Essentials of Contract of Sale

According to the section 4(1) of the Sale of Goods Act, 1930, a contract to sell is a contract in which the seller of the goods transfers or agrees to transfer the goods to the buyer for a price or consideration.

In this type of contract, there are two parties. One party agrees to sell the goods and receives a price for it, and the other party receives the goods and pays the price for it.

Table of Contents

1 Essentials of Contract of Sale
2 Transfer of Title by Non-owner
- 2.1 Transfer of Title
- 2.2 Transfer of Title by Non-owner
3 Doctrine of Caveat Emptor
4 Performance of the Contract of Sale
5 Who is Unpaid Seller?
- 5.1 Rights of Unpaid Seller
- 5.2 Rights of Unpaid Seller Against Buyer

The following are the elements that are essential to form a contract of sale:

There must be two parties to the contract of sale. One is the buyer and the other is the seller.
The object to sell must be movable goods. It may be either existing goods or future goods.
A transfer of goods must be made from the seller to the buyer.
There should be a price or consideration for the goods to be transferred.
The contract to sale must be absolute and unconditional.
Other essential elements of the contract must also be present in this contract of sale.

Sale and Agreement to Sell

In a contract, when goods or any other movable property is sold by a seller to a buyer, the contract is known as a contract of sale. The sale made is called an absolute sale. In an agreement to sell, the ownership of the goods does not transfer. The goods are transferred at a future date after the fulfillment of certain conditions. Therefore, it is called a conditional sale.

Thus, the main difference between a contract of sale and an agreement to sell is the time of transfer of the ownership of the goods from the seller to the buyer. In a contract of sale, the ownership is transferred immediately, but in an agreement to sell, the ownership is transferred at some point in the future.

Difference between a sale and an agreement to sell

Points of Distinction	Sale	Agreement to Sell
Nature of Contract	Sale is an executed contract. Under this contract, one of the parties has already performed its part of the contract.	The agreement to sell is an executor contract. Under this contract, both parties are yet to perform their mutual promises within the agreed time.
Transfer of Property	The property in the goods is transferred to the buyer with the risk.	The risk and property do not transfer to the buyer immediately.
Remedies on Breach of Contract	The seller is entitled to sue for the price of the goods.	The seller has the right only to sue for damages for non-performance of the contract.
Risk of Loss	The loss is borne by the buyer even if the possession of goods is with the seller.	The loss is borne by the seller as the ownership of the goods has not passed to the buyer.
Insolvency of Seller if the Buyer has already Paid the Price	The buyer is entitled to receive the goods from the official assignee or receiver.	The buyer has to prove the amount it has paid and can only claim a rateable dividend. The buyer cannot compel the receiver to sell and deliver the goods.

Difference between a sale and an agreement to sell

Sale of Goods and ‘work and Labour’

Sale of Goods

In a contract, when there is a delivery of goods from the seller to the buyer, the contract is termed as a contract or agreement to sell or sale. In this case, a physical object is transferred, which is movable and tangible. Ownership gets transferred from one person to another person.

Work and Labour

Work and labor are a kind of service where no physical goods are involved. If gold is transferred to the goldsmith for making ornaments, then it is termed work and labor. Similarly, if a painter is painting a picture, then what he/she is doing can be termed as work or labor.

The agreement in which no physical form of goods is transferred is called the Agreement of Work and Labour. It is also referred to as a “Contract of Service”.

Contract for Work and Labour

In an agreement, when there is no transfer of goods, it cannot be said to be a sale or an agreement to sell. In such cases, what is included in the agreement? What is transferred between the parties in the agreement? Is there any consideration or price in that agreement?

An agreement that includes the utilization of the workforce in order to complete some work is termed as an agreement for work and labor. In this type of contract, no goods are transferred from the seller to the buyer.

A contract of work and labor relates to service. Basically, two types of contracts exist according to the object clause available in the essentials of a contract.

These are as follows:

Contract of goods
Contract of service

In the contract of goods, movable, physical, or tangible property is transferred from the seller and the buyer. In this case, the ownership of the commodity is transferred from one party to another party. The contract of goods can be made for the past, present, or future transfer of goods.

However, in the case of a contract of service, a service has to be rendered by one party to the other party. It includes the facilitation of some work for the convenience of the other party for which a price or consideration is paid to that party. As no goods or commodities exist in this type of contract, they cannot be made for the past or future.

Suppose a house is being constructed by Mr. A. The material Mr. A purchased from the shopkeeper for a price may be termed as an agreement to sell.

However, when the same material is given to the workers for the construction work, and the labor is utilized for the construction activity, that agreement of Mr. A with the labor (workers) is termed as a contract of work and labor.

Hire Purchase

Hire purchase is an agreement in which the possession of an asset is transferred from one person to another person, but ownership of the asset is not transferred. The payment for the asset is made in installments by the buyer to the seller.

The ownership gets transferred on the complete payment of the assets. Till that time, the ownership remains with the seller. However, the buyer can use the assets for his own benefit till he makes the full payment for that asset.

The term hire purchase originated in the U.K. and is basically used in the hiring of vehicles for road transport.

Features of Hire Purchase Agreement

The main features of a hire purchase agreement are as follows:

It includes two parties, the hirer and the owner. The hirer is the person who takes the assets.
There is no transfer of ownership. Ownership is transferred only when full payment of the value of the asset is made.
The agreement is not a sale as in a sale, the asset is sold to the buyer and full consideration is paid at the time of transfer of goods.
The hire purchase agreement generally includes two elements, the element of bailment and the element of the sale.
There is no obligation on the part of the buyer to purchase the asset. Options are available with him to either buy or decline the hire purchase agreement.

Differences Between Hire Purchase Agreement and Sale

The main differences between a hire purchase agreement and a sale are as follows:

Sale is governed by the Sale of Goods Act, of 1930, while the hire purchase agreement is governed by the Hire Purchase Act, of 1972.
In the case of a sale, ownership is transferred immediately upon payment while in the case of the hire purchase agreement, no ownership is transferred.
Lump sum payment is made in the case of sale while in hire purchase agreements, payment is made in instalments.
On the non-payment of the amount of the asset, the seller cannot take back the assets in the case of a sale. However, in the case of a hire purchase, the owner can take back the asset if the installments are overdue.
In the case of a sale, the buyer only pays the actual price of the assets to the seller, but in the case of a hire purchase, some amount of interest is also paid by the hirer to the owner of the asset.
Once a sale has been made, the assets cannot be given back to the original owner. In the case of hire purchase, the owner of the asset can take it back before the total installments are received.

Transfer of Title by Non-owner

The transfer of title plays a crucial role in the sale of goods contract. The legal rights and duties of the buyer and the seller are decided by the ownership of the goods.

Thus, the primary rules are applied to the legal rights and the transfer of the ownership of goods are described as follows:

In an unconditional contract, when the delivery of the goods is ready, the ownership is set to be transferred as and when the contract is made. For example, in an electronics shop, the seller sells a television to a buyer through a contract. The ownership gets transferred as and when the buyer decides to purchase the television.
When the goods are not in a deliverable state and the seller has to do work on it to bring it to a workable condition, the ownership does not get transferred until the seller does that work and the buyer is satisfied with it.
In the case of the sale of future goods, if the goods are in a deliverable state and the seller has agreed to sign a contract with the buyer, the ownership gets transferred only at the time of the execution of the contract.

Transfer of Title

A seller cannot sell a better title than he himself has. This means that if the seller is not the real owner of the goods, then as per the general rule, the seller cannot sell the desired goods to the buyer. A seller can only sell those goods on which he has his own.

The rule is also expressed in the Latin maxim as “Nemo dat quod non-habit”, which means that nobody can sell what he does not have. The buyer is not entitled to get ownership of the goods if the seller is not the real owner of those goods.

For example, if A has stolen someone’s bag and sold it to C, then C is not the real owner of the bag.

Transfer of Title by Non-owner

The exceptions to the above rule are defined as follows:

Sale by an Agent

A sale made by an agent to the buyer for the document of title to goods will transfer a goods title to the buyer.

In such cases, the following conditions must be fulfilled:

The agent must be authorized by the real owner of the goods or documents.
The sale must be made in the normal course of business by an agent.
The buyer must not be in receipt of any notice that the agent is not authorized to sell the goods to him.

Sale by Joint Owner

If any of the joint owners have possession of goods with the permission of other joint holders to sell the goods, then that joint owner can sell the goods to the buyer, and the buyer will get the ownership of the goods.

Sale by Party Having Possession of Goods Under Voidable Contracts

Sale by the party having possession of goods under voidable contracts: A person who acquires the possession of goods under a contract that is voidable due to factors like fraud, misrepresentation, coercion, and undue influence can sell his goods and transfer a legal title to any person.

Sale of Goods Already Sold to Another Party

When a person has sold any goods to a party but is still in possession of the goods, then he may sell them and transfer a goods title to a third person if that person obtains the goods in good faith and without obtaining the notice of the previous sale.

Sale Without Getting the Physical Delivery of Goods

A buyer who obtains the ownership of the goods that he has bought from the seller in good faith but does not get the delivery of the goods can still sell the goods to another person and the third person gets it in good faith.

Sale by an Unpaid Seller

When an unpaid seller obtains the right of lien on goods, he can sell those goods to anyone and transfer a legal title to him

Sale Under Other Acts

A pawnee can sell goods and transfer a goods title to the buyer.
When a finder of goods sells them, he can transfer a goods title to the buyer.
A sale made by a liquidator of a company can easily transfer a valid title to other persons.

Doctrine of Caveat Emptor

Caveat emptor means “Let the buyer beware”. When a buyer purchases goods or any commodity displayed by the seller, and some defect is found in it, the seller cannot be held responsible for it. It is the duty of the buyer to satisfy the seller about the selected product.

If the goods or products are not according to his requirements or are defective, then the seller cannot be held responsible for it. The buyer has to use his own skills and judgment while selecting the product.

Section 16 of the Sale of Goods Act, of 1930 describes this doctrine. It specifies that “subject to the provisions of the Act or of any other law that is being enforced in the time, there will be available no implied warranty or condition for the quality of the goods or for the fitness as to the purpose of the buyer under the contract of sale”.

The principle of caveat emptor does apply in the following conditions:

When the buyer tells the seller his requirement and the seller uses his own skill and judgment in choosing the product.
When a description is written on the goods, it is implied that the goods shall correspond with the description
The doctrine of caveat emptor does not apply to a sample of products.
When the seller sells the product by misrepresenting it to the buyer or sells wrong or expired goods

Performance of the Contract of Sale

The performance of the contract of sale starts with the seller who has the duty to deliver the goods to the buyer and the buyer to accept the goods delivered and to make payment accordingly as appropriate. The first component is the delivery of goods.

It is an integral part of a contract of sale. Delivery of goods refers to their transfer from the seller’s place to the buyer’s place.

Types of Delivery of goods

Delivery is of the following three types:

Actual Delivery

It refers to the actual transfer of goods from the place of the seller to the place of the buyer. An agent may be preferred by the seller to deliver the goods.

Symbolic Delivery

When the goods are bulky and cannot be delivered immediately, the seller usually resorts to symbolic delivery. For example, if the goods are lying in the warehouse, then the seller may give its key to the buyer in order to complete the symbolic delivery.

Constructive Delivery

In constructive delivery, the goods are delivered without any change in the actual or visible custody of the goods. In this case, the goods are with a person who holds them on behalf of the seller.

Acceptance of Goods by Buyer

The second component in the performance of the contract is the acceptance of goods by the buyer. The important points to remember here are as follows:

On delivery of the goods, the buyer has a right to check whether they are correct and are not broken or stolen. He has the right to examine the goods to his satisfaction.
A buyer is deemed to have accepted the goods when:
- He tells the seller that he has received the goods and they are appropriate.
- He does any action on the goods which, according to the seller, is inappropriate.

Payment of Price for Goods Delivered by Seller

Another important component in the performance of the contract of sale is the payment of the price for the goods delivered by the seller to the buyer.

The following points must be kept in mind in this regard:

The price paid must be absolute and must be paid as per the contract.
The price paid must reach the seller on time.
The seller must be satisfied with the price at which he has sold the goods.

Who is Unpaid Seller?

The term ‘unpaid seller’ is defined under section 45(a) of the Sale of Goods Act, 1930. It states that the seller of the goods is treated as an unpaid seller in the following circumstances:

The price for the goods is not paid in full by the buyer to the seller and the seller has an immediate right to claim the full amount.
A cheque or bill of exchange is provided to the seller and the same has been dishonored unless the payment was absolute and not conditional.

Rights of Unpaid Seller

The person or seller in the position of an unpaid seller has some rights. These rights can be briefly explained as follows:

Right to Lien

The seller has the right to lien the goods. The right to lien exist till the full payment has been received by the seller.

However, the unpaid seller loses his right to a lien in case the goods are gone from his possession. The right also stands void when the buyer lawfully obtains possession of the goods.

Right to stop in transit

In case the goods are in transit and are not delivered, the seller has a right to stop the goods in transit. He can also provide instructions to send the goods back during their transport.

Right of resale

The seller has full authority to resell the goods that were earlier provided to a party that has not paid for them. Since no payment has been received, the seller can sell the goods to another buyer. However, if some payment has been received from the party, the goods can be returned to the original buyer.

Rights of Unpaid Seller Against Buyer

The rights of an unpaid seller against a buyer are as follows:

Suit for claiming the price

The unpaid seller can claim or can file a suit in the court against the buyer to recover his balance payment for the goods delivered to the buyer. When the goods are delivered to the buyer, he can also demand payment for them.

Suit for damages for non-acceptance

In case the buyer wrongfully rejects the goods or neglects to accept them, the seller can file a suit against the buyer for the damages caused due to the non-acceptance of the contract.

Repudiate contract before date

When the buyer refuses to accept the contract before the date of delivery then the seller can claim damages caused for the non-delivery. This is also known as ‘rule of anticipatory breach contract’.

ARTICLE SOURCES

Clarkson, K., Miller, R., Jentz, G., & Cross, F. (2014). Business law: Text and cases (11th ed.).
Keenan, D., & Riches, S. (2007). Business law. Harlow: Pearson Longman.
Law.cornell.edu,. (2014). Caveat emptor. Retrieved 28 February 2023, from http://www.law.cornell.edu/wex/caveat_emptor
Legislation.gov.uk,. (2014). Sale of Goods Act 1893. Retrieved 28 February 2023, from http://www.legislation.gov.uk/ukpga/1893/71/part/I/crossheading/conditions-and-warranties/enacted