Sale of Goods Act, 1930

Introduction
Trade is often said to be one of key drivers of an economy. The importance of trade can be gauged from the fact that the western world was constantly asking India to open its doors to foreign investment in retail trading. When trade is such a vital constituent of a country’s economy it is essential that we understand the laws governing trade. The sale of goods in India is governed by the Sale of Goods Act, 1930 (“the Act”). While the Transfer of Property Act, 1882 applies to the transfer of immovable property, the Sale of Goods Act applies to the sale of certain movable property, being goods. This Act was earlier a part of the Indian Contract Act, 1872. However, in 1930 it was felt that there is a need for a separate dedicated legislation and hence, a separate Act was carved out. Let us examine some of the key facets of this Act.

Goods
The pivot of the Act is the definition of the term “goods”. If a particular property cannot be termed as goods then the Act does not apply to the same. This definition is also relevant since certain other Acts also refer to this definition, since what constitutes goods is often relevant for several issues.

Goods are defined under the Act to mean every kind of movable property. It 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. However, actionable claims and money are not goods. Thus, the definition is very wide to include all types of movable property other than what is expressly excluded. According to the General Clauses Act, 1897, things attached to or forming part of the land are treated as immovable property. However, the Sale of Goods Act states if they have been agreed to be severed before or under the Contract of sale, then they become goods. Since the definition revolves around movable property it also becomes essential to understand what constitutes movable and what is immovable property. Sale of immovable property is governed by the Transfer of Property Act, 1882 and this Act applies to the sale of movable property.

The following three landmark decisions of the Supreme Court dealing with what is immovable property are very relevant:

(A) T he Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree. The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

(B) Further, the decision of the Supreme Court in the case of Duncan’s Industries Limited vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished the Sirpur’s case and held that whether a machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent ? If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertilizer plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property. It was held that it could be said that the plant and machinery could have been transferred by delivery of possession on any date prior to the date of conveyance of the title to the land.

(C) In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Court held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

The Central Board of Excise and Customs has, under the Central Excise Act 1944, after considering several Supreme Court decisions (including those mentioned above), clarified that:

(A) if items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B) If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

In the context of sales tax, the Supreme Court in the case of Tata Consultancy Services Ltd vs. State of AP (2005) 1 SCC 308, has held that software, even though intangible, is goods.

Shares and stock are expressly included in the definition of goods. The Companies Act also states that shares in a company shall be movable property. However, a debenture does not constitute movable property as held by the Supreme Court in the case of RD Goyal vs. Reliance Industries Ltd, (2003) 1 SCC 81.

Actionable claims are governed by section 130 of the Transfer of Property Act and are hence, outside the purview of this Act.

The goods may be existing or future goods which would come into the seller’s possession. If however, the goods are specific, i.e., are identified when the agreement is made and they perish thereafter, the agreement becomes void. However, they must perish due to no fault of the seller or buyer.

Sale
The next vital cog in the wheel is the definition of “sale”. Section 4 of the Act defines a contract of sale of goods as:

(a) A contract. Thus, all the elements of a valid contract as laid down in the Indian Contract Act, 1872 must be fulfilled.
(b) In which there is a seller, i.e., a person who sells or agrees to sell goods;
(b) H e transfers or agrees to transfer property in goods;
(c) The transfer is to a buyer, i.e., a person who sells or agrees to buy goods; and
(d) The transfer is for a price.

Thus, the pre-requisite of a sale is the transfer of movable property being goods. This view has also been expressed in State of Madras vs. Gannon Dunkerley & Co., (1959) SCR 379 – “sale of goods …. is a nomen juris, its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement.” Halsbury defines a sale as “the transfer by mutual consent of the ownership of a thing from one person to another for a money price.”

The contract may be absolute or conditional. If property in goods is transferred from seller to buyer,  then such    a contract becomes a sale. However, if property is transferred in future or is conditional, then such a contract is termed as an agreement to sell. Eventually, when the conditions are fulfilled or the time period elapses, an agreement to sell becomes a sale. The principles of a sale have been succinctly summed up by the Apex Court in the case of State of Tamil Nadu vs. Sri Srinivasa Sales Circulation, (1996) 10 SCC 648 as follows:

“…in order to constitute a sale under the Sale of Goods Act, it is essential to establish that there is an agreement between the parties for transfer of title    to the goods and that such agreement should be supported by money consideration and as a result of the transactions the goods. article or the property must actually pass to the purchaser. It is settled law that the expression “sale” under the Sales Tax Act has to be understood with reference to the definition of “sale of goods” under the Sale of Goods Act. But if the title of the goods passes without any contract between the parties, express or implied, there is no sale. Similarly if the consideration of the transfer is not money, but some other valuable consideration, it may amount to exchange or barter but not a sale in the strict sense of the law..”

The most vital part of the definition is that the title of goods must pass from the seller to the buyer.

PRICE
A sale of goods under the Act is always for a price, i.e., for a money consideration. A price is an essential element of a contract of sale of goods. If there is no price there   is no contract. This is also an essential ingredient under the Contract Law. Hence, a sale of goods as understood under the Act cannot be for a barter or for any non- monetary consideration. Such a transaction  would  be an exchange and not a sale. This is a very important fundamental distinction which is relevant even for several fiscal statutes. The Transfer of Property Act defines an exchange on the other hand, to mean a mutual transfer of the ownership of one thing for the ownership of another thing and neither thing nor both thing being money only. As opposed to a sale transaction, the fundamental difference is the absence of money as consideration. The distinction between a sale and an exchange transaction has been very succinctly brought out by three Supreme Court decisions under the Income-tax Act, CIT vs. Ramakrishna Pillai (R.R.), 66 ITR 725 (SC); CIT vs. Motors and General Stores (P.) Ltd., 66 ITR 692 (SC); CIT vs. B. M. Kharwar 72 ITR 603 (SC). Recently, the Bombay High Court in Bharat Bijlee Ltd. [TS-270-HC-2014(BOM)], distinguished a slump exchange from a slump sale and held that a slump exchange does not entail capital gains tax.

The price may be either fixed by the contract or left to the negotiation of the parties or may be fixed as agreed upon. However, in the absence of the above, the buyer must pay a reasonable price. What is a reasonable price depends upon the facts of each case. In some cases, the price determination is to be decided by the valuation of  a third party. If such third party cannot fix the value, then agreement is avoided.

TRANSFER OF PROPERTY IN GOODS
When the property in the goods is transferred from the seller to the buyer is the most important effect of a contract for sale of goods.

Unascertained Goods: If the goods are unascertained, then property passes only when they are ascertained. E.g., the seller agrees to sell 50 kgs. of rice but at that time he has 250 kgs. in his warehouse. No property passes to buyer until the seller identifies and appropriates 50 kgs. of rice towards this agreement. Thus, there must be a clear-cut identification as to which goods out of the generic mass are towards satisfaction of the contract.

Where there is a contract for the sale of unascertained / future goods by description and goods of that description and in a deliverable state are unconditionally appropriated to the contract the property in the goods passes to the buyer. Such assent may be expressed or implied, and may be given either before or after the appropriation      is made. Thus, an appropriation must be made by the seller or the buyer and only then would the property in such unascertained goods pass to the buyer. Further, the appropriation of unascertained goods must be unconditional. Till property passes there is no sale.

E.g., in Emperor vs. Kuverji Kavasji, 1941 43 BLR 95, a merchant agreed to sell 20 litres of liquor out of a cask containing 100 litres. It was held that until the 20 litres are separated or bottled, the property does not pass to the buyer.

The Supreme Court in the cases of New India Sugar Mills Ltd vs. CST, 1963 AIR 1207, CST vs. Husenali Adamji & Co., 1959 AIR 887, M/s. Carona Sahu Ltd vs. State, 1966 AIR SC 1153 has held that in case of sale of unascertained goods, no property is transferred to the buyer unless and until the goods are ascertained and there is unconditional appropriation of the goods in a deliverable state.

Ascertained Goods: However, if they are ascertained / specific, then property passes in accordance with the contract, i.e., when the parties want it to pass. In this respect, section 2(2) of the Act is also relevant. It defines the term delivery to mean a “voluntary transfer of possession from one person to another”. Thus, delivery of goods is one of the ways in which possession can be transferred.

Section 30 of the Act provides that a seller need not have actual physical possession of the goods sold. It is enough that he has control over the goods by making over a document of title to the goods. Possession of documents of title enable the holder of document to transfer the goods. Section 30 does not require the seller to be in actual physical possession of goods – Pramatha Nath Talukdar vs. Maharaja P M Tagore, AIR 1966 Cal 405. This view has also been laid down in Halsbury’s Laws of England, 3rd Edition Vol. 34 @ p.84 and in the English case of Nicholson vs. Harper, (1895) 2 Ch. D. 415. Unless a different intention arises from the contract, the following three rules have been laid down under the Act to determine the intention of the parties as to when the property passes to the buyer:

(a)    When contract is for sale of specific goods in a deliverable state, property passes to buyer when contract is made, irrespective of whether time of payment or delivery is postponed.
(b)    However, when under a contract for specific goods and the seller has to do something to the goods for putting them in a deliverable state, then property passes only when such thing is done and the buyer is given notice of the same. E.g., a 2nd hand car dealer agrees to sell a car but it needs certain repairs before it can run properly. Property passes only once the repairs are done and the buyer is intimated about the same.
(c)    When contract is for sale of specific goods in a deliverable state but seller has to weigh, measure, test or do some act for ascertaining the price, the property passes to buyer when such act is done and buyer is given notice of the same. E.g., a seller sells cotton at a price per ton. To ascertain the price, he needs to weigh the cotton. Till such act is done, property does not pass.

It is essential to determine when property passes because if there is any damage or loss to the goods then the same would be borne by the seller in cases where property has not yet passed to the buyer. The Act provides that unless the contract provides otherwise, the goods remain at the seller’s risk till property passes to the buyer. However, where the property has passed risk passes to the buyer even if the delivery has not yet been made. E.g., a seller sells a certain vase to a buyer but both payment and delivery are postponed till the next day. Before delivery can be effected, the vase breaks due to mishandling. The loss is to the buyer’s account since property of specific goods in a deliverable state under an unconditional contract passes immediately even if delivery is postponed. But when delivery is delayed due to the fault of any one party, the risk of loss is to his account.

NEMO DAT QUAD NON HABET
‘No one can give a better title than what he himself has’ is the meaning of the above Latin maxim. Thus, a sale by a person who is not the legal owner of the goods does not give any title to the buyer. The actual owner can recover possession of the goods from the buyer without compensating him. However, if the seller has authority  of the owner; he is an authorised mercantile agent (e.g., broker, factor); he is a joint owner, etc., then he can give a good title to the buyer.  Whether the buyer can raise   a plea of being a bona fide purchaser without notice is   a matter which depends upon the facts of each case – Sumitra Debi Jalan vs. Satya Narayan Prahladka, AIR 1965 Cal 355.

CONDITIONS AND WARRANTIES
A contract of sale may come with conditions and warranties as to the quality, fitness, title, etc. of the goods. A condition is a stipulation essential to the main purpose of the contract. If breached, the contract may be repudiated. A warranty on the other hand is collateral to the main purpose and a breach of the same gives rise to a claim for damages but not a right to repudiate the contract. Thus, sale of soft drinks with pesticides is a breach of a condition, i.e., it is fit for human consumption. However, sale of soft drinks in glass bottles instead of plastic bottles, as contracted, is a breach of a warranty. The former entitles the buyer to cancel the contract while under the latter the buyer can sue for damages.    It may not be always a cut and dried situation as to whether a stipulation is a condition or a warranty and the determination of the same depends upon the contract  as a whole. Even a Share Purchase Agreement (SPA) carries conditions and warranties from the seller as to the shares. Breach of material conditions can lead to cancellation of the SPA.

CAVEAT EMPTOR; QUI IGNORARE NON DEBUIT QUOD JUS ALIENUM EMIT
Let a purchaser beware; who ought not to be ignorant that he is purchasing the rights of another – buyer beware of what you buy for the seller has no obligation to caution you is the meaning of this maxim. Section16 of the Act lays down that subject to this Act and any other law in force, there is no implied condition or warranty as to the fitness or quality of the goods sold by a seller. This is a statutory recognition of the above maxim. The Supreme Court in Commissioner of Customs (Preventive) vs. M/s. Aafloat Textiles (I) P. Ltd. has explained the maxim as follows:

“….Caveat emptor means “Let the purchaser beware.” It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence.

21.    “Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.” (See Wallis vs. Russell (1902) 21 R 585, 615).

22.    “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication  he represents such defects not to exist.” (See William R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d. Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.

23.    Caveat emptor, qui ignorare non debuit quod jus alienum emit. A maxim meaning “Let a purchaser beware; who ought not to be  ignorant  that  he  is  purchasing  the rights of another. Hob. 99; Broom; Co., Litl. 102 a: 3 Taunt. 439.

24.    As the maxim applies, with certain specific restrictions, not only to the quality of, but also to the title to, land which is sold, the purchaser is generally bound to view the land and to enquire after and inspect the title- deeds; at his peril if he does not.

25.    Upon a sale of goods the general rule with regard   to their nature or quality is caveat emptor, so that in the absence of fraud, the buyer has no remedy against the seller for any defect in the goods not covered by some condition or warranty, expressed or implied. It is beyond all doubt that, by the general rules of law there is no warranty of quality arising from the bare contract of sale of goods, and that where there has been no fraud, a buyer who has not obtained an express warranty, takes all risk of defect in the goods, unless there are circumstances beyond the mere fact of sale from which a warranty may be implied. (Bottomley vs. Bannister, [1932] 1 KB 458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers) 14

26.    No one ought in ignorance to buy that which is the right of another. The buyer according to the maxim has  to be cautious, as the risk is his and not that of the seller.

27.    Whether the buyer had made any enquiry as to the genuineness of the license within his special knowledge. He has to establish that he made enquiry and took requisite precautions to find out about the genuineness of the SIL* which he was purchasing. If he has not done that consequences have to follow.”

* SIL = Special Import Licence

However, the Law also provides for the following statutory exceptions to this Rule:

(a)    Where the buyer makes known to the seller that he requires goods for a particular purpose, then goods must meet such purpose.  In  Eternit  Everest  Ltd.  vs. Abraham, AIR 2003 Ker 273, it was held that corrugated asbestos sheets are mainly used for roofing of buildings for protecting the building from sun and rain and it is not being used for a variety of purposes. The leakproof of the asbestos sheet is the essential quality of the sheets and only if it is leakproof, it can be said to be fit for the purpose for which it is purchased.

(b)    Where goods are bought by description from a seller who deals in goods of that description, then there is an implied condition as to the merchantable quality  of the goods. In Agha Mirza Nasarali Khoyee & Co. vs. Gordon Woodroffe & Co., AIR 1937 Mad 40 it was held that goods are treated as being of merchantable quality if they are of such quality that any defects which a buyer of ordinary diligence and experience would have detected by due diligence in the use of  all ordinary and usual means (what is due diligence, depending upon the circumstances).

(c)    An implied warranty or condition as to quality or fitness for a purpose may be annexed by the usage of trade.

CONCLUSION
This is a very important mercantile Law which is relevant for commercial matters. It is essential for businesses to keep in mind the provisions of this Act while entering into contracts for sale and purchase of goods.