Formation of Contract under Sales of Good Act, 1930

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Sales of Good Act, 1930

The Indian Sale of Goods Act, 1930 is a Mercantile Law that came into being during the British Raj on 1 July 1930, borrowing heavily from the 1893 Sale of Goods Act. It provides for the creation of contracts where the seller transfers or agrees to transfer, for consideration, the title (ownership) of the goods to the buyer.

Formation of Contract

What is a Contract of Sale?

An agreement between a seller and a purchaser is a contract of sale. For a fixed price, the seller offers to deliver or sell something to a buyer that the buyer has agreed to pay. For these contracts, when the buyer pays and the seller delivers, the transfer of ownership occurs.

The sale of goods agreement is regulated by the Sale of Goods Act, 1930. An arrangement between the buyer and the seller agreeing to exchange property is the contract of sale. The contract of sale is specified in Section 4(1) as a contract for the sale of goods under which the seller sells or agrees to transfer the property for a price to a buyer.

The essentials of Contract of Sale

  1. At least two parties ought to be there.
  2. Products ought to be the basis of the contract.
  3.  Price.
  4. Transfer of ownership of property.
  5. Ultimate or Conditional.
  6. The other important constituents of a contract that is legitimate.

This article is mainly focused on formation of the contract that is mentioned under section 4 to section 17 of the Sales of Goods Act, 1930.

Sale and Agreement to Sell

The sale and an arrangement to sell is one of the foundation principles of the Sale of Goods Act 1930. Section 4 of the Sale of Goods Act 1930 deals directly with the sale and the selling agreement. It directly deals with sale and selling agreements.

Sale is described in Section 4(1) as a contract in which the seller transfers or agrees to move the goods to the buyer for a price. It is, therefore, occurring in the moment. Such a sales event is set, conditional and binding on the two parties. A sales contract is generated by the concept of purchasing or selling products at a cost and the affirmation of such a bid.

The agreement may involve the speedy transfer of the commodity or the prompt payment of costs or both, or the transport or payment of portions, or the delay of transport or payment, or both. Furthermore, before further notice in power, a contract of sale may be rendered or reported in writing or by word of mouth, or partly in writing or partly orally, or may be inferred by the actions of the parties, subject to the arrangements of any statute. The method of establishing a sales contract has thus been clarified in section 5 of the Act in question.

Existing goods are primarily the focus of a sales contract. The goods may also, however, be owned or possessed by the vendor or potential goods.

An agreement to sell may be described as a transfer of assets in goods to take place in the future, or a transfer may take place in accordance with the fulfilment of certain conditions. The same is mentioned in section 4 (3). When the given time elapses or the conditions necessary for the move to occur are met, an agreement to sell also becomes a sale. Thus, the terms and conditions of the sale of a property by the seller to the buyer are laid down by an agreement to sell.

The amount for which it is to be sold and the future date of payment are incorporated into these terms and conditions. It can also contain the definition of a contingent contract in compliance with Section 31 of the Indian Contract Act 1872. An arrangement to sell is also a deal, to do or not to do anything whether there is or is not occurrence collateral to such a contract.

All the terms and conditions reported for the understanding of sales must be carried out by all parties together and obeyed during the deal process before the selling deed is made or completed. An agreement to sell is, therefore, a simple document on which the sales deed is drawn up. In other words, a sale agreement may be considered a confirmation of the potential occurrence that will take place based on the fulfilment of the present terms and conditions.

As already mentioned above, the sale takes place immediately, while, depending on the compliance of certain terms and conditions, the agreement to sell takes place in the future. Therefore, an actual transfer takes place at the time of the transaction, while a potential transfer takes place at the time of the agreement to sell. Risks are passed immediately during purchases, while sales risks are added to the seller in the sales agreement before the products are transferred in the future. The sale is an executed contract, while the sale agreement is an executor agreement.

Formalities of Contract of Sale

Contract of Sale How Made

A contract of sale is concluded pursuant to section 5 of the Sale of Goods Act when-

For a price, there should be an offer to buy or sell products.

Acceptance of an offer of this kind.

Instant delivery or payment or both can be provided for by the contract. Both delivery and payment may be delayed in the case of payment or delivery by instalment.

In the case of MP Laghu Udyog Nigam v Gwalior Steel Sales Division[1], for example, these essentials were neither proven nor pleaded, so the court held that these essentials were compulsory and that the appeal had to be pleaded.

According to clause (2) of section 5 of the Sales of Goods Act, it should be in writing or word of mouth, or partially in writing and word of mouth, or implied by the actions of the parties.

A sales contract is treated as legitimate when all these necessary requirements are met.

Subject Matter of Contract of Sale

Section 6 states that commodities must always be the subject matter of the contract. The goods may be goods that are presently in existence or may be in the future. A contract for the selling of goods can also be concluded as an ordinary contract for the goods, the procurement of which is dependent on a contingency by the seller which may or may not occur.

A contract for the sale of a bag to be made by a factory, for example, is a legal contract. If, without the consent of the purchaser, a particular product is lost or impaired at the time the contract of sale is entered into, the contract shall be deemed void ab initio. The Section is based on the rule that if both parties to a contract are in error with respect to a matter of fact which is relevant for the contract, the contract shall be null and void, as referred to in Section 7 of the Act.

Section 8 of that act, however, deals with the goods which have died before the sale but after the agreement to sell, so this section again highlights the goods which, without any fault of the seller or the buyer, damage or perish. This just happens to be an example of a contract to sell.

The Price

Price’ means the monetary value for the sale of goods referred to in Section 2(10).[2]

Under Section 9, the price may be fixed by the contract or agreed to be fixed in the manner referred to in the contract, e.g. by the value-addressing agent, or to be calculated in the course of negotiations between the two parties.

Section 10 enables a third party to decide the price. If there is an agreement to sell goods on the conditions on which a third party has to set the price and the third party is unwilling or unable to make such an estimate, then the agreement will be null.

In the case that a third party is forbidden from setting a price by default on the part of either party, the third party shall be liable to the other party for damages and the other party shall not be liable for such damages. However, the buyer who has purchased and kept the goods must pay a fair price for them in any event.

Conditions and Warranties

Stipulation of Time:

As far as the cycle of payment of the price is concerned, the stipulation in that regard is not considered to be the essence of the contract of sale where a certain reason arises from the contractual terms. The distribution of goods should, however, be achieved without delay. Whether or not such a clause is of the form of a contract depends on the agreed conditions.

The price of goods can be fixed by contract or could be decided to be fixed in a particular manner at a later stage. The stipulations concerning the time of delivery are generally the crux of the contract.[3]

A condition is the basis of the whole contract and an integral part of the success of the contract in the sense of the Sale of Goods Act, 1930. The violation of the terms gives the aggrieved party the right to consider the contract as being repudiated. In other terms, if a condition is not met by the seller, the buyer has the option of repudiating the agreement or refusing to accept the goods. If the customer has already paid, the prices may be recovered and penalties may also be demanded for the violation of the contract.

Kinds of Conditions

  1. Expressed Condition – In a legal agreement, the dictionary sense of the word is defined as a declaration that says something must be done or occurs in the contract. It is said that the conditions which are imperative for the execution of the contract and are incorporated into the contract at the will of both parties are conveyed.
  2. Implied Condition – There are often implicit requirements that are presumed by the parties in various forms of sales contracts. Say, for example, the presumption of selling by definition or selling by sample. In Sections 14 to 17 of the Selling of Goods Act, 1930, implied conditions are defined. These implicit conditions are assumed by the parties, unless otherwise agreed, as if they were contained in the contract itself.

In the event of a violation of a condition, the aggrieved party may refuse the contract or seek damages. Only in the case of a breach of the guarantee can the aggrieved party demand damages. Violation of the condition may be deemed to be a violation of the guarantee. It is not necessary to see a violation of the promise as a breach of the condition.

Implied condition as to title

The basic, but important, implied conditions on the part of the seller in any sales contract are that –

(1)   He has the authority to sell the goods.

(2)   Secondly, he would have the right to sell the products at the time of execution of the contract in the event of an agreement to sell.

Consequently, if the seller does not have the right to sell the goods listed, the buyer may refuse or reject the goods. In addition, he is entitled to recover the full price paid by him.

The group purchased a second-hand motor car from the former in Rowland v. Divall [4]and paid for the same. He was stripped of it after six months, as the vendor had no right to sell the vehicle. It was held that it was the right of the aggrieved party to recover the money.

Implied condition as to the description

Moving to Section 15 of the Act, there is an implicit provision in the contract of sale that the goods must comply with the definition. The purchaser has the option of either approving or refusing products that do not adhere to the product description. For instance, say: where Ram buys a new car that he thinks is new from “B” and the car is not new. The car can be rejected by Ram ‘.

Goods must be of merchantable quality, referring to Section 16(2) of the Act in question. In other words, the items are of such high quality that a rational individual will consider them. For example, a B-bought sugar sack that was destroyed by ants. The marketability situation here is broken and it is unfit for use. From this section, it should be noted that before approving it, the buyer has the right to inspect the products. But a mere opportunity would not be sufficient to deprive the purchaser of his rights without an actual review. If, however, the inspection does not show the defect, but the goods are found to be defective within a fair period of time, he may dismiss the contract even if he approves the goods.

The implied conditions must be wholesome and sound and fairly fit for the purpose for which they are purchased, especially in the case of eatables. For example, Amit buys milk that contains typhoid germs and he dies because of its consumption. His wife will be entitled to seek damages.

Implied condition as to sale by sample

In the light of Section 17 of the Act, the following implied conditions can occur in a contract of sale by sample-

(1)   In terms of consistency, size, colour, etc., the actual products will correlate with the sample.

(2)   The purchaser is given a fair opportunity to compare the items with the sample.

(3)   In addition, the products are free of any flaws that make them irreplaceable.

For example, through sample sales to the French Army, a company sold some shoes made of a special kind of sole. It was later discovered when the bulk was shipped that they were not made from the same sole. The customer was entitled to the price and loss compensation.

Implied condition as to Sale by sample as well as a description

Referring to Section 15 of the Sale of Goods Act, 1930, both the sample and the description of the goods delivered must be compatible with both the sample and the description. There was a selling of international, refined rape-oil in Nichol v. Godis[5]. The supplied oil was the same as the sample, but a mixture of other oil was also available. In this case, it was held that the vendor was liable to refund the money charged.

Warranty is the additional stipulation and a written guarantee that is collateral to the main purpose of the contract. The effect of a breach of a warranty is that the aggrieved party cannot repudiate the whole contract however, can claim for the damages. Unlike in the case of breach of condition, in the breach of warranty, the buyer cannot treat the goods as repudiated.  [6]

Kinds of Warranty                                      

Expressed Warranty – The warranties which are generally agreed by both the parties and are inserted in the contract, it is said to be expressed warranties. [7]

Implied Warranty – Implied warranties are those warranties which, despite the fact that the parties did not expressly include them in the contract, the parties believed had been integrated into the sales contract. The following are the implicit warranties in the contract of sale, subject to the contract:

Warranty as undistributed possession: Section 14(2) of the Act provides that an implicit promise exists that the consumer would enjoy uninterrupted possession of the products. In fact, if the buyer is later disturbed at some stage by getting possession of the goods, he may sue the seller for breach of warranty.

For example, ‘X’ bought a second-hand bike from ‘Y’. He used the bike, unbeknownst to the fact that the bike was stolen. He was forced later to return the same one. X is entitled to sue Y for violation of the guarantee.

Warranty as to freedom from Encumbrances: There is an implicit warranty in Section 14(3) that the products are free of any costs or burdens on the part of any third party not known to the consumer. However, if it is proven that at the time of entering into the contract, the purchaser is aware of the truth, he will not be entitled to any claim.

Implied warranty to disclose Dangerous nature of the goods sold

If the products sold are potentially hazardous or likely to be hazardous and the buyer is not aware of the fact, it is the seller’s responsibility to warn the buyer of the likely risk. The seller would be responsible if there is a violation of this warranty.

Conclusion

In order to become a legal contract, an agreement for the selling of products must be subject to certain stages and procedures. The parties must verify the fairness of the agreement and then finalise it prior to entering into a contract or completing a contract. There is no formal framework for the drafting of the sales contract, which can be established in accordance with the particular needs of the parties.

However, the key framework for the basic conditions of the contract for the selling of goods is provided for in some clauses of this Article. The substance of a contract for the selling of goods really has no legal structure, but the addition of such clauses really enhances the contract.


[1] MP Laghu Udyog Nigam v Gwalior Steel Sales Division, AIR 1992 MP 215

[2] Ipleaders, https://blog.ipleaders.in/formalities-subject-matter-contract-sale/#Subject_Matter_of_Contract_of_Sale, last visited on : 06 February, 2021

[3] iPleaders, https://blog.ipleaders.in/formalities-subject-matter-contract-sale/#Subject_Matter_of_Contract_of_Sale, last visit on: 6th February, 2021

[4] Rowland v Divall [1923] 2 KB 500

[5] Nichol v. Godts (1854) 10 EX 191

[6] iPleaders, https://blog.ipleaders.in/condition-warranty/#Condition, last visited: 6th February, 2021

[7] iPleaders, https://blog.ipleaders.in/condition-warranty/#Condition, last visited : 6th February, 2021


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