Contract of Sale and Formalities of the Contract - Section 4 & 5 of the Sales and Goods Act, 1930

By Tania Maria Joy

Introduction

The Indian Contract Act, 1872 governed all transactions relating to the sale of goods until 1930. Now, the contract of the sale of goods is regulated by The Sale of Goods Act, 1930 (hereinafter, referred to as the ‘Act’). Sections 76-123 of the Indian Contract Act, 1872 were superseded by the Act of 1930. Excluding the state of Jammu & Kashmir, the Act applies to all of India. 

The object of the contract of sale is always the goods. This is codified in Sections 6, 7, and 8 of the Sales of Goods Act, 1930. Consequently, almost any sort of movable property falls within the ambit and definition of the “goods” provided for in Section 2(7) of the Sales of Goods Act, 1930. Goodwill, patents, trademarks, copyrights, and more are known as movable assets. Although, the Act excludes actionable claims and assets. 

The Act deals with movable property subject matter and not about selling immovable assets. The transaction concerning immovable property, such as sales, rentals, gifts, etc., is regulated by a separate Act, known as the Transfer of Property Act, 1882. Money here means actual money and not the rare or old coins that can be regarded as goods purchased and sold as such. 

A contract for the sale of goods has many unique characteristics, mentioned in the Sales of Goods Act, 1930 such as the transfer of possession of the goods, the distribution of goods, buyer’s and seller’s rights and duties, remedies for breach of contract, terms, and guarantees provided by a contract for the sale of goods, etc. 

Essentials of the contract of sale

The contract for the sale of goods is a contract between the buyer and the seller agreeing to trade goods for a profit. Section 4(1) of the Sales of Goods Act, 1930 describes the phrase ‘Contract of Sale’ as a contract for the sale of goods under which the seller transfers or agrees to move the goods to the purchaser for a price. The definition shows that the essential elements involved in the transfer of ownership at a price include two parties to the contract who are willing to trade their goods or services to receive a common benefit i.e. price.

Some features must thereof the contract should be goods that include only movable property. They can be either actual goods owned or owned by the seller or potential goods. The price of goods should be paid or agreed to.

The transfer of the goods from the seller to the buyer must take place. The contract of sale shall be made by proposing the purchase or sale of goods at the price by one party and the acceptance of that bid by another party. The contract of sale must be absolute or conditional, as stated in Section 4(2). The other important aspects of a legal contract must be included in the contract of sale, as mentioned later in the article.

Bilateral

According to Pothier, sales need to be consensual, bilateral and commutative. In a contract of sales a property has to be passed from one person to another, a person cannot buy his property this was held by the supreme court in the case of Gujrat V Ramanlal And Sakalchand, where on the dissolution of a partnership firm surplus assets and goods were divided among partners in specie, the sales tax officers sought to tax this but the court said that no money consideration was promised or paid by any partner to the firm as consideration for goods they can not be both buyer and seller of goods.

The element of consensuality is important because parties should agree with their free consent, a forced purchase is an acquisition not sales. Similarly, when a property is compulsorily acquired following the rules under an authority given by statute there is no sale of the property, even though compensation is payable its price can be fixed by negotiation. For instance, the supply of electricity, gas, water, essential medicines by the government cannot be considered as a sale.

Money

One of the essential elements that separate sale from merely an exchange(barter) or gift or donation, is the price of goods and no sale can take place without price. Herein, price means consideration in terms of money. When the goods are sold for some price as well as in terms of goods, that will be considered as a sale not barter.

For example, in, Aldridge V Johnson fifty-two bullocks worth 6$ each were sold for 100 quarters of barley at 2$ per quarter, the difference has to be made up in cash, was treated as a contract of sale.

In another case Cit V Motor And General Store, an old car was returned to the dealer in exchange for a new car and the difference was paid in cash was considered as a sale by a court of law.

Price

One of the essential elements following in that separates sale from merely an exchange(barter) or gift or donation, is the price of goods and no sale can take place without price. Herein, price means consideration in terms of money. There are three essential elements of price:

1- It should be in terms of money.

2- It should be definite.

3- It should be realistic.

To make sure all these essentials are met, there should be an ascertainment of the price which can be done in many ways, as per sections separate 9 and 10 of Sales of Goods Act 1930:

Contract-

one of the basic methods of ascertaining price is directly mentioning it in the contract of sale of goods. Reasonability of price does matter to the court of law. Seller and buyer can any price which is to be paid by the buyer to the seller.

A course of mutual dealing- in case there is no price or particular method to set price is laid down in the contract, it can be set by course of dealing between the parties through mutual understanding.

Fixing a reasonable price–

according to law of the land, when no price is set in the contract of sale of goods, at the time of execution of the contract the buyer must pay the reasonable price which is subjective and depends upon the circumstances of the case.

Fixing it in the manner agreed- price can also be set by any manner that is agreed in the contract.

Fixing by third-party-

acc to section 10, the buyer and seller of the goods can also include the third party to ascertain the price of goods, but if the third party fails to do so, the contract becomes void. In case there has been any transfer of goods then the buyer has to pay a reasonable price.

For example, L has 5 cars. He agreements to an agreement to sell 4 out of 5 cars to Z if A ascertain the price of all 4 cars. But A does not ascertain the price but 2 cars have been delivered to Z. in this case Z has to pay the reasonable price to L. For the rest 2 cars, it entirely depends upon L and Z, if they want to proceed or not.

Apart from this when a certain part or full price is paid in advance by the buyer to the seller as a part of his performance, it is known as earnest money or security. This amount is adjusted against the cost of goods at the time of completion of the contract. In case there is a default on the part of any party the other party has a right to ask for a refund of that amount.

Goods

As per section 2(7) of the sale of goods act well a can be defined as every moveable property other than actionable claims and money are considered as goods. An actionable claim is something which a person cannot use or enjoy but which can be recovered by him through a suit or an action in the court of law, for example, a debt due to a person from another. Stocks, shares, growing crops (separated) Mp v Orient Paper Mill court held that standing timber is a movable property if under any contract it has to be severed but the severance should take place when timber still vest in contracting parties, goodwill, trademark, patent, copyright, ancient/rare coins all can be termed as goods except immovable property, broadband is a sale (Airtel V Karnataka), Software St Albans City And District Council v International Comp Ltd in this case, The appellant was the defendant company which had supplied computer software to the respondent, and for which the respondent had been awarded £1.3 million.

The software had overestimated the number of community charge payers in the council’s area with the result that there was a shortfall of £484,000 in revenue from the charge. The additional effect was that the council had to pay an increased precept to the county council of £685,000. It was held that a distinction should be drawn between the precept payment, which only arose because of the fault in the software and the community charge shortfall which formed an ongoing obligation which the council had always been subject to and therefore was held not to be recoverable.

Types of goods

According to section 2(7) of the sale of goods act 1930, every moveable property other than actionable claims and money is considered as goods. An actionable claim is something which a person cannot use or enjoy but which can be recovered by him through a suit or an action in the court of law, for example, a debt due to a person from another. Stocks, shares, growing crops(separated), goodwill, trademark, patent, copyright, ancient/rare coins all can be termed as goods except immovable property.

Section 6 sale of goods act bifurcates goods into 3 types: existing goods; future goods; contingent goods.

Sale and an agreement to sell

In the sale of goods, the asset is passed directly from the seller to the buyer. The word ‘sale’ is defined in Section 4(3) of the Sale of Goods Act, 1930. In the contract of sale, the property and the goods are passed from the seller to the buyer, and the contract is known as the sale. In an agreement to sell, the ownership of the goods shall not be transferred immediately. First, the conditions need to be fulfilled, then they can be transferred. 

The term ‘agreement to sale’ is specified in Section 4(3) of the Sale of Goods Act, 1930, which says that in a contract of sale, the transition of the property or goods takes place at a certain time or according to the requirement that has to be satisfied. Therefore, whether a contract for the sale of goods is an actual sale or a sale agreement relies on whether it allows for an instant transfer from the seller to the buyer or if the transfer has to happen at the point in the future.

Formalities for a contract of sale are as follows:

• There is no need for a particular form to constitute a valid contract unless and until it is specifically required by law. 
• The agreement can be expressed or implied by the actions of the parties. Section 5 of the Sale of Goods Act, 1930 lays down the law as to how a contract of sale can be made that has nothing to do with the transfer/delivery of the goods.
• The contract of sale can be fulfilled if the items are delivered immediately or if the price is paid, although it can be agreed that the delivery is to be made at a separate in the per following future by future by date. 
• Therefore, it can be achieved if the items are shipped immediately and the price is also paid immediately. These are some of the formalities of a contract of sale.