This Formation of Contract Of Sale – CA Foundation Law Study Material is designed strictly as per the latest syllabus and exam pattern.
Formation of Contract of Sale – CA Foundation Business Law Study Material
What is a contract of sale? What are the essentials of a valid contract of sale?
According to Section 4(1) of the Sale of Goods Act, 1930, “a contract whereby the seller transfers or agrees to transfer the property in the goods to the buyer for a price.”
The following are the essentials of a valid contract of sale:
- The presence of two parties, i.e. buyer & seller, is required.
- Transfer of property in goods i.e. ownership is required in a contract of sale. Transfer of ownership must take place or must be agreed to take place from the seller to the buyer. Thus it includes both sale and agreement to sell.
- The subject matter of a contract of sale must always be goods. Goods mean every kind of movable property other than money and actionable claims.
- The transfer of property in goods must take place from the seller to the buyer for a price.
- The contract of sale may be absolute or conditional.
- All the essentials of a valid contract must be present.
What are the rules for the ascertainment of price in a contract of sale?
Section 9 of the Sale of Goods Act, provides 4 modes of ascertainment of price. The price in a contract of sale may be
- be fixed by the contract.
- maybe left to be fixed in an agreed manner (such as market price or fixation of price by a third party).
- maybe determined by the course of dealings between parties (such as manufacturing cost, market price).
- a reasonable price (if price cannot be fixed in accordance with the above provisions. What is a reasonable price is a question of fact dependent on the circumstances of each particular case?
- The parties may agree to sell and buy goods on the terms that the price is to be fixed by the valuation of a third party and if such third party fails to make the valuation the contract becomes void.
- However, if the buyer has received and appropriated the goods or any part thereof, he becomes bound to pay a reasonable price.
- If the third party is prevented from making the valuation by the fault of the seller or the buyer, the innocent party may maintain a suit for damages against the party in fault.
What is meant by ‘goods’ under the Sale of Goods Act, 1930? What are its different types?
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). Actionable claim means a right to a debtor to any beneficial interest in movable property not in the possession of the claimant, which can be recovered by a suit or legal action. Money means the legal tender or currency of the country and it does not include old coins and foreign currency.
Even Fixed Deposit Receipts are considered as goods under the Sale of Goods Act, 1930.
The following are the types of goods:—
1. Existing goodsThe goods which are in existence at the time of contract of sale Le. are either owned or possessed by the seller at the time of contract of sale are said to be existing goods. The existing goods may be further classified as follows:—
A. Specific goods
The goods which are identified and agreed upon at the time when the contract of sale is made, are called ‘specific goods’
B. Ascertained goods
Ascertained goods are those goods that are identified in accordance with the agreement after the contract of sale is made. When out of a large number of unascertained goods, the number or quantity contracted for is identified and set aside for such contract, such number or quantity is said to be ‘ascertained goods’. Thus ascertained goods, are identified after the making but before the performance of the contract, the process being conducted in conformity with the agreement.
C. Unascertained goods
The goods which are not specifically identified and agreed upon at the time when the contract of sale is made, are called ‘unascer¬tained goods’. They are defined by way of description or sample only the time of the creation of contact. On appropriation, the goods become ascertained. If the identity of contract goods is not estab¬lished by appropriating them towards the contract, the contract remains in respect of unascertained goods.
2. Future goods
Those goods which are yet to be manufactured or produced or acquired by the seller after the making of the contract of sale, are called ‘future goods’. A contract for the sale of future goods is always an agreement to sell It is never an actual sale because a man cannot transfer what is not in existence.
3. Contingent goods
As per section 6(2) of the Act, contingent goods are those goods the ac¬quisition of which by the seller depends upon a contingency (uncertain event) which may or may not happen. It may be noted that although the contingent goods are a type of future goods they are different from future goods in the sense that the procurement of contingent goods is dependent upon an uncertain event or uncertainty of occurrence, whereas the obtaining of future goods does not depend upon any uncertainty of occurrence.
What is meant by delivery? What are the different modes of delivery?
According to the provision of the Sale of Goods Act, 1930, delivery means voluntary transfer of possession from one person to another. To effect delivery of goods any act may be performed by one party in favor of the other party which has the effect of putting the goods into the possession or control of that other party. Delivery can be effected in any of the following ways:
- Actual Delivery: It is affected when the goods are physically delivered to the buyer or his agent.
- Constructive delivery: It is used as a method of transferring possession when the goods are in the custody of a third person. When the seller gives such directions to a third party, who has the physical custody of the goods, which has the effect of transferring the goods into the possession of the buyer, without the actual movement or delivery of goods, it amounts to constructive delivery. It is also known as delivery by attornment (acknowledgment).
- Symbolic Delivery: When there is a delivery of a thing in token of transfer of something else, such as a key of godown or warehouse where the goods are stored or documents of title, then it amounts to symbolic delivery.
(a) Sale and Agreement to Sell
(b) Sale and Hire Purchase
(c) Sale and Bailment
|BASIS||SALE||AGREEMENT TO SELL|
|Transfer of property||The title to the goods passes to the buyer immediately.||The title to the goods passes to the buyer on future date or on fulfilment of some condition.|
|Nature of Contract||It is an executed contract.||It is an executory contract.|
|Burden of risk||The risk of loss is that of the buyer since risk follows ownership.||The risk of loss is that of the seller.|
|Nature of rights||It creates jus in rem that is the buyer as an owner gets the right to enjoy the goods against the whole world. If the seller refuses to deliver the goods the buyer may sue for recovery of goods by specific performance.||It creates jus in personam that is the buyer has only a personal remedy against the seller. He can sue only for damages for breach and not for recovery of goods.|
|Remedies for breach||If the buyer fails to pay for the goods, the seller may sue for the price (suit for price sec. 55) and also has other remedies available to an unpaid seller.||If the buyer fails to accept and pay for the goods, the seller can only sue for damages and not for the price. (Damages for non-acceptance sec. 56)|
|Insolvency of Buyer||If the buyer becomes insolvent before paying the price, the seller shall have to deliver the goods to the Official Receiver on his demand because the ownership of the goods has passed to the buyer.||Since the seller continues to be the owner, he can refuse to deliver the goods to the Official Receiver unless he is paid the price because the seller continuous to be the owner of the goods.
|Insolvency of Seller||If the seller becomes insolvent while the goods are still in his possession, the buyer shall have a right to claim the goods from the Official Receiver because the ownership of goods has passed to the buyer.||If the seller becomes insolvent, the buyer cannot claim the goods. If the buyer has paid the price he can claim a ratable dividend from the estate of the insolvent seller.|
|In a contract of sale, the seller transfers or agrees to transfer the property in goods to the buyer for a price.||In hire purchase, there is an agreement for the hire of an asset conferring an option to purchase.|
|The ownership in goods passes on making the contract even if the price is paid in installments.||The ownership passes when the option to purchase is finally exercised by the intending purchaser after complying with the terms of the agreement.|
|The purchaser becomes the owner of goods||In a hire-purchase, the hirer is not the owner but only a bailee of goods.|
|After a sale takes place the buyer cannot terminate the contract and refuse to pay the price of the goods.||In a hire-purchase, the hire purchaser can terminate the contract at any time and he is not bound to pay any further installments.|
|On default the buyer the seller cannot claim back the goods.||On default of any payment by the hirer, the owner of the article has the right to terminate the agreement and to regain possession of the article.|
|In a contract of sale, the seller transfers or agrees to transfer the property in goods to the buyer for a price.||In case of bailment possession of goods is transferred from the bailor to Hailee for some purpose, e.g., safe custody, repair, etc.|
|The buyer can deal with the goods the way he likes.||The bailee can use the goods only for the intended purpose of bailment.|
|The buyer gets ownership of the goods.||The bailee only acquires possession.|
|Generally, the goods are not returnable in a contract of sale.||The goods are returnable after a specified period or when the purpose for which they were delivered is achieved.|
|The consideration for a sale is the price in terms of money.||The consideration for bailment may be gratuitous or non-gratuitous.|
Describe the consequences of ‘destruction of goods under the Sale of Goods Act, 1930, where the goods have been destroyed after the agreement to sell, but before the sale is affected.
Goods perishing before sale but after an agreement to sell [Section 8]
- Where specific goods had perished or became damaged
- without the fault of seller or buyer
- after the agreement to sell is made and before the risk passes to the buyer
- the contract becomes void.
Thus, the agreement to sell become void in the following circumstances:
- The contract of sale must be an agreement to sell and an actual sale
- The agreement to sell must be for specific goods
- The goods must perish or become damaged after an agreement to sell but before the sale
- The goods get perished or damaged without any wrongful act or default on the part of the seller or the buyer.
For example, an agreement to sell a car after a certain period becomes void, if the car is destroyed or damaged in the intervening period.
A sells a laptop computer to B with a stipulation that payment should be made within 3 days. B makes the payment after 7 days of the contract.
Hint: Stipulations as to the time for payment of the price is not of the essence; A cannot avoid the contract on the grounds of the breach of stipulation as to the time of payment of the price.
A agrees to sell two of his cars to B at a price to be fixed by C. He immediately gives delivery of the first car. C refuses to fix the price. A asks for the return of the car already delivered while B claims the delivery of the second car too. Decide.
Hint: Buyer B shall pay a reasonable price to A for the car already taken. As regards the second car, the contract becomes void.