Mercantile Law (Sale of Goods Act)

1. Contract of Sale of Goods

DEFINITIONS AND SCOPE
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DEFINITIONS [2]
The Sale of Goods Act, 1930 defines various terms used in the Act as given below:
means every moveable property other than actionable claims and money,
and includes electricity, water gas, stock and shares, growing crops,
goods
grass, and things attached to or forming part of the land which are agreed
to be served before sale or contract of sale.
specific
means goods identified and agreed upon at the time a contract of sale is
made.
goods
future
means goods to be manufactured or produced or acquired by the seller
goods
after making the contract for sale.
means voluntary transfer of possession from one person to another.
delivery
deliverable goods are under deliverable state when buyers would be bound to take
state
delivery of them under contract.
includes a bill of lading, dock-warrant, warehouse keepers certificate,
wharfingers certificate, railway receipts, warrant or order for delivery of
document
goods and any other document used in the ordinary course of business as
to title of
proof of the possession or control of goods, or authorizing or purporting to
goods
authorize, either by endorsement or by delivery, the possessor of the
document to transfer or receive goods thereby represented.
means the money consideration for a sale of goods.
price
property
means the general property in goods, and not merely a special property.
quality of
includes their state or condition.
goods
buyer
means a person who buys or agrees to buy goods.
seller
means a person who sells or agrees to sell goods.
means a person who has ceased to pay his debts in the ordinary course of
insolvent
business, or cannot pay his debts as they become due, whether he has
committed an act of insolvency or not.
means a mercantile agent having in the customary course of business as
mercantile such agent authority either to sell goods, or to consign goods for the
agent
purpose of sale, or to buy goods, or to raise money on the security of
goods.
fault
means wrongful act or default.
All other expressions shall have the same meanings as defined under Contract Act, 1872.

APPLICATION OF CONTRACT ACT [3]

The provisions of Contract Act, 1872 shall continue to apply to firms so far as they are not
inconsistent with the provisions of Sale of Goods Act, 1930.
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CA Module B

FORMATION OF CONTRACT
CONTRACT OF SALE [4]
It is a contract where:
(a)
the seller;
Page | 2 (b)
transfers or agrees to transfer;
(c)
the property in goods;
(d)
to the buyer;
(e)
for a price.
The term contract of sale includes both sale and agreement to sell.
The contract of sale may be absolute or conditional and there may be a contract of sale
between one part-owner and another.

SALE AND AGREEMENT TO SELL [4]

The contract in which property in goods is transferred from seller to buyer is called sale.
Where the transfer of property is to take place in future or subject to some condition to be
fulfilled in future is called agreement to sell.
Illustration
Facts: On 1st January 2007, Anwar agrees with Babar that he will sell Babar his motorbike
on 15th January 2007 for a sum of Rs.30,000/-. Is it sale or agreement to sell?
Solution: It is agreement to sell since transfer of ownership shall take place at a future time.
DIFFERENCE
Transfer of
1.
property
(ownership)
2.

Risk of loss

3.

Consequences
of breach

4.

Right of resale

Saima Iqbal & Kashif Adeel

SALE
The property in goods passes to
the buyer immediately at the time
of making the contract.
The risk of loss is that of buyer
because the risk of loss prima
facie passes with property.
In case buyer makes default in
payment, the seller can sue for
price even if the goods are in his
(seller) possession.

The seller in possession of goods

after sale cannot resale the goods.
If he does so, the subsequent
buyer having knowledge of the
previous sale does not acquire a
title to the goods.

AGREEMENT TO SELL
The seller remains the owner
of goods until the agreement
to sell becomes sale.
The risk of loss remains that
of seller as he is still the
owner of goods.
If buyer makes default in
payment, the seller can sue
only for damages and not for
price, even though the
possession
has
been
transferred to the buyer.
The property in the goods
remains with the seller and as
such he can dispose of the
goods as he likes and the
original buyer can sue him for
the breach of contract only.

Mercantile Law (Sale of Goods Act)

5.

Insolvency of
buyer

6.

Insolvency of
seller

If the buyer is adjudged insolvent

before he pays for the goods, the
seller (unless he has right of lien)
must deliver the goods to official
assignee. The seller is entitled
only to a ratable dividend for the
price of goods.
The buyer is entitled to receive
goods from official assignee if he
has paid for the goods.

If the buyer is adjudged

insolvent before he pays for
the goods, the seller may
refuse to deliver the goods to
the official assignee unless
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paid for.
If buyer has paid the price, he
shall be entitled to ratable
dividend as a creditor only.

An agreement to sell becomes a sale when time elapses or conditions mentioned above
are fulfilled.
Illustration
Facts: Jazib agrees to purchase Anthonys car for Rs.500,000/- provided Anthony stands
surety for him with Salman. Is it sale or agreement to sell?
Solution: It is an agreement to sell. It becomes the sale when the condition is fulfilled by
Anthony.

CONTRACT OF SALE HOW MADE [5]

A contract for sale is made by an offer and acceptance to buy or sell. The contract may
provide for:
(a)
immediate delivery of goods or payment of price or both;
(b)
delivery or payments by installments; or
(c)
postponement of delivery or payment or both.
Illustration
Facts: A dealer in televisions gives a Sony TV to a customer on the terms that Rs.100/should be paid by him immediately and Rs.200 more in two monthly equal installments. It
was further agreed that if the TV is found defective the customer may return it within a week
but not later. The customer makes default in paying the last installment. Can the TV dealer
take back the TV on his default?
Solution: No, the TV dealer cannot take back the TV on default by the customer because it
is contract of sale (the property in goods have been transferred) and not of hire purchase.
Subject to any other law in force, a contract may be:
(a)
written or oral;
(b)
partly written and partly oral; or
(c)
implied from the conduct of parties.

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CA Module B

SUBJECT MATTER OF CONTRACT

KINDS OF GOODS
The following are two main kinds of goods:
(a)
existing goods (which may be specific or unascertained); and
Page | 4 (b)
future goods (which may be certain or contingent).

EXISTING OR FUTURE GOODS [6]

The goods which are subject matter of contract may be existing (owned or possessed by the
seller) or future goods.
There may be a contract for the sale of goods the acquisition of which by the seller depends
upon a contingency which may or may not happen.
Where by a contract of sale the seller purports to affect the present sale of future goods, the
contract operates as an agreement to sell.

GOODS PERISHING BEFORE MAKING OF CONTRACT [7]

Contract of sale of specific goods is void if at the time of making the contract without the
knowledge of the seller goods perish or become so damaged as no longer to answer to their
description in the contract e.g. where cement is spoiled by water and becomes almost stone
and cannot be used as cement. The perishing also includes loss by theft and lawful
requisition of goods by the government.
Illustration
Facts: Anwar agrees to sell to Babar a certain horse. It turns out that the horse was dead at
the time of bargain, though neither party was aware of the fact. Discuss the validity of the
contract.
Solution: The agreement is void.
In case part of goods is perished, the following rule applies:
(a)
if contract is indivisible, it shall be void; and
(b)
if contract is divisible, it will not be void and the part available in good condition must
be accepted by the buyer.
Illustration
Facts: There was a contract for the sale of a parcel containing 50 bags of spices of various
qualities. Unknown to the seller, 10 bags had been stolen at the time of the contract. The
seller delivered the remaining 40 bags and on refusal of buyer to take them, brought an
action for the price. Discuss the validity of the contract.
Solution: The contract, being indivisible, had become void by reason of loss of goods.
However, if there had been all bags of same weight and quality for certain price per bag, the
contract would have been divisible.
Saima Iqbal & Kashif Adeel

Mercantile Law (Sale of Goods Act)

PERISHING BEFORE SALE BUT AFTER AGREEMENT TO SELL [8]

When goods which are subject matter of an agreement to sell perish or damaged
subsequently before the risk passes to buyer the agreement is avoided if there is no fault of
buyer or seller.
Illustration
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Facts: A buyer took a horse on a trial for 10 days on condition that if found suitable for his
purpose the bargain would become absolute. The horse died on 5th day without any fault of
either party. Discuss the position of both parties.
Solution: The contract, which was in the form of an agreement to sell, becomes void and
the seller shall bear the loss.
Illustration
Facts: Zafar had contracted to erect machinery on Bashers premises; the price was to be
paid on completion. During the course of work, there was a fire which completely destroyed
the premises and machinery. Discuss the rights and liabilities of both the parties.
Solution: Both the parties are excused from performance and Zafar is not entitled to any
payment as the price was payable on the completion of entire work.
If only part of goods agreed to be sold perish, the contract becomes void if it is indivisible.

THE PRICE
ASCERTAINMENT OF PRICE [9]
The price may be:
(a)
fixed by the contract;
(b)
left to be fixed in an agreed manner;
(c)
determined by course of dealing between the parties.
Where the price is not determined as above the buyer shall pay a reasonable price
determined on circumstances of particular case. What is a reasonable price is a question of
fact dependent on the circumstances of each particular case.

AGREEMENT TO SELL AT VALUATION [10]

When under agreement to sell price is to be set as per valuation by third party and such
third party cannot or does not make such valuation, the agreement is avoided. However, the
buyer shall pay a reasonable price for the goods or part of goods received and appropriated
by him.
Illustration
Facts: Kamran agrees to sell to Jazib on the terms that the price was to be fixed by Ghalib.
Jazib takes the delivery of one car immediately. Ghalib refuses to oblige Kamran and Jazib
and fixes no price. Kamran asks for the return of the car already delivered whereas Jazib
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CA Module B
insists on the delivery of the second car to him for the reasonable price of both the cars.
Decide the case.
Solution: As regards the car already delivered, Kamran cannot ask for its return and must
accept a reasonable price for that. As regards the second car, Jazib cannot insist on its
Page | 6 delivery to him since the contract has become void.
Where third party is prevented from valuation by the fault of buyer or seller, the party not in
default may maintain a suit for damages against the party in default.

Saima Iqbal & Kashif Adeel