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FORMATION OF THE CONTRACT.

Table of Contents

(Ss. 4 to 11).

QUESTION BANK.

Q.1. Define ‘sale’ and ‘Contract of sale. Distinguish it from an ‘agreement to sell. Nov. 07, Apr.2010

2. Explain fully the sale and agreement to sell. Oct .01, Apr 2000.
3. State the consequences of goods perishing before sale but after an agreement to sell.
4. Definition and Nature of sale and agreement to sale.

SHORT NOTES.

1) Essentials of Contract. Nov. 04.

SYNOPSIS

WHAT IS A “CONTRACT OF SALE” (S. 4(1))
WHAT IS ‘SALE’ : -(S. 4(3))

III. WHAT IS AN “AGREEMENT TO SELL” (S.4 (3))

Essentials of Agreement to sell: –

Contract: –
Transfer of goods (not immediate): –
“Agreement to sell” becomes sale: –
DISTINCTION BETWEEN ‘SALE’ AND ‘AGREEMENT TO SALE’: –
Nature of Contract
Nature of property (General or particular): –
Remedies in case of default of buyer: –
Remedies in case of default of seller: –
Right to Re-sell: –
Risk of loss: –
Effect of insolvency of seller: –
Effect of insolvency of the buyer: –
‘SALE’ DISTINGUISHED FROM OTHER FORMS OF ‘CONTRACTS’: –
Distinction between ‘Contract of work and labour and ‘Contract of sale of goods: –
Distinction between ‘Hire purchase contract’ and ‘Contract to the sale of goods: –
FORMALITIES OF THE CONTRACT OF SALE (S.5)

VII. SUBJECT MATTER OF CONTRACT OF SALE: –

Effect of goods (Subject matter) perishing before making the Contract (S.7): –
Effects of goods perishing after an agreement to sell (S.8): – But before ‘Sale’:

I. WHAT IS A “CONTRACT OF SALE”? (S. 4(1))

S.4 defines a ‘contract of sale, whereas S. 5 lays down formalities required for making a Contract of sale.

4 (1) defines a “Contract of sale of goods[1] as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price[2]”.

Thus, the term contract of sale is a general term comprising two types of contracts, viz.

i) Sale, and
ii) Agreement to sell.

There may be a sale contract between one part owner and another. A contract of sale may be absolute or conditional. Price is the essence of the Contract of sale.

II. WHAT IS ‘SALE’: -(S. 4(3)).

“When under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale”[3].

Thus, the exchange of property for a price in money is the essence of ‘sale’. In a sale, ownership transfer must occur; mere transfer of possession will not do [In Re, Ancherline Ltd.[4]]. Thus, if A pays Rs. 25000 to B and B immediately transfers ownership of the horse, it is a sale.

In the State of Uttaranchal v. M/s. Khurana Brothers.

AIR 2011 SCC (CIVIL) 22

Facts– The Contract for the sale of crude resin was interred between the State Government and the petitioner. The term of the Contract stated that the resin would be at the purchaser’s risk from the date of acceptance of a bid.

Issue- Whether the property and risk thereto have passed on bid.

Held– The property in goods and risk thereto has passed to the purchaser on acceptance of the bid itself.

III. WHAT IS AN “AGREEMENT TO SELL” (S.4 (3))-

Where under a contract of sale, 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, subject to which the property in the goods is to be transferred), it is an agreement to sell[5].

Illustration

A agrees to sell his motorcycle to B on the condition that B pays Rs. 20,000 as the price within one month. This is an agreement to sell. But when B pays Rs. 20,000 as the price of the motorcycle to A within one month, it becomes a sale.

Essentials of “Agreement to sell”.

The essentials of an agreement to sell are as follows: –

1. Contract: –

There must be a valid Contract between the persons. All the essentials mentioned in the general Contract from S. 1 to S. 75 must be fulfilled to make the Contract valid.

2. Transfer of goods (not immediate): –

In an agreement to sell, the property in goods passes to the buyer on a future date or after the condition mentioned in such Contract is fulfilled.

3. “Agreement to sell” becomes sale: –

“Agreement to sell” becomes sale proper when the time elapses or the condition is fulfilled, subject to which the property in the goods is to be transferred.

IV. DISTINCTION BETWEEN ‘SALE’ AND ‘AGREEMENT TO SALE’:

There are the following points of distinction between ‘Sale’ and ‘Agreement to Sale.’

1. Nature of Contract (Executed, executory): –

A ‘sale’ is an executed contract. Whereas ‘agreement to sell’ is an ‘executory contract’, because its execution depends upon the fulfilment of a condition or lapse of time subject to which an agreement is made.

2. Nature of property (General or particular): –

A sale affects a transfer of the general property (ownership) in the goods to the buyer and, therefore, creates a right in rem.[6].

Whereas, in ‘agreement to sell’ the ‘particular property[7] in goods transfers; therefore, right in personam[8] is created.

3. Remedies in case of default of buyer: –

In an ‘agreement to sell, if the buyer makes a breach of a contract, the seller is entitled to the damages because ownership has not passed to the buyer, whereas in the case of a ‘Sale,’ since the ownership has passed to the buyer, the seller is entitled to sue for the price of the goods sold.

4. Remedies in case of default of seller: –

In the case of an ‘agreement to sell, if the seller commits a breach, the buyer can only claim damages (because the goods are still the property of the seller).

But in the case of a ‘Sale,’ if the seller defaults in transferring goods (since the buyer has become the owner), the buyer can sue for damages or be held liable for conversion.[9].

5. Right to Re-sell: –

In a Contract of an agreement to sell (since the ownership has not passed to the buyer), the seller can sell the goods to any other person, and the buyer can only sue for damages.

Whereas, in the Contract of ‘sale’ (since the ownership has passed to the buyer), the seller will be guilty of conversion if he sells the goods to any other person, and the buyer can sue and recover those goods as owner, even from the third person.

6. Risk of loss[10]: –

In an agreement to sell, since ownership does not pass to the buyer, the risk of loss, deterioration or destruction of goods remains with the seller. However, in ‘sale’, it passes to the buyer.

7. Effect of insolvency of seller: –

In an agreement to sell, if the buyer, who has paid for goods but not received those (goods), finds that the seller has become insolvent, he can claim the amount back (i.e. rateable dividend)[11].

Whereas in ‘Sale’ (since ownership has passed to the buyer, and the seller becomes insolvent, without transferring goods (possession) to the buyer), the buyer is entitled to recover the goods, specifically.

8. Effect of insolvency of the buyer: –

In an agreement to sell, if the buyer becomes insolvent without paying for the goods (since the ownership has not passed to the buyer), the seller may refuse to deliver the goods unless paid.

In case of a ‘Sale’ (since ownership has passed to the buyer), if the buyer becomes insolvent without paying for the goods, the seller should deliver the goods first (unless he is entitled to the right of retaining or stoppage in transit over the goods) and claim the price due.

V. ‘SALE’ DISTINGUISHED FROM OTHER FORMS OF CONTRACTS: –

There are other types of Contract, which closely resemble sale, but they are entirely different in their nature and effect; they are: –

1. Distinction between ‘contract of work and labour’ and ‘Contract of sale of goods: –

A contract of sale contemplates the delivery of chattel. But if the substance of the Contract is the exercise of skill and labour, and the delivery of the chattel is only incidental, it is a contract for work done and labour supplied.

E.g. X promises to carve a block of marble belonging to himself into a beautiful statue for sale to Y. This is a contract for work and labour to carve a beautiful statue, and not a contract of sale of goods to deliver a marble peace. Therefore, the supply of marble blocks by X to Y is incidental to the works contract for the supply of beautiful statues carved in marble.

2. Distinction between ‘Hire purchase contract’ and ‘Contract to the sale of goods: –

Hire purchase is a contract of bailment coupled with an option to purchase the goods hired. E.g. A ‘Bank’ is the owner of the motorcycle, transfers it to B, who agrees to pay the price thereof in suitable monthly instalments. Although there is the delivery of the motorcycle to B, the ownership thereof remains with the Bank, ‘B’, in this case, has two options: (i) either to purchase the motorcycle after paying off all instalments or (ii) to return the motorcycle to the Bank. But if, in the meantime, the hirer sells or pledges the goods, the purchaser or pledgee does not get a good title.

In Jaibharat Credit & Investment Co. V. CST[12].

The court held that, unlike the sale, even though the hirer pays money in consideration of using goods, ownership continues with the seller. This is the difference between a sale and a hire purchase.

VI. FORMALITIES OF THE CONTRACT OF SALE (S.5).

5 provides formalities for the ‘formation of a Contract of sale’. According to this section, the following are requirements for the formation, viz-
i) Offer to sell or buy goods and acceptance of such offer.
ii) Delivery of goods, either immediate or future.

iii) Payment of price is either immediate, instalments, or future.

iv) It may be made-
a) in writing,
b) by word of mouth,
c) partly in writing and partly oral,
d) implied (from the conduct of parties).

In short, all the requirements of a valid Contract under the Indian Contract Act are, required to be fulfilled for the completion of a contract of sale.

VII. SUBJECT MATTER OF CONTRACT OF SALE

(Existing or future goods) (S. 6): –

The goods, which form the subject of the Contract of sale, may be either existing goods owned or possessed by the seller or future goods[13]. There may also 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, e.g. ‘A’ agrees to sell the sugar to ‘B’ in England if A gets through shipping it in India.

Where the seller purports to effect a present sale of future goods under a contract of sale, the Contract operates as an agreement to sell. For example, A agrees to supply B with a specified quantity of vegetable seeds, and B agrees to sow these seeds on his farm and sell the vegetables obtained to A at the given price. This is an agreement for the sale of goods by B to A.

1. Effect of goods (Subject matter) perishing[14] before making the Contract (S.7): –

Where there is a contract for the sale of specific goods[15], and such goods, at the time of the making of the Contract, perished or damaged without the knowledge of the seller, makes the contract void.

E.g. A agrees to buy from B a specific horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The Contract is void.

2. Effects of goods perishing after the agreement to sell But before ‘Sale’ (S. 8): –

Where there is an agreement to sell specific goods, and subsequently, the goods, without any fault on the part of the seller or buyer, perish or are damaged (so as no longer to answer to their description in the agreement) before the risk passes to the buyer, the agreement is thereby avoided.

E.g. A contracts to sell a horse to B on the condition that B may keep it for eight days for trial and that B would be at liberty to return the horse to A at the expiry of eight days if he did not find the horse suitable. Though no fault of A or B, the horse dies three days after it was given by A to B for trial. The Contract between A and B is avoidable.

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[1] माल विक्रेचा करार – म्हणजे असा करार की, ज्यामध्ये विक्रेता खरेदीदारास ठरलेल्या किमतीस माल हस्तांतरीत करतो किंवा हस्तांतरित करण्याची सहमती देतो.

[माल की बिक्री का अनुबंध/करार – इसका मतलब ऐसा करार जिसमें विक्रेता एक निश्चित मूल्य के लिए खरीदारको माल हस्तांतरित करता है या हस्तांतरित करने के लिए सहमत होता है।]

[2] Price’ (S. 2 (12)) means a money consideration for a sale of goods.

[3] जेव्हा माल विक्रीच्या कराराप्रमाणे माल विक्रेत्याकडून खरेदीदारास माल हस्तांतरीत केला जातो. त्यास विक्री असे म्हणतात.

[जब माल की बिक्री के अनुबंध के अनुसार विक्रेता से खरीदार को माल हस्तांतरित किया जाता है। इसे बेचना कहते हैं।]

[4] 1936 All.E.R.

[5] जेव्हा माल विक्रीच्या कराराप्रमाणे मालाचे हस्तांतरण भविश्यात करण्याचे असते किंवा काही अटीवर हस्तांतरण अवलंबून असते त्यास माल विक्रीचा करार असे म्हणतात.

[जब माल की बिक्री के करार/अनुबंध में भविष्य में माल का हस्तांतरण शामिल होता है या स्थानांतरण किसी शर्त पर निर्भर करता है, तो इसे माल की बिक्री का अनुबंध कहा जाता है।]

[6] Right in rem means right against whole world.

[7] Particular property means a right other than ‘ownership, e.g. right to sue on default. Etc.

[8] Right in personam means right against particular person only.

[9] To transfer one persons goods to another.

[10] मालाच्या नुकसानीची जबाबदारी. [माल की क्षति के लिए देयता।]

[11] He can get rateable dividend means an amount which comes to creditors share in insolvency proceeding of debtor.

[12] 2000 SCC

[13] Specific goods (S. 2 (14)) means goods identified and agreed upon at the time a contract of sale is made. Goods may be (i) Specific or existing, or (ii) Generic or unascertained, e.g. 50 k.g. of rice out of 100 k. g. is unascertained goods unless they are kept aside form 100 k.g. bag (ascertained).

[14] कराराच्या वेळी नाषवंत माल नाष पावल्यास. [अगर खराब होने वाला सामान अनुबंध के दौरान खराब हो जाता है]

[15] Supra note. 9