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What are the Laws Governing the Sales of Goods in India?

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  • Post published:December 21, 2023
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Last Updated on December 30, 2023 by Kanakkupillai

We acknowledge that the fundamental nature of business is the exchange of goods and that the Sale of Goods Act 1930 governs such transactions in India. This legislation supersedes and consolidates Sections 76–123 of the Indian Contract Act of 1872, making it a standalone statute controlling the sale of goods. The provisions of the Contract Act were unable to adequately handle the changing nature of business transactions during the fast industrialization period, which led to their separation.

This void was filled with the complications caused by expanding commerce by the Sale of Goods Act, which borrowed provisions from the 1893 English Sale of Goods Act. Yet, notwithstanding this independent law, the Contract Act continues to apply to transactions involving the sale of goods. Although it covers a lot of ground, the Sale of Goods Act does not define several phrases or concepts that are defined in the Contract Act.

This article aims to provide a thorough overview of the Sale of Goods Act 1930 by delving into its important clauses and reviewing major case laws.

Definition clause of the Sale of Goods Act, 1930

Here, under Section 2 of the Sales of Goods Act of 1930, are defined terms that are vital to understanding the Act.

Buyer: Under the first clause, “buyer” encompasses not only the actual purchaser of goods but also an individual who is in a position to do so. However, a person is not considered a buyer if an agreement allows them to acquire without legal obligation (Helby v. Mathews, 1895).

Delivery: The term “delivery” is defined as the free and voluntary transfer of ownership in Clause 2. You may get the goods or the key to their location in an actual transaction, or you can receive symbolic delivery or acknowledgement without really transferring ownership in a constructive transaction.

Goods: Clause 7 defines ‘goods’ as movable property except money or actionable claims. Various court interpretations provide examples:

  • Shares of a company were recognized as goods in Bacha F. Guzdar v. CIT (1955).
  • Gas and electricity were deemed not goods (Rash Behari v. Emperor, 1936), but electricity was considered goods in Associated Power Co. v. Ram Ratan (1970).
  • ‘Standing timber’ agreed to be severed before the sale was classified as goods in the State of Maharashtra v. Champalal (1971).
  • Partnership assets’ interest, including immovable property, was seen as movable property and thus goods in Narayanaapa v. Bhaskar Krishnappa (1966).
  • Sugarcane supplied to a sugar factory was considered good in U.P. Coop. Cane Unions Federations v. West U.P. Sugar Mills Assn. (2004).

However, some items were excluded:

  • Goods supplied by a building contractor in construction (Mahadeo v. State of Bombay, 1959).
  • Documents entrusted to a lawyer were not seen as goods (R.D. Saxena v. Balram Prasad Sharma, 2000).
  • The sale and purchase of lottery tickets, deemed actionable claims, were excluded from the goods’ definition (Union of India v. Martin Lottery Agencies Ltd., 2009).

Specific Goods

Clause 14 relates to ‘Specific Goods,’ which are identifiable at the moment of sale, as opposed to generic or unascertained goods. For instance, selling a specific car in possession is different from selling an unascertained variant in a showroom.

Formation of a Contract

What is a Contract of Sale?

Section 4 of the Act delineates the concept of sales and sales agreements, formerly known as “bargain and sale.”

Under Subsection 3 of Section 4, a contract of sale is classified as a sale when ownership of goods transfers from the seller to the buyer, constituting an executed contract. Conversely, an agreement to sell indicates a future transfer or a condition precedent for the goods’ property transfer, termed an executory contract. As affirmed in State of Uttaranchal v. Khurana Brothers (2011), an agreement to sell evolves into a sale upon time or condition fulfilment.

Subsection 1 allows partial ownership transfer of goods by an owner.

In the case of Camera House, Bombay v. State of Maharashtra (1969), the Bombay High Court distinguished between distinct transactions. While the initial printing and film processing activities involve a photographer’s artistic expertise, the final transaction involving providing copies to clients constitutes a contract of sale.

Absolute and conditional contracts of sale

A contract of sale can take either an absolute or conditional form. An absolute sale involves the complete transfer of property to the buyer. Conversely, a conditional sale incorporates stipulations. These conditions can be antecedent or subsequent. When a sale hinges on fulfilling a specific condition, it’s termed a “condition precedent.” Default in payment within a certain period may result in resale, as stated in an auction sale condition. In this case, the seller maintains ownership even if the buyer receives the property at completion, subject to certain terms.

Difference between sale and agreement to sell

The buyer gains full ownership rights upon a sale, creating a jus in rem. In contrast, an agreement to sell doesn’t transfer ownership but establishes a jus in personam, enabling legal action if either party breaches the agreement (Sales Tax Officer v. Buddha Prakash Jai Prakash, 1954).

If the buyer fails to pay after a sale, the seller can file a lawsuit for the purchase price under Section 55. However, with an agreement to sell and refusal to accept goods, the seller can only claim damages under Section 56 for non-acceptance.

If the seller breaches a sale agreement, the buyer can claim damages. Despite the breach, the seller retains ownership and can dispose of the items. Conversely, if the seller breaches after a sale, the buyer has recourse like an owner, like suing for conversion or detinue.

In the event of product destruction, the responsibility differs. For a sale, the buyer bears the loss even if the items were not in their possession. However, the seller is liable for the loss in an agreement to sell.

What are the formalities of the contract?

Section 5 outlines the fundamental requirements for establishing “contracts of sale.”

The essentials for a contract to be valid include:

  • Offer and acceptance of the purchase or sale.
  • Arrangements for the delivery of goods or services can be immediate, simultaneous, in instalments, or in the future.
  • Stipulation of the payment terms, whether immediate, in instalments, or a lump sum.

Key aspects of a valid contract of sale are:

  • It may be written or oral.
  • It can be a combination of oral and written agreements.
  • It can be inferred from the parties’ conduct or business practices.
  • Official written instruments applicable to the government and certain statutory bodies can be sealed and governed by existing laws.

In the case of Poppatlal Shah v. The State of Madras (1953), a Constitution Bench emphasized that the phrase “sale of goods” comprises several elements. These components encompass the exchange or promise of payment, delivery of goods, and the actual transfer of title. The sale is considered complete only when the buyer legally owns the goods.

Subject matter of a contract

Section 6 of the Sale of Goods Act outlines the types of existing or future goods included in the contract’s subject matter:

  • Goods may exist presently or come into possession in the future.
  • Goods whose acquisition is contingent on a particular event.
  • When there’s a present sale of future goods.

Regarding goods perishing before contract formation, Section 7 applies only to specific goods. It deems a contract void if goods have expired or been substantially damaged, rendering them unfit according to the contract’s description, unbeknownst to the seller.

Section 8 covers instances where goods perish after an agreement to sell is made but before the risk transfers to the buyer. This applies only to specific goods.

Implied conditions and warranties, addressed in Sections 14 to 17 of the Sale of Goods Act, include:

  • Implied conditions concerning title (Section 14(a)) assert that the seller has the right to sell the goods.
  • Implied condition in sales by description (Section 15) requires goods to match their description, even if not inspectable.
  • Implied condition as to quality or fitness (Section 16) applies when the buyer relies on the seller’s expertise for specific goods.
  • Implied condition on sale by sample (Section 17) assures goods match the sample provided at the time of sale.

Implied warranties involve:

  • Implied warranty of quiet possession (Section 14(b)) guarantees the buyer’s uninterrupted possession of goods.
  • Implied warranty that goods are free from encumbrances (Section 14(c)) ensures third-party claims do not burden goods.
  • Express conditions and warranties refer to clauses agreed upon by both parties, necessary for the contract’s functionality (expressed conditions), and warranties accepted and included in the contract.

Effects of the contract

Section 18 of the Sale of Goods Act addresses the transfer of property in specific goods:

Property transfer is bound by the parties’ intentions, as per Section 19. This relies on the contract terms, parties’ conduct, and circumstances.

Section 20 covers specific goods in a deliverable state, where the property passes to the buyer at a specified time or immediately upon contract formation.

For specific goods in a deliverable state but requiring further action by the seller to ascertain the price (Section 22), the property transfers upon the seller’s action and notification to the buyer.

Section 23 describes the transfer of goods unconditionally appropriated by either party to the contract.

In Arihant Udhyog v. State of Rajasthan (2017), it was affirmed that property transfer happens when goods are in a deliverable state, as agreed in an unconditional contract, unless the contract specifies otherwise.

Sections 27 to 30 outline the rules for title transfer:

Section 27 disallows sellers from giving better title than what they own, except in specific circumstances.

Exceptions to Section 27 include sales by mercantile agents (Section 27), joint owners (Section 28), and sales under voidable contracts (Section 29).

Section 30 addresses sales by sellers retaining possession or buyers acquiring goods before the property vests in them, providing guidelines for valid transactions.

The stipulations under Section 30 allow for valid sales when goods or title documents remain with the seller, ensuring the buyer acts in good faith without prior knowledge of the first sale. Another aspect is when a buyer acquires possession before the property transfer, allowing the buyer to dispose of the goods with the seller’s consent.

This section also covers hire-purchase agreements, allowing the beneficiary to take possession and dispose of goods unless otherwise agreed upon.

Iram

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