Conditions And Warranties – Chapter Notes
CA Foundation Business Laws Chapter 3 Unit 2 notes on Conditions and Warranties under the Sale of Goods Act, 1930. Covers stipulation as to time, condition, warranty, implied conditions, implied warranties and caveat emptor.
Contents
This unit explains the promises and assurances attached to goods in a contract of sale. Every statement made by the seller does not carry the same legal weight. Some statements go to the root of the contract; others are only collateral assurances. That is the basic distinction between a condition and a warranty.
- Stipulation as to time.
- Conditions and warranties in a contract of sale.
- Express and implied conditions and warranties.
- Doctrine of caveat emptor.
- Condition vs warranty distinction.
- When breach of condition becomes breach of warranty.
- Implied conditions: title, description, sample, fitness, merchantability, wholesomeness.
- Implied warranties: quiet possession, encumbrances, usage of trade, dangerous goods.
- Caveat emptor and its exceptions.
In contracts of sale, time may relate to payment of price or delivery of goods. The legal effect is different for each.
| Stipulation | General Rule | Exam Point |
|---|---|---|
| Time for payment of price | Generally not essence of contract unless contrary intention appears. | Delay in payment does not automatically allow repudiation. |
| Time for delivery of goods | Usually treated as essence of contract. | Delayed delivery may defeat the purpose of contract. |
A supplier promises to deliver inspection gauges before a customer audit. Delivery date is normally essential because late delivery defeats the business purpose.
At the time of sale, the seller may make statements about nature, quality, description, fitness or performance of goods. If such statements do not form part of the contract, they have no legal effect. If they form part of the contract and the buyer relies on them, they become stipulations.
A representation forming part of the contract of sale with reference to goods.
Condition
A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
A condition is not a small assurance. It is the reason why the buyer enters the contract. If it fails, the buyer may reject the goods, repudiate the contract and claim damages.
P wants a car with mileage of 20 km/litre. Q points to a car and says it will suit him. The car gives only 15 km/litre. Since mileage was essential to the purchase, breach is breach of condition.
Warranty
A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
A warranty is a supporting assurance. Its breach does not destroy the main object of contract. The buyer keeps the goods and claims damages.
Ram buys a new car with warranty against manufacturing defects. Six months later, the horn stops working. This does not defeat the purpose of buying the car. Ram cannot reject the car; he can ask for repair/replacement or damages.
| Basis | Condition | Warranty |
|---|---|---|
| Meaning | Essential to main purpose of contract. | Collateral to main purpose of contract. |
| Effect of breach | Buyer may repudiate, reject goods and claim damages. | Buyer may claim damages only. |
| Conversion | Breach of condition may be treated as breach of warranty. | Breach of warranty cannot be treated as breach of condition. |
| Business meaning | Failure defeats the deal. | Failure causes loss but deal survives. |
Section 13 gives cases where breach of condition is treated only as breach of warranty. The buyer then loses the right to rescind and can claim only damages.
Voluntary Conversion
Compulsory Conversion
A agrees to supply 10 bags of first quality sugar at ₹625 per bag but supplies second quality sugar worth ₹600 per bag. Buyer may reject. But if buyer elects to accept, he may treat breach as warranty and claim ₹25 per bag as damages.
Conditions and warranties may be express or implied.
| Type | Meaning | Example |
|---|---|---|
| Express | Specifically agreed by parties at the time of contract. | Seller expressly states that machine speed will be 500 units/hour. |
| Implied | Presumed by law even if not written in contract. | Seller must have right to sell goods. |
These are conditions presumed by law in a contract of sale unless circumstances show a different intention.
| Implied Condition | Section | Core Rule |
|---|---|---|
| Condition as to title | 14(a) | Seller must have right to sell. |
| Sale by description | 15 | Goods must correspond with description. |
| Sale by sample | 17 | Bulk must correspond with sample; buyer must get comparison opportunity; goods must be free from latent defects. |
| Sale by sample and description | 15 | Goods must correspond with both sample and description. |
| Fitness for purpose | 16(1) | Goods must be fit where purpose is disclosed and buyer relies on seller’s skill. |
| Merchantability | 16(2) | Goods bought by description from dealer must be merchantable. |
| Wholesomeness | General implied condition | Eatables must be wholesome and safe for consumption. |
In every contract of sale, unless there is an agreement to the contrary, there is an implied condition that the seller has the right to sell the goods.
| Transaction | Seller’s Obligation |
|---|---|
| Sale | Seller must have right to sell at the time of sale. |
| Agreement to sell | Seller must have right to sell when property is to pass. |
A purchases a tractor from B, who had no title. Later the true owner demands it. A must return it to true owner and can recover price from B.
Facts Buyer purchased a tractor from a seller who had no ownership or authority to sell it. After some time, the real owner identified the tractor and demanded it back.
Issue Can the buyer keep the tractor merely because he paid price in good faith?
Held No. The buyer must return the tractor to the true owner. But the buyer can recover the price from the seller who had no title.
Facts Seller sold condensed milk under a brand label which infringed another company’s trademark rights.
Issue Did the seller have a valid right to sell goods with that label?
Held No. The buyer could reject the goods or remove the labels and claim damages for reduced value.
Where goods are sold by description, there is an implied condition that goods shall correspond with the description.
The rule is simple: if the seller contracts to sell one described thing, he cannot supply another. The description may identify the class, kind, place of origin, shipment, packing or essential characteristics of the goods.
A sells twelve bags of “waste silk”. There is an implied condition that the goods must be known in market as waste silk. If not, buyer may reject.
Facts A ship was sold as a “copper-fastened vessel”. Later it was found that the ship was only partly copper-fastened.
Issue Did the ship correspond with the description used in the contract?
Held No. The description was part of the identity of the goods. The buyer could reject or claim damages.
Sale by Sample
In sale by sample, the buyer purchases relying on a sample shown by the seller. Law implies three conditions.
| Condition | Meaning |
|---|---|
| Bulk corresponds with sample | The delivered goods must match the sample in quality. |
| Reasonable opportunity of comparison | Buyer must get a fair chance to compare bulk with sample. |
| Freedom from latent defects | Goods must be free from hidden defects not discoverable by ordinary examination. |
In sale by sample of two parcels of wheat, seller allowed inspection of smaller parcel but not larger parcel. Buyer could refuse both parcels because reasonable opportunity was not given.
Facts Shoes were supplied by sample for the French Army. They looked proper on ordinary inspection. Later it was discovered that paper had been inserted in the soles.
Issue Can buyer reject where defect is hidden and not visible during normal sample inspection?
Held Yes. The defect was latent and made the shoes unmerchantable. Buyer could recover price and damages.
Sale by Sample as well as Description
Where goods are sold by both sample and description, the bulk supplied must correspond with both sample and description. Matching only one is not enough.
Oil was described as refined sunflower oil and was equal to sample, but contained hemp oil. Buyer could reject because goods matched sample but not description.
Condition as to Quality or Fitness — Section 16(1)
The general rule is that there is no implied condition as to quality or fitness. But such condition arises when three requirements are satisfied.
False teeth bought from dentist but not fitting the buyer’s mouth: buyer may reject because purpose was obvious. But if buyer asks for a specific “Merrit” sewing machine by trade name, he relies on brand, not seller’s skill.
Facts Priest purchased a hot-water bottle from a chemist and asked whether it would safely hold hot water. The chemist assured him it was suitable. When hot water was poured, the bottle burst and injured his wife.
Issue Was the seller liable when the buyer relied on his skill and judgment?
Held Yes. The buyer made the purpose known and relied on the seller’s expertise. The seller had to supply goods reasonably fit for that purpose.
Facts Timber was purchased expressly for use as railway sleepers. The timber supplied was found unsuitable for that purpose.
Issue Could the buyer avoid the contract?
Held Yes. The purpose was clearly communicated and the goods were unfit for that purpose.
Condition as to Merchantability — Section 16(2)
Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that goods shall be of merchantable quality.
Goods are merchantable when a person of ordinary prudence would accept them as goods of that description.
Damaged motor horns due to bad packing may be rejected as unmerchantable. Black velvet cloth damaged by white ants is also breach of merchantability.
Condition as to Wholesomeness
In case of eatables and provisions, goods must not merely be merchantable; they must also be wholesome and safe for consumption.
Milk supplied with typhoid germs caused death after consumption. Seller was liable because eatables must be wholesome.
An implied warranty is a warranty which law presumes in the contract, unless excluded by express agreement, course of dealings or usage of trade.
| Implied Warranty | Section | Meaning |
|---|---|---|
| Quiet possession | 14(b) | Buyer shall enjoy undisturbed possession of goods. |
| Freedom from encumbrances | 14(c) | Goods must be free from undisclosed charge or encumbrance. |
| Quality or fitness by usage of trade | 16(3) | Trade usage may attach warranty of quality or fitness. |
| Disclosure of dangerous nature | Common law principle | Seller must warn buyer if goods are dangerous and buyer is ignorant of danger. |
Facts X bought a laptop from Y, spent money on repairs and used it. Later it was found stolen and taken from X by the true owner.
Issue Can X recover only price or also other losses?
Held Y was responsible for breach of warranty of quiet possession. X could claim price and repair cost as damages.
A pledges car with C for loan and then sells it to B without disclosing the pledge. B can ask A to clear the charge or pay and recover the amount with interest.
Caveat emptor means “let the buyer beware”. The buyer must examine goods and satisfy himself that they suit his purpose.
The seller is generally not bound to disclose every defect. If the buyer depends on his own skill and judgment and makes a bad selection, he cannot hold the seller responsible.
A buys infected pigs; seller was not bound to disclose the defect if buyer did not rely on seller. A buys a horse for riding but does not tell seller; horse is suitable only for carriage. Buyer cannot reject.
| Exception | Rule | Section / Link |
|---|---|---|
| Fitness for purpose | Purpose disclosed + reliance on seller + seller deals in such goods. | 16(1) |
| Patent or brand name | If buyer relies only on brand, fitness condition does not apply. | 16(1) exception |
| Sale by description | Goods must correspond with description. | 15 |
| Merchantable quality | Goods bought by description from dealer must be merchantable. | 16(2) |
| Sale by sample | Bulk must match sample and be free from latent defects. | 17 |
| Sample + description | Goods must match both sample and description. | 15 and 17 |
| Usage of trade | Trade usage may imply quality or fitness obligation. | 16(3) |
| Fraud or active concealment | Seller cannot hide defects or misrepresent goods. | General contract law |
| Dangerous goods | Seller must warn where goods are dangerous and buyer is ignorant. | Implied warranty |
| Case / Example | Topic | Principle |
|---|---|---|
| Priest v. Last | Fitness for purpose | Purpose disclosed and reliance on seller creates implied condition of fitness. |
| Bombay Burma Trading Corporation Ltd. v. Aga Muhammad | Fitness for purpose | Goods supplied must be fit for the disclosed purpose. |
| Copper-Fastened Vessel | Sale by description | Goods must exactly correspond with description. |
| French Army Shoes | Sale by sample | Goods must be free from latent defects not discoverable on ordinary inspection. |
| Tractor Title Example | Condition as to title | Seller without title must refund buyer when true owner claims goods. |
| Trademark Infringement Example | Condition as to title | Seller must have lawful right to sell goods in the form supplied. |
| Laptop Example | Quiet possession | Buyer disturbed by true owner can claim damages from seller. |
One-Line Revision
- Section 11: Time of payment is generally not essence; time of delivery usually is.
- Condition: Essential to main purpose; breach allows rejection and damages.
- Warranty: Collateral to main purpose; breach allows damages only.
- Section 13: Breach of condition may be treated as breach of warranty.
- Express Terms: Specifically agreed by parties.
- Implied Terms: Presumed by law unless excluded.
- Title: Seller must have right to sell.
- Description: Goods must correspond with description.
- Sample: Bulk must match sample and be free from latent defects.
- Fitness: Purpose + reliance + seller’s business required.
- Merchantability: Goods bought by description from dealer must be merchantable.
- Wholesomeness: Food must be safe and wholesome.
- Quiet Possession: Buyer must enjoy undisturbed possession.
- Caveat Emptor: Buyer beware, subject to exceptions.
High-Frequency ICAI Traps
- Do not treat every seller statement as a condition.
- Do not confuse rejection remedy with damages-only remedy.
- Do not forget that condition may be treated as warranty, but not vice versa.
- Do not apply caveat emptor where buyer relied on seller’s skill.
- Do not apply fitness condition where buyer relied only on brand/trade name.
- Do not confuse merchantability with fitness for particular purpose.
- Do not forget latent defects in sale by sample.
- Do not forget both requirements in sale by sample plus description.
Conditions and Warranties — One Page Recall
- Payment time: generally not essence.
- Delivery time: usually essence.
- Depends on contract terms.
- Essential to main purpose.
- Breach allows repudiation.
- Buyer may reject goods.
- Buyer may claim damages.
- Collateral to main purpose.
- Breach gives damages only.
- No right to reject goods.
- Buyer waives condition.
- Buyer elects damages only.
- Non-severable contract accepted.
- Performance excused by law.
- Title — seller has right to sell.
- Description — goods match description.
- Sample — bulk matches sample and no latent defect.
- Sample + description — both must match.
- Fitness — purpose + reliance + seller’s business.
- Merchantability — acceptable commercial quality.
- Wholesomeness — eatables must be safe.
- Quiet possession.
- No undisclosed encumbrance.
- Quality or fitness by trade usage.
- Warning for dangerous goods.
- Let the buyer beware.
- Buyer must inspect goods.
- Seller not liable for buyer’s bad selection.
- Subject to major exceptions.
- Fitness for purpose disclosed to seller.
- Sale by description.
- Merchantable quality.
- Sale by sample.
- Sale by sample and description.
- Trade usage.
- Fraud or active concealment.
- Dangerous goods without warning.