Sales of Goods Act

Sale and Contract of Sale

 What is a Sale?

A sale consists of a transaction between two parties, i.e. the buyer and the seller.

In each transaction, the following happens:

• There is a sale of movable goods.
• Between two parties, a buyer and a seller.

For example:          A housewife buys a box of juice.

A chemical company buys a truckload of salt.

An office goer buys a car.

The three examples show the sale of goods. The goods sold are a box of juice, a truckload of salt and a car. The buyer in these illustrations is the housewife, the chemical company and the office goer respectively. The seller is the person or company or shopkeeper who sells the goods. All the illustrations show that in a Sale or Purchase, transfer of ownership of goods takes place.

Thus, the scope of the Act is:

• To deal with sale of goods and not mortgages.
• To deal with goods, not with actionable claims and money.

 What is a Contract of Sale?

According to Section 4(1) of the Sale of Goods Act 1930, “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.”

Thus, a contract of sale is a contract by which the ownership of movable goods is transferred from the buyer to the seller.

The above definition brings out the following elements of contract of sale. These are:

• It is a contract as specified in the Indian contract Act 1872.
• Existence of two parties: a buyer and a seller.
• Goods for exchange between two parties.
• Transfer or agreement to transfer property.
• Price as mutually determined.

These points are discussed below:-

(1)         A contract: A sale or an agreement to sell is in accordance with all the essential elements of a valid contract. Money is the essence of any transaction.

(2)      Two parties: A seller and a buyer. The Buyer is a person who buys or agrees to buy goods. The Seller is a person who sells or agrees to sell goods. The Act does not permit the buyer and the seller to be the same person. 

Case Law 1: State of Gujarat Vs Ramanlal : A partnership firm was dissolved and the surplus assets including some stock were divided among the partners in specie. The Sale tax officer was interested in taxing this as a sale. The court held that the property distributed among the partners was their own. They could not sell this property to themselves. Not being a sale, there could be no levying of sales tax

 Exception to the rule: A part owner may sell to another part owner.

When a person’s goods are sold in execution of a decree, he may himself buy them back from the trustee. King Vs England 

(2)         Goods: It is important, that there are ‘some goods’ for a valid sale or for an agreement to sell’.

Illustration: Akash agrees to sell to Bhasker the wheat crop which is grown in his (Akash’s) field. They agreed that upon the payment of the price, Bhakser may cut the crop and take it away. It is a valid contract of sale as the growing crop is included in the term’goods’, and can be validly sold.

“Goods’ means 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”[Section 2(7)]. It may be noted that the contracts relating to actionable claims, immovable property and services are not covered by this Act.

A      ‘Actionable claims’ are the claims, which can be enforced through law, e.g, a debt due from one person to another is an actionable claim.

B      ‘Money’ here means legal tender (i.e. currency of the country). Rare coins can be treated as goods and sold.

Case Law 2: Kuresell Vs Timber Operators & Contractors Ltd: Some trees were sold so that they could be cut down and separated from the land and then taken away by the buyer. The court held that it was sale of goods.

 (4)     Transfer or agreement to transfer property. The word  ‘general property means ownership of goods’. Special property means possession of goods. For example: Manu pledges a scooter to Ram for a loan of Rs.20,000. In this case, Manu has general property or ownership of the scooter, while Ram has special property or right to the extent of Rs.20,000 in the scooter.

Thus, for contract of sale, the seller should transfer or agree to transfer the ownership of the goods to the buyer. A mere transfer of possession of goods is not sale.

Illustration :  Meena keeps some of her jewellery in Kirin’s locker. Kirin cannot become the owner of the jewellery, as no sale has taken place. In this case, there is no sale or purchase.

 (5)      Price or Consideration. In every sale there must be a price, which is the money consideration for a sale of goods. [Section 2(10)]. If the consideration is in the form of ONLY GOODS, it is a barter and not a sale. However, the Sale of Goods Act, 1930 does recognize a sale where part money and part goods are paid.

Illustration:  Mona agrees to sell a saree to Geeta for Rs.500. Geeta makes a payment of Rs.300 to Mona and the balance she pays in the form of a lipstick. This is a valid sale.

 The illustration shows that the entire payment for the transaction has been made.

Case Law 3: Aldridge Vs Johnsons: 52 bullocks valued at 6 pounds each were exchanged for 100 quarters of barleys at 2 pounds per quarter and the balance in cash. The court held that it was a sale of goods.

Diggerence Between 'SALE'and ‘AGREEMENT TO SELL’.

As stated earlier, the ‘contract of sale’ includes both a sale and an agreement to sell Section 4(1) of the Sale of Goods Act.

S.No.	Differences	Sale	Agreement to Sell
1.	Type of Contract	The contract is complete.	The contract is to be completed.
2.	Transfer of Rights	The Buyer becomes the owner.	The buyer gets a ‘jus in personam’ i.e. (a right against the person).
3.	Transfer of Property	Creates jus in rem (Right against Property). He can get the property anytime.	Buyer only gets jus in personam
4.	Transfer of Risk	The risk of danger or loss passes with property to the buyer.	Risk of loss or damage has to be borne by the seller.
5.	Rights of seller if there is breach of contract by buyer	The Seller can sue the buyer for price even if goods are in possession of the seller	Seller can sue the buyer for damages of breach of contract and not for recovery of goods
6.	Rights of buyer if there is breach of contract by seller	The Buyer can sue the seller for damages and sue the third party.	The Buyer can sue the seller for damages only
7.	Right of Resale	The Seller cannot resell the goods even if he has their possession.	The Seller can sell to another buyer, but the first buyer can sue the seller for damages.
8.	Insolvency of Seller and its effects	The Buyer can recover his goods	The Buyer can claim only a proportional amount, depending on the payment that he has made for the purchase of the goods.
9.	Insolvency of buyer and its effects	He can get the delivery of the goods through his legal representative.	The Seller can refuse to sell the goods until the entire price has been paid, by the buyer.

HIRE PURCHASE AGREEMENT AND SALE: A COMPARISON

A Sale is different from a ‘Hire Purchase Agreement.’ A hire purchase agreement is an agreement under which an owner delivers his goods on hire basis to a person called ‘hirer’, to be used by him. Also, the hirer has the option of purchasing the goods by paying the agreed amount in installments. The term ‘hire purchase agreement’ is defined in Section 2(c) of the Hire Purchase Act, 1972, which reads as under: 

“Hire purchase agreement means an agreement under which goods are let on hire and under which the hirer has an option of purchasing them in accordance with the terms of the agreement, and it includes an agreement under which:

• possession of goods is delivered by the owner thereof to a person on the condition that such a person pays the agreed amount in periodical installments, and
• the property in the goods is to pass to such person on the payment of the last of such installments, and
• such a person has a right to terminate the agreement at any time before the property so passes.”

The above definition shows that in a hire purchase agreement, the owner delivers his goods to a person (i.e., hirer) for his use, and the hirer agrees to pay the fixed amount in periodical installments. It is agreed that after the payment of all the installments the ownership of the goods will be transferred to the hirer. The hirer has the following two options:

• He may purchase the goods after paying all the installments.
• He may return the goods at any time and stop further payment of the installments. The installments already paid are treated as the hire charges for the use of goods hired.

Illustration:  Amar, a shopkeeper, delivered his new cycle to Krishan. They agreed that Krishan would  pay Rs.50 on the first day of every month for ten consecutive months. After making all the payments regularly for ten months, he (Krishan) would  become the owner of the cycle. It was also agreed that Krishan may return the cycle at any time and stop the payment of further installments. This is a hire purchase agreement.

The nature of Hire Purchase Agreement is described below: 

Hire Purchase Agreement

The hire purchaser agrees to pay a fixed number of installments which are treated as hire charges by the owner of the goods.

When the last payment is made by the hire purchaser, it is only then that he gets the ownership of the goods. If this hire purchaser is unable to pay any of the installments, even one, the seller can take back the ownership and possession of the goods.

The hire purchaser can only recover the goods once he makes the entire payment.

Illustration:  Ankush takes a computer from M/s Electronics on hire purchase. It is agreed that Ankush will pay Rs.1,000 for 2 years (24 installments) to M/s Electronics. At the time of payment of the last installment of Rs. 1,000, Ankush defaults and cannot pay. M/s Electronics takes back the computer and the money paid by Ankush is treated as hire charges for the period he used the computer.

Sale through Installments

Here all the elements of sale are included. The difference is that the total price is not paid in one lump sum but in installments. In the case of consumer goods like washing machines, cars, electronic equipments, this mode of sale is gaining popularity as the buyer does not have to make the entire payment at one time.

Illustration:  Sheela bought a camera from a shopkeeper. It was agreed that she would pay for the camera in 10 monthly, interest free installments of Rs.1,000 each as the cost of the camera was Rs.10,000. The ownership of the camera was transferred to Sheela at the time of the contract.

Similarity between Sale and Hire Purchase Agreement        

In both a sale and a hire purchase agreement the purpose is that the property in goods passes from the seller to the buyer.

Following are the legal provisions relating to hire-purchase agreement, as contained in the Hire Purchase Act, 1972.

• The hire purchase agreement must be in writing and signed by all the concerned parties. If any one of these two requirements is not fulfilled then, the hire-purchase agreement shall be void. [Section 3(1)].
• The number of installments and the amount of each installment should be specified and written in the hire-purchase agreement. [Section 4 (d)].
• The hirer may end the hire-purchase agreement at any time, before the final payment falls due.
• The owner may also terminate the hire-purchase agreement in any of the following circumstances [Section 18]:

A        Where the hirer makes defaults that are more than one in the payment of the hirer.

B        Where the hirer does any act, with regard to the goods, which is inconsistent with any of the terms of the agreement.

C        Where the hirer does not follow any express condition, which provides that, on breach thereof, the owner may terminate the agreement.

In the cases B and C mentioned above, the owner is also required to give the hirer a notice in writing.

D        On the termination by the owner, he may keep the hire charges which have already been paid to him. However, if any charges are due, the owner may recover the arrears. He may also apply to court for the recovery of the possession of the goods. [Section 19, 21 & 22].

 Similarity between Hire Purchase Agreement and Sale

The property in goods passes from owner to buyer /hire purchaser at a future date. This happens in both a sale and a hire purchase.

 Types of Goods

The goods are the subject matter of any contract. They can be classified as follows:

1     Existing Goods

These may be of three types:

A        Specific Goods

B        Ascertained Goods

C        Unascertained Goods

2     Future Goods

3     Contingent Goods                    

We now explain each one.

1)       Existing Goods: When the goods are in possession of the seller at the time the contract is entered into, they are called existing goods. This means that the goods to be sold are in the control of the seller (Section 6(1) has stated: “ The goods which form the subject matter of a contract of sale may be either existing goods, owned or possessed by the seller; or future goods.”

As stated above the existing goods may be Specific, Ascertained or Unascertained. According to Section 2(14) “Specific goods means goods identified and agreed upon at the time the contract of sale is made.”

Illustration: A contract to sell a Nokia cell phone of a particular model is a contract to sell a specific good. In this case, the sale is for a specific good, as the phone has been identified.

An ascertained good is a part of the goods that are available in bulk are specially meant for sale.

Illustration: Sheela owns 20 Maruti Cars. Uma enters into a contract with Sheela to buy one car out of those 20 cars. After the contract one car is given to Uma and this car will then be an ascertained good.

 Unascertained goods are the goods that are not specifically agreed upon at the time of entering into the contract.

Illustration: 100 leather jackets are lying in the godown out of this lot of 100 jackets 10 jackets are to be bought by Bhawana, this is a contract for sale of unascertained goods made by the leather jacket manufacturer.

2)Future Goods: Section 2(6) has defined future goods as “Future Goods means goods to be manufactured or produced or acquired by the seller after the making of the contract of the sale” Future goods therefore are neither in existence nor in possession of the seller at the time when the contract of sale is entered into.

Illustration: Rama agrees to sell to Urmilla the entire crop of sugarcane to be grown at her farm in Uttar Pradesh for an amount of Rs.2,00,000. Such type of agreement is not a sale but an agreement to sell future goods.

 3) Contingent Goods: Section 6(2) has defined ‘contingent goods’ as the goods “the acquisition of which by the seller depends upon a contingency which may or may not happen”.  Such goods are therefore dependent upon an event or an occurrence which may or may not happen.

Illustration: Ravi agreed to sell 100 cotton shirts he was importing from China provided his ship arrived safely in time. In this example, the cotton shirts are contingent goods as their sale is dependent upon the safe and timely arrival of the ship.