Contract of Sale of Goods

I. Introduction

Commercial Law in General

 Although the Roman-Dutch law is the common law of Sri Lanka, the main source of
Commercial law is English law
 English Commercial Law was first introduced into the country through Civil Law Ordinance
No. 5 of 1852
- S.3:
 Bills of Exchange, Promissory notes & Cheques, partnerships, joint stock
companies & Corporations, Banks & Banking, Principal & Agent, Carriers by land,
life & fire Insurance would be governed by the contemporary EL
 This applies unless the provisions of a domestic statute address the issue in
question
 Therefore, EL governs commercial matters in SL except tenure or conveyance, or assurance
of, or succession to, any land or other immovable property

Sale of Goods
 The Sale of Goods Ord. 1896 (SoG) which is an adaptation of the Sale of Goods Act 1893 of
the UK governs sale of goods in SL
 The UK Act was later replaced by the Sale of Goods Act 1979
- This was a consolidating Act (which consolidated several laws)
- This consolidation has no application in SL

II. Sale

 A sale is a,
i. transaction where the,
ii. ownership of goods or property is transferred from a seller to a buyer,
iii. in exchange for a monetary value or its equivalent

 Agreement/contract to exchange:
- A sale usually involves an agreement or contract i) between the buyer and seller, ii)
outlining the terms of the transaction, such as price, delivery method, and quantity

 Essential elements of a sale:

i. Offer (by the seller)
ii. Acceptance (by the buyer)
iii. Consideration/ price (Something of value offered by the buyer – money or an
equivalent)
 iv. Transfer of ownership (from seller to buyer)
 The most distinguishing feature of a sale
 Seller: relinquishes control over the goods/services  transfers rights &
responsibilities associated w/ the good
 Buyer: gains full ownership & control over the good/service (ie – the right to
use, sell, dispose)

*In sum it’s a transfer of ownership in exchange for money value or its equivalent

 The differences between sales and other transactions:

- The most essential element in a contract of sale is the price
- S.9:
(1) The price in a contract of sale may be i) fixed by the contract or may be ii) left to be
fixed in manner thereby agreed, or may be iii) determined by the course of dealing
between the parties
(2) Where the price is not determined in accordance with the foregoing provisions the
buyer must pay a reasonable price. What is a reasonable price is a question of fact
dependent on the circumstances of each particular case

- The price is,

i. presumed to be payable with money (legal tender)
ii. governed by the lex pecuniae (the law of the currency of the specific currency
issuing state)

- Due to the absence of price, barter and exchange are not governed by the law relating
to the sale of goods
- However, there are some transactions that have similar features but have different
characteristics:

i. Lease / Rental Agreements

 No transfer of ownership (only temporary possession, ownership remains
w/ the lessor at the end of the lease term)  the key difference
 Periodic payments (payment for the period of use)
Ie – renting a car/apartment

Temporary right to use

property for an agreed
period

Lessor (owner) Lessee (renter)

Consideration
ii. License agreement
 No transfer of ownership (permission to use the product, ownership
remains w/ the licensor)  the key difference
- Limitations on use (how, where and for how long a licensee can use
a good/service/IP is limited by the license)
- Revocation (license can be revoked under specific conditions like
breach of agreement)
 Licensing agreements are made for products/ services & IP
Ie – S/w licenses, brand licensing

Temporary right to use

product/service/IP for
an agreed period

Licensor Licensee

Consideration

iii. Barter
 No consideration (exchange of goods or services for other goods or services
– not for money or its equivalent)  the key difference
 Value of goods being exchanged is determined by the parties

Goods/services

Transferor/transferee Transferor/transferee

Goods/services

iv. Gift or donation

 No consideration (transfer of goods or services w/out consideration)  the
key difference
- Guided by altruism or goodwill
- No expectation of a payment at all

Transferor Transferee

Goods/services
III. Sale of Goods Ord.

i. S.59(1) – Definition
- Goods:
 All movables except money
 Includes crops & things attached to the land as long as they’re
separated before the sale or under the contract of sale
* Doesn’t apply to services  however the definition of “goods” in
the Consumer Affairs Authority Act applies to services as well

- Contract of Sale (CoS):

 Agreement to sell or a sale

- Buyer:
 A person who buys/ agrees to buy goods

- Seller:
 A person who sells/ agrees to sell goods

Formation

ii. S.2 – Formation of a Contract of Sale

(1) Contract of sale
 A CoS is where a seller transfers/agrees to transfer goods in
property to the buyer
 For a monetary consideration called the price
 A CoS can exist between co-owners (co-owners can buy out each
other’s shares)

(2) Absolute/conditional sale

 A CoS may be absolute or conditional

(3) Sale v. agreement to sell

 Sale: where property in goods is transferred from the seller to the
buyer
 Agreement to sell: where the transfer of property is to take place
either,
i. At a future time/
ii. Subject to a condition that needs to be fulfilled

(4) How a sale becomes an agreement to sell

 An agreement to sell becomes a sale,
 i. when time lapses/
ii. conditions subject to which property is transferred are
fulfilled

 Cammel Laird & Co. v. The Manganese Bronze & Brass

- A contract to build & sell a ship = contract of sale of goods
- Decisive criteria: The discretion to exercise their skill &
judgment to produce the completed product was left w/ the
manufacturers

 Robinson v. Graves
- A contract to paint a portrait = contract of work & material
(service)
- Reasoning:
- The substance of the contract is skill & experience +The
delivery of the movable is only a subsidiary part of the
contract = not a sale of goods

Capacity

iii. S.3 – Capacity to Contract

 Capacity to buy & sell is regulated by the general law on the

capacity to contract
 Proviso:
– Where “necessaries” are sold to a minor/ or person who
doesn’t have capacity to contract (due to mental illness or
drunkenness) they must pay a reasonable price
– Necessaries: Goods appropriate for the condition of life &
actual requirement of the person w/ the incapacity

Form Requirements

iv. S.4 – Form Requirements of a Contract

 A contract can be made in the following ways:
i. In writing
ii. By word of mouth
iii. Partly in writing & partly by word of mouth
iv. Implied by the conduct of parties

 This is subject to the Ord or any other enactment on that behalf

 Does not apply to corporations
v. S.5 – Enforcement of Contracts by Action
(1)
 A contract will not be enforceable by action unless:
i. The buyer accepts & receives part of the goods
ii. The buyer pays all or part of the price
iii. There is a written & signed record of the contract by the
party being charged or their agent

(2)
 The above applies to all contracts enforceable by action even if:
i. Goods are to be delivered in the future
ii. Goods don’t exist yet/ are not obtained yet
iii. Goods are not ready & fit for delivery
iv. Further work is needed to make / complete the good before
delivery

(3)
 A buyer is considered to have accepted the goods if they by an act
recognize a pre-existing contract, even if the contract has not been
fully carried out

 Mohamed Ezak v. Marrikar

– A letter by an agent detailing the terms of the contract meets the writing
requirement in S.4

 Cohen v Roche
– The entries in a sales catalogue (in an auction) meets the writing
requirement (writing by way of memorandum)

Subject Matter

vi. S.6 – Specific Goods & Future Goods

(1) Subject matter of a contract may be a specific or future good
 The goods which form the subject of a contract of sale may be either
i. existing goods (goods in specie), owned or possessed by the
seller, or
ii. goods to be manufactured or acquired by the seller after the
making of the contract of sale, in this Ordinance called
“Future Goods”
 (2) Contracts can be made for future goods acquirable only upon a specific
contingency taking place
 There may be a contract for the sale of goods, even where the
acquisition of a good by the seller depends upon a contingency
which may or may not happen

 Howell v. Coupland
– Contract for the future sale of potatoes
– The performance of the contract was contingent on the
potatoes not dying due to external reasons
– Non-performance due to the potatoes being infected by a
disease
– Held:
 The contract was subject to a contingency
 The contingency rendered performance impossible
 Seller – not liable

(3) The present sale of future goods = an agreement to sell

vii. S.7 – Contracts for Perished Goods are Void

 The contract is void if the goods have perished at the time of the
contract w/out the knowledge of the seller
*Rationale: no goods existed for the property to be passed under the
contract

viii. S.8 – Perishing of Goods Subsequent to the Formation of the Contract

 Subsequent to entering the contract, if the goods perish w/out any fault
on the part of the seller/buyer, before the risk passes to the buyer, the
contract is avoided

The Price

ix. S.9- Determination of Price

(1) The price in a contract of sale may be,
i. fixed by the contract
ii. left to be fixed in manner thereby agreed
iii. determined by the course of dealing between the parties

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

x. S.10 – Valuation by a 3rd Party

(1)
– If the agreement is to sell the goods at a price set by a 3rd party & that
3rd party fails to/is unable to make the valuation  contract should be
avoided
– If the buyer has already received the goods (in whole or part)  buyer
should pay a reasonable price

(2) If the 3rd party is prevented from making the valuation bcz of the fault of the
seller or buyer  the party not in fault can bring an action for damages
against the party in fault

– Reasonable price is often determined w/ reference to,

i. The current market price at the time of contracting/
ii. The price of the goods at the place of delivery

 Watson v Hornby
- Cost of production of the contracted goods = reasonable price

– The requirement of “price” has been borrowed from RL

– In RL too “price” had to be stated in terms of an amount of money (pecuniae
numerate – money paid)

Conditions & Warranties

– Conditions & warranties = terms of a contract (applies to sales contracts as well)

– Subject to clear contrary intention in the contract:
- Condition: major term (SoG: right to repudiate + right to claim damages)
- Warranty: minor term (SoG: right to claim damages)
– Fundamental terms which is a category of terms is identified in general contract
law, but not in the SoG
- The effect of the fundamental terms (repudiation of the contract + right to
claim damages) is reflected in the consequences for the breach of contract
in the SoG
– Courts infer the intention of the parties at the time of contracting to construct
whether a term is a condition or warranty (mere declarations of parties to this effect
don’t suffice)
Conditions

– SoG doesn’t define a ‘condition’  merely provides the legal consequences for its
breach

xi. S.12 (2) -

 Breach of a condition allows a contract to be repudiated

Warranties

– SoG defines warranties

xii. S.59(1) -
 An agreements related to the goods of a contract, which are,
i. collateral to the main purpose
ii. the breach of which gives rise to damages but not the right to
repudiate the contract (& reject goods)

Implied Conditions & Warranties

xiii. S.13 – Implied Terms as to Title

(a) Implied condition:
In a sale a seller has the right to sell goods & in an agreement to sell the
seller has the right to sell goods at the time the property is to pass

 Rowland v Divall
- The seller has to have good title
- Where theft broke the chain of good title, the buyer was allowed
recover the purchase price

(b) Implied warranty:

The buyer shall have & enjoy the quiet possession (enjoyment w/out
interruption by the seller or 3rd parties claiming superior title) of the goods

(c) Implied warranty:

The goods shall be free from any charge or encumbrance in favour of a 3rd
party which the buyer didn’t know of before or at the time of contracting

*These implied terms make it nearly impossible to sell goods w/out clear
title

xiv. S.14 – Implied Condition as to Description

 In contracts for the sale of goods,
i. by description  the goods should correspond w/ the
description
 ii. by description + sample  bulk of the goods should correspond
w/ the sample + goods should correspond w/ the description

– Sale by description doesn’t only include express description but also where the good
describes itself (ie – branding/ appearance)

 Beale v Taylor
- A seller who wanted a certain model of car, saw it before
purchasing
- It was later discovered that only certain parts of the car were of the
model he wanted
- Held:
 This is a sale by description
 Seller is in breach of S.14 (UK Act)

 Arcos Ltd v Ronaasen & Sons

- A contract for staves of wood required them to be of a particular
specification
- Most of the goods sold were a bit above the thickness specified but
were merchantable
- Held:
 Regardless of the merchantability of goods, the buyer is
entitled to goods that conform w/ the description

xv. S.15 – Implied Terms as to Quality & Fitness

 There is usually no implied condition as to the quality & fitness of a
good  Reason: The buyer must take the risk as to quality & fitness for
the purpose (caveat emptor – ‘buyer beware’)
 But there are exceptions to this rule:
(1) Implied condition:
The buyer informs the seller the purpose for which the goods are
needed + relies on the seller’s skill/judgment + seller normally
supplies such goods  implied condition that the goods will be fit
for the purpose
(Doesn’t apply when specific goods are bought under patents or
other trade names)
(2) Implied condition:
When goods are bought by description from a seller who deals w/
goods of that description  implied condition that the goods will
be merchantable
(But if the buyer has examined the goods  no implied condition
regarding defects which should have been revealed by that
examination)
  Grant v Australian Knitting Mills (Sulphite in Underwear Case)
- Merchantable:
 Not merely looking saleable on the face
 Not having defects that make them unsuitable for their
proper use
 These defects may not be apparent upon ordinary
inspection
 Selling underwear w/ sulphites  a breach of Ss.15(1) &
15(2)

 Carlowitz & Co. v Sun Shing Firm

- Goods were found to be in good condition upon visual examination
& later found to be unmerchantable
- Court held w/ the buyer

 Ashington Piggeries Ltd v Christopher Hill

- A seller not in the business of making mink feed contracted to make
them
- The feed led to the death of minks
- Held:
 Breach of both 15(1) & 15(2)  since the buyer informed
the seller of their requirements & relied on their &
judgment

 Jackson v Rotax Motor & Cycle

- Court held w/ rejecting faulty goods

(3) An implied warranty/ condition as to quality or fitness for purpose

may arise from trade usages

(4) An express warranty/condition doesn’t negative a warranty/

condition implied by this Ord.

xvi. S.15 – Implied Terms Regarding Sale by Sample

(1) A contract is a sale by sample if there is a term in the contract
express or implied to that effect
(2) There are 3 implied conditions as to sale:
i. The bulk of goods must correspond w/ the sample
ii. The buyer should be given a reasonable opportunity to
compare the bulk w/ the sample before acceptance
iii. The seller should provide goods free from any defects
rendering them unmerchantable, that would not be
apparent on a reasonable examination of the sample
  Kearley and Tonge Ltd. v Peter
- In a sale by sample, the sample (Australian jam) was in good
condition, but the bulk wasn’t
- The buyer was entitled to damages

 Kwei Tek Chao v British Traders & Shippers

- The buyer can repudiate the contract & reject goods that don’t
conform w/ the sample (different to the holding in Kearley &
Tonge)

 Rothensal & Sons v Esmail

- Goods (bales of cotton) were shipped as 2 consignments, carrying 2
invoices in the same ship
- This was done to avoid shipping restrictions (which both parties
knew about)
- The first consignment was in good condition but the 2nd wasn’t
- Held:
 The 2 consignments amounted to one shipment (since they
came in the same ship & both parties knew the reason for
the separation into 2 consignments)
 The buyer can’t accept half of the shipment & reject the
other half (this may be allowed if it’s 2 separate shipments)
 Right to damages but not repudiation

 Drummond (James) & Sons v Van Ingen & Co.

- The bulk corresponded to the sample in every way, but had a defect
that made the unmerchantable
- Held: breach of warranty

Effects of the Contract

Transfer of Property

xvii. S.18 – Transfer of property of ascertained goods

(1) Where there is a sale for specific/ascertained goods, the property in them
transfers to the buyer at the time the parties intend it to be transferred
(2) When determining the intention of the parties regard should be had to:
i. The terms of the contract
ii. The conduct of the parties
iii. Circumstances of the case

xviii. S.19 – Rules for ascertaining the intention of the parties

Rule 1 –
Where there’s an unconditional contract for specific goods in deliverable state

 Property passes at the time the contract is made (immaterial whether the time
of delivery/payment is postponed)

Rule 2 –
Where there’s a specific good to which the seller should do something to put it
into a deliverable state  Property passes after such thing is done & the buyer
is notified

Rule 3 –
Where there’s a specific good in deliverable state, but the seller has to do
something (ie – weigh, measure) to ascertain the price  Property passes after
such thing is done & the buyer is notified

Rule 4 –
Where goods are delivered to the buyer “on approval” or “on sale or return”
(this is basically where the buyer is given the goods to test use for a certain
time)  Property passes either when,
a. Buyer signifies approval/ does any act to show that the
transaction has been adopted
b. Buyer doesn’t signify approval but keeps the goods
w/out notifying rejection,
- Past the fixed period for the return of goods
- Where there is no such period fixed, after the
expiration of a reasonable time

Rule 5 –
i. When a contract is for unascertained or future goods  Property
passes when goods matching that description in a deliverable state are
unconditionally designated to the contract with the agreement of both
parties (the agreement can be express/ implied + given before or after
the designation)
ii. “Unconditional appropriation” – Delivery of the goods w/ purpose of
transmission w/out reserving the right of disposal

xix. S.20 – Reservation of the right of disposal

(1) Where the seller has retained the right of disposal for
specific/unascertained goods (through the contract or appropriation) 
Property won’t pass to the buyer until certain conditions are fulfilled,
regardless of delivery of the good to the buyer (ie – buyer can be in
possession of a good, but property won’t pass to them until the payment is
made, like goods bought on instalments)

xx. S.21 – Passing of risk

 Risk passes when the property is transferred (whoever has the property
has the risk)
  Provided in the case of a delay in delivery, the risk is borne by the party
at fault for any loss which might have not occurred if not for the delay
(note: the party at fault is not liable for all risks, but only for those that
wouldn’t have occurred if not for the delay)

 Demby Hamilton & Co v Bardon

- Delay of the buyer caused the goods (apple juice) to go
bad
- Seller is liable under Proviso 1 of S.21

Performance of the Contract

xxi. S.27 – Duties of the buyer & seller

 Duty of the seller: to deliver the goods
 Duty of the buyer: to accept them & make the payment
 These should be done in accordance w/ the terms of the contract

xxii. S.28 – Delivery & payment being concurrent conditions

 Delivery of goods & payment of price are concurrent conditions
 The parties must be willing to provide one for the other

Delivery of goods

– Not only handing over the actual good, but other related actions like transferring a
document of title (ie – bill of lading) also constitutes delivery

xxiii. S.59(1) – Definition of “delivery”

 Voluntary transfer of possession from one person to another

xxiv. S.29 – Delivery

(1) Place of delivery
 The contract will specify (expressly or by implication) whether the buyer
should take possession of the goods or the seller should send them
 Place of delivery: unless the contract says otherwise, the seller’s place
of business – if he doesn’t have one, his residence
 Provided if both parties know at the time of the contract that the goods
are in some other place  that place will be the place of delivery

(2) Time of delivery

 Where the seller is bound to send the goods to the buyer, but no time
has been fixed  the seller has to send them within a reasonable time
(5) Expense of putting a good into deliverable state
  Unless otherwise agreed, the expense of putting the good into
deliverable state is w/ the seller

xxv. S.30 – Delivery of wrong quantity

(1) Quantity less than agreed – reject/ accept & pay the contract rate
(2) Quantity more than agreed – reject the excess/ reject the whole/ accept the
whole & pay the contract rate
(3) Goods not specified in the contract mixed w/ goods specified in the
contract – accept only the goods that match the description + reject the
rest/ reject the whole
(4) This is subject to trade usages/ special agreements or course of dealings of
parties

xxvi. S.32 – Delivery to carrier

(1) Where the seller is authorized/ required to send goods: delivery to carrier
(named/not named by the buyer) = delivery to buyer
(2) Unless otherwise authorized the seller has to make a contract w/ the carrier on
behalf of the buyer as may be reasonable having regard to the nature of the
goods + circumstances of the case  Failure resulting in damage allows the
buyer to decline the goods/ hold the seller responsible
(3) Unless otherwise agreed, if the goods are delivered by sea under circumstances
in which it is usual to insure  seller must inform the buyer of the same &
enable them to insure  failure to do this transfers the risk to the buyer during
the sea transit

Acceptance of goods

xxvii. S.27 – Buyer has to accept & pay for the goods
xxviii. S.34(1) –
 No acceptance of delivery until the buyer has had a reasonable
opportunity to examine the goods

xxix. S.35 – Acceptance

 Acceptance =
i. Buyer communicates acceptance to seller
ii. Goods have been delivered to the buyer who does an act
inconsistent w/ the ownership of the seller to them
iii. Retains the goods past a reasonable time w/out indicating
rejection to the seller

Unpaid seller
xxx. S.38 – Unpaid seller
(1) Seller to whom the entire price hasn’t been paid/ seller paid by a
dishonoured negotiable instrument

xxxi. S.39 – Unpaid seller’s rights

(1) Rights:

i. A lien/ the right to keep the goods until payment is made while
the seller still has possession,
ii. the right to stop the goods while they are being delivered if the
buyer becomes insolvent, and
iii. the right to resell the goods, within the limits set by the law.

xxxii. S.40 (1) – Unpaid seller’s lien

 This is seller’s right to hold goods of which he has possession but not
ownership, when the price has not been paid
 Specific situations where this applies:

i. when the goods were sold without any agreement to give

credit
ii. when the goods were sold on credit but the credit period
has ended
iii. when the buyer becomes insolvent

xxxiii. S.42 (1) – End of lien

i. when he delivers the goods to a carrier or other bailee for the purpose
of transmission to the buyer without reserving the right of disposal of
the good
ii. when the buyer or his agent lawfully obtains possessions of the goods
iii. by waiving his right of lien

xxxiv. S.43 – Stoppage in transit (applicable when:)

i. Unpaid seller
ii. Insolvent buyer
iii. Goods in transit

xxxv. Right of resale (Section 47): The seller has the right to resell when: (a) the goods
are of a perishable nature; or (b) when the unpaid seller gives notice to the
buyer of his intention to resell and the buyer does not within a reasonable
time pay the price; (c) Where the right was expressly reserved in the contract of
sale
IV. Illegal Contract of Sale

 Contracts of sale tainted by illegality are unenforceable

 Jafferjee v. Subbiah
– Contract of sale deemed unenforceable (void ab initio) due to selling above
the controlled price (violation of price controls)
– Illegality should be an illegality at the time of contracting