Formation Of The Contract Of Sale – Chapter Notes
CA Foundation Business Laws Chapter 3 Unit 1 notes on The Sale of Goods Act, 1930: scope, definitions, goods, contract of sale, sale vs agreement to sell, hire purchase, bailment, subject matter and price.
Contents
This unit begins the Sale of Goods Act, 1930. The central question is: when does a transaction become a contract of sale of goods? For that, students must understand the meaning of goods, sale, agreement to sell, price, delivery, and the difference between sale and similar transactions like hire purchase, bailment and work/labour contracts.
- Scope of the Sale of Goods Act, 1930
- Definitions: buyer, seller, goods, delivery, price, property
- Classification of goods: existing, specific, ascertained, unascertained, future and contingent
- Meaning and essentials of contract of sale
- Sale vs agreement to sell
- Sale vs hire purchase, bailment and work/labour
- How a contract of sale is made
- Subject matter and perishing of goods
- Ascertainment of price and valuation by third party
- They confuse goods with immovable property.
- They write “possession” when the answer requires “property/ownership”.
- They confuse sale with agreement to sell.
- They treat hire purchase as sale from day one.
- They forget that future goods can only create an agreement to sell.
- They miss the effect of goods perishing before contract or after agreement to sell.
The Sale of Goods Act, 1930 deals with contracts relating to the sale of goods in India. Earlier, sale of goods provisions were part of the Indian Contract Act, 1872. Later, due to the need for a separate law, the Sale of Goods Act was enacted and came into force from 1st July 1930.
What the Act Covers
- Contracts relating to sale of goods.
- Goods means movable property.
- Parties may modify the legal rules by express terms, unless restricted by law.
- Customs and usages may bind parties if reasonable and known to them.
What the Act Does Not Cover
- Sale of land, buildings, shops, fields or other immovable property.
- Such transactions are governed mainly by the Transfer of Property Act, 1882.
| Term | Section | Meaning |
|---|---|---|
| Buyer | 2(1) | A person who buys or agrees to buy goods. |
| Seller | 2(13) | A person who sells or agrees to sell goods. |
| Goods | 2(7) | Every kind of movable property except actionable claims and money. |
| Delivery | 2(2) | Voluntary transfer of possession from one person to another. |
| Document of Title | 2(4) | Document used in ordinary course of business as proof of possession or control of goods. |
| Mercantile Agent | 2(9) | Agent who can sell, consign, buy or raise money on security of goods in ordinary course of business. |
| Property | 2(11) | General property in goods, meaning ownership. |
| Price | 2(10) | Money consideration for sale of goods. |
| Quality | 2(12) | Includes state or condition of goods. |
Goods means 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 land which are agreed to be severed before sale or under the contract of sale.
What Goods Include
- Tangible goods: machinery, vehicles, steel, furniture, yarn, fabric, cotton bales.
- Intangible goods: goodwill, patents, trademarks, copyrights.
- Stock and shares.
- Growing crops, grass and things attached to land if agreed to be severed.
- Gas, electricity, steam and water may also be treated as goods.
What Goods Exclude
- Actionable claims, such as a debt recoverable through legal action.
- Money in circulation.
- Immovable property.
Classification of Goods
| Type | Meaning | Example |
|---|---|---|
| Existing Goods | Goods owned, possessed or acquired by seller at the time of contract. | Car already owned by seller. |
| Specific Goods | Goods identified and agreed upon at the time of contract. | Seller’s particular Santro car. |
| Ascertained Goods | Goods identified after contract from a larger lot. | 50 cotton bales selected from 100 bales. |
| Unascertained Goods | Goods not specifically identified at the time of contract; described by quantity/type/sample. | One packet of salt from 100 packets. |
| Future Goods | Goods to be manufactured, produced or acquired after the contract. | Potatoes to be grown next season. |
| Contingent Goods | Goods whose acquisition depends on an uncertain event. | Painting to be sold only if seller can acquire it from current owner. |
A agrees to sell 5,000 precision turned bushes that will be manufactured next month. These are future goods. The contract is an agreement to sell, not an immediate sale.
Delivery
Delivery means voluntary transfer of possession from one person to another. Delivery may be made by doing anything which has the effect of putting goods in possession of the buyer or a person authorised to hold them on the buyer’s behalf.
| Form of Delivery | Meaning | Example |
|---|---|---|
| Actual Delivery | Physical delivery of goods. | Seller hands over machine parts to buyer. |
| Constructive Delivery | Transfer of possession without actual physical movement. | Warehouseman agrees to hold goods for buyer instead of seller. |
| Symbolic Delivery | Delivery of means or symbol of possession. | Delivery of warehouse key, railway receipt or bill of lading. |
Deliverable State
Goods are in a deliverable state when they are in such condition that the buyer would be bound to take delivery under the contract.
If timber is to be bundled before delivery, it becomes deliverable only after bundling is completed.
Document of Title to Goods
A document of title is used in ordinary business as proof of possession or control of goods and authorises transfer or receipt of the goods represented by it.
- Bill of lading
- Dock warrant
- Warehouse keeper’s certificate
- Wharfinger’s certificate
- Railway receipt
- Multimodal transport document
- Delivery order
A share certificate shows title but is not a document of title to goods. It does not allow transfer merely by endorsement and delivery like a bill of lading.
A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.
A contract of sale may be absolute or conditional. It may result in an immediate sale or merely an agreement to sell, depending on whether ownership passes immediately or later.
Essentials of Contract of Sale
Facts The case involved building contracts where materials were used in construction. The question was whether there was a sale of materials as goods or an indivisible works contract.
Issue Does use of materials in execution of work automatically amount to sale of goods?
Held In an indivisible works contract, there was no separate sale of goods in the traditional sense because the substance of the contract was execution of work, not sale of materials as goods.
When property in goods is transferred immediately from seller to buyer, the contract is called a sale. When transfer is to happen later or after a condition is fulfilled, it is called an agreement to sell. An agreement to sell becomes a sale when the time elapses or the condition is fulfilled.
| Basis | Sale | Agreement to Sell |
|---|---|---|
| Transfer of Property | Ownership passes immediately. | Ownership passes in future or after condition. |
| Nature of Contract | Executed contract. | Executory contract. |
| Remedy for Breach | Seller may sue for price if property has passed. | Aggrieved party generally sues for damages, unless price payable on stated date. |
| Risk | Buyer bears loss because risk follows ownership. | Seller bears loss until ownership passes. |
| Nature of Right | Creates jus in rem — right against world. | Creates jus in personam — right against contracting party. |
| Right of Resale | Seller cannot resell because ownership has passed. | Seller may resell because ownership remains with seller. |
| Insolvency of Seller | Buyer can claim goods; official assignee cannot take them. | Official assignee may take control because goods still belong to seller. |
| Insolvency of Buyer | Official assignee may take goods because buyer owns them. | Official assignee has no control because buyer does not own goods. |
X agrees on 10 October to sell his car to Y on 10 November for ₹7 lakh. Since ownership is to pass later, it is an agreement to sell.
Sale and Hire Purchase
Hire purchase looks like sale because the hirer may ultimately become owner. But until the last instalment is paid, ownership remains with the owner, and the hirer is generally like a bailee with an option to buy.
| Basis | Sale | Hire Purchase |
|---|---|---|
| Passing of Property | Immediate. | On payment of last instalment. |
| Position of Party | Buyer is owner. | Hirer is bailee till final payment. |
| Termination | Buyer cannot terminate and return goods to avoid price. | Hirer may terminate as per terms before property passes. |
| Risk of Insolvency | Seller bears risk of buyer’s insolvency after sale. | Owner can repossess goods if hirer defaults. |
| Transfer of Title | Buyer can pass good title to bona fide purchaser. | Hirer cannot pass title until ownership passes. |
| Resale | Buyer can resell. | Hirer cannot resell before final payment. |
Sale and Bailment
| Basis | Sale | Bailment |
|---|---|---|
| Transfer | Ownership is transferred. | Only possession is transferred. |
| Return of Goods | Goods are not to be returned as same goods. | Same goods must be returned or disposed as directed. |
| Consideration | Price in money. | May be gratuitous or non-gratuitous. |
| Nature | Transfer of general property. | Transfer of special property/possession for purpose. |
Sale and Contract for Work and Labour
If the main substance is transfer of goods for a price, it is sale. If the main substance is exercise of skill, labour or service, it is work and labour.
If gold is supplied to a goldsmith for making an ornament, the basic substance is skill and labour. It is not simply sale of goods.
Facts A dentist made artificial teeth for a patient. The question was whether the contract was for sale of goods or for work and labour.
Issue How to identify whether a contract is sale or work and labour?
Held The contract was treated as sale because the end result was delivery of a chattel, namely artificial teeth.
Facts An artist was engaged to paint a portrait. Materials such as canvas and paint were involved, but the real purpose was artistic skill.
Issue Is a portrait commission sale of goods or contract for work and labour?
Held It was a contract for work and labour because the dominant object was skill and labour, not sale of materials.
A contract of sale is made by offer and acceptance. The offer may be to buy or sell goods for a price, and acceptance may be given by the other party. Delivery and payment may be immediate, future or by instalments.
R agrees to deliver his old motorcycle valued at ₹55,000 to S in exchange for a new motorcycle and agrees to pay the difference in cash. Since consideration is partly money, it can amount to a contract of sale.
The goods forming the subject matter of a contract of sale may be existing goods, future goods or goods whose acquisition depends upon a contingency.
| Subject Matter | Legal Position | Example |
|---|---|---|
| Existing Goods | May be subject of actual sale or agreement to sell depending on intention and transfer of ownership. | Seller’s existing machine. |
| Future Goods | Always agreement to sell. | Goods to be manufactured next month. |
| Contingent Goods | Agreement to sell depending on uncertain event. | Goods arriving only if ship reaches safely. |
Section 7 — Goods Perishing Before Making of Contract
Where there is a contract for sale of specific goods, the contract is void if the goods, without the knowledge of the seller, had already perished or become so damaged at the time of contract that they no longer answered their description.
A agrees to sell B 50 bags of wheat stored in A’s godown. Unknown to both parties, the wheat had already been destroyed by waterlogging before the agreement. The agreement is void.
Section 8 — Goods Perishing After Agreement to Sell
Where there is an agreement to sell specific goods, and the goods subsequently perish without fault of seller or buyer before risk passes to buyer, the agreement becomes void.
| Situation | Section | Effect |
|---|---|---|
| Specific goods already perished before contract. | 7 | Contract is void. |
| Specific goods perish after agreement to sell but before risk passes. | 8 | Agreement is avoided / becomes void. |
| Future specific goods fail to come into existence. | General impossibility principle | Contract may become void due to supervening impossibility. |
Facts A seller agreed to sell potatoes to be grown on particular land. The crop failed due to disease, and the seller could deliver only part of the agreed quantity.
Issue Is the seller liable when the specific future crop fails without fault?
Held The seller was not liable for the undelivered quantity because performance became impossible due to failure of the specific crop.
Price means the money consideration for a sale of goods.
Section 9 — Modes of Fixing Price
Section 10 — Agreement to Sell at Valuation
| Situation | Legal Effect |
|---|---|
| Price to be fixed by third party, but third party does not or cannot fix price. | Agreement becomes void. |
| Third party is prevented by fault of one party. | Defaulting party liable for damages. |
| Buyer has received and appropriated goods. | Buyer must pay reasonable price. |
P agrees to sell two bikes to S at a price to be fixed by Q. P delivers one bike immediately. Q refuses to fix the price. S must pay reasonable price for the bike already received. As regards the second bike, the contract may be avoided.
| Case | Topic | Principle |
|---|---|---|
| State of Madras v. Gannon Dunkerley & Co. | Sale vs works contract | In an indivisible works contract, the dominant object is work, not separate sale of materials. |
| Lee v. Griffin | Sale vs work and labour | If the end product/chattel is the dominant object, the contract may be treated as sale. |
| Robinson v. Graves | Work and labour | If skill and labour are dominant, it is not sale merely because materials are used. |
| Howell v. Coupland | Future goods/perishing | Failure of specific future crop may discharge seller due to impossibility. |
One-Line Revision
- Scope: Sale of Goods Act applies to movable goods, not immovable property.
- Goods: Movable property excluding actionable claims and money.
- Property: Ownership, not possession.
- Delivery: Voluntary transfer of possession.
- Sale: Ownership passes immediately.
- Agreement to Sell: Ownership passes later or after condition.
- Hire Purchase: Hirer gets ownership only after last instalment.
- Bailment: Possession passes; ownership does not.
- Future Goods: Always agreement to sell.
- Contingent Goods: Acquisition depends on uncertain event.
- Section 7: Specific goods already perished before contract → void.
- Section 8: Specific goods perish after agreement but before risk passes → agreement avoided.
- Price: Money consideration; may be fixed by contract, agreed manner or dealings.
- Valuation: If third party fails to value, agreement void unless goods already received and appropriated.
Formation of Contract of Sale — One Page Recall
- Applies to sale of goods.
- Goods mean movable property.
- Does not cover immovable property.
- Contract Act applies where not inconsistent.
- Buyer and seller.
- Goods and price.
- Delivery and documents of title.
- Property means ownership.
- Existing goods.
- Specific goods.
- Ascertained and unascertained goods.
- Future and contingent goods.
- Seller transfers or agrees to transfer ownership.
- Buyer pays price.
- May be absolute or conditional.
- Includes sale and agreement to sell.
- Hire purchase: ownership after last instalment.
- Bailment: possession transferred, ownership retained.
- Work and labour: main object is skill or service.
- Offer and acceptance.
- Immediate or future delivery.
- Immediate or future payment.
- Instalments allowed.
- Goods may be existing, future or contingent.
- Specific goods perishing may make contract void.
- Price may be fixed, agreed later or based on dealings.
High-Frequency ICAI Traps
- Do not call immovable property “goods”.
- Do not confuse ownership with possession.
- Do not treat agreement to sell as sale.
- Do not say future goods can be immediately sold.
- Do not forget that risk usually follows ownership.
- Do not confuse hire purchase with instalment sale.
- Do not confuse document of title with document showing title.
- Do not ignore Section 7 and Section 8 in perishing-goods problems.