Originally, the transactions related to sale and purchase of goods was regulated by Chapter VII (Sections 76 to 123) of Indian Contract Act, 1872 – which was broadly based on English common law. A need was felt to overhaul the law due to rapid growth of mercantile transactions and various progressive English judgments being passed to meet the needs of the community. Thus, the provisions of Chapter VII were repealed, suitably amended keeping in mind the English Sales of Goods, 1893 and recent judicial decisions of the time. A separate act, the Sale of Goods Act came into force on 1 st July 1930.
It extends to the whole of India except the State of Jammu and Kashmir. It does not affect rights, interests, obligations and titles acquired before the commencement of the Act. The Act deals with sale but not with mortgage or pledge of the goods.
Definition of Sale
Section 4 of the Sales of Goods Act, 1930 defines a sale of goods as a “contract of sale whereby the seller transfers or agrees to transfer the property in goods to the buyer for price”. The term ‘contract of sale’ includes both a sale and an agreement to sell.
A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer by the other party. The contract may be oral or in writing. A contract of sale may be absolute or conditional.
Formalities of a contract of sale: Section 5 of the Act specifically provides for the following three steps or formalities in a contract of sale:
1) Offer and Acceptance: A contract of sale is made by an offer to buy or sell the goods for a price and acceptance of such offer.
2) Delivery and Payment: It is not necessary that the payment for the goods to the seller and delivery of goods to the buyer must be simultaneous. They can be made at different times or in instalments – as per the contract.
3) Express or Implied: The contract can be in writing, oral or implied. It can also be partly oral and partly written.
Essentials
The five essential features of a contract of sale are as discussed below:
2) Subject matter to be goods
3) Transfer of ownership of goods
4) Consideration is price.
5) Essential elements of a valid contract
1) Two parties: A sale has to be bilateral because the goods have to pass from one person to another. There must be a buyer – a person who buys or agrees to buy the goods and a seller – a person who sells or agrees to sell goods. The seller and the buyer must be different persons. A part owner can sell to another part owner. A partner may, therefore, sell to his firm or a firm may sell to a partner. But if joint owners distribute property among themselves as per mutual agreement, it is not ‘sale’. A person cannot be the seller of his own goods as well as the buyers of them.
However, when a bankrupt person’s goods are sold under an execution of decree, the person may buy back his own goods from his trustee.
2) Subject matter to be goods: The term ‘goods’ is defined in Section 2(7). It states that ‘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 the land which are agreed to be severed before sale or under the contract of sale”.
Money cannot be sold because money means legal tender and not the old coins which can be sold and purchased as goods. Actionable claims are things that a person cannot make use of, but which can be claimed by him by means of legal action such as a debt.
Sale of immovable property is not covered under this Act. As per Section 3 of the Transfer of Property Act, 1882, ‘immovable property’ does not include standing timber, growing crops or grass. They are considered movable property and thus goods. Standing timber is taken as movable property while trees are immovable property.
Things like goodwill, copyright, trademark, patents, water, gas, electricity are all goods. In the case of Commissioner of Sales Tax vs. Madhya Pradesh Electricity Board [AIR 1970 SC 732], the Supreme Court observed – “…electricity…can be transmitted, transferred, delivered, stored, possessed, etc., in the same way as any other movable property…If there can be sale and purchase of electric energy like any other movable object, we see no difficulty in holding that electric energy was intended to be covered by the definition of “goods”.
In the case of H. Anraj vs. Government of Tamil Nadu [AIR 1986 SC 63], it was held that lottery tickets are goods and not actionable claims. Thus, sale of lottery tickets is sale of goods. Sugarcane supplied to a sugar factory is goods within the meaning of Section 2(7) of the Act as held in the case of UP Cooperative Cane Unions Federation vs. West UP Sugar Mills Assn. [AIR 2004 SC 3697]
3) Transfer of ownership of Goods: There must be transfer of ownership or an agreement to transfer the ownership of goods from the seller to the buyer – not the transfer of mere possession or limited interest as in the case of pledge, lease or hire purchase agreement). If goods remain in possession of seller after sale transaction is over, the ‘possession’ is with seller, but ‘ownership’ is with buyer. The Act uses the term ‘general property’ implying that sale involves total ownership and not a specific right limited by conditions.
Delivery of goods refers to a voluntary transfer of possession of goods from one person to another. Delivery may be constructive or actual depending upon the circumstances of each case. A contract may provide for the immediate delivery of the goods or immediate payment of the price or both. Alternatively, the delivery or payment may be made by instalments or be postponed.
4) Consideration is Price: The consideration in a contract of sale has to be price i.e., money. If goods are offered as the consideration for goods, it will not amount to sale. It will be barter. If there is no consideration, it will be called gift. But where the goods are sold for definite sum and the price is paid partly in kind and partly in cash, the transaction is a sale.
Consideration is an essential for a valid contract as per the Indian Contract Act, 1872. It is the duty of a buyer who has received and appropriated the goods to pay a reasonable price. According to Section 2(10) ‘price’ means the money consideration for the sale of goods. If the price is not fixed, the contract is void ab initio.
Section 9 lays down how the price may be fixed in a contract of sale:
Section 10 makes it clear that if the third party appointed under the agreement to fix the price cannot or does not make such valuation, then the agreement to sell goods will become void. If the third party is prevented in his valuation due to the buyer or the seller, the party not at fault can file a suit for damages against the party in fault.
5) Essential elements of a valid contract: All the essentials of a valid contract must be present. viz., competent parties, free consent, legal object and so on. The transfer of possession and ownership under the Act has to be voluntary and not be tainted with fraud or duress.
Time: Any stipulation with respect to time is not deemed to be of essence to a contract of sale unless a different intention appears from the terms of the contract.
SALE & AGREEMENT TO SELL
A contract of sale is a generic term and includes both an actual sale and an agreement to sell. Section 4 provides that if the property in goods is transferred from the seller to the buyer under a contract, the contract is called a sale. Where the transfer of the property in the goods will take place at a future time or is subject to some condition which has to be fulfilled, the contract is called an agreement to sell. Such an agreement to sell becomes a sale when the prescribed time lapses or the conditions are fulfilled.
| Basis of Distinction | Sale | Agreement to Sell |
| Contract | It is an executed contract. | It is an executory contract. |
| Transfer of property | The property in the goods sold passes to the buyer at the time of contract. It passes immediately. | The property passes when it becomes sale on the expiry of prescribed time or the fulfilment of certain conditions. It takes place at a future time or subject to fulfilment of conditions. |
| Conveyance of property | It creates a right in rem – a right to enjoy the goods against the whole world including the seller. | It creates a right in personam – right against the seller. |
| Transfer of risk | The transfer of risk takes place immediately. It is related to ownership and when ownership is transferred, the risk also passes to the person. If there is loss of goods, it will fall on the buyer even though the goods maybe in the possession of the seller. | There is no transfer of risk of loss of goods as ownership is not transferred. The loss will be borne by the seller even though the goods are in possession of the buyer. |
| Right of seller in case of breach | Since the property has passed to the buyer, the seller can sue the buyer for price of the goods. | The seller can only sue for damages, unless the price was payable at a particular date. |
| Right of buyer in case of breach | He can sue the seller for damages. He can also sue the third party who bought those goods for the goods. | He can sue the seller for damages only. |
| Insolvency of seller in possession of goods | He can claim the goods from the Official assignee or Receiver. | He cannot claim the goods but only a rateable dividend for the money paid. |
| Insolvency of buyer before paying the price | The seller has to deliver the goods to the Official assignee except where he has a lien over the property. | The seller can refuse to deliver the goods to the Official Assignee or Receiver. |
The question of paying sales tax arises only in case of a completed sale and not where there is only agreement to sell.
SALE & HIRE PURCHASE AGREEMENT
A Hire purchase agreement is an agreement for hire of goods where the person who hires the goods has an option to purchase the goods at the end. The possession of the goods is delivered to such a hirer and he has to pay via instalments. The property in the goods passes to the hirer on the payment of the last instalments. The Hire purchase agreements are treated as bailment and the parties have the same rights as a bailor and bailee. The hirer has a right to terminate the agreement at any time before the property passes.
The test whether an agreement is sale or hire purchase was given in the case of Lee vs. Butler [1893 2 QB 318] – If a person taking the goods has no option to terminate the agreement, is a contract of sale irrespective of where the price is paid in instalments.
| Basis of distinction | Contract of Sale | Hire Purchase Agreement |
| Law | A contract of sale is governed by the Sale of Goods Act, 1930. | They are governed by Hire Purchase Act, 1972 |
| Nature of contract | It may be written, oral or implied. | It is an agreement to hire and an agreement to sell. It has to be in writing. |
| Possession | Possession may or may not transfer immediately. | Possession passes immediately |
| Transfer of ownership | The ownership of goods is transferred immediately. | It transferred only when the option to purchase is exercised and the last payment is made. |
| Buyer | The buyer becomes the full owner of the goods | The hirer is a bailee, and not the owner until he pays all the instalments of the price in full or exercises the option to purchase. |
| Transfer to third parties | The buyer can transfer a good title to third parties because ownership of goods has been transferred. | The hirer cannot transfer a good title to a third party as ownership has not been transferred. |
| Right to repossess | The seller can sue for price but he cannot repossess the goods. | The hire vendor has a right to repossess the goods if the hirer defaults in the payments. |
| Right to terminate | In a sale, there is no option to the buyer to return the goods bought. | The hirer can terminate the agreement before the ownership is transferred. |
| Sales Tax | In case of sale of taxable goods, sales tax is levied. | Even if taxable goods are hired, sales tax is not levied. |
SALE OF GOODS & WORK AND LABOUR
A contract of sale of goods is one in which some goods are sold or are to be sold for a price. It requires the delivery of goods. But there are transactions where there is a contract of exercise of skill and labour, and the delivery of goods is subsidiary. These are the contracts for work or labour or the contracts for service. It is the intention of the parties that creates the difference – whether only delivery of goods is intended or exercise of skill and labour with regard to the goods has to be delivered.
Example: A commissions B to paint his portrait and supplies him with the material to paint. It is a contract for work and labour and not a contract of sale because the substance of the contract is the artist’s skill and not the delivery of the material.
In a similar case of Robinson vs. Graves [1935 1 KB 579], A, a painter was orally commissioned by B to paint portrait of a lady. Later, B repudiated the contract before its completion. It was held that the contract was of work and labour because the substance of the contract was the skill and experience of the artist in producing the picture.
Example: A bought a portrait painted by B, a famous artist. It is a contract of sale and not a contract for work and labour because the substance of the work is the delivery of the portrait.
In Lee vs. Griffin [1861 30 LJ QB 252], a dentist was engaged by a lady to make false teeth ‘to be fitted into her mouth’. The lady died before the completion of work and a question arose as to the nature of the contract. It was held that the contract was one of sale.
Where gold is given to a goldsmith for preparing ornament, it is a contract of work and labour. When a photographer takes a photograph, develops the negative and does other photographic work and then supplies the prints to his client, the contract is one of skill and labour and not that of sale of goods as held in the case of Asstt. Sales Tax Officer vs. B C Kame [AIR 1977 SC 1642]
Sale and Barter: A sale is always for a price but in case of barter, the transfer of ownership of goods is in return for other goods – there is not price paid.