Formation of Contract of Sale: Everything you need to Know

The present article is an elaborative description of the formation of contract of sale as under the Sale of Goods Act. It further specifically discusses two basic concepts of sale and agreement to sell, various statutory provisions that are related to it and also about their difference and other how to distinguish a contract of sale from other similar kinds of contracts. This comprehensive article deals with various aspects associated with the formation and statutory transaction to the Contract of the Sale.

The author of the article discusses how a contract of sale is formed and the essential perquisites of making a valid contract of sale with a special reference to differences between the contract of sales and other kinds of contract like hire-purchase, contract for work/labour etc.

I. Introduction

Based on the social contract theory, the foundational basis of Indian society is a contractual agreement. It is not incorrect to say that contract agreement is the root basis in business law which deals with the common business transaction, involving the sale and purchase of goods in Indian society as well as the country’s economy. The mother law which governs the sale and purchase of goods in India is the Indian Contract Act, 1872 which paved the way for the introduction of the Sale of Goods Act, 1930.

Sale of Goods Act is derived with the purpose of enhancing, encouraging, and promoting business transaction where the seller transfers or agrees to transfer the title in the goods to the buyer for some specific consideration.

II. Concept of Goods

The concept of goods can be derived from its definition given under Section 2 (7) of the Sale of Goods Act, 1930. As per the provision, a good can be defined as every moveable property other than actionable claims and money. An actionable claim is an exception to the definition of goods because it is something which a person can’t use or enjoy but can only be recovered through a suit or an action in a court of law.

In the case of MP v. Orient Paper Mill[1], the Supreme Court of India held that standing timber is a movable property if it is provided under any contract that it has to be severed but the severance of timber should take place when timber still vests in contracting parties, trademark, goodwill, patent, copyright all can be termed as goods under Sales of Goods Act, except immovable property.

Types of goods

Section 2(7) of the sale of goods act says that every moveable property other than actionable claims and money comes under the definition of goods. The act bifurcates goods into three types: existing goods; future goods; contingent goods.[2]They are explained as below:

1. Existing goods: The goods which at the time of entering into contract, the ownership and possession of the goods is under the seller’s authority and after fulfilling all the contractual obligations, the seller is vested with every legal rights to transfer that ownership or possession of the concerned goods to the buyer, is known as existing goods. Existing goods are further classified into two heads:
2. Ascertained goods: There are certain kinds of goods which require to be identified at the time of making the contract. Such goods are needed to be selected specifically so are also known as specific goods. When from a lot of unascertained goods, a specific quantity of goods is set aside after making the contract of sales; it’ll be considered as specific goods. For example, A enters into a contract agreement with B to sell his car, at that time A was owning 5 other similar looking cars, when B specifically chooses a particular form that an unascertained lot of cars, then that particularly selected car is considered as ascertained goods.
3. Unascertained goods: The goods which can’t be identified specifically but are identified by their description or sample from a lot of goods are known as unascertained goods. For example, when A enters into an agreement with B to sell his car, and at that time A was having 5 similar looking cars, when B does not specifically choose a car, but provided the description of car colour, and then it will be considered as unascertained goods.
4. Future goods: Future goods are those which are made or acquired or produced on specific demand of the buyer and don’t exist at the time of making the contract of sale. These kinds of goods are not considered a contract of sale but only an agreement to sale because one of the essential conditions of existence of goods at time of making a contract is absent and the seller can’t transfer which is not produced yet.
5. Contingent goods: The contingent goods are another type of future goods, the acquisition of which by the seller is dependent on a contingent event which may or may not happen. These kinds of goods are not a contract to sale but an agreement to sell. For example, A’s car is with his brother in England but he proposes to sell his car to B. The contract of sale will be valid only if A’s brother returns from England and returns his car.

III. ‘Sale’ and ‘Agreement to sell’

In the sale of goods, the good is directly passed from the seller to the buyer. Defined under Section 4(3) of the Sale of Goods Act, 1930, the word ‘sale’ indicated that in the contract of sale, the owned goods and property in possession of the seller is passed directly to the buyer. Such contracts are known as the sale.

On the contrary, an agreement to sell, says that the ownership of the goods and property shall not be immediately transferred to the buyer. There are certain prerequisites to be fulfilled then only the ownership transfers.

The term ‘agreement to sell’ is defined under section 4(3) of the act, and the provision states that in a sale contract, the transfer of the goods or property takes place at a certain time or pursuant to the conditions that have to be satisfied. Therefore, whether a contract for the sale of goods is an actual sale or an agreement to sell depends on whether it allows for an immediate transfer of possession from the seller to the buyer or if the transfer is contingent to happen at a certain point in future.

Differences between sale and an agreement to sell

Talking about the main differences between the sale of contract and an agreement to sell, in case of a sale, the goods are sold to the buyer with the liability of the seller associated with it. It is an enacted deal, meaning, the contract in respect of which specific consideration has already been paid, and that is why the seller on account of the transfer of property has all the right to sue the buyer for the price of goods.

Any apprehended loss or damage of quality of goods shall be considered as the fault of the buyer and any breach of the seller’s part open a double remedy option for the buyer. The double remedy options available to buyers are claims for damages against the seller and a proprietary remedy for the recovery of goods from third parties who purchase them. Moreover, in an agreement to sell, the goods or property doesn’t pass on to the buyer and that is why the risk also doesn’t pass on to the buyer.

It’s basically an executive contract for which payment is due at a future date. It is to note that the aggrieved party may sue for recovery of damages only and not for a price unless the price has been paid at the agreed date. Any other loss or injury that occurred will be the responsibility of the seller. The seller, by far the owner of the goods, may dispose as he pleases, and the buyer’s recourse will be to discard the suit for damages only.

IV. Sale Distinguished from other similar contracts

Statutory transactions and Contract of Sale

As per the definition of ‘contract of sale’ under the Sales of Goods Act, “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.”[3] Moreover, statutory transactions are those transactions in which the supply of goods is done by virtue of a statutory obligation.

The above definition lays down four different essentials of a sale contract. They are:

• Bilateral: – A person can’t purchase his own goods, that’s why, in a contract of sale, there must be at least two parties entering into contract i.e. one buyer and the other seller. However, there’s an exemption in the case of a part-owner and also in regard to the sale of partnership property, the partners of firm aren’t considered as separate persons. A partner can’t be both seller and buyer but he may sell goods to the firm or purchase goods from the firm. A part-owner may also sell his ownership to another part owner.
• Subject matter of the sale must be ‘goods’:– It is pertinent to note that the subject matter of the contract must be goods. The expression ‘goods’ as defined in section 2(7) of the act means “every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”[4]
• Transfer of property in the goods: – In a contract of sale, it’s the ownership that transfers from the seller to buyer. When the goods are pledged, it’s only the possession of the goods that is transferred to the pledge while the ownership rights remain with the pledger.
• Consideration in Price: – In a sale contract, consideration necessarily has to be money. So, if for instance, goods are being offered as consideration for goods, it’ll not amount to sale, but will be called ‘barter’. In case no consideration is paid, it will amount to a gift but not a sale. However, the consideration may be partly in money and partly in goods.

According to jurist Pothier, the contract of sale is: consensual, bilateral, and commutative”.[5] Statutory transactions would not amount to the sale of goods in case the consensual element or any of the above essential elements which form the basis of the contract is absent.

Contracts for ‘Works’ / ‘Labor’

A contract of sale of goods represents that some goods are on sale, are sold, or are to be sold for a considerable price. But in cases, where no goods are sold, and there’s only the rendering of some sort of work or labour, then such contracts are deemed to be only of work and labour and not of sale of goods contract. For example, where gold is sold to a goldsmith for crafting an ornament or when a painter is asked to paint a picture, it will only amount as a contract for work or labour.

Hire-Purchase Agreement

In a hire-purchase agreement, the buyer of goods pays a part of the total price and the rest of the amount in instalments. Accordingly, the possession of property or goods is transferred at the time of making the contract and ownership over goods is transferred when the instalments are completely paid off. If any instalment is not paid by the buyer, the seller has the legal right to take away his goods and is also not bound to return the already paid amount by the buyer.

In Lee v. Butler[6], an agreement was entered into between a furniture dealer and a hirer for the hire and purchase of certain chattels. It was provided in the contract that the hirer would pay to the dealer ‘as and by way of rent for the hire and use’ of the chattels the initial sum of £1 on 6th May the further sum of £96 4s on 1st August. The other contractual provisions forbade the hirer to remove the chattels and it was declared that ‘no property or interest in the chattels should rest in the hirer until the whole of the payments of rent’ is actually made.

The court held the agreement to be an agreement for sale within section 9 of the act. Because in a sale contract, the ownership is transferred immediately and the seller has no legal right over the goods transferred if he has received the consideration price but his possession is yet to be transferred.

V. Conclusion

The contract of sale must be subjected to certain essential requirements and procedures in order to be a legally valid contract. Before making or entering into a contract, the parties are advised to test the integrity of each agreement and then finalize it to complete the contract of sale. Since there is no specific outlined structure for drafting a contract of sale, it can be formed as per the specific needs of the parties. While doing so, it is important for the readers to read and closely apply all the essentials of the aforementioned similar contracts to the sale contract in order to successfully distinguish between the two.

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[1] State of Madhya Pradesh & Ors v. Orient Paper Mills Ltd, 1977 AIR 687.

[2] Section 6 of the Sale of Goods Act, 1930.

[3] Section 4 of the Sale of Goods Act, 1930.

[4] section 2(7) of the Sale of Goods Act, 1930.

[5] Tudor, O. D., Pothier, R. J. A Treatise on the Contract of Partnership, (1854).

[6] Lee v. Butler, [I893] 2 Q.B. 3I8.

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