Essentials of Contract of Sale

Introduction

Every day, hundreds and thousands of sale transactions take place worldwide. Buying and selling of goods have existed since the first societies came into being, and the initial system of barter was replaced by minted currency once a standardised form of exchange began to emerge. Sale and purchase of goods locally as well as through export and import contributes largely to the economic growth and development of a country. Thus, it is important that these transactions be regulated through properly enforced laws and procedures.

The transaction of a sale is essentially a contract, because it involves the basic elements that would render an agreement a contract. In India, contracts are governed through the Indian Contract Act, 1872, and up till 1930, sale transactions were also governed through it. However, in 1930, sections 76 to 123 of the Contract Act were replaced by the Sale of Goods Act, and this Act became the regulator of sale transactions in India. Elements of transfer of ownership, consideration, rights and liabilities of a party etc. are covered by the Sale of Goods Act, 1930.

It is important to note that the Sale of Goods Act, 1930, governs only transactions of sale of movable property, and not immovable property, for which the Transfer of Property Act, 1882, comes into play.

Contract of Sale

A contract of sale, or a sales contract, is an obvious practice of exchange of goods and their price between two parties – the buyer and the seller. Agreements mentioning sale of particular goods are now recognised by countries through their statutory law, and several elements have been incorporated thus.

Section 4 of the Sale of Goods Act, 1930, contains the definition of a contract of sale, whereby it is stated that a contract of sale of goods is one where the seller and the buyer engage in a transfer of property, in the goods, and the property is either sold or agreed to be sold by the buyer in exchange for a price by the seller. The property in the goods is sold when the goods are transferred to the buyer and the seller has received a price in return for the goods thus sold.

For example, A agrees to sell wheat in gunny bags for a price of Rs. 200 per bag to B. A transferred all the gunny bags to B’s silo and in exchange, B paid the total amount due to A. Here, a valid sale has taken place, even though no written documents were involved.

We already know that for every valid contract, whether oral or written, there are certain essentials that require to be fulfilled before a contract can be termed valid. They are –

• An offer must be initiated by one party, which begins a contract of any kind. If there is no offer, there can be no contract.
• Acceptance of the offer by the other party is very important, and in accepting of the offer, it should be communicated adequately to the party which advanced the offer.
• Every contract has its basis in legality, hence the parties to any contract must have the intention to create a legal relationship. In other words, a contract must not be made to achieve unlawful ends. Both the parties to the contract must intend to create a legal relationship with each other.
• Consideration is the most important part of any contract, and it is the reason for which the contract is coming into existence, thus a valid consideration should be present in the contract.

These essentials are as much important for a contract of sale as they would be for any other contract. But these are the basic elements of any type of contract, and the contract of sale requires the fulfillment of further such conditions which would render the contract valid.

Essentials of A Contract of Sale

The definition laid down in Section 4 of the Sale of Goods Act sets out the following essentials of a contract of sale –

(a) Every contract of sale must have two parties, one being the buyer and the other being a seller, and the seller advances the property in goods in exchange for the price advanced by the buyer. This implies that a person cannot sell his own goods to himself. However, if the same person exists in two different capacities altogether, then that person can execute a contract of sale for himself.

As per section 2(1) of the Sale of Goods Act, a buyer is a person who buys or agrees to buy goods, from the seller. Section 2(13) mentions a buyer as being a person who sells or agrees to sell goods, to the buyer.

(b) A contract of sale must be for the sale of goods and only goods. As mentioned before, the Sale of Goods Act does not concern itself with the sale of immovable property, but only movable property. Thus, the property so transferred by the seller to the buyer must be movable. The property can exist at the place where the contract is being executed, or may exist at some place from where the seller may transfer it to the buyer. Only when the property in the goods is transferred will the sale be deemed complete.

Goods are defined in Section 2(7) of the Act, which includes movable property apart from actionable claims and money, as well as stocks and shares, growing crops, grass, and anything which is required to be severed before it can be sold as movable property.

(c) Similar to a general contract, which includes the most important element as being consideration, the contract of sale states its most important element as price, which is given to the buyer in exchange of goods from the seller. The price is the most important part of a contract of sale because if it were to be absent, the whole contract would be out of the purview of ‘sale’. The contract is termed as one of sale because of the existence of a consideration in the form of price.

The price of the sale is usually fixed by the seller, since he is the real owner of the goods before the contract of sale can be executed. But the price should not be excessive, and nor should the buyer pay a reduced price to the seller which would put the seller at loss.

The price may be paid in toto at once, or may be paid in instalments, or a part of it may be promised to be paid after a certain date or time.

(d) The transfer of property must take place between the parties, i.e. the buyer must transfer the property he has in the goods to the seller in order to execute a contract of sale.

Property, as per Section 2(11) of the Act, would mean the general property in the goods, and not only some special property that may coexist.

Sale and Agreement to Sell

A contract of sale is, before its execution, essentially an agreement. It becomes a sale only when all the essentials have been duly fulfilled. In an agreement to sell, as differed from a contract of sale, the ownership of the goods is not immediately transferred to the buyer. Rather, the property in the goods is transferred at a later date, usually owing to the fulfilment of certain future conditions. A contract of sale may be absolute or conditional, as per Section 4(2) of the Act. When it is absolute, it is termed as a sale, and when it is conditional, it is termed as an agreement to sell, as stated in Section 4(3).

For example, A agrees to sell his car to B once B comes of a legal age to hold a driver’s license. Here, the agreement to sell is based on a future condition, which makes the contract an agreement to sell.

For example, A agrees to sell his car to B on the 27^th of the following month. This is an agreement to sell since it is based on a future condition of the lapse of a certain amount of time. Once the time elapses, the agreement will be deemed as sale.

Once the condition(s) of the agreement to sell is fulfilled or sufficient time has elapsed, the agreement will convert to a sale, as per Section 4(4) of the Act.

Formalities of Contract of Sale

As such, there is no prescribed form to draft a legal contract of sale, and it is up to the parties to either express their terms or imply them through appropriate conduct. According to Section 5 of the Sale of Goods Act, 1930, a contract of sale may require either the immediate delivery of goods or the immediate payment of money, or both. Or, it may require the goods to be delivered in installments, or the payment to be made in installments, or that the delivery or payment be postponed for a stipulated time.

Even though there is no prescribed form for a contract of sale, it must contain certain points which act as proof that the contract is one of sale. They are –

1. A contract of sale must contain the name of the parties entering into the contract, to make it clear who all are the parties to the contract
2. Recitals in a contract act as elements of enforceability for the contract, since they represent the intention of the parties for which the contract is being formed
3. Since a contract of sale is a contract for the sale of goods, the goods in question must always be mentioned, as well as their particulars, such as quantity, quality, type, whether they are of perishable nature etc.
4. A contract of sale may require the buyer to deliver the goods whether immediately, or after some time, as agreed by the parties, and in both the cases, the time of delivery must be mentioned
5. Conditions and warranties must be mentioned by the parties, condition meaning a condition precedent, the fulfilment of which will lead to the fulfillment of the contract, and warranty meaning the breach of which will give rise to claims for damages
6. The buyer’s obligations must be duly mentioned, which may relate to the mode and amount of payment, as well as the particulars of the delivery of the goods
7. Boilerplate provisions are generally miscellaneous provisions, such as how the contract may be interpreted, the laws governing the contract, third parties’ involvement etc.
8. An arbitration clause will always help the parties in case any disagreement arises between the parties or if any party breaches any provision, and it will prompt resolution between the parties

There are several other formalities that a contract of sale includes. The ones mentioned above are the basic details that every contract of sale is supposed to carry. A contract of sale undergoes a lot of scrutiny and analysis before it can be finalised, and it is better to cross-check several provisions before execution of the contract, so that discrepancies and disagreements may be removed.

FAQs on Essentials of Contract of Sale