University of Lucknow
Faculty of Law
LL.B. (Hons.)
Commercial Law
Topic: Formation of Contract under Sales of
Good Act, 1930
Submitted to: Dr. Chandra Shekhar Rai Sir
Submitted by: Vanshika Gaur
Roll Number: 2110013015172
Semester: VI
Section: A
Serial Number: 70
1
ACKNOWLEDGMENT
Acknowledgment is the most beautiful page in any project. More than a formality, this appears
to me as the best opportunity to the best opportunity to express my gratitude.
My list can never begin without you dear God. I thank you again and again for always being
and for providing me with all the necessary goods and strength to finish the project.
The success and final outcome of this assignment required a lot of guidance and assistance
from many people and I am incredibly fortunate to have gotten this all. I want to express my
respect and sincere gratitude to my professor for giving me the opportunity to work on this
assignment. I am thankful for his guidance and able stewardship which helped me to understand
the concept of the assignment better and complete it successfully.
I would also like to thank my friends and family who have supported me throughout this
assignment. Their encouragement gave me the confidence to pursue the task ahead. I am also
grateful to my classmates for the discussions we had which enabled me to take the right
approach to my assignment.
I would also like to thank the library staff for providing me with the required books that were
necessary for my research. Their assistance enabled me to gather the relevant data and
information for my assignment.
Finally, I would like to thank the internet for providing me with the necessary resources and
tools that helped me to write this assignment. It was an invaluable source of information for
my research. I learned many new things while searching various online and offline materials
related to this assignment topic. I am grateful to all of them for their help in completing this
assignment.
Thank you
Vanshika Gaur
LL.B (Hons.), Semester VI
2
Formation of Contract under Sales of
Good Act, 1930
Table of Contents
1. Introduction ............................................................................................................................ 4
2. Contract of Sale...................................................................................................................... 4
i. Difference between 'Sale' and 'Agreement to sell' .............................................................. 5
ii. Commutative Contract vs. Aleatory Contract .................................................................... 5
iii. Essence of Sale is Price .................................................................................................... 5
iv. Sale Comprises of Delivery of Property ........................................................................... 6
v. Movement of Goods constitutes Sale ................................................................................. 6
vi. Contract of Sale forms on mutual terms of parties ........................................................... 6
vii. Price is the only consideration for Sale of Goods............................................................ 6
viii. Contract of Sale requires Seller and Buyer .................................................................... 6
3. Formalities of the Contract .................................................................................................... 6
3
Formation of the Contract
1. Introduction
Selling and buying products is a fundamental component of trade and business, which has
developed into the era we live in today. It is necessary to have laws and regulations controlling
many forms of contracts, and sale of goods is one of them, in a country as varied as India.
Until the 1ª July, 1930, the law of Sale of Goods history in India was governed Chapter VII
(sections 76 to 123) of the Indian Contract Act, 1872.
The Sale of Goods Act, 1930 was laid down to define and amend the law relating to the sale of
goods or movable, borrowing heavily from the 1893 Sale of Goods Act. The Act came into
force on 1" July, 1930. It lays down special provisions governing the contract of Sale of Goods.
The general law of contract is also applicable to contracts for the Sale of Goods unless they are
inconsistent with express provisions of the 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.
Chapter II of the Act explains the provisions relating to the formation of contract under sections
4 to 17.
2. Contract of Sale
As defined under section 4(1), contact of sales of goods is a contract under which seller
transfers or agrees to transfer certain goods in exchange for some consideration preferably
money. According to Blackstone, when ownership of any goods transferred in exchange for
money, then a sale have been made. This contract can be absolute or conditional. When a person
buys goods outrightly it is considered as absolute but when a person buys goods on approval
or trial basis then it is termed as a conditional contract.
A sale has the immediate effect of transferring property, whereas in an agreement to sell the
property is to pass at some future time or subject to some condition.
If an agreement to sell contemplates passing of property at a future date, it becomes sale when
that date arrives. If it contemplates certain condition subject to which the property is to pass, it
becomes a conditional sale.
4
A contract of sale may be absolute or conditional but not temporary. According to Potheir, the
contract of sale is "consensual, bilateral and commutative".
i. Difference between 'Sale' and 'Agreement to sell'
Sale Agreement to sell
Sale is an executed transaction. Agreement to sell is an executory
transaction.
In Sale, property passes immediately. In an agreement to sell, property passes later
on.
In Sale, the risk is with the buyer because the In an agreement to sell, risk remains with the
property has been passed to buyer and risk seller as the property remains with the seller.
prima facie passes with property
As the property passes to the buyer, the seller As the seller is still the owner of the property
has right to recover the price of the goods. he does not have the right to recover the
price.
Sale makes the buyer owner. He acquires It is an agreement, pure and simple. Here, the
right jus in rem (right against the goods). right is in the nature of jus in personam.
If the seller refuses to deliver the goods, Buyer can sue only for damages for breach of
buyer can sue the seller for recovery/delivery contract but not for recovery of goods.
of goods.
A sale can't convert into agreement to sell. An agreement to sell can fructify into sale
when conditions are fulfilled.
ii. Commutative Contract vs. Aleatory Contract
Commutative contract is the one in which each of the parties to the contract gives and receives
an equivalent. The seller sells a thing and receives the price equivalent to it by the buyer.
Whereas in an aleatory contract the obligation of parties is linked to a future and uncertain
event. For Eg:- Wagering Contract, Insurance Contract etc.
iii. Essence of Sale is Price
K.L. Johar & Co. vs. Deputy Commercial Tax Officer1, in this case it was laid down that the
essence of sale is that the property is transferred from the seller to the buyer for a price, whether
paid at once or paid later in instalments.
1
AIR 1965 SC 1082.
5
iv. Sale Comprises of Delivery of Property
R.C. Jal & on. vs. Union of India2, in this case it was laid down that the transaction of sale is
a composite transaction consisting of agreement of sale, passing of title, delivery of goods,
payment of price and costs and charges of the transportation.
v. Movement of Goods constitutes Sale
Hyderabad Enge. Industries vs. State of A.P.3, in this case it was laid down that movement of
goods from one State to another was held to be a sale for the purpose of sales tax as there was
agreement of sale though the sale was not completed.
vi. Contract of Sale forms on mutual terms of parties
Agricultural Market Committee vs. Shalimar Chemical Works Ltd.4, in this case the Supreme
Court has observed that a Contract of sale, like any other Contract is a consensual act in as
much as the parties are at liberty to settle for themselves the terms of their bargain.
vii. Price is the only consideration for Sale of Goods
Aldridge vs. Johnson5, it was laid down that the consideration for a sale of goods must be
money, called the price. Where the property in goods is transferred for any consideration other
than money that will not be sale.
viii. Contract of Sale requires Seller and Buyer
Graff vs. Evans6, it was held that a sale contemplates a seller and a purchaser. If a person
revalues his goods and shows a higher value for them in his books of account, he cannot be
considered to have sold those goods and made profits therefrom.
3. Formalities of the Contract
Section 5 provides bare formalities for making of a "contract of sale", likewise any other simple
contract, a contract of sale can be made by:
(i) An offer to sell or buy goods and acceptance of such offer.
2
(1972) 3 SCC 470.
3
(2011) 4 SCC 705.
4
(1997) 5 SCC 516.
5
(1857) 7 E&B 885.
6
(1882) 8 QBD 373.
6
(ii) Provision for delivery of goods or payment of price. Delivery or payment may be
immediate, simultaneous by instalments or in future.
Besides the above bare requirements, a contract of sale may contain other terms as the nature
of the case may require.
A 'contract of sale may be either in implied or in express form. If it is in express form it may
be in written or oral or partly in written and partly in oral form. If it is in implied form, then it
may be infer from the conduct of parties.
M.P. Laghu Udhyog Nigam vs. Gwalior Steal Sales Branch7, in this case it was laid down that
where the essentials of clause (1) of section 5 of the Sale of Goods Act, 1930 were neither
proved nor pleaded, the suit for price was dismissed.
4. Subject-matter of contract
Section 6 lays down that the 'goods' which are the subject matter of the contract of sale may be
existing goods which are owned and possessed by the seller at the time of contract of sale or
may be future goods, that are to be manufactured, acquired or produced in future after the
contract of sale comes into existence.
Such goods can also be subject matter of contract for sale the acquisition of which by the sellers
depends upon happening or non-happening of some future event.
Where the seller purports to execute a present sale of some future goods [refer section 2(6)] the
transaction is not a sale, but an agreement to sell.
Section 7 provides that Where there is a contract for the sale of specific goods, the contract is
void if the goods without the knowledge of the seller have, at the time when the contract was
made, perished or become so damaged as no longer to answer to their description in the
contract.
i. A Contract stands void when does not correspond to description
Couturier vs. Hastie8, A agrees to sell to B a specific cargo of corn while at sea. It turns out
that, before the day of the bargain, the ship had been abandoned and the corn had been so
damaged as not to answer its description in the contract. The contract is void.
7
AIR 1992 MP 215.
8
(1856) 5 HLC 673.
7
In Bell vs. Lever Bros Ltd.9, Lord Atkin observed that the principle of this section does not
apply where the seller has knowledge of the destruction of the goods. In that case, he must
make his contract good or pay compensation for its breach except where the buyer also knows
that the goods have perished.
Hayward Bros vs. Daniel10, in this case it was laid down that this provision is confined to
Specific goods. Generic goods defined by description only are not covered.
While section 8 deals with a condition in which there is an "agreement to sell" whereas the
previous section deals with the contract for sale. The section lays down that an agreement to
sell specific goods is to be avoided if subsequently the goods without any fault on the part of
the seller or buyer have:-
(i) perished, or
(ii) become so damaged as no longer to answer to their description in the agreement before the
risk passes to the buyer.
5. The Price
Section 9 of the Act lays down following modes to fix price in a contract of sale:-
(i) it may be fixed by the parties at the time of contract, or (ii) may be fixed in a manner agreed
upon by the parties, or (iii) by course of dealing between the parties.
i. Failure of parties to fix price makes contract void
Foley vs. Classique Coaches Ltd.11, where the parties agree to fix the price by mutual agreement
and they fail to do so and, if the contract still exists, it may be declared void under section 29,
Contract Act, 1872 for uncertainty and if the goods have already been delivered and accepted,
reasonable price would be payable.
Section 10 declares the consequences flowing from non-fixation of the price by valuation by a
third party. Where the third party is not willing to value the price, the contract is avoided
provided the goods are not delivered to the buyer.
Where the third party is unable for any reason to value the price, the contract is avoided
provided the goods are not delivered to the buyer, Where the third party is prevented from
9
1932 AC 161.
10
(1904) 91 LT 319.
11
(1934) 2 KB 1 (CA).
8
valuing the price as a result of the fault of the seller or buyer, the party in fault is liable to pay
damages to the party not in fault.
Where, however, the goods are delivered to buyer before the price is valued, the buyer is liable
to pay to the seller reasonable price for the goods delivered. Such reasonable price may be fixed
by the Court or by arbitrator. The liability to pay reasonable price and the liability to pay
damages are two distinct remedies contemplated by this section.
5. Conditions and Warranties
As per section 11, stipulation as to time of payment would ordinarily be not the essence of
contract for sale of goods. In other words, the time of payment is not a condition of the contract
unless the parties make it so by their contract. The buyer's failure to pay in time does not entitle
the seller to repudiate the contract. But where by their contract, the parties contemplate time of
payment to be of the essence of the contract, a failure to pay in time entitles the seller to treat
the contract as repudiated and sue the buyer for damages.
For answering whether any other stipulation as to time is of the essence of the contract or not,
the section leaves the whole thing upon the terms of the contract and the interpretations that
the courts will place upon them.
Section 12 lays down that the only term/stipulation in a contract can be either a condition or
warranty. If a statement is mere representation not forming the term of the contract, it cannot
be called as term of the contract.
Those stipulation/term which goes directly to the root or substance of the contract or in other
words, are so essential to its very nature that their non- performance may fairly be considered
by the other party as a substantial failure to perform the contract, are "conditions" and in breach
of any such condition the party may treat the contract as repudiated. On the other hand there
are some stipulations which though must be performed but are not so vital that a failure to
perform them goes to root of the contract, these are "warranties". In case of breach of such
warranties a party may claim for damages but have no right to treat the contract as repudiated
or reject the goods.
According to section 13, in a case of contract of sale where a condition has been attached to
the contract, which must be fulfilled by the seller, the buyer may elect either to waive such
condition or may treat breach of such condition as breach of warranty.
9
Where the contract of sale is indivisible or inseparable and the buyer accepts the goods or part
of it, then the breach of condition which is to be fulfilled by the seller will be treated as breach
of warranty. Hence, the buyer can't repudiate or reject the goods and treat the contract as
repudiated.
This section shall not affect any condition or warranty the fullfilment of which is excused by
reason of impossibility or otherwise.
The section lays down that subject to circumstances of the contract there are following implied
conditions and warranties in a contract of sale:
Condition: (i) On the part of Seller: In case of sale he has right to sell the goods and in case of
an agreement to sell he will have right to sell the goods at the time when property is to pass.
This provision is based upon a simple logic that only an owner has the right to effect a valid
sale of goods, since only he can confer ownership. The rule of law is Nemo dat quod non habet,
i.e. one cannot give what one does not have. This condition is very essential to protect the
interest of innocent buyers.
Warranty: (ii) Buyer shall have right to enjoy the quiet possession of goods. Thus, if the right
of enjoyment or possession of the buyer is disturbed by the seller or any other person, the buyer
shall be entitled to see the seller for damage.
(iii) Goods shall be free from any charge or encumbrance in favour of any third party not
declared or known to the buyer before or at the time of contract.
Thus, this clause will not be applicable where the buyer has been informed of encumbrance or
has notice of the same.
For example: A sells certain goods to B. A had already taken a loan of Rs. 500 from X on the
security of those goods. B was not aware of this charge on goods and he had to pay Rs. 500 to
X is order to enjoy the goods. Now B can claim this amount from A.
National Employers Mutual General Insurance Assn Ltd vs. Jones12, it was held that if there is
a chain of transactions beginning with the original owner from whom the goods are stolen and
ending with the last buyer, each buyer would have his remedy against his immediate seller only.
But the owner would have the right to recover possession from the last of the buyers.
12
(1990) 1 AC 24.
10
According to section 15, in cases of contract for the sale of goods by description there is an
implied condition that the goods shall correspond with the description, and
In cases of sale by sample and description both, it is mandatory that the bulk of the goods shall
correspond with sample as well as description. It is not sufficient if it only corresponds with
the sample but not with the description.
Further, section 16 lays down that unless anything contrary to this Act or of any other law for
the time being in force there is no implied warranty or condition as to the quality or fitness for
any particular purpose of goods supplied, except-
(a) Implied condition as to fitness or quality where:
(i) the buyer makes known to the seller (expressly or impliedly) the particular purpose for
which the goods are required;
(ii) the buyer relies on the seller's skill or judgment; and
(iii) the goods are of a description dealt in by the seller, whether he be the manufacturer or not.
The condition cannot be invoked against a casual seller.
This implied condition can't be availed in case of sale of specified article under its patent or
other trade name.
(b) Implied condition as to merchantability where:
(i) goods are brought by description;
(ii) from a seller who deals in goods of that description, whether he be the manufacture or not.
In such cases there is an implied condition that goods shall be of merchantable quality. The
expression 'merchantable quality' in simple words means that the quality of goods shall be such
that they are capable of being used as the goods of that description and should be free from any
latent or hidden defects. It also means that the goods must be properly packed.
But this implied condition is inapplicable where the buyer has examined the goods and the
defects ought to have been revealed through such examination.
Usage of trade may also annex an implied warranty or condition as to quality or fitness for a
particular purpose.
Implied warranty or condition may co-exist with express warranty or condition.
11
Caveat Emptor- It is a fundamental principle of the law relating to sale of goods. It means
'Caution Buyer', i.e. let the buyer beware. It is the duty of buyer to examine the goods before
purchasing as per suitability.
Section 17 deals with Sale by Sample:
A sale is by sample when there is a term in the contract express or implied to that effect. Thus,
if A sells goods to B on the terms that "the goods shall be equal in quality to the sample," the
sale is a sale by sample and the incidents mentioned in sub-section 2) will attach. It has been
decided that where samples are analysed and transformed into a formula, the sale may still be
by sample.13 But if the seller exhibits the sample merely to show the sort of goods he is offering,
the sale is not necessarily by sample.14 In such a case if the seller shows goods on one quality
and delivers goods of another quality, he may be liable for fraud, but the sale is not a sale by
sample.
In the case of a contract for 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, which would
not be apparent on reasonable examination of the sample.
Bibliography
BARE ACT
• The Sale of Goods Act, 1930
BOOKS
• Dr. Avtar Singh, Partnership & Sales of Goods Act, Eastern Book Co.
• Mulla, Partnership & Sales of Goods Act, Lexis Nexis
WEBSITES
• [Link]
• [Link]
13
Lalchand v Baijnath, (1937) 63 Cal 736 : 169 IC 128 : AIR 1937 Cal 140 .
14
Hill v Smith, (1812) 4 Taunt 520.
12