Law Notes: Sales of Goods Act

Sale & Agreement to Sale

Section 4 of the Sales of Goods Act defines the term ‘Sale’ and ‘Agreement to Sale’. Firstly the Section states that ‘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.’ The above explanation pertains with it some certain features of a sale those are:
1. Bilateral Contract: A sale has to be bilateral because the property in goods has to pass from one person to another. Its first essential, therefore, is that the seller and the buyer must be different persons. A sale is said to be consensual because it is necessary that the parties should agree with their free consent.
In Graff V. Evans, the accused was the manager of a club. The club was not licensed for the sale of intoxicating liquors, but these were supplied by the manager to the members at fixed prices. This was held to be not a sale within the meaning of licensing Acts. It was merely a distribution of the liquors among the members, they being the joint owners of the club. But if the club were an incorporated body, the result would perhaps have been different.
Sometimes a contract may not be entered into by the normal process of negotiation, but under a statutory compulsion. When the goods are supplied under a statutory compulsion whether that results in sale or not. In Vishnu Agencies V. Commercial Tax Officer, it was held that the transaction of supply of cement by a distributor to a permit-holder, in terms of the provisions of West Bengal Cement Control Act and control Order, amounts to ‘sale’ and thus eligible to sales tax. The appellant contended that no volition or free will or bargaining power was left to it, and since there was no element of mutual consent or agreement between it and the allottees, the transactions were not sales within the meaning of Sales Tax Act.
The court observed that the offer and acceptance need not always be in an elementary form, nor indeed does the Law of Contract or of Sale of goods require that the consent to a contract must be ex press, it may be implied and can be spelt out from the conduct of the parties. In the first place, it is not obligatory on a trader to deal in cement nor on anyone to acquire it. The decision of trader to deal in an essential commodity is volitional. Such volition carries with it the willingness to trade in the commodity strictly on the terms of Control Order. The consumer too, who is under no legal compulsion to acquire or possess cement, decided as a matter of his volition to obtain it on the terms of permit or the order of allotment issued in his favour. Thus, though both parties are bound to comply with the legal requirements governing the transaction they agree as between themselves to enter into transaction on agreeing to supply on statutory terms and other agreeing to accept it on the very terms. Thus, transaction between them, is ‘consensual’ or with their ‘free consent’
Also, there is some scope for the parties to bargain. The Cement Control Order provides that no person shall sell cement at a “higher than notified price”, leaving it open to parties to charge and pay a price which is less than the notified price.
In another case of Coffee Board, Karnataka V. Commissioner of Commercial Taxes, it was held that the compulsory delivery of coffee by the coffee growers to the Coffee Board constitutes a sale and not compulsory acquisition, and the State can impose Purchase tax on the same.
2. Money Consideration: The consideration for a sale of goods must be money, called the price. Where the property in goods is transferred for any consideration other than money that will not be sale, but an exchange or barter. But where goods are sold for a definite sum and the price is paid partly in terms of valued up goods and partly in cash, that is sale. For example if 52 bullocks, valued £ 6 a piece, were exchanged for 100 quarters of barley at £ 2 per quarter, the difference to be made up in cash, the contract was treated as one of sale. Similarly, where corn was delivered on terms that on demand either the price would be paid or an equal quantity of corn would be returned, that was held to be a sale.
3. Goods: The subject-matter of the contract must be 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 that land which are agreed to be severed before sale or under the contract of sale.
Thus, goods include every kind of movable property other than actionable claim or money. Things like goodwill, copyright, trade mark, patents, water, gas, electricity and ships are all goods and may be the subject of the contract of sale. Human organs and tissues have become an object of sale subject to statutory restrictions.
The Goods which form the subject-matter of any contract of sale can be classified into various categories. This classification help in determining as to when does the property in the goods pass from the seller to the buyer. The goods may be either existing goods or future goods. Existing goods may be further classified into specific goods and unascertained goods. Specific goods are those goods which have been identified and agreed upon at the time of the contract of sale. If the goods are not identified and agreed upon at the time of making of the contract, they are known as ascertained goods. In case of specific goods, there is a possibility of the property in the goods passing to the buyer at the time of making of the contract, whereas in the case of unascertained goods, the property in the goods does not pass to the buyer unless and until the goods are ascertained.
The parties are free to provide as to when the performance of the contract by each side will be made. They may provide that the delivery of the goods will be made either immediately or by instalments or on some future date. Similarly regarding the payment of price too the contract may require either immediate payment, or payment by instalments or the payment on some future date.
4. Transfer of ownership in the goods: Transfer of property i.e. the ownership in the goods from the seller to the buyer, is the essence of the contract. A sale is said to be ‘consensual’ because it is necessary that the parties should agree with their free consent.
Sale and Agreement to Sell:
Further Section 4 distinguishes between ‘Sale’ and ‘Agreement to Sell’. It states where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
A ‘Contract of Sale’ is a generic term and includes both an actual sale, where the ownership in the goods passes to the buyer immediately when the contract is made, and an agreement to sell, where the ownership in goods is to pass subsequent to the making of the contract.
In order to constitute a sale there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposed capacity to contract, that it must be supported by money consideration, that as a result a transaction, the property must actually pass in goods.
A sale has the immediate effect of transferring property, whereas in an agreement to sell the property is to pass at some future time or subject to some condition. The sale of the whole of the haystack on the seller’s farm, the buyer having the liberty to take away when he likes, is an immediate sale.
The essential object of the contract of sale is the exchange of property for a money price. There must be a transfer of property, or an agreement to transfer it, from one party, the seller, to the other, the buyer, in consideration of a money payment or a promise thereof by the buyer.
A contract of sale becomes a sale only when the property in the goods is transferred to the buyer under the terms of the contract itself. As there must be a complete exchange of property to constitute a sale, it follows that the seller and buyer must be different persons. One co-owner may sell to another and therefore a partner may sell to his firm and the firm may sell to a partner, but in the case of a member of an ordinary club paying for a meal at the club, or even for provisions which he may carry away, there is no sale; the transaction is a release of joint interest of the other members of the club, and the only contract involved is the contract made once and for all by the member on ‘his admission to use the property of the club only on the conditions laid down or authorised in its rules and usages. Members of a club or voluntary society are undivided joint owners, not part owners.
In Ghasiram V. State, the accused, a retailer, made an agreement with State Government and agreed to sell whet during shop-hours to consumers within his zone at a retail rate fixed by government. The wheat was delivered by government to the retailer on his deposit of price of wheat at the agreed whole-sale rate. At one stage, by night-time, retailer removed some bags of wheat from shop and thereafter, possibly apprehensive of adverse consequences brought them back to his shop.
The question in the case was whether there was an agreement of sale or that of an agency. The court held that retailer by virtue of agreement could not be regarded as an agent of government in respect of wheat received by him under agreement. The property in wheat received by retailer, under the agreement, did pass to him. There was no criminal breach of trust by him, as he was not agent of government.
If an agreement to sell contemplates passing of property at a future date, it becomes a sale when that date arrives. If it contemplates certain conditions subject to which the property is to pass, it becomes a sale when those conditions are fulfilled.
‘Sale’ and ‘Agreement to Sell’ can be distinguished on the following grounds:
1. In a sale the buyer becomes the owner of the goods at the time of making of contract but in an agreement to sell buyer becomes owner of goods at a later time.
2. A sale makes the buyer the owner of the goods. He can exercise al the proprietary rights in respect of them, such as an action for conversion or detenue. He acquires a jus in rem, that is, a right against the goods. The effect is that if the seller refuses to deliver the goods, the buyer may sue for recovery of the goods by specific performance. If the seller has resold the goods to another person, the buyer may follow the goods in his hands, unless that other had bought them in good faith and without notice. On the other hand, an agreement to sell is a contract pure and simple. It is not a conveyance. The buyer’s right are only personal against the seller, that is, a jus in personam. He can sue only for damages for breach and not for recovery of goods.
3. In a sale, since the ownership in the goods has passed to the buyer, the risk of loss, if any, of the goods is on the buyer. But in an agreement to sell, the seller remains the owner of the goods and, therefore, he runs all the risks.
4. In a sale, if the buyer commits default, the seller may sue him for the price, that is, for specific enforcement of the contract. In an agreement to sell, the seller’s only remedy is to sue for damages for breach.
5. Sale is an executed contracted, where there is a contract plus a conveyance, whereas an agreement to sell is termed as executory contract pure and simple.

Sales & Hire Purchase

The Hire Purchase agreement can be described as a hiring agreement coupled with an option to purchase, that is to say, the owner lets out the chattel on hire and undertakes to sell it to the hirer his making a certain number of payments. If that is the real effect of the agreement there is no contract of sale until the hirer has made the requisite number of payment, and he remains a bailee until then. But some so-called hire-purchase agreements are in reality contracts to purchase, the price to be paid by instalments, and in those cases the contract is a contract of sale and not of hiring.
A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. A hirer may not be bound to purchase the thing hired but where there is an obligation or an option to buy on the terms that the hirer on payment of a premium as also the number of instalments, shall enjoy the goods which ultimately may become his property, the transaction amounts to one of hire-purchase, though the title to the goods would remain with the owner till all the instalments are paid or the hirer has exercised his option to finalise the purchase on payment of a sum nominal or otherwise.
Under a hiring agreement the hirer has a right to return the goods at any time, and thereby relieve himself from any further obligation. If the intention of the financing party in obtaining the hire-purchase and the allied agreement was to secure the return of loans advanced to their customers the transactions would merely be financial transaction.
An agreement to sell and a sale have to be distinguished from a contract of hire purchase. They can be distinguished on the basis, firstly a hire purchase agreement entitles the hirer only to possession of the goods. He cannot pass a good title to any buyer from him. But a person who receives possession under an agreement to buy is able to pass a good title to a bona fide purchaser from him. Secondly, a hirer cannot claim the benefit of implied conditions and warranties created by the Act unless it becomes a sale. Thirdly, the Hire Purchase Act is applicable only to hire purchase contracts. Lastly, sales tax is not leviable on a hire purchase until it becomes sale.
In a hire-purchase agreement the hirer has two options: (i) hirer has an option to buy, but no obligation to buy; and (ii) right to terminate the agreement as such.
The basis of distinction between the two was ex plained by House of Lords in Helby V. Matthews. Helby let a piano on hire on the following terms: (i) Hirer should pay a certain amount per month; (ii) should he punctually pay 36 monthly instalments, the piano should become his property, until then it should continue to be the property of Helby; and (iii) Hirer had the right to terminate the hire at any time by returning the instrument to Helby.
After paying a few instalments hirer pledged the instrument with the defendant, who acted in good faith. Helby sued defendant to recover the instrument. It was held that he could do so. Hirer was not in possession having agreed to buy the piano, but under a hire purchase agreement and therefore, had no right to pledge.
An agreement to buy imports a legal obligation to buy. If there was no such obligation, there cannot properly be said to have been an agreement. Hirer might buy, or not, just as he pleased. He did not agree to pay 36 or any number of monthly payments. All that he undertook was to make the monthly payment so long as he kept the piano. He had an option no doubt to buy it by continuing the stipulated payments. If he had exercised that option he would have become the purchaser. Under these circumstances how hirer can be said either to have bought or agreed to buy the piano.
Thus, it is the presence of the option on the part of the hirer to buy or to terminate the hiring that makes the distinction. The ownership passes to him when he exercises that option. The hirer cannot be compelled to buy. The Supreme Court of India has cited this statement in K L Johar & Co. V. Deputy Commercial Tax Officer. The court said that the essence of sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in instalments. On the other hand, a hire purchase agreement has two aspects. There is first an aspect of bailment of goods subject to the hire purchase agreement, and there is next, an element of sale which fructifies when the option to purchase is exercised by the intending purchaser.
Where the hirer does not have the option to return, it will be an agreement to buy and not a hire purchase, even if the price is payable in instalments and the seller has the power to seize the goods on default. This was established in Lee V. Butler. Here a lady hired certain furniture from plaintiff, the price to be paid in two instalments, and the plaintiff having the right to take back the furniture if an instalment was not paid. Before the last instalment was paid, the lady sold the furniture to the defendant. It was held that the defendant had acquired a good title, the lady being in possession of the furniture under an agreement to buy. She did not have the option to return but was compellable to buy.
In Sundram Finance Ltd. V. State of Kerala, the appellant carried on the business of financing purchase of motor vehicles on the security of these vehicles. The State imposed sales tax on the transaction between the appellants and their customers. Appellant contended that they were mere financiers and that they did not enter into any transaction of sale of goods with parties and they were not ‘dealer’ within the meaning of the Act.
The court observed that a hire-purchase agreement broadly takes one or the other of two forms. IN the first, the goods are purchased by financier dealer, and he obtains a hire-purchase agreement from customer, under which the latter become owner of goods on payment of all installments by exercising his option to purchase the goods. In the Second, goods are purchased by the customer which remain in his possession, subject to liability to any amount paid by financier on his behalf to dealer, and the financier obtains a hire purchase agreement which given him a licence to seize the goods in event of failure by customer to fulfil agreement’s conditions.

Contract for Work & Material

Sometimes a contract may involve supply of some article which also involves rendering of some work or service in respect of the same. In such a case, there may be difficulty in deciding whether it is a contract of sale of goods or a contract for work and labour or a contract of service. The problem of ascertaining the nature of the contract in such cases generally arises in the context of the liability for sales tax, which could be levied in case of sale of goods and not when the contract is one for work and labour.
A contract of sale has to be distinguished from a contract involving the exercise of skill or labour on some material. Apart from the question of liability to sales tax, the distinction is important because it is only a sale that carries a number of implied conditions and warranties.
In Lee V. Griffin, a lady engaged a dentist to make two sets of false teeth “to be fitted into her mouth”. Before the work could be completed the lady died. In the doctor’s action to recover his charges the contract was held to be one of sale. The court emphasized that we should see the end of the transaction. If the result of a transaction is the passing of an article for a price it is a sale.
Whether the contract is one of sale or of work and labour depends on the circumstances of each case. If the object of the contract is to transfer the property in some chattel and the delivery of the same to the buyer, it is a contract of sale, irrespective of the fact that the cost of the materials used bear a very small proportion to the price charged. On the other hand, if the object is not to transfer property in the chattel but to render skill and labour, the contract is one for work and labour.
In Robinson V. Graves, the test laid down in above case was not approved by the Court. In this case the defendant orally commissioned the plaintiff, an artist, to paint the portrait of a lady, and subsequently repudiated the contract before the portrait was completed. In an action by the plaintiff for the agreed price, it was held to be a contract of work and labour. The painter recovered.
In Asstt. Sales Tax Officer V. B.C. Kame, it has been held by the Supreme Court that when a photographer undertakes to take a photograph, to develop the negative, or to do other photographic work and thereafter supply the prints to his client, the contract is one of skills and labour and not that of sale of goods.
The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work or rendering service no property, in the things produced as a whole notwithstanding that a part or even the whole of the material used him may have been his property. In the case of contract of sale, the thing produced as a whole has individual existence as the sole property, and of the party who produced it, at some time before delivery, and the property therein passes only under the contract relating thereto in goods used in the performance of the contract is not sufficient; to constitute a sale there must be an agreement express or implied relating to the sale of goods and completion of the agreement by passing of title in the very goods contracted to be sold.
In every case the court will have to find out what was the primary object of the transaction and the intention of the parties while entering into it. Generally a contract to make a chattel and deliver it, when made, is a contract of sale, but not always. The test would seems to be whether the thing to be delivered has any individual existence before delivery as the sole property of the party who is to deliver it.
For example ‘A’ is employed by ‘B’ to draw a conveyance on paper and with ink furnished by ‘A’. This is a contract for work and not for the sale of goods.
In Northern India Caterers V. Lt. Governor of Delhi, the appellant, who ran a hotel in which not only lodging and meals were provided to the residents on an all-inclusive basis, but meals were also served to non-residents in the restaurant located in the hotel. Regarding the nature of the contract in the two kinds of services rendered by the appellant it was held by the Supreme Court that not only the service of meals to the visitors in the hotel on an all-inclusive basis, but also service of meals in the restaurant to the casual visitors was in the nature of a service provided to the customers and the same could not be considered to be a transaction of sale, and therefore, the transactions were not subject to the imposition of sales tax.
The Supreme Court reviewing its own decision in Northern India Caterers V. Lt. Governor, Delhi, held that where food is supplied in an eating house or restaurant, and it is established upon the facts that the substance of the transaction, evidenced by its dominant object, is a sale of food and the rendering of services is merely, incidental, the transaction would undoubtedly be eligible to sales tax.
When there is sale of an article with an additional and subsidiary contract to affix it, it is considered to be a contract of sale. In such a case, the main contract is to deliver the goods in which the property passes and the services put in the process is only ancillary to that. When, on the other hand, the object is to complete a certain stipulated work.
In State of Rajasthan V. Nenu Ram, the Supreme Court held a contract to supply and fix wooden door and window frames and shutter to be a contract for work and not a sale.
A contract of sale is a contract whose main object is the transfer of the property in, and the delivery of the possession of a chattel as a chattel to the buyer. Where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua-chattel, the contract is one for work and labour. The test is whether or not the work and labour bestowed and in anything that can properly become the subject of sale neither the ownership of the materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration is determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of chattel.
The primary test is whether the contract is one whose main object is transfer of property in chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale or is carrying out of work by bestowal of labour and service and materials are used in execution of such work. The test has been recognized and approved in a number of decisions of this court and it may now be regarded as beyond controversy, but the real difficulty arises in its application as there are a large number of cases which are on the border line and fall within what may be called grey area. To resolve this difficulty, the courts have evolved some subsidiary tests.
The primary difference between a contract for work or service and a contract for sale of goods is that in the former there is in the person performing work rendering service no property in the things produced as a whole. In the case of a contract for sale, the thing produced as a whole has individual existence as the sole property of the party who produced it, at some time before delivery, and the property there in passes only under the contract relating there to the other party. “this was the test applied by this court in the State of Rajasthan V. Man Industrial Corporation, for holding that a contract for providing and fixing four different types of windows of certain size according to specifications, designs, drawings and instructions set out in the contract was a contract for work and labour and not a contract for sale.
The same test was applied by the court in Sentinel Rolling Shutters V. CST. There the question was whether a contract for fabrication, supply and erection of certain types of rolling shutters, was a contract of sale or a contract for work and labour, this court analysed the nature of the contract and pointed out that not only are the Rolling shutters to be manufactured according to the specifications drawlings and instructions provided in the contract, but they are also to be erected and installed at the premises of the company. The price stipulated in the contract is inclusive of erection and installation charges and the contract does not recognise any dichotomy between the fabrication and supply of the Rolling Shutters and their erection and installation so far installation of Rolling shutters is as much an essential part of the contract as the fabrication and supply and it is only on the erection and installation of Rolling shutters that our contract would be fully executed.
This court then proceeded to examine what is a rolling shutter and how it is erected and installed in the premises and observed that a rolling shutter consists of several component parts and the component parts do not constitute a rolling shutter until they are foxed and erected on the premises. It is only when the component parts are fixed on the premises and fitted in the one another that they constitute a rolling shutter as a commercial article and till then they are merely component parts and cannot be said to constitute a rolling shutter. The erection and installation of the rolling shutter cannot therefore, be said to be incidental to its manufacture and supply. It is a fundamental and integral part of the contract, because without it the rolling shutter does not come into being. The manufacturer would undoubtedly be the owner of the component part when he fabricates them but at no stage does as to transfer he rolling shutter comes into existence as a unit when the component parts are fixed in position on the premises and it, therefore becomes the property o the customer as soon as it comes into being. There is no transfer of property in the rolling shutter by the manufacturer to the customer as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the premises so as to constitute a rolling shutter. The contract for fabrication supply and erection of the rolling shutters was, on this reasoning held by the court to be a contract for work and labour and not a contract for sale.
The principle established in the above case is applied in Ram Singh & Sons Engineering Works V. The Commissioner of Sales Tax, U.P. There was a contract for fabrication and erection of 3 motion electrical overhead traveling cranes. The fabrication and erection was one single indivisible process and such a crane came into existence only when the erection was complete. The fabrication and erection of a 3 motion electrical overhead traveling crane is highly skilled and specialized job and the component parts have to be taken to the site and they are assembled and erected there and they are assembled and it is only when this process is complete then a 3 motion electrical overhead traveling crane comes into being. The process of assembly and erection requires a high degree of skill and it is not possible to say that the erection of a 3 motion electrical overhead traveling crane comes into existence only when the erection is complete. The erection is thus a fundamental and integral part of the contract because without it the 3 motion electrical overhead traveling crane does not comes into being. The manufacturer would undoubtedly be the owner of the component parts when he fabricated them, but at no stage does he become the owner of the 3 motion electrical overhead traveling crane as a unit so as to transfer the property into the customer. The 3 motion electrical overhead traveling crane comes into existence as a unit only when component parts are fixed in position and erected at the site, but at that stage it becomes the property of the customer because it is permanently embedded in the land belonging to the customer. The result is that as soon as 3 motion electrical overhead traveling crane comes into being it is the property of the customer and there is, therefore, no transfer of property in it by the manufacturer to the Customer As A Chattel. It is essentially a transaction for fabricating component parts and putting them together and erecting them at the site so as to constitute a 3 motion electrical overhead traveling crane. The transaction is no different than one for fabrication and erection of an open godown or shed with asbestos or tin sheets fixed on columns. There can, therefore be no doubt that the contract in the present case was a contract for work and labour and not contract for sale.

Conditions & Warranties

Some terms of the contract of sale constitute the hard core of the contract and their non-fulfilment may seem to upset the very basis of the contract. They may be so vital to the contract that their breach may seem to be a breach of the contract as a whole. Such terms are known as conditions of the contract and their breach entitles the innocent party to repudiate the contract. A term which is not of such vital importance is known as a warranty. Its breach does not lead to repudiation, but only to damages for breach.
Section 12(1) provides that stipulations in a contract of sale with reference to goods may be conditions or warranties. The section then goes on to explain the distinction between the two. It says ‘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.’ Whereas ‘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.’ Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract.
The court is not bound by the terminology employed by the parties. The concept of a condition is well illustrated by the case of Baldry V. Marshall. The plaintiff consulted the defendants, motor car dealers, for a car “suitable for touring purposes”. The defendants suggested that a “Bugatti” car would be appropriate and the plaintiff accordingly bought one. The car turned out to be unfit for touring purpose and the plaintiff ought to reject it. The defendants relied upon a term in the contract which guaranteed the car for twelve months against mechanical defects and excluded every other guarantee or warranty.
But it was held that the suitability of the car for touring purposes was not a guarantee or warranty, but a condition of the contract. The term was so vital that its non-fulfilment defeated the very purpose for which the plaintiff bought the car. He was, therefore, entitled to reject and have refund of the price.
Consequences of Breach: Since a condition is a stipulation essential to the main purpose of the contract its breach by one party entitles the other to treat contract as repudiated. For example, if the seller makes a breach of condition, the buyer may reject the goods. Similarly, if the breach is made by the buyer, the seller may treat it as a breach of contract and not perform his own part of the obligation.
Option to the buyer on breach of conditions by the seller: When there is a breach of condition by the seller, the buyer may:
(i) treat the contract as repudiated, or
(ii) waive the condition, or
(iii) treat the breach of condition as a breach of warranty.
The law implies into every sale of goods a number of conditions and warranties. They are read into every contract of sale unless they are excluded and are known as implied conditions and warranties.
1. Conditions as to title: The essence of sale being the transfer of ownership, it is one of the duties of the seller to ensure that he has the right to sell what he purports to sell. If the seller’s title turns out to be defective the buyer may reject the goods. There can be no sale at all of the goods which the seller has no right to sell. The whole object of sale is to transfer property from one person to another. In fact the buyer has not received any part of that which he contracted to receive-namely, the property and right to possession- and that being so, there has been a total failure of consideration.
In Niblett V. Confectioners’ Material Co, the defendant sold the plaintiffs 3,000 tins of condensed milk. On their arrival in England from New York it was found that 1,000 tins were labeled ‘Nissley Brand’. Another manufacturer of condensed milks under the name of ‘Nestle Brand’ claimed that this was an infringement of his trade mark. The plaintiff had to remove all the labels in order to obtain the goods and subsequently sold them at a reduced value. He sued the sellers for the breach of the condition as to title. It was held that the plaintiff had the right to reject the goods or to recover as damages the loss caused by the sale at a reduced price.
Explaining the meaning of ‘right to sell’ it was said that the seller had not the right to sell these goods. Having admitted that they were an infringement of the Nestle Company’s trade mark they were liable to an injunction restraining the sale. Therefore they had no right to sell these goods at the time when the property was to pass. If a vendor can be estopped by process of law from selling he has not the right to sell.
2. Sale by description: Section 15 of the Act lays down the conditions which is implied by law in a sale by description. It says that where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description.
Two things are necessary to enable a buyer to invoke the protection of this section. First, there should be a sale by description and, secondly, the goods do not correspond with the description. The expression ‘sale description’ includes many situations. Firstly, it refers to a case where the buyer has never seen the goods and buys them on the basis of the description given by the seller. This happened in Varley V. Whipp.
There was a sale of reaping machine which the buyer had never seen and which the seller stated ‘to have been new the previous year and used to cut only 50 to 60 acres.’ On delivery the buyer found the machinery to be extremely old and, therefore, returned it. The seller’s action against the buyer for the price failed. It was a sale by description and the machine did not correspond with the description.
Even where the buyer has seen the goods, it may be a sale by description if he relies not on what he has seen but what was stated to him and ‘the deviation of the goods from the description is not apparent’. This is illustrated in Nicholson and Venn V. Smith Marriott.
It was an auction sale of a set of linen napkins and table cloths, described as ‘dating from the seventeenth century’. The plaintiff, who were dealers in antiquities, saw the set and bought it. They subsequently found it to be an eighteenth century set and sought to reject it. It was held that they could do so. They had relied on the description and the discrepancy between the description and the quality could not have been discovered by the casual examination.
Thirdly, packing of goods may sometimes be a part of the description. Thus, in Moore & Co. V. Landuer & Co., there was a contract for the purchase of 3,000 tins of canned fruit from Australia, to be packed in cases each containing 30 tins. The sellers tendered a substantial portion in cases containing 24 tins. The method of packing was held to be a part of the description and, therefore, the purchasers were entitled to reject the whole consignment.
Once it is proved that the sale is by description, the law implies the condition that the goods must correspond with the description. If they do not do so the buyer may reject them and it will be no defence to say that they will serve the buyer’s purpose. Where is a sale of copra cake, the goods were found adulterated with castor beans. It was held that the goods did not correspond with description and the condition was broken.
3. Sale by description as well as by Sample: The section 15 further provides that if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods correspond with the sample if the goods do not also correspond with the description. In other words, the implied condition in such cases is that the goods shall not merely agree with the sample, but must also correspond with the description. The basic insistence of the section is ‘correspondence with description.’
4. Sale by sample: This is defined in Section 17 of the Act. A contract of sale is a contract for sale by sample where there is a term in the contract, express or implied, to that effect. A sale by sample is indistinguishable from a sale by description. The law implies three conditions into every contract of sale by sample:
(i) That the bulk shall correspond with the sample in quality.
(ii) That the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
(iii) That the goods shall be free from any defect, rendering them un-merchantable, which would not be apparent on reasonable examination of the sample.
In Godley V. Perry, a retailer tested toy catapults by pulling at the elastic and found no defect, but one of them subsequently exploded in the hands of a child who had bought it from the retailer. It was held that the goods were un-merchantable by reason of the latent defect. The court pointed out that ‘reasonable examination means as that phrase is understood by the commonsense standards of everyday life.’ It obviously does not mean complete or through examination.
There are certain types of warranties which are implied by law in a sale of goods contract.
1. Quite Possession: An implied warranty that the buyer shall have and enjoy quiet possession of the goods. It is a warranty that the vendor shall not, nor shall anybody claiming under a superior title, or under his authority, interfere with the quiet enjoyment of the vendee.
2. Free from Encumbrance: The goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made.
Conditions reduced to warranty:
In certain circumstances a condition is reduced to the status of a warranty. The effect is that the buyer losses his right to reject the goods. He has to be content with the remedy for damages for the breach of the conditions. This happens in the following cases:
1. Waiver by Buyer: Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty. The conditions, express or implied, are for the benefit of the buyer. He has, therefore, the option to waive the breach of a condition. In that case he remains liable for the price, but may recover damages for the breach. The buyer’s election may be express or implied.
2. Acceptance of goods by buyer: Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of the condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods, unless there is a term of the contract of that effect. Thus, where the buyer has accepted the goods and thereafter discovers that some conditions was not fulfilled, he cannot reject.
An illustration in point is Hardy & Co. V. Hillerns & Fowler. Wheat sold under a contract arrived at the port of destination. The buyers took up the shipping documents. The day on which the wheat was unloaded they resold and dispatched a portion of it to sub-purchasers. They subsequently discovered that the wheat was not of the contract quality and gave the sellers a notice of rejection. All this happened within three days and, therefore, reasonable time for the examination of the goods had not expired. It was held that the transfer of the possession to the sub-purchasers was an act inconsistent with the ownership of the sellers and, therefore, that put an end to the buyer’s right of rejection. Notwithstanding that it took place before the expiry of reasonable time for inspection. The act of resale is inconsistent with the seller’s ownership because the buyer has to place the rejected goods at the disposal of the seller immediately on rejection, whereas if he has resold them, he cannot do that till he receives them back from the sub-buyers.
When a condition is reduced to the status of a warranty, the effect is not that the condition becomes a warranty, but that the condition remains a condition, it is only the remedy which changes. When the contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of condition has got to be treated as a breach of warranty. The idea behind the provision is that when the buyer has a choice of either accepting or rejecting the goods and he chooses to accept them, his right of rejection can no more be exercised. Merely taking delivery of the goods by the buyer does not necessarily mean the acceptance of them. This is demonstrated by the decision of the House of Lords in Wallis, Son & Wells V. Pratt. The defendants sold seed to the plaintiffs, as “Common English Sanfoin” on the condition that the “seller give no warranty express or implied as to growth, description or any other matter.” The seed delivered to the buyers was not “Common English Sanfoin”, but “Giant Sanfoin”, a different and inferior seed. The buyer accepted the seed believing it to be “Common English Sanfoin” and resold it as such to other parties, to whom they were obliged to pay damages for the mistake.
The time for rejection having been lost, the only course open to the buyers was to sue for damages. The sellers contended that the “condition” was reduced to “warranty” and they had excluded liability for warranties. The House of Lords rejected this contention and allowed the buyers to recover damages for their loss. A condition is converted into warranty only for remedial purposes. The result may be summed up as it was absurd to suggest that, because subsequent events had prevented the buyers from repudiating the contract, they had also converted a more into a less important term. Once a condition always a condition, whether or not the remedies remained the same.
Where goods not answering to the description contracted for are delivered to a buyer, the buyer has a right to one of two alternative remedies:
(a) reject the goods and obtain a refund of the price in advance and sue for damages for non delivery. In such an event the damages he would obtain would be the difference between the contract price and the market price of the goods on the date of the breach if the latter were higher;
(b) waive condition and accept the goods and sue for damages for a breach of warranty. When he accepts the goods, he has to pay the contract price less any claim for set-off for breach of warranty.
Section 62 of the Act enables the parties to a sale to exclude liability for implied terms. The section recognizes three modes by which liability for implied terms may be negatived:-
(i) By express Contract;
(ii) By course of dealing; and
(iii) By trade usage.

Caveat Emptor

Section 16 of the Act prescribes that ‘subject to the provisions of this Act or any other law for the time being in the force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale.’ This is a restatement of the principle of caveat emptor (buyer beware). It means that subject to the implied conditions which have been seen above and the exception created by Section 16, the seller is not bound to supply goods which should be fit for any particular purpose or which should possess any particular quantity. It is the buyer’s duty to select goods of his requirement. “It was for the buyer to make himself acquainted with qualities and defects of the goods which he contemplated purchasing.
The principle is that it is for the buyer to satisfy himself that the goods which he is purchasing are of the quality which he requires or, if he is buying them for a specific purpose, that they are fit for the purpose. This principle is summed up in the maxim ‘Caveat emptor’; and is based upon the presumption that the buyer is relying on his own skill and judgment, when he effects a purchase.
One illustration of the application of this principle is Ward V. Hobbs. Certain pigs were sold by auction and no warranty was given by the seller in respect of any fault or error or description. The buyer paid fair price for healthy pigs, but they were ill and all but one died of typhoid fever. They also infected a few of the buyer’s own pigs. The House of Lords held that sending infected pigs to the market was an offence, but there was no implied condition or warranty that they were sound. It was said hat although a vender is bound to employ no artifice or disguise for the purpose of concealing defects in the article sold, since that would amount to a positive fraud on the vendee; yet under the general doctrine of caveat emptor, he is not ordinarily bound to disclose every defect of which he may be cognizant, although his silence may operate virtually to deceive the vendee.
Another case of the same kind is Burnby V. Bollet. ‘A’, a farmer, bought from ‘B’ a butcher, the carcass of a dead pig for consumption and left it hanging up, intending to return after completing other business, and take it away. In his absence ‘C’, a farmer, on seeing and wishing to buy it, was referred to ‘A’, and bought it of ‘A’. It turned out unsound and unfit for human consumption. It was held that no warranty of soundness was implied by law between the farmers ‘A’ and ‘C’. The result would have been different if the plaintiff had bought the pig from a dealer in pork. In that case there would have been an obligation to supply goods of merchantable quality.
Caveat Emptor does not mean that the buyer must ‘take chance’, it means he must ‘take care’. It applies to the purchase of specific things upon which the buyer can, and usually does, exercise his own judgment; it applies also whenever the buyer voluntarily chooses what he buys; it applies also where by usage or otherwise it is a term of the contract, that the buyer shall not rely on the skill or judgment of the seller.
Exceptions:
The exceptions to the rule of caveat emptor have now become more prominent than the rule itself. The rule owes its origin to the times when nearly all sales took place in the open market. The buyer and the seller came face to face, the seller exhibited his wares, the buyer examined them and bought them if he liked. But as trade grew and assumed global dimensions, it became difficult for buyers to examine goods beforehand, most transactions being concluded by correspondence. Further on account of the complex structure of modern goods, it is only the sellers who can assure the contents and quality of the goods. For these reasons it became necessary to restrict the rule of caveat emptor by grafting a few exception upon its scope.
The essence of these exceptions it thus explained as it is the duty of the court in administering the law to lay down rules calculated to prevent fraud, to protect persons who are necessarily ignorant of the qualities of a commodity they purchase, and to make it the interest of manufactures and those who sell, to furnish the best article that can be supplied. Section 16 provides for the following exceptions:
(a) Fitness for buyer’s purpose: S. 16(1) requires the seller in certain circumstances to supply goods which shall be fit for the buyer’s purpose. For this exception to apply, the following points have to be proved:
(1) The buyer should make known to the seller the particular purpose for which the goods are required.
(2) The buyer should rely on the seller’s skill or judgment.
(3) The goods must be of a description which it is the course of the seller’s business to supply.
At first glance the exception seems to require too many conditions to be satisfied. But all of them are implicitly satisfied in the routine course of the act of purchasing an article. This is shown in Grant V. Australian Knitting Mills. The plaintiff, a doctor, purchased from a retailer two woolen underpants manufactured by the defendants. Next day after wearing one of them he became ill. His illness was diagnosed as dermatitis caused by a chemical irritant which the defendants had negligently omitted to remove in the process of manufacture. It was held that the sale was within the exception and the implied condition of fitness for the buyer’s purpose was broken. It was said that it is no doubt essential that the buyer must rely upon the seller’s skill or judgment. But the reliance will seldom be express, it will usually arise by implication from the circumstances. Where the seller deals in certain goods, the buyer goes to the shop in the confidence that the tradesman has selected his stock with skill and judgment.
This should be contrasted with a case where the plaintiff contacted dermatitis from Harris tweed coat and the illness being due to her sensitiveness the sellers were held not liable, the cloth being fit for a normal person.
Where the goods are capable of more than one use, the buyer should inform his purpose to the seller and only then may depend upon him to supply goods for that purpose. Where this is not done, the condition as to fitness will not be implied.
For example, in Re Andrew Yule and Co., Hessian cloth, which is generally used for packing purpose, was supplied to the buyer who found it, because of an unusual smell, unfit for packing foodstuffs, though it was good as a packing cloth, the buyer could not reject it, because he had never disclosed his particular purpose to the seller. Where the “particular purpose” is disclosed, the condition immediately attaches. The seller is entitled to assume that the goods are required for their normal purposes, or one of their normal purposes, unless otherwise indicated by the buyer.”
Sale under Trade Name: The proviso to Section 16(1) provides that sometimes a buyer may rely more on the trade name of a commodity than on the skill and judgment of the seller. “If a person goes in a shop and asks for a bottle of R White’s Lemonade, or somebody’s particular brand of beer, he is not relying on the skill and judgment of the person who serves it to him.” In such cases it would be manifestly unjust to burden the seller with responsibility for fitness.
The mere mention of the name of a product, or patent does not exclude the condition, for even then the buyer may rely on the seller’s skill and judgment. In Baldry V. Marshall, a car had to be selected for touring purpose and the seller recommended “Bugatti” car, a trade name. This did not exclude the implied condition of fitness.
Stating the true effect of the proviso it was said that the mere fact that an article sold is described in the contract by its trade name does not necessarily make the sale, a sale under a trade name. we may illustrate meaning by reference to three different cases. First, where a buyer asks a seller for an article which will fulfil some particular purpose and in answer to that request the seller sells him an article by a well known trade name; there it is clear that proviso does not apply. Secondly, where the buyer says to the seller “I have been recommended such and such an article’ mentioning it by its trade name ‘will it suit my purpose’, naming the purpose and thereupon the seller sells it without more; there again I think the proviso has no application. But there is a third case where the buyer says to a seller, I have been recommended so and so, ‘giving its trade name’ as suitable for the particular purpose for which I want it. Please sell it to me. In that case it is equally clear that the proviso would apply and that the implied condition of things’ fitness for the purpose named would not arise.
The condition of fitness remains applicable even when goods are sold by an agent who does not disclose that he is selling on behalf of his principal and the buyer does not know that he is buying from an agent.
(b) Merchantable Quality [S. 16(2)]: The second leading exception of the principle of caveat emptor is that a dealer who sells goods by description is bound to deliver goods of merchantable quality. The only requirement for this condition to arise is that the goods must be purchased by description from a seller who deals in goods of that description. When this requirement is fulfilled it becomes the responsibility of the seller to supply goods which shall be of ‘merchantable quality’.
For instance, in Godley V. Perry, a toy dealer displayed in his shop window some toy catapults. A child of six was attracted by them and bought one. While he was using it, it broke off an entered his left eye which had to be removed. The seller contended that there was no condition of merchantable quality as the toy was not bought from him by description. Rejecting this and holding him liable, the court said that a sale over the counter can be sale ‘by description’ is clear, and where, as here, a child asks for a catapult and one is sold to him over the counter, that is no less a ‘sale by description’ than one where an order is placed on the strength of a catalogue.
The term ‘merchantable quality’ includes the following propositions:
(i) Marketability: Merchantability does not merely mean that the goods shall be marketable, but that they shall be marketable at their full value. “Merchantability does not mean that the thing is saleable in the market because it looks all right; it is not merchantable in that event if it has defects unfitting it for its only proper use but not apparent on ordinary examination.
(ii) Reasonable fitness for general purpose: “Merchantable quality” means, in the second place, that if the goods are purchased for self use, they must be reasonably fit for the purpose for which they are generally used. “It has long been recognized that merchantable quality reflected in use value, as well a exchange value, and that the two are inseparably linked.
The principle has been applied in a great number of cases. In Priest V. Last, the plaintiff went to the defendant, a chemist, and asked for a hot-water bottle. The defendant sold him an American rubber bottle, saying that it would sand hot but not boiling water. The plaintiff had purchased the bottle for his wife and while she was using, it burst and injured her. Since the bottle was not fit for being used as a hot-water bottle, the ‘particular purpose’ for which the buyer had purchase it, the defendant was held liable to pay compensation for the breach of the implied condition.
Defective packing. Packing of the goods is an equally important consideration in judging their ‘merchantability’. The plaintiff purchased a bottle of Stone’s Ginger Wine. When he attempted to draw its cork with a corkscrew and with due care, the neck of the bottle broke off, the bottle fell to the ground cutting the plaintiff’s hand. The seller had to answer in damages.
Partly defective. Where a part of the goods are defective, the buyer may reject the whole lot even if he had accepted some deliveries before finding out the defect.
Merchantable quality means that the goods shall be as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all other relevant circumstances.
There are points of distinction between the two exception. The Legislature intended, and the courts have always treated, them to be two independent conditions. And they do make sometimes a very practical difference to the buyer. In Henry Kendall & Sons V. William Lillico & Sons Ltd, a Brazilian groundnut extraction was sold to a manufacturer for use as ingredient in compounding food for poultry. The compound caused death of chicks and poults due to toxic substance in the groundnut extraction. But the food was fit for older birds and other animals. It was held that the food was not fit as a poultry feed and, therefore, the implied condition of fitness by the buyer’s particular purpose was breached and the suppliers were responsible for the loss caused to him, but the goods were of merchantable quality.
Secondly, the prerequisites of two exception are different. To avail of the first exception the buyer had to rely on the seller’s skill and judgment, but this is not necessary to import the condition of merchantable quality.
Lastly, the proviso the two exception are different. Where goods are sold under their patent or trade name, the implied condition of fitness is excluded. But the condition of merchantability arises even when the purchase is effected by reliance on the patent or trade mark.
(c) Conditions implied by trade usage [S. 16(3)]: S. 16(3) gives statutory force to conditions implied by the usage of a particular trade. It says, ‘An implied warrant or condition s to quality or fitness for a particular purpose may be annexed by the usage of trade’. It has long been settled that in commercial transactions extrinsic evidence of custom and usage is admissible to annex incidents to written contracts in matters with respect to which they are silent. This is so because the parties ‘contract with reference to those known usages.’ An unreasonable custom will not, however affect the parties contract.
(d) Express Terms [S. 16(4)]: It is open to the parties to include any express condition and/or warranties in their contract. But an express warranty or condition does not negative a warranty or condition implied by the Act unless the express terms are inconsistent with the implied conditions.

Nemo Dat Quod Non Habet

In the development of our law, two principles have striven for mastery. The first is the protection of property: no one can give a better title than he himself possesses. The second is the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. The first principle held sway for a long time but it has been modified by the common law itself and by statute so as to meet the needs of our times. The first principle is enshrined in the ancient maxim, nemo dat quod non habet, which means that no one can transfer a better title than he himself has.
When the seller himself is the owner of the goods which he sells or he is somebody’s agent to dispose of the goods, he conveys a good title in the goods to the buyer. Difficulty arises when the seller is neither himself the owner nor has he any such authority from the owner to sell the goods.
Section 27 of the Act states this principle. It says that subject to the provisions of this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with consent of the owner, the buyer acquires no better title to the goods than the seller had. So where goods are sold by a finder or a thief the buyer gets no title.
Section 27, as a general rule, tries to protect the interest of the true owner when it provides that where the goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had.
Exceptions:
The principle of protecting bona fine commercial transactions is given effect to by engrafting a number of exceptions upon the above principle. After stating the principle in general terms, Section 27 and the three sections that follow it enumerate the situations in which nemo dat does not apply.
I. Estoppel:[S.27]: Section 27 says that a purchaser may get a good title if, ‘the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.
When the owner is not permitted to deny the seller’s authority that is known as an estoppel against him. Estoppel arises from a representation that the seller has the authority to sell. And when that representation is innocently acted upon by the buyer, it becomes too late to deny the seller’s authority. Representation may arise from words or declaration or it may arise from an act or omission. An omission to perform one’s duty may create an estoppel. But the duty must be a legal obligation.
Estoppel by negligence: Mere carelessness may not create an estoppel. “Negligence, in order to give rise to a defence under this section, must be more than mere carelessness on the part of a person in the conduct of his own affairs, and must amount to a disregard of his obligations towards the person who is setting up the defence.
Failure to register a transaction where registration is compulsory may create an estoppel, but not failure to register as a safety measure with a private organization such as Hire-Purchase Information Ltd.
II. Sale by mercantile Agent [S. 27, Proviso]: A buyer of goods from a mercantile agent acquires good title if the conditions laid down in Section 27(2) are satisfied.
Folkes V. King illustrates the protection that this section affords to an innocent purchaser from a mercantile gent. The plaintiff entrusted his car to a mercantile agent for sale at a stated price and not below that. He sold it to X below that price and misappropriated the proceeds. X resold the car to the defendant. The plaintiff could not recover it from the defendant. X got a good title from the mercantile agent and he conveyed a good title to the defendant. A conveyance through documents of title to the goods is equally effective against the true owner.
The conditions subject to which the rule operates may now stated as:
(1). Mercantile Agent: The first requirement is that the sale must be by a ‘mercantile agent;
(2). In Possession as mercantile agent: Secondly, the mercantile agent should be in possession of the goods as mercantile agent. If the goods are entrusted to him in any other capacity, he cannot convey a good title. This was so held in Staffs Motor Guarantee Ltd. V. British Wagon Co. Ltd. A dealer in second-hand cars sold his lorry to a company and then immediately took it back from the company under a hire-purchase agreement. He then resold the lorry to another company, which claimed that it had good title to the lorry having bought it from a mercantile agent in good faith.
But the court refused to sustain this claim. The lorry had been handed back to the dealer not as an agent but as a hirer and, therefore, as its bailee. It was said because one happens to trust his goods to a man is in other respects a mercantile agent, but with whom he is dealing, not as a mercantile agent, but in a different capacity, I do not think that it is open to a third party who buys the goods from that man to say that they were in his possession as a mercantile agent.
(3). With owner’s Consent: Thirdly, the goods should be in the possession of the mercantile agent ‘with the consent of the owner’. This requirement is satisfied when it is shown that ‘the true owner did intentionally deposit in the hands of the mercantile agent the goods in question. When this is so, then it is immaterial that the consent was obtained by fraud of tricks or other methods which render the consent voidable.
For instance, if a mercantile agent should induce the owner to pass the property to him by some false pretence, as by giving for display purposes, by falsely pretending that he was in a large way of business when he was not, then the owner cannot claim the goods back from an innocent purchaser.
Where the agent obtains possession of the goods by theft, or otherwise without the consent of the owner, the buyer from him cannot acquire a good title. Pearson V. Rose & Young Ltd. Is a well-known authority. P left his car with a mercantile agent and authorized him only to receive offers and not to sell. The agent obtained possession of the registration books from P without his consent and then promptly sold the car to the defendants. It was held that a sale without the registration books would not have been a good sale and the registration books were obtained without the consent of the owner, and, therefore, the buyer did not acquire a good title.
(4). Must sell while acting as mercantile agent: Fourthly, the mercantile agent must sell the goods ‘when acting in the ordinary course of business of a mercantile agent’. It means ‘acting in such a way as a mercantile agent in the ordinary course of business as a mercantile agent would act; that is to say, within business hours, at a proper place of business, and in other respects in the ordinary way in which a mercantile agent would act, so that there is nothing to lead the other party to suppose that anything wrong is being done.
(5). Good faith and without notice: Lastly, the buyer must act in good faith and should not have notice that the seller has no authority to sell. Mere suspicion should not amount to notice. But it is well established that suspicion in the mind of a person, and the means of knowledge in his power willfully disregarded, would amount to notice.
III. Sale by Joint Owner [S. 28]: If one of the several joint owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to any person who buys them of such joint owner in good faith and has not at the time of the contract of sale notice that the seller has no authority to sell.
IV. Sale by Person in Possession under Voidable Contract [S. 29]: When a person has obtained possession of the goods under a voidable contract and he makes a sale of them, the buyer gets a good title provided the contract has not been avoided at the time of the sale and the buyer acts in good faith and without notice of the seller’s defect in the title.
The first condition for application of this exception is that the goods should have been obtained under a voidable contract as opposed to a void contract. Where possession of the goods is obtained under a void contract, the buyer does not get a good title.
Sale after avoidance of contract does not pass title: The next requirement is that the contract must not have been rescinded at the time of the sale. The usual method of rescinding a contract is by giving notice to other party of the intention to rescind. If he makes a sale after receiving this notice, he cannot convey a good title to the buyer. Where the goods have been taken away by a fraudulent person who will keep out of the way and cannot be communicated with, the contract may be rescinded by doing whatever the owner of the goods can do to regain possession.
Good faith and without notice: The last requirement is that the buyer should act in good faith and should not have notice of the seller’s defective title.
V. Seller in possession after the Sale [S. 30(1)]: Where a seller, having sold goods, continues to be in possession of them, and sells them over again to another person, the buyer gets a good title provided the conditions of Section 30(1) are satisfied.
The first requirement of the exception is that the seller should continue to be in possession of the goods after having sold them. In Staffs Motor Guarantee Ltd. V. British Wagon Co. Ltd., the owner of a lorry sold it to the defendants and took it back on hire-purchase. He then resold it to the plaintiffs. The later would not get a good title because the seller was not in possession ‘as seller’ but as a bailee under a hire-purchase agreement.
It is however not necessary that the seller should be in personal possession of the goods. It is enough that the goods are at his disposal even if they are in the custody of a warehouse keeper. Thus, in City Fur Manufacturing Co. V. Fureenbond (Brokers) London Ltd. One H purchase a quantity of skins from a broker. The goods remained in the broker’s warehouse pending payment. H sold them to the plaintiffs who gave him a bill of exchange to enable him to pay the broker and arrange delivery to the plaintiffs. Instead H pledged the goods with the defendants. The defendants were held to have acquired a good title.
Where, however, the sale has been completed by delivering the goods to the buyer, this exception will not apply even if the buyer has subsequently returned the goods to the seller for some specific purpose and they are in the possession of the seller when he resells them. In such cases the second buyer does not get a good title.
The buyer has to act in good faith and without notice of the fact that the goods in question were already sold. It is necessary for this condition to be satisfied that the sale must take place in the seller’s ordinary course of business of a mercantile agent.
VI. Buyer in possession before sale [S. 30(2)]: Where a person has bought or has agreed to buy certain goods of which possession has been given over to him, but the seller still has some lien or right over the goods, if the buyer resells the goods the second buyer will get a title free from the seller’s right of lien.
The sale may have been made by actually transferring the goods or by transfer of documents of title. A pledge or any other disposition of the goods will be equally effective. The second buyer should act in good faith and without notice of the seller’s rights.
Possession obtained under a hire-purchase agreement does not make the possessor a buyer in possession so that a sale by him will not convey a good title to the buyer.
It is necessary that the original seller should have the right to sell the goods. If he does not have the right to sell the goods, e.g. he is a thief or finder, neither the person taking possession from him nor any subsequent buyer will get a good title.
VII. Resale by an Unpaid Seller: According to Sec. 54(2), if an unpaid seller has exercised the right of lien or stoppage in transit and the buyer does not pay him, he may resell the goods after a notice to the buyer. If such a notice is not given, the seller is neither entitled to claim from the buyer any loss if the goods bring lower than the contract price nor can he retain the benefit if the goods are sold at a higher price. When an unpaid seller has exercised his right of lien or stoppage in transit and resells the goods, the buyer acquires good title thereto as against the original buyer, notwithstanding that no notice of the resale has been given to the original buyer.
VIII. Sale by Finder of Goods: According to S 71, Indian Contract Act, the finder of goods is subject to the same responsibility as the bailee. He is to take due care of the goods while they are in his possession and also to return them when their owner has been found. According to S 169 of the Indian Contract Act, however, if the owner cannot with a reasonable diligence be found or if he refuses upon demand, to pay the lawful charges of the finder, the finder may sell the goods.
When the goods is in danger of perishing or of losing the greater part of its value, or when the lawful charges of the finder, in respect of the thing found, amount to two-third of its value the finder may sell the goods and the buyer of such gods gets a good title.
IX. Sale by Pawnee: Normally, the pawnee of the goods is under a duty to return them if the debt secured by such goods is paid back to him. According to S. 176, Indian Contract Act, if the pawnor makes a default in the payment o the debt, the pawnee may either sue him for the debt or may sell the goods pledged on giving the pawnor reasonable notice of the sale. Upon such a sale being made by the pawnee, the buyer of such goods acquires a good title to them.
X. Sale in Market Overt: The sale of goods in market according to the usage of the market, the buyer acquires a good title to the goods, provided he buys them in good faith and without notice of any defect or want of title on the part of the seller. Such sale means sale in the open market by a person who generally deals in such goods. The buyer’s title is protected in case of such a sale though the seller may be liable for the tort of conversion.

Unpaid Seller

Section 45 of the Sales of Goods Act defines the term ‘unpaid seller’. The seller of goods is deemed to be an ‘unpaid’ seller within the meaning of this Act:
(a) When the whole of the price has not been paid or tendered;
(b) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise.
A seller who has only received a part of the price is also an unpaid seller. Where the seller has received a negotiable instrument, like a bill of exchange, promissory note or cheque, for the price, he is not a unpaid seller. But if, before he has delivered the goods, the negotiable instrument is dishonoured, then he becomes an unpaid seller and may exercise his rights. This is so because a negotiable instrument is always presumed to have been received as a conditional payment and the condition is not fulfilled when it is dishonoured.
If the bill is dishonoured before delivery has been made, then the vendor’s lien revives; or if the purchaser becomes openly insolvent before the delivery actually takes place, then the law does not compel the vendor to deliver to an insolvent purchaser.
The protection afforded by the Act to an unpaid seller are also extended to “any person who is in the position of a seller, as for instance, an agent of the seller to whom the bill of lading has been endorsed or a consignor or agent who has himself paid, or is directly responsible for the price.” But this provision does not operate so as to convert a buyer into a seller.
Section 46 seeks to protect the interest of an unpaid seller by conferring upon him the following rights against the goods, notwithstanding the facts that the property in the goods has passed to the buyer:
(i) a lien on the goods for price while he is in possession of them;
(ii) in case of the insolvency of the buyer a right of stoppage of the goods in transit after he has parted with the possession on them.
(iii) a right of resale as limited by Act.
These rights of an unpaid seller do not depend upon any agreement, express or implied between the parties. They arise by implication of law. They are some of the incidents attached by law to a contract of sale. The buyer has no right to have possession of the goods till he pays the price. The seller’s right in respect of the price is not a mere lien which he will forfeit if he parts with the possession, but grows out of his original ownership and dominion, and payment or a tender of the price is a condition precedent on the buyer’s part and until he makes such payment or tender, he has no right to the possession.
These rights generally presuppose that the property in the goods has passed to the buyer, and, in order to assure the same rights and protections to seller where the property has not passed, Section 46(2) specially declares that where the property in the goods has not passed to the buyer, the seller would have the same rights of lien and stoppage in transit which he would have had as if the property had passed.
“Lien” is the right to retain possession of goods until certain charges due in respect of them are paid. The unpaid seller has the right to retain the goods until he receives their price. Section 47 provides that the unpaid seller of goods who is in possession of them is entitled to retain his possession until payment or tender of the price in the following cases, namely:
(1) Where the goods have been sold without any stipulation as to credit;
(2) Where the goods have been sold on credit; but the term of credit has expired;
(3) Where the buyer becomes insolvent.
Where the goods are sold on credit, the right of lien is suspended during the term of credit. But on the expiry of that term, if the goods are still in the possession of the seller, his lien revives.
The right of lien is linked with possession and not with title. Thus, where seller has transferred to the buyer the documents of title to the goods, his lien is not defeated as long as he remains in the possession. Even where the seller issued to the buyer delivery orders thereby converting himself from an owner into a bailee for the buyer, his lien was not defeated. For Section 47(2) clearly declares that ‘the seller may exercise his lien notwithstanding that he is in possession of the goods as agent or bailee for the buyers.
The right of lien exists only for the price of the goods. The seller is not entitled to lien for any other charges, i.e., charges for stronger or the like.
Section 48 of the Act provides for part delivery. Where an unpaid seller has delivered a part of the goods, he may exercise his lien on the remainder. Where delivery of a part is intended as a delivery of the whole, the lien is lost. “If both parties intend it as a delivery of the whole, then it is a delivery of the whole; but if either of the parties does not intend it as a delivery of the whole if either of them dissents, then it is not a delivery of the whole.
Where the contract envisages delivery of goods by instalments, the buyer’s default in paying for one instalment does not entitle the seller to stop delivery of the rest of the instalments unless: (1) the buyer has become insolvent, or (2) the buyer’s default amounts to repudiation of the whole contract.
Termination of Lien: Lien is linked with the possession and is lost when possession is lost. Section 49 accordingly provides that the unpaid seller of goods loses his lien in the following cases:
1. By delivery to Carrier: Delivery of the goods to a carrier for the purpose of transmission to the buyer operates as a delivery to the buyer himself, and therefore, the right of lien is thereby lost. Delivery to a carrier puts an end to lien, but the seller still has the right of stoppage in transit. If the seller regains possession of the goods from the carrier by exercising his right of stoppage in transit, his lien revives. But if he takes back the goods from the carrier for any other purpose, the lien does not revive. Where the seller has reserved the right of disposal of the goods his lien continues till the end of the transit.
2. By delivery to Buyer: The right of lien is also lost when the goods are delivered to the buyer or his agent. The effect of delivery to the buyer is stated as when the vendor has given the buyer possession under the contract of sale all his rights in the goods are completely gone; he must recover the price exactly as he would recover any other debt and has no longer any claims on the goods sold superior to those of any other creditor. The delivery and acceptance of possession complete the sale, and give the buyer absolute, unqualified and indefeasible right of property and possession in the things sold, though the price be unpaid and the buyer be insolvent.
Where the goods are delivered back to the seller for a specific purpose, such as repair of a machine sold, that does not revive the seller’s lien. The seller’s lien is, however, not defeated where the buyer has obtained possession without the consent of the seller. The buyer has to obtain possession lawfully and under the contract.
3. By waiver: The right of lien is attracted by implication of law to every contract of sale for the benefit of the seller. The seller may, therefore, if he so likes, waive his right. Waiver may be express or implied from the conduct of the seller. An implied waiver takes place when the seller is guilty of some wrongful act in reference to the goods, ‘such as dealing with the goods in a manner inconsistent with the mere right to have possession of them, as by wrongfully re-selling or consuming them, or by claiming to keep them on some ground other than his right to lien’.
4. By tender of price: When the buyer tenders price for the goods, the seller ceases to be an unpaid seller, and, therefore cannot, by his voluntary refusal to accept the price, convert himself into an unpaid seller and claim lien.
Both the rights are designed for the protection of the unpaid seller. The effect of their exercise is also the same, because when the seller stops the goods in transit he resumes possession and the goods once again fall into the spell of his lien until the price is paid. Yet, ‘it is important to keep them distinct, because, though the rights are analogous, they are in certain respects governed by different considerations.’
Requirements of stoppage in transit:
(i) The first requirement is that the seller should be unpaid;
(ii) The second that the buyer should have become insolvent;
(iii) The property should have passed to the buyer, for, if the seller reserves the right of disposal, the goods remain his property, and, therefore, under his lien; and
(iv) The goods should be in the course of transit.
Commencement and end of transit [S. 51]: Section 51 tries to solve the difficulty by laying down basic propositions which govern the commencement and end of transit:
1. Delivery to Buyer: Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them. Thus, transit ends when the goods are delivered to the buyer or his agent. For example, in G I P Rly Co. V. Hanmandas, the seller consigned the goods with the G I P Rly Co. for transportation to the buyer. On arrival at the destination the company had delivered the goods to the buyer who had loaded them on his cart, but the cart had not yet left the railway compound when a telegram was received by the company to stop the goods. The company did not do so and were sued by the seller in damages.
It was held that the transit had ended as soon as the goods were handed over to the buyer. The railway company was, therefore, left with no power to stop them. Where the buyer does not accept the goods, the transit does not end even if the goods have been landed at the port of destination.
2. Interception by Buyer: The transit ends when the buyer or his agent takes delivery of the goods from the carrier before their arrival at the appointed destination. It may be wrongful for the carrier to deliver the goods to the buyer before their arrival at the appointed destination and the carrier may be held liable in damages for depriving the seller of his opportunity, but transit ends with that. The mere fact that the buyer takes his seat as a passenger in the ship which is carrying the goods does not amount to delivery to the buyer before their arrival at the appointed destination.
3. Acknowledgement to buyer: When the goods have arrived at their appointed destination and the carrier acknowledges to buyer or his agent that he is now holding the gods on his behalf, the transit is at an end, and it is immaterial that the goods are still with the carrier or that the buyer has indicated a further destination. It requires a very clear acknowledgement to put an end to the original contract of carriage.
4. Rejection by Buyer: If the goods are rejected by the buyer and the carrier or other bailee continues in possession of them, the transit is not at an end. This will be so even if the seller himself has refused to take back the goods.
5. Delivery to ship chartered by buyer: Where the goods are delivered to a ship chartered by the buyer, it is a question of fact in each case whether the carrier is acting independently or as agent of the buyer. If the circumstances show that the carrier is acting as an agent of the buyer, then the transit is at an end as son as the goods are loaded on board the ship. But the mere fact that the ship is chartered by the buyer and he has given no indication of the destination of the goods does not mean that the carrier has become the agent of the buyer.
When the vendor knows that he is delivering the goods to someone as carrier, who is receiving them in that character, he delivers them with the implied right of stopping them so long as they remain in the possession of the carrier as carrier.
6. Wrongful refusal to deliver: Where the carrier wrongfully refuses to deliver the goods to the buyer or his agent, the transit is at an end. It is obvious that the goods should have been arrived at their destination, because otherwise the carrier has the right to refuse to deliver them.
7. Part Delivery: Where the goods have been delivered in part, the seller may stop the remainder of the goods, unless the part delivery shows an agreement to give up the possession of the whole.

How Stoppage is effected: A notice is given to the carrier to stop the gods and redeliver them to the seller or according to his directions. Notice may be given to the person in actual possession or to his principal, in which case there should be sufficient margin of time to enable the principle to communicate with his agent.
Effect of Sub-Sale: The unpaid seller’s right to lien or stoppage in transit is not affected by any sale or other disposition of the goods by the buyer. Thus, for example, in Mordaunt Brothers V. British Oil and Cake Mills, an oil merchant sold a quantity of oil to B, without appropriating any particular oil to the contract. B sold some of it to C and gave him a delivery order. C lodged the delivery order with the merchant requesting him to await his orders. Meanwhile B failed to pay the merchant, who, therefore, became an unpaid seller. It was held that the merchant’s lien on the goods for the price was not defeated by B’s sale to C and he could retain the goods till the price was paid.
But there are two cases in which the buyer’s dealings with the goods defeat the seller’s right against the goods. They are :
1. Seller’s Consent: Where the buyer sells or makes other disposition of the goods with the consent of the seller, that is binding on the seller. The assent contemplated must be ‘such an assent as in the circumstances shows that the seller intends to renounce his rights against the goods. It is enough to show that the fact of a sub-contract has been brought to his notice, and that he has assented to it merely in the sense of acknowledging the receipt of information. This was pointed out in Mordaunt Brothers V. British Oil and Cake Mills, where the seller was informed of the sub-sale after it had been effected and it was held that by this the seller had merely acknowledged the existence of the sub-sale subject to his own rights the goods until paid for.
2. Transfer of documents of title: When the seller has issued to the buyer documents of title to the goods and he has sold or pledged the goods by transferring the documents of title, then in the case of sale, the seller’s right of lien and stoppage in transit are defeated and, in case of pledge, his right become subject to the pledge. It is necessary that the transferee should act in good faith and should have given value for the goods. He should not at the time have the notice of the fact that the original seller is still unpaid and has rights against the goods.
Thus, resale by the buyer by transfer of the documents of title completely defeats the seller’s right against the goods. But a pledge does not completely defeat the seller’s right against the goods. It only makes his rights subject to the pledge. The effect is that the seller may still exercise his rights by paying off the pledge.
3. Right of Resale: The contract of sale is not rescinded when the seller exercises his right of lien or stoppage in transit. The contract still remains in force and the buyer can claim delivery of the goods on tendering the price. The property having passed to the buyer, it is not revested in the seller. But obviously the law cannot allow the things to stand in that condition indefinitely. The seller is, therefore given a limited right to resell the goods.
In the first place, he may resell the gods without reference to the defaulting buyer if the goods are of perishable nature.
Secondly, in other cases, the seller should give a notice to the defaulting buyer of his intention to resell. If the buyer does not pay the price within reasonable time after receiving the notice, the seller may resell the goods. He can recover from the defaulting buyer any loss occasioned by his breach of contract. He can also keep any profit which may occur on the resale. But if the unpaid seller sells the goods without serving upon the buyer a reasonable notice, the seller cannot recover damages for the breach and he has also to hand over any profit to the buyer made on the resale.
The seller may expressly reserve the right of resale in case the buyer should make a default. In such a case no notice of sale is necessary. The contract is automatically rescinded when the seller resells the goods. He does not resell as an unpaid seller, but as an original owner of the goods.
Where the buyer pays a deposit he is entitled to refund of it when the seller resells the goods, but subject to the seller’s claim for damages. Where the seller does not offer evidence of the difference between the contract price and resale price on the date of breach, he is not entitled to any compensation.

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Friday, January 26, 2007

Sales of Goods Act