Effects of the Contract of Sale: Explained with Relevant Provisions

Contract of sale of goods is one of the special kinds of contract. Initially, the act governing contract of sale, i.e. Sale of Goods Act was part of the Indian Contract Act, 1972 which was later deleted and passed as a separate Sale of Goods Act in 1930.

As per section 4 (i) of the act, a contract of sale of goods is termed as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for price consideration. However, in this article, we will be especially discussing the effects of the contract of sale in terms of the transfer of property from the seller to the buyer of goods. Further, the article will focus on the relevance of the maxim Nemo dat quod non habet in the contract of sale and exceptions to this rule, by referring to the relevant provisions of the Sale of Goods Act.

I. Transfer of Property between Seller and Buyer

Section 18 to Section 20 of the Sale of Goods Act, 1930 deals with the transfer of ownership or passing of property from the seller to the buyer of goods, however, what are the effects of the contract of sale, when the sale of goods is made by a person other than the owner of the goods? To have a key understanding of the same, let’s dive into this informative article:

Doctrine of Nemo dat quod non habet

The literal meaning of Nemo dat quod non habet is that “no one gives what he does not have”. The maxim states a legal rule that the after purchasing the possession of a property from someone who has no ownership right over the property will also deny the buyer from carrying the original ownership title.

The maxim of nemo dat rule suggests that the transfer of property being carried out in contract of sale, the rights of the transferee is derived from those of the transferor. This means that if the transferor itself doesn’t possess the ownership title of the property and he transfers the same to some other buyer, then the ultimate buyer will also not hold the legal possession of the property. The Denning LJ in the case of Bishopsgate Motor Finance Corpn. Ltd. v. Transport Brakes Ltd has defined the position of the modern law as reproduced under:

“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.”[1]

Moreover, the Nemo dat rule is also related to the “first in time is first in right” principle. Let’s understand this with an example. Suppose A transfers his interest to B and then turns around, and out of mistake transfers his interest to C. In that case who owns the property now? Well, if we apply the nemo dat rule, it would be B who would own the property because A had rights to transfer when A transferred the property to B unlike in case of C.

So, now B has the ownership rights. In other words, suppose that later on A again transfers the property to C, but since A has no more vested ownership rights, hence by nemo dat rule C gets nothing. In these types of cases nemo dat and the implications of the first-in-time principle are the baselines to decide a case.

The nemo dat rule rests on the idea involving a chain of transactions where the present owners of the property must be able to later trace back their ownership in time through a chain of legitimate transfers to an act of legitimate original acquisition of property. While the tracing to the ultimate root of title gives you the legitimate owner but this process is quite complicated in itself.

II. Implementation of Nemo dat rule in India

Section 27 of the Sale of Goods Act, 1930 provides rules for sale by a person who is not the owner of the property. The provision as stated under the act is as follow:

“Section 27: Sale by person not the owner – 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 the consent of the owner, the buyer acquires no better title to the goods than the seller had unless the owner of the goods is by conduct precluded from denying the seller’s authority to sell.

Provided that, where a mercantile agent is, with the consent of the owner, in possession of the goods or of a document of title to the goods, any sale made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same, provided that the buyer act is good faith and has not at the time of the contract of sale notice that the seller has no authority to sell.”[2]

The above provision as a general rule seeks to protect the true owner’s interests when it states that where the goods are sold by a person who is not the actual owner of the property and who doesn’t sell the goods with the consent of the true owner or under his authority, the purchaser acquires no better title to the property than the seller has.

This essentially implies that if the ownership title of the seller is defective, the buyer’s title will also be subject to the same defect and not any superior to that of the seller. The principle is demonstrated in the case of Greenwood vs. Bennett where the original owner A entrusted his car to B for repairs to be carried out. B then used A’s car for his personal work, crashed it, and caused extensive damage to the car and sold it to C for £75.

C did not realize that B wasn’t the true owner of the car and sold the car to a financial company. The court held that since the car belonged to A, B didn’t have title to the property therefore he can’t transfer the title of the car to C and C for the same reason can’t transfer it to the company.

Although the nemo dat principle in its essential form may be clear, it’s not always fair, as there is always a scope for any innocent third party buyer to fall prey to this situation and suffer. Where the goods are in question, the purchaser may fall in a very difficult position. Looking at the apparent harshness of the principle, several exceptions to it were developed and added by statute which are applicable only in favour of a person who acquires the property in good faith and without notice of the original owner’s rights.

III. Exceptions to the rule

There are certain exceptions to the rule of nemo dat principle. They are illustrated with relevant provisions and case laws below:

Sale by joint owner

Section 28 of the act states that if one of the several joint owners of goods has its sole possession with the permission of the co-owners of goods, the property in the goods is transferred to any person who buys the goods from such joint owner in good faith. It is important to note that the buyer must not have notice of the fact that the seller has no authority to sell the goods.

Moreover, in absence of the provision under section 28, the buyer would’ve obtained only the title of his co-owners and would’ve become merely a co-owner with the other co-owners. Hence, this provision constitution as an exception the nemo dat rule – “no one can give what he has not got”.

Sale by a mercantile agent (Section 27)

The proviso under section 27 expressly states that if a mercantile agent has an authority to sell the property in goods and accordingly he sells, then no difficulty arises considering the general rule which says that an agent having the appropriate authority to sell the property can convey a good title to the buyer. However, the problem arises when the mercantile agent disposes of the property to some other person, without having the authority to do so.[3]

For the application of the above proviso, the following conditions are required to be fulfilled:

• That the seller is a mercantile agent as defined under Section 2(9) of the Sales of Goods Act. The provision states that “Mercantile agent means a mercantile agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of goods.”[4]
• The mercantile agent has the possession of the property or its title with the original owner’s consent, and in his capacity as a mercantile agent;
• While selling the property, the agent must have been acting in its ordinary courses of his business.
• The buyer of goods must have acted in good faith, without having the knowledge that the mercantile agent didn’t have the authority to sell.

Sale under voidable contract (Section 29)

As per section 19 and 19A of the Contract Act, if the consent of a party to the contract has been obtained by fraud, misrepresentation, coercion, or undue influence, the contract is voidable at the option of the party whose consent has been so obtained under influence.

Section 29 of the Sale of Goods Act states that if a person has obtained possession of property in goods under a contract which is voidable under section 19 and 19A of the contract act, and he sells the concerned goods before the contract has been avoided by the party entitled do so, the purchaser of such goods acquire a good ownership title to them. However, it is necessary that the purchaser must have bought the goods in good faith and without the seller’s notice of the defective title. The section 29 is only applicable to a voidable contract and not for any void contract, or where the seller has no ownership title of the goods at all.

Sale by the seller in possession (Section 30 (1))

As a general rule, if the seller has sold the goods and the property in the goods has passed to the purchaser, the seller then can’t deal with such goods. If the seller is still in possession of the property and deals with them, the buyer can sue the seller for the tort of conversions.

Section 30 (1), however, states that “if the seller after having sold the goods is still in the possession of goods or of the documents of title to them, the delivery or transfer of such goods or of the documents of title to them, the delivery or transfer of the goods or of the documents of title under any sale, pledge or other disposition thereof by the seller or by a Mercantile agent on his behalf will convey a good title to the buyer provided the buyer has been acting in good faith and he has no notice of the previous sale.”[5]

Sale by the buyer in possession after sale (Section 30 (2))

Section 30 (2) provides that, “if a buyer has obtained the possession of the goods or the documents of title to them with the consent of the seller, any sale, pledge or other disposition thereof to any person will convey the good title and without any notice, as regards any lien or other right of the original seller in respect of those goods.”[6]

IV. Conclusion

The concept of transfer of property in the goods is different from delivery of goods as it essentially calls for transfer or passing of ownership title in the goods. The passing of property or ownership in goods may occur even without the delivery of such goods and also mere delivery of goods may not constitute the transfer of its ownership in goods. Thus, the transfer of property in goods is distinct from its delivery.

As a general rule, unless otherwise agreed, the goods remain at the risk of the seller of goods until the goods therein get transferred to the buyer. As per section 26 of the act, when the property is transferred to the buyer then the goods are at the buyer’s risk, whether delivery has been made or not, therefore, prima facie the risk passes with the title of the property.

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[1] 1902 AC 325 (326).

[2] Section 27 of Sale of Goods Act, 1930.

[3] R.K Bangia, Contract – II, 6th Edition, Allahabad Law Agency, 2009.

[4] Sec. 2(9) of the Sales of Goods Act, 1930.

[5] Section 30 (1) of the Sale of Goods Act, 1930.

[6] Section 30 (2) of the Sale of Goods Act, 1930.

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