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Performance of a Contract: Delivery and Payment – CA Foundation Business Law Notes
After the conclusion of contract of sale, the next stage is of performance of that contract. The buyer & seller must perform their respective duties and obligations Sec. 31 lays down that it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale.
Delivery of Goods:
Delivery means voluntary transfer of possession of goods from the seller to the buyer. It may be (i) actual, (ii) symbolic, or (iii) constructive. Section 33 lays down that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or the delivery may be made by doing anything which has the effect of putting the goods in possession of the buyer.
Delivery is said to be actual when the seller hands over the goods physically, to the buyer or his agent, authorised to take possession of the goods.
A symbolic delivery:
A symbolic delivery takes place when the ‘means of obtaining possession’ is handed over to the buyer. This happens where the goods are bulky and incapable of actual delivery, example – a truck is delivered” (symbolically) by handling over its keys to the buyer or the transfer of bill of lading/RR in the name of the buyer entitles him to obtain the goods. Delivery of the key of a godown is symbolic delivery of the goods therein.
A constructive delivery:
A constructive delivery takes place when goods are delivered to another person on behalf of buyer, instead of buyer himself. A third party is authorized by buyer to take delivery on his behalf. Such third party may be seller himself or carrier or godown keeper.
Constructive delivery is a delivery by attornment i.e. by formal acknowledgement. It involves change in the possession of goods without any change in,their actual and visible custody. It takes place when the person in possession of the goods acknowledges that he holds.the goods on behalf of and at the disposal of the buyer. Constructive delivery takes place in the following cases:
(a) when the seller, who is in possession of the goods, agrees to hold them on behalf of the buyer;
(b) when the buyer is already in possession of the goods and the seller agrees to the buyer’s holding the goods as owner;
(c) when the goods are in possession of a third person (e.g. a warehouseman, a carrier or any other bailee) who acknowledges to hold them on behalf of the buyer. For instance, A sells 100 bags of sugar to B, A’s stock of sugar-bags is lying in X’s godown. A issues a delivery order to X, asking him to deliver to B or his order 100 bags. X acknowledges the delivery order and agrees to hold 100 bags of sugar on B’s behalf. This is a constructive delivery, even though the goods still continue to be in X’s possession.
Rules as to delivery:
1. Duty to deliver [Sec. 31]:
It is the duty of the seller to deliver the goods. It is duty of the buyer to accept the goods and to pay for them in accordance with the terms of the contract of sale.
2. Payment and delivery are concurrent conditions [Sec. 32]:
Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions.
3. Mode of delivery [Sec. 33]:
Mode of delivery may be actual, symbolic or constructive.
4. Part delivery [Sec. 34]:
How Much Goods Must Be Delivered? (Section 34): The quantity of goods to be delivered is specified in the contract. If the parties have not agreed otherwise, the seller must deliver all the goods in a single delivery. However, where part of the goods have been delivered, and rest of the goods are yet to be delivered, there may be two possibilities:
(a) where the part delivery is made in progress of the whole delivery, then it is treated as a delivery of the whole. And the ownership of the whole quantity is transferred to the buyer.
(b) Where the part delivery is made with the intention of separating it from the whole, then in is not treated as delivery of the whole, (since each part of delivery is intended to be treated as separate delivery) In such a case the ownership of the whole quantity is not passed to the buyer.
Goods were sold in a lot and the seller instructed the wharfinger to deliver them to the buyer who had paid for them. The buyer thereafter weighed all the goods, accepted them and took away a part. The court held this constituted delivery of the whole – Hommond v. Anderson (1803) 1 Bank P.N.S. 69.
5. Buyer to apply for delivery [Sec. 35]:
Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery. The buyer has no cause of action against the seller if he has not applied for delivery. It may be noted here that this provision is intended for the benefit of the seller. The seller may, if he chooses, deliver the goods without any application in that behalf of the buyer. But he is also entitled to wait until the buyer applies for delivery.
6. Place of delivery [Sec. 36(1)]:
Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the terms of the contract. When nothing is agreed upon, the following rules apply – a) the goods are to be delivered at the place where they were lying, at the time of the sale or at the time of the agreement to sell; b) if the goods are future goods, they should be delivered at the place of manufacture or production thereof.
7. Time for delivery [Sec. 36(2) & 36(4)]:
If time is fixed, and the seller is bound to send the goods to the buyer, he must send them within the fixed time. If no time is fixed, then the seller must send them within a reasonable time 36(2). The demand or tender of delivery must be at a reasonable hour 36(4).
8. Goods in possession of third person [Sec. 3(5(3)]:
If the goods are in possession of a third party, there is no delivery until such third party acknowledges to the buyer that he holds the goods on his behalf.
9. Expenses of delivery [Sec. 36(5)]:
Unless otherwise agreed, expenses of making delivery are borne by the seller and expenses of obtaining delivery by the buyer.
10. Delivery of wrong quantity [Sec. 37]:
Subject to any usage of trade, special agreement or course of dealing between parties, the following rules shall apply when delivery of wrong quantity is made—
(a) Short delivery: If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may:
- reject the goods, or
- accept the goods, if he accepts, he shall pay for the accepted quantity at the rates contracted for.
(b) Excess delivery: If the seller delivers to the buyer a quantity larger than he contracted to sell, the buyer may:
- reject the whole, or
- accept the whole, or
- accept the quantity he ordered and reject the rest.
(c) Delivery of goods mixed with other goods: If the seller delivers to the buyer goods ordered mixed with goods of a different description, the buyer may:
- reject the whole, or
- accept the agreed goods and reject the remaining goods.
11. Instalment deliveries [Sec. 38]:
Unless otherwise agreed, the goods are not to be delivered by instalments. There might be an agreement for delivery by instalments but the price may be payable either on complete delivery or on delivery of each instalment. There will be a breach of such contract in the following cases:
- If the seller makes no delivery or makes defective delivery, in respect of one or more instalments; or
- If the buyer neglects or refuses to take delivery of or pay for, one or more instalments.
In each of the above breach, it will depend upon the terms of the contract and the circumstances of each individual case whether i) the whole contract is repudiated, or ii) it is a severable (separable) breach giving rise to a claim for compensation but not to right to treat the whole contract as repudiated [Sec. 38(2)].
12. Delivery to a carrier or wharfinger [Sec. 39]:
The delivery of goods to a carrier or a wharfinger in pursuance of a contract of sale, is prima facie deemed to be delivery of goods to buyer. If the contract of sale specifies the name of the carrier, the seller must deliver the goods to such named carrier. If the instructions of the buyer are carried out properly, the risk is with the buyer. If the instructions of the buyer are not carried out properly, the goods remain at the risk of the seller during transit.
While delivering goods to the carrier, it is the sellers duty to do whatever is necessary to secure the carrier’s responsibility for the safe delivery of goods to the buyer so that in the event of the loss, the buyer can claim compensation against the carrier.
Where the goods are sent by sea it is usual frpr the buyer himself to insure. In such a case it is the duty of the seller to give such notice of the shipment to the buyer as may enable him to insure the goods. If he does not, the risk does not pass to the buyer.
13. Buyer’s risk for deterioration of goods in transit [Sec. 40]:
Where the seller agrees to deliver the goods to the buyer at a place other than that where they are when sold, the merchantable quality of the goods may be affected due to transit. In such a case any risk of deterioration in the goods necessarily incident to the course of transit shall be borne by the buyer, unless otherwise agreed.
Example – A sold to B a certain quantity of hoop iron which was to be sent by canal at the request of B. It was rusted before it reached the buyer. The sting, however, was not more than what was necessarily incidental to its transmission. It was held that B was bound to accept the goods.
Force majeure is a situation in which either of the parties to a contract is prevented from performing its obligations due to circumstances beyond its control. The clause on force majeure usually starts with a description of the events which are considered as events of force majeure. Such events are acts of God, acts of nature (earthquakes, floods, epidemics and fires etc.), acts of governments, wars, riots and civil disturbances, strikes and lockouts etc.
The party who is affected by it, has to notify the other party of the occurrence of the event and the cessation of the event, supported by documentary evidence. If it is a strike or a lock out, the labour departments certificate/statement would act as the evidence.
The force majeure may be short term or long term or prolonged force majeure. For short term force majeure, the normal remedy is to allow extension of the delivery date(s) to the extent the performance is affected by the event. Examples of long-term or prolonged force majeure are natural calamities such as earthquakes, typhoons, severe cyclones, devastating fire/explosion in chemical factories, which may ravage the facilities and prevent the performance of the obligations.
The general remedy is to provide for a discussion between the two parties within a time-frame already specified in the clause to explore ways to fulfil all or some obligations and to find a solution. If is not feasible to perform the contract, it may be terminated.
14. Buyers Right of Examining the Goods:
A buyer cannot be said to have accepted the goods unless he had an opportunity to examine the goods and ascertain that they are in conformity with the contract, (sec. 41).
15. ‘Delivery of the goods to the buyer does not mean acceptance of the goods’:
Delivery of goods to the buyer does not amount to acceptance thereof by the buyer. According to sec. 42 a buyer is deemed to have accepted the goods –
- When he intimates to the seller that he has accepted them, or
- When he does an act in relation to such goods which is inconsistent with the ownership of the seller. example – pledges or resells, or
- When, after the lapse of a reasonable time, he retains the goods without intimating the seller that he has rejected the goods.
16. Buyer not bound to return rejected goods [Sec. 43]:
Where goods are delivered to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller. It is sufficient if he intimates to the seller that he refuses to accept them. This rule applies when the rejection is rightful and there is no agreement to the contrary.
17. Liability of buyer for neglecting or refusing delivery of good [Sec. 44]:
When the property in the goods has passed to the buyer and the seller is ready and willing to deliver the goods and requests the buyer to take delivery, but the buyer fails to take delivery within reasonable time, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for reasonable charge for the care and custody of the goods.
Forms of Contract As Regards Carriage by Sea:
The three common forms of contract as regards carriage by sea are –
- F.O.B. (Free on board)
- C.I.F. (Cost Insurance & Freight)
1. Free On Board (FOB):
Transportation term meaning that the invoice price includes delivery at the j seller’s expense to a specified point and no further. In other words the seller has to place the goods on board a ship at his own expense. He has only to bear the expenses of loading the goods. The seller must notify the buyer immediately that the goods have been delivered on board, so that the buyer may insure them.
If he fails to do so the goods shall be deemed to be at seller’s risk during such sea transit. Thereafter the goods are at the buyer’s risk and he is responsible for freight, insurance and subsequent expenses thus the price is exclusive of freight and insurance.
For example, “FOB our Nagpur warehouse” means that the buyer must pay all shipping and other charges associated with transporting the merchandise from the seller’s warehouse in Nagpur to i the buyer’s receiving point.
In a F.O.B. (Free on Board) shipment, the risk passes to buyer at the F.O.B. point. The F.O.B. point can be the seller’s factory or warehouse. In that case, the sale price quoted does not include freight which is the responsibility of the buyer as is the risk from the warehouse onward. If, however, the term is F.O.B. point of destination, seller bears the risk during transit and is responsible for payment of the freight.
FAS (free alongside):
The term F.A.S. (Free Alongside) followed by “vessel” at some specific port g is a variation of F.O.B. The sale of consummated when the seller delivers the goods alongside the (S vessel. The difference between the terms “F.O.B. vessel” and “F.A.S. vessel” is that in the F.O.B. the * seller bears the risk until the loading has been completed.
FAS means that the seller fulfils his obligation to deliver when the goods have been placed alongside he vessel on the quay or in lighters at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.
The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot carry out either directly or indirectly all of the export formalities. This term can only be used for sea freight or inland waterway transport.
2. C.I.F. Contracts:
‘C.I.F.’ stands for cost, insurance and freight. A CIF contract is a type of contract where in the price includes cost, insurance and freight charges. “C.I.F. London”, for example, would mean that the quoted price would include the price of the goods plus freight up to London and insurance.
A CIF contract is performed by delivery of the shipping documents relating to the goods and not by actual delivery of goods. Documents of title to the goods (bill of lading) are delivered so as to symbolise the delivery of goods.
Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of the price, or against acceptance of the bill.
This method protects the seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods.
3. Ex-ship Contracts:
“Ex Ship” means that the seller fulfils his obligation to deliver when the goods have been made available to the buyer on board the ship uncleared for import at the named port of destination. The seller has to bear all costs and risks involved in bringing the goods to the named port of destination.