Contract of sale, conditions and warranties

1. Contract of sale: section 4

Section 4(1) of the Sale of Goods Act, 1930: 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. It may be absolute or conditional (section 4(2)). Where the property is transferred at once, the contract is a sale; where the transfer is to take place at a future time or subject to a condition, it is an agreement to sell (section 4(3)). An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled (section 4(4)).

Essentials. (i) two parties, a seller and a buyer; (ii) goods; (iii) a price in money; (iv) a transfer or agreement to transfer the general property; and (v) all the elements of a valid contract under the Contract Act (section 3 of the 1930 Act keeps the Contract Act applicable). The contract may be made by offer and acceptance, in writing or by word of mouth, or partly each, or implied from conduct (section 5).

2. Sale and agreement to sell

• Property. In a sale it passes at once; in an agreement to sell it passes later.
• Nature. A sale is an executed contract creating a right in rem; an agreement to sell is executory and creates a right in personam.
• Risk. Risk prima facie follows property (section 26). If the goods perish after a sale, the buyer bears the loss; after an agreement to sell, the seller does.
• Remedies. After a sale the seller may sue for the price (section 55); after an agreement to sell, ordinarily only for damages (section 56).
• Insolvency. If the buyer becomes insolvent after a sale but before paying, the seller can claim only a dividend unless he exercises his lien; after an agreement to sell he may refuse to deliver.

A sale also differs from a hire-purchase agreement, where the hirer has an option to buy and is not bound to (Helby v. Matthews, 1895, House of Lords); from barter, where there is no money price; and from a works contract. In State of Madras v. Gannon Dunkerley & Co., 1958 INSC 35, AIR 1958 SC 560, the Supreme Court held that an indivisible building contract involves no sale of the materials, because there is no agreement to sell goods as such. The Constitution (Forty-sixth Amendment) Act, 1982 then added Article 366(29A) so that States could tax the transfer of goods in works contracts; the meaning of sale under the 1930 Act was not changed.

3. Goods and price

Goods (section 2(7)) 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. In Tata Consultancy Services v. State of Andhra Pradesh, 2004 INSC 643, (2005) 1 SCC 308, canned software sold on a medium was held to be goods. Goods may be:

• existing, owned or possessed by the seller (section 6(1)), and either specific (identified and agreed upon when the contract is made, section 2(14)) or unascertained (described by kind, such as 100 bags of rice out of a godown);
• future, to be manufactured, produced or acquired by the seller after the contract (section 2(6)); and
• contingent, whose acquisition depends on a contingency which may or may not happen (section 6(2)).

A contract for the present sale of future goods operates only as an agreement to sell (section 6(3)). If specific goods have perished without the seller's knowledge when the contract is made, the contract is void (section 7); if they perish without fault after an agreement to sell but before risk passes, the agreement is avoided (section 8).

Price (section 9) may be fixed by the contract, left to be fixed in an agreed manner, or determined by the course of dealing; otherwise the buyer pays a reasonable price. Where the price is to be fixed by a third party who cannot or does not do so, the agreement is avoided, but a buyer who has received and appropriated goods must pay a reasonable price; a party who prevents the valuation is liable in damages (section 10).

4. Conditions and warranties: sections 11 to 13

Stipulations as to time of payment are not of the essence unless a different intention appears; whether any other time stipulation is of the essence depends on the contract (section 11). Section 12: a condition is a stipulation essential to the main purpose of the contract, the breach of which gives a right to treat the contract as repudiated; a warranty is collateral to the main purpose, and its breach gives a claim for damages but not a right to reject the goods. Whether a stipulation is one or the other depends on the construction of the contract, not on the name the parties give it.

Under section 13, a buyer may waive a condition or elect to treat its breach as a breach of warranty. Where the contract is not severable and he has accepted the goods or part of them, a breach of condition can be treated only as a breach of warranty, unless the contract says otherwise.

5. Implied conditions and warranties: sections 14 to 17

• Title (section 14). An implied condition that the seller has a right to sell (or will have when property is to pass); implied warranties of quiet possession and freedom from undisclosed encumbrances. In Rowland v. Divall (1923) the buyer of a stolen car, which he had used for four months before it was taken back, recovered the whole price: there was a total failure of consideration.
• Description (section 15). In a sale by description, the goods must correspond with the description; if by sample as well as description, with both. Varley v. Whipp (1900): a reaping machine described as new the year before and hardly used was an old one; the buyer could reject.
• Fitness for purpose (section 16(1)). Where the buyer expressly or by implication makes known the particular purpose, so as to show that he relies on the seller's skill or judgment, and the goods are of a description which it is in the course of the seller's business to supply, there is an implied condition that they are reasonably fit for that purpose. In Priest v. Last (1903) a hot-water bottle burst; its only purpose being obvious, the purpose was impliedly made known. The proviso excludes the condition where a specified article is sold under its patent or trade name.
• Merchantable quality (section 16(2)). Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that they are of merchantable quality, that is, saleable under that description at the ordinary price. If the buyer has examined the goods, there is no implied condition as regards defects which that examination ought to have revealed. In Grant v. Australian Knitting Mills (1936, Privy Council), woollen underwear with excess sulphites gave the buyer dermatitis; it was neither fit nor merchantable, and the hidden defect could not be discovered by ordinary examination.
• Usage (section 16(3) and (4)). A condition or warranty may be annexed by usage of trade; an express warranty does not exclude an implied one unless inconsistent.
• Sample (section 17). The bulk must correspond with the sample in quality; the buyer must have a reasonable opportunity of comparing them; and the goods must be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.

6. Caveat emptor: section 16

The opening words of section 16 state the rule: subject to the Act and any other law, there is no implied warranty or condition as to quality or fitness for any particular purpose. The buyer must look after himself. Ward v. Hobbs (1878): pigs sold “with all faults” carried typhoid; the seller was not liable. The exceptions are: (i) fitness for a purpose made known (s.16(1)); (ii) merchantable quality in a sale by description (s.16(2)); (iii) usage of trade (s.16(3)); (iv) sale by sample (s.17); (v) sale by description (s.15); and (vi) where the seller obtains consent by fraud or actively conceals a defect, as the buyer may then avoid the contract under sections 17 and 19 of the Contract Act. Implied terms can be negatived by express agreement, course of dealing or usage (section 62), and consumer protection law now adds its own remedies for defective goods under the Consumer Protection Act, 2019.

7. Problem

B tells a chemist that he wants a hair dye for his own use. The chemist sells him a branded dye. B's scalp is badly burned because the dye contains a harmful chemical. Is the chemist liable?

Issue. Whether the implied conditions of fitness and merchantable quality apply, or caveat emptor protects the seller.

Law. Section 16(1) and its trade-name proviso; section 16(2); Priest v. Last; Grant v. Australian Knitting Mills.

Application. The purpose was obvious and made known, and the chemist deals in such goods. The proviso applies only where the buyer asks for the article by its trade name, which B did not. In any event a dye that burns the scalp in normal use is not merchantable, and the defect was not discoverable on examination.

Conclusion. The chemist is liable for breach of the implied conditions and B can recover damages, including for his injury. Caveat emptor does not apply.

How this is examined

Essays: “Distinguish between sale and agreement to sell”, “Distinguish between a condition and a warranty”, “Explain the doctrine of caveat emptor and its exceptions.” Short notes: goods, sale by sample, implied condition as to title. Problems on unfit or defective goods are answered on the pattern above.