditions and warranties may be express or implied Express conditions and warranties are those which are expressly provided in the contract Implied conditions and warranties are those which the law implies into the contract unless the parties stipulate the contrary Sec 16(4) further provides that an express warranty or condition does not negative an implied warranty or condition unless the express warranty or condition is inconsistent with the implied warranty or condition 3.3.4 Implied Conditions Condition as to title [sec 14 (a)]: In a contract of sale, unless the circumstances of the contract are such as to show a different intention, there is an implied condition on the part of the seller that- (a) in the case of a sale, he has a right to sell the goods, and secondly (b) in case of an agreement to sell he will have a right to sell the goods at the time when the property is to pass If the goods delivered can only be sold by infringing a trade mark, the seller has broken the condition that he had a right to sell the goods, the expression “right to sell” is wider than the “right to property” Where the seller having no title to the goods at the time of the sale, subsequently acquires a title, that title feeds the defective titles of both the original buyer and the subsequent buyer Sale by description [sec (15)]: Where there is a contract for the sale of goods by subscription, there is an implied condition that the goods shall correspond with the description The rule of law contained in sec 15 is summarized in the following maxim: “if you contract to sell peas, you cannot oblige a party to take beans If the description of the article tendered is different in any respect, it is not the article bargained for and the other party is bound to take it.” Sale of goods may include the following situations: (a) where the buyer has not seen the gods and rules on their description given by the seller, (b) where the buyer has seen the goods but he relies not on what he has seen but that was stated to him and the deviation of the foods from the description is not apparent, (c) packing of goods may sometimes be a part of the description, (d) sale by description as well as by sample Condition as to quality or fitness sec 16(1): Normally, in a contract if sale there is no implied condition as to quality or fitness of the goods for a particular purpose, the buyer must examine the fields thoroughly before he buys them in order to satisfy himself that the foods will be suitable for the purpose The following points should however be noted in this regard: (a) where the buyer, expressly or by implication, makes known to the seller the particular purpose for which he needs the goods and depends upon the skill and judgment of the seller whose business it is to supply goods of that description, there is an implied condition that the goods shall be reasonably fit for that purpose, (b) if the buyer purchasing an article for a particular use is suffering from an abnormality and it is not made known to the seller at the time of sale, implied condition of fitness does not apply (c) if the buyer purchases an article under its patent or other trade name, the implied condition that articles are fit for a particular purpose shall not apply, unless the buyer relies on the sellers skill and judgment and makes known to the seller that he so relies on him, (d) in case the goods can be used for a number of purposes, the buyer must tell the seller the particular purpose for which he requires the goods If he does not, he cannot hold the seller liable if the goods not suit the particular purpose for which he buys the goods 45 Contract of Sale 46 International Business Law Condition as to merchantability [sec 16(2)]: Where goods are bought by description form a seller who deals in goods of that description there is an implied condition that the goods are of merchantable quality This means goods should be such as are commercially saleable under the description by which they are known in the market at their full value Condition implied by custom: An implied condition as to quality or fitness for a particular purpose may be annexed by the usage of trade sec 16(3) In some cases, the purpose for which the goods are required may be ascertained from the acts and conduct of the parties to the sale, or from the nature of description of the article purchased, for instance, if a perambulator or a bottle of milk is purchased, the purpose for which it is purchased is implied in the thing itself, in such a case the buyer need not tell the seller the purpose for which he buys the goods Sale by sample [sec (17)]: 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 or 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 The defect should not however be apparent on a reasonable examination of the sample This implied condition applies only to latent defects, i.e., defects which are not discoverable on a reasonable examination of the sample the seller is not responsible for the defects which are patent, i.e., visible or discoverable by examination of the goods in case of patent defects, there is to breach of implied condition as to merchantability Condition as to wholesomeness: In the case of eatables and provisions, in addition to the implied condition as to merchantability there is another implied condition that the goods shall be wholesome 3.3.5 Implied Warranties The implied warranties in a contract of sale are as follows: Warranty of quiet possession [sec 14(b)]: In a contract of sale Unless there is a contrary intention, there is an implied warranty that the buyer shall have and enjoy quiet possession of the goods If the buyer is in any way disturbed in the enjoyment of the goods in consequence of the seller’s defective title to sell, he can claim damages from the seller Warranty of freedom from encumbrances [sec 14(c)]: In addition to the previous warranty, the buyer is entitled to a further warranty that the goods are not subject to any charge or right in favor of a third party If his possession is in any way disturbed by reason of the existence of any charge or encumbrance on the goods in favor of any third party, he shall have a right to claim damages for breach of this warranty Warranty as to quality or fitness by usage of trade [sec 16(4)]: An implied warranty as to quality or fitness for a particular purpose may be annexed by the usage of trade Warranty to disclose dangerous nature of goods: Where a person sells goods, knowing that the goods are inherently dangerous or they are likely to the dangerous to the buyer and that the buyer is ignorant of the danger he mist warm the buyer of the probable danger, otherwise he will be liable in damages Check Your Progress What you understand by ‘Express and implied conditions and warranties’? ……………………………………………………………………………………… ……………………………………………………………………………………… 3.4 TRANSFER OF PROPERTY There are generally three stages in the performance of a contract of sale of goods by a seller They are (a) the transfer of property in the goods; (b) the transfer of possession of the goods; and (c) the passing of the risk Out of these the transfer of property of goods form the seller to the buyer is the main object of a contract of sale The property in goods means the ownership of goods whereas possession refers to the custody or control of goods, it is important to know the precise moment of time at which the property of goods passes from the seller to the buyer for the following reasons: 3.4.1 Risk Follows Ownership Unless otherwise agreed, risk follows ownership whether delivery has been made or not and whether price had been paid or not Thus the risk of loss as a rule lies on the owner Sec 26 provides in this regard that, unless otherwise agreed, the goods remain at the seller’s until the property therein is transferred to the buyer, the goods are at the buyer’s risk whether delivery had been made or not But if delivery had been delayed through the fault of either the buyer or the seller, the goods are at the risk of the party at fault Thus risk and property go together 3.4.2 Action against Third Parties When the goods are in any way damaged or destroyed by the action if third parties, it is only the owner of the goods who can take action against them Insolvency of the seller or the buyer: In the event of insolvency of seller or buyer, the question whether the official receiver or assignee can take over the goods or not depends on whether the property in the goods has passed from the seller to the buyer Suit for the price: The seller can sue for the price, unless otherwise agreed, only if the goods have become the property of the buyer Passing of property: The primary rules for ascertaining when the property in goods passes to the buyer are as follows: (1) 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 (sec 18) (2) Intention of the parties: where there is a contract for the sale of specific or ascertained goods, the property in them passes to the buyer at the time when the parties intend it to pass For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case (sec 19(2)), when the intention of the parties cannot be ascertained then the rules contained in sec’s 20 to 24 apply namely: (a) specific goods, (b) unascertained goods, (c) goods sent on approval or on sale or return, (d) reservation of right of disposal Check Your Progress Fill in the blanks: A condition is a ………………… A warranty is a stipulation which is ………………… the main purpose of the contract A breach of a condition may be treated as a ………………… 47 Contract of Sale 48 International Business Law 3.5 LET US SUM UP 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 In a sale, the property in the goods passes from the seller to the buyer immediately so that the seller is no more the owner of the goods sold In an agreement to sell, the transfer of property in the goods is to take place at a future time or subject to certain conditions to be fulfilled There are generally three stages in the performance of a contract of sale of goods by a seller They are (a) the transfer of property in the goods; (b) the transfer of possession of the goods; and (c) the passing of the risk 3.6 LESSON END ACTIVITY Explain the following: Condition Warranty Sale and agreement to sell Sale by description 3.7 KEYWORDS 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 Warranty: A warranty is a stipulation which is collateral to the main purpose of the contract Condition: A condition is a stipulation which is essential to the main purpose if the contract 3.8 QUESTIONS FOR DISCUSSION Explain the concept of contract of sale and what are the essentials of contract of sale? Explain the difference between conditions and warranties Check Your Progress: Model Answers CYP 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 conditions thereafter to be fulfilled, the contract is called an agreement to sell An agreement to sell becomes a sale when the rime elapses or the conditions, subject to which the property in the goods is to be transferred, are fulfilled Contd… CYP Express and implied conditions and warranties: In a contract of sale of goods conditions and warranties may be express or implied Express conditions and warranties are those which are expressly provided in the contract Implied conditions and warranties are those which the law implies into the contract unless the parties stipulate the contrary CYP Stipulation Collateral to Breach of a warranty 3.9 SUGGESTED READINGS Herbert M Bohlman & Mary Jane Dundas, The Legal, Ethical, and International LawEnvironment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical, Regulatory & International Law Krishnaveni Muttai, Logistics Management Kapoor S K, International Law, Central Law Agency, 13th ed., Motilal Nehru Road, Allah bad, 2000 Kapoor N D, Elements of Mercantile Law, 26th ed., Sultan Chand & Sons, New Delhi, 2002 Gulshan S S, Business Law, Excel Books, New Delhi, 2002 Mithani D M, International Economics, 3rd ed., Himalaya Publishing House, Mumbai, 2000 49 Contract of Sale ...40 International Business Law LESSON 41 Contract of Sale CONTRACT OF SALE CONTENTS 3.0 Aims and Objectives 3.1 Introduction... Legal, Ethical, and International LawEnvironment of Business, 4th Edition, South-Western College Publishing, 1999 Miller, Roger LeRoy; Cross, Frank B., Legal Environment Today: Businessmen Its Ethical,... contract of sale z Know the rights and duties of buyers and sellers under contract of sale 42 International Business Law 3.1 INTRODUCTION The sale of goods is the most common of all commercial contracts