CONTRACT OF SALES OF GOODS

CONTRACT OF SALES OF GOODS

INTRODUCTION

A contract is an agreement enforceable by law, made between two or more person by which one party acquires right resulting from cuts on the other party.

A contract of sale is any formalized agreement between a buyer and seller that outlines terms and conditions by which the buyer agrees to purchase a product or service, and a seller agrees to sell it. A legal contract document requires signatures from both the buyer and seller or their legally authorized representatives.

A contract of sales of goods is where by the seller transfers or agrees to transfer the property or goods to the buyer for a money consideration called price

A contract of sales may be absolute on conditional contract:

Absolute contract

This is the contract of sales in which there is a certain conditions that are attached to it.

Conditional contract

Is the agreement subjected to consideration that it does not come into effect until a specific event occurs. That it is not come into effect at once but ownership is not passing until the specified event occurs.

MORTGAGE AND PLEDGE

-          Mortgage is the transfer of the general property in the goods to form the Mortgager to the mort gee to secure debt

-          Pledge is the delivery of goods from one person to another to secure payment of the debt.

SALES AND AGREEMENT TO SELL

The term contract of sale includes both actual sales and agreements to sell.

-          When the property in good is passed from the seller to the buyer , is called contract of sales

-          When the transfer of property in good is to take place in future time or subject to some conditions later to be fulfilled the contract is called agreement to sell.

-          An agreement to sale becomes contract of sale when the time elapse on the conditions are fulfilled subject to which the property in goods is to be transferred.

PARTIES TO A CONTRACT OF SALES

These are person which are involved in the transfer of ownership of goods. The two parties are involved mainly the seller and the buyer.

SELLER: This is the person who gives an offer (OFFER) that he is willing to be bound by that preposition in the event of proper acceptance being made. The offer must be clean complete and final.

BUYER: A person who accept an offer (OFFEREE) that the assets to the terms and conditions expressed in the proposal

The proposal (OFFER) made by the seller to the buyer may be orally or in writing form or broth.

-          The acceptance of the buyer will not be effective until communicated and received by the seller.

-          The acceptance must be  unqualified  and must correspond  to the terms of offer of the seller

TERMS (TERMINOLOGIES)

1.      Property means the right of ownership

2.      Goods means property other than things in action and money

3.      Specific goods means goods identified and agreed  upon at the time the contract of sales  is made

4.      Future goods mean the goods to be produced by the seller after the making of contract.

ELEMENTS/ ESSENTIAL OF A CONTRACT OF SALES

In order the contract of sales of goods to be valid, it should contain the following elements:

i.        Mutual consent for the transaction (or agreement)

Both the seller and the buyer must agree to sell and buy the specified goods on terms and conditions agreed upon

ii.      The subject matter should be “goods” and not money or monetary claims:

Goods include every kind of movable property (other than money) including  stock and shares.

iii.    Intension (transfer of goods):

Parties to a contract should an intension to transfer such goods that should be transferred or agreed to be transferred from the seller to the buyer

iv.    Price (consideration):

There should be a price for the sell and buy of the goods in the form of money and money only should be paid or there should be an agreement to pay the same

v.      Legality and possibility:

The purpose of the contract should not be of sales of goods which are against the public policy and the contract should be possible to perform.

The law will clearly to give effect to the contract of sale of goods which involved legal wrongs

vi.    Capacity to contract (parties to the contract must be competent to contract.)

Is the ability of the parties to perform their obligations, they should be of secured mind and attained the age of majority and they must be a free consent of the parties

A minority (below 18yrs) is not allowed to enter into contract of sale of goods, however the sales of goods act provide that he must pay reasonable for necessaries sold and delivered to him.

vii.   The form of contract.

The contract of sales may be in writing or may be orally or it may be partly in writing and partly by words of mouth.

The procedure of making contract of sales consists of:-

a.       Offer by a seller or a buyer to sell or buy goods.

b.      Acceptance of the offer to buy or sell the goods by the part to whom the offer is made

viii.   Delivery of the goods:

The contract may provide for immediately delivery of goods and also the payment on the spot

-          It may lay down the time limit for the delivery of goods and may  permit installment payment

-          The delivery of goods and payment of the price may be postponed

ix.        The buyer and the seller must be different person:

The contract of sales involves the transfer of ownership, therefore the person cannot buy or sale to him or her self

x.         Existing of goods or future goods:

-          Existing of goods mean those which are in physical possession of the seller as the owner of the goods.

-          Feature goods is meant goods which are to be produced, manufactured or reacquired by a seller subsequent to the making of contract of sale.

SUBJECT MATTER OF THE CONTRACT OF SALES.

Subject matter of the contract of sales includes:-

a.       Methods of sales

b.      Conditions and warranties

c.       Transfer of the properties

d.      Transfer of risk

e.       Right of seller

f.       Rights of un paid seller

g.      Right of the buyer

a.     Methods of sale

In order to lay down concrete terms in the contract of sales regarding the quality of goods and avoid subsequent complaints, the methods of sales such as sale by inspection, sale by description, sale by sample and sales on return basis should be followed.

b.    Conditions and warranties in the contract of sale:

These are different stipulations included in the contract of sale, which affect the legal position of the sellers and buyer with terms which are laid down as the part of agreement.

Such stipulation may pertain to the quality, fitness, or use of the goods or the fixation of price, samples, mode of delivery of goods.

These stipulations differ according to the methods of sale. There are two main broad types of stipulations which are:-

Conditions: is a stipulation essential to the main purposes of the contract, the breach of which gives rise to a right treat to treat the contract as repudiated. It is the fundamental clause going to the heart of contract, and breach gives rise to the right reputation.

Warrant: A warrant is a subsidiary term to the main purpose of the contract; breach of which entitles the innocent party to claim for damages and not right to reject goods. It is running side by side of the main purposes of the contract.

Differences between conditions and warranty

condition	warrant
1.         Its fulfillment is very essential to save the central purpose of a contract.	It is associated with any execution of a contract.
2.         If a condition is not complied with the buyer has an option to abrogate the whole contract by rejecting accept the delivery of the goods	If the warrant is not fulfilled , the buyer can only claim damages as compensation for the breach of the stipulation

IMPLIED CONDITIONS AND WARRANTIES

A conditions as well as warranties may be express or implied. There are five implied conditions and two implied warranties and these serve as important protection to the buyer against the common rule in the sale of goods termed caveat emptor- let the buyer be carefully when acquiring title of the goods.

The implied conditions includes:-

> The seller has the legal title to sell the good

> Goods sold by description correspond to description or any sample presented prior to sale

> Goods sold are reasonably fit for the purposes made known by the buyer when purchasing

  the goods.

>Goods sold must be of merchantable quality having regard to their normal use

>For sale by sample, the bulk commodity sold must be of the same quality as the sample

  and be free from defects.

The implied warranties include:

Ø  The buyer shall have and enjoy quiet possession of the goods purchased

Ø  That the goods supplied are free from any charge in favor of third parties.

c.       Transfer of property and title

The transfer of title is the right to legal ownership which rest only with the present owner of goods who possess a good’s title. The main criterion execution of a contract of sales consists of the transfer of ‘property in goods’ from the seller to the buyer. A sale or agreement to sale means change in the ownership of goods. This shift in the ownership of goods is not the same as actual possession of goods by the buyer. Good may be actually be still with the seller but legally the ownership might have been already transferred to the buyer as per the terms of agreement.

d.    Transfer of risk

The general implications of the contract of sale are that, risk passes along with the property in the goods. In other word as long as the property in the goods is not transferred to the buyer, goods are remain at the seller’s risk. However, they would be at the buyer’s risk, the property on them has been passed on to him even though the right is not delivered to him.

Buyer and seller may provide otherwise regarding the mutual liabilities arising from risk of damage, theft or deterioration.(read example in page 09,  a text book of commerce by MUGALI VOL II)  

e.      Right of a seller

A seller has the following right:

1.      He can require the buyer to take delivery of goods

2.      He can require the buyer to pay the agreed price for the goods

3.      He is bound to give delivery only when the buyer applies for it unless otherwise agreed

f.      Right of unpaid seller :

Un paid seller is the one to whom the buyer has not paid the agreed price for the goods.

A seller becomes unpaid under the following conditions:-

-          When the price is not paid or tendered fully

-          When a bill of exchange or any other similar negotiable instrument has been received as a condition for payment but the instrument is subsequently dishonored.

The right of unpaid seller is divided into two categories which are

1.      Against the goods

2.      Against the buyer in person.

1.      Rights against the goods

a.       When the property in goods has passed on to the buyer, unpaid seller has the following rights:-

Ø   Right of lien on the goods for the price while they are in his possession.

A lien is the right to retain the possession of good of another until the claims are settled. Under the sale of goods act an unpaid seller has right of lien only in respect of the price of goods. When the property in the goods under contract of sales passes on to the buyer of the good, in the eye of law, belong to the buyer, even though they are in possession of the seller; but while these goods are still in the custody of the seller he can retain them with him till the payment of price.

Such a lien arises in the following cases:-

a.       If the goods are sold without any agreements about credit

b.      If the goods have been sold in credit but the terms credit have expired

c.       If the buyer becomes insolvent.

Ø   Right of stoppage of goods in transit

When the goods are more under his possession and are in the process of transit, seller cannot exercise the lien. But he has the right of stopping them in transit before they handled over to the buyer or to the lawful agent and resume their possession until the price is paid.

The seller has the right to stop goods in transit when the following conditions are fulfilled:-

a.       Seller has parted with the possession of the goods

b.      Seller has not received the price

c.       Goods are in the course of transmission to the buyer i.e. they have not been delivered to the buyer or his representative

d.      When the buyer has become insolvent

The right of stoppage in transit is exercised either by the seller taking actual possession of the goods or by the seller giving notes of his claim to the carrier or otherwise holding the goods. When the notes are given to the carrier, the carrier must deliver the goods to the seller.

Ø   Right of resale

After un paid seller after regains the goods under the lien or by stopping them in transit may resale them. But the right to resale is exercisable only on the following conditions:-

-    When the goods are perishable

- When the buyer does not pay the price and the possession of goods is retained or resumed by un paid seller under lien or by right of stoppage in transit.

- When the seller has given notice of his intention to resale the goods if the buyer fails to pay within the reasonable time after the issuance of the notice.

- When the right of resale has been expressly reserved by the seller in the original contract of sale.

Note : > in case of perishable goods there is no need of giving notice of resale.

                  >In the case of non- perishable goods, notice of reasonable time should be given to the buyer before exercising the right of resale.

                    Seller is entitled to claim the damages from the buyer if he suffers loss as a result of resale and is also entitled to retain profits arising from such resale

                    If notice of resale is not given, the unpaid seller is not entitled to return the profits or to claim the damages consequent to the resale.

b.      When the property in the goods has not been transferred

The seller has the right of withholding the delivery of goods

2.      Right against the buyer in person.(remedies of the seller)

The unpaid seller has the following rights against the buyer in person:

Ø  Right to sue for the price : a seller may sue the buyer for the price of goods if the buyer  wrongfully  neglects or refuses to pay the price on agreed date

Ø  Right to sue for the damages: the unpaid seller has right to sue the buyer to claim damages if the buyer wrongly refuses to accept delivery of goods

Ø  Right to sue for interest: the unpaid seller can sue buyer to recover the interest at reasonably rate on total unpaid price from the time it was due until it was actual paid.

these are also called as legal remedies that an unpaid seller can adopt in case of the contract by the buyer.

g.     Remedies (right of the buyer)

a.       A buyer has the right to examine the goods. He cannot be deemed to accept to have accepted them unless he is given opportunity to inspect them.

b.      If the seller delivers to the buyer a wrong quantity of goods (less than that agreed upon) the buyer can reject them. If he accept the goods so delivered, then he shall have to pay for them at agreed rate

c.       If the seller neglect or refuses to deliver the goods to the buyer, the buyer has the right to sue the seller for the damages.

d.      In case of the breach of the warranty, the buyer can plead the damages from the seller. When the breach of condition is treated by the buyer as breach of warranty, then also he can sue the seller for damages.

DISCHARGE OF CONTRACT OF SALES.

When two parties enter into binding agreement, does the contract run on forever? If it does not, when does it end?

Discharge of a contract refers to the time the contract comes to an end and all rights and liabilities of parties becomes extinguished.

Generally a contract may be discharged by the performance, mutual agreement of the parties, impossibilities of the performance, operation of law, or acceptance of breach.

1.   Discharge by performance

A contract is usually discharged by performance of the terms of agreement. In most cases, the parties perform their promises and the contract ceases to exist or is thereby discharged. It happens when both parties of a contract fulfilled their obligations. That the seller had delivered the goods and the buyer had received, accepted and payments are effected to the seller.(read : business law 11^th edition  by Anderson page  239-243 . Books are available in the library)

2.   Discharge by mutual agreement

A contract may be terminated by the operation of one of its provisions or by a subsequent agreement.

The following constitutes discharge by agreement:-

(i)        Provision of original contract.

The contract may provide that it shall terminate upon the happening of a certain event, such as destruction of a particular building, or upon the existence of a certain fact, even though the intended performance by one or both parties has not been completed.

The contract may specify that one party may terminate the contract upon giving notice to the other. A notice to terminate must be clear and definite.                           

(ii)      Rescission by agreement.

The parties to a contract may agree to undo the contract by returning any property or money that had been delivered or paid.

(iii)             Waiver  (A formal written statement of relinquishment)

A term of a contract is discharged by waiver when one party fails to demand performance by the other party or to object when the other party fails to perform according to the term of a contract. Unlike rescission, a waiver does not return the parties to their original position; it leaves the parties where they are at the time.

(iv)     Substitution.

The parties may decide that their contract is not the one they want. They may then replace it with another contract. If they do so, the original contract is discharged by substitution.

It is not necessary that the parties expressly state that they are making a substitution.

(v)       Novation

In a novation, the original contract is discharged by the new contract. When a parties’ liability under a contract is discharged by innovation, that party cannot there after sue to enforce the contract or to recover damages for its breach.

(vi)     Accord and satisfaction

In the respect of the performance of an obligation specified by the contract the parties may agree to a different performance, such agreement is called an accord. When the accord is performed or executed there is an accord and satisfaction which discharge the original obligation. An accord is not binding until the satisfaction is made.

(vii)  Release.

A person who has a contract claim or any other kind of a claim against another may agree to give up or release the claim. This may be done by delivering a writing which states that the claim is released. The release effective to discharge the obligor from the contract obligation.

3.   Discharge by impossibility of performance (by frastuation)

Impossibility of performance refers to external or extrinsic conditions as contracted with the obligor’s personal inability to perform. (read more on business law page 245)

It is where the performance of the contract becomes impossible caused by the inevitable events. The event should not be caused by parties. when the contract was formed  on one which result in the situation to which the parties did not wish.

Such event may be:-

Ø  If the either parties to the contract dies, becomes seriously ill, called for military services.

Ø  The happenings of war in either parties, nation or area

Ø  Change of law: If the governments prohibit the performance of the main object of the contract subsequently becomes illegal.

Ø  Destruction of the subject matter: when the parties contract expressly for or with reference to particular subject matter, the contract is discharged if the subject matter is destroyed through no fault of either party. Example; when a contract calls for the sale of a wheat crop growing on a specific parcel of land, the contract is discharged if the crop is destroyed by blight.

4.   Discharge by operation of law

In certain situations the law provides for discharge of a contract, such as when the contract has been altered, has been destroyed by the obligee is subject to bankruptcy proceedings, or is barred by a statute of limitations.

Under operation of law the following are involved:-

a.       Alteration: A written contract whether under seal or not, may be discharged by alteration .This becomes effective under the following conditions:-

Ø It must be material alteration, that is it must change the nature of obligation

Ø It must be made by the party to contract; because alteration made by a stranger    has have no effect.

Ø It must be made intentionally and not through  accident or mistake

Ø It must be made without the consent of the other party to the contract. For example , when one party to an advertising contract , without the consent of the other party, added  ‘at a monthly payment basis’ thus making the rate of payment higher, the advertiser was discharged from any duty under the contract.

There is no discharge of the contract by alteration when the term added is one which the law would imply, for in such a case the change is not material.

b.      Destruction of the contract: The physical destruction of a written contract may discharge the contract.

When the person entitled to performance under a sealed instrument destroys the writings with the intent to terminate the liability of obligor, the letter’s liability is discharged.

In any case the physical destruction of the writings may be evidence of an intension to discharge the obligation by mutual agreement.

c.       Merge: in some instances, contract rights are merged into or absorbed by a greater right. When an action is brought upon a contract and a judgment is obtained by the plaintiff against the defendant, the contract claim is merged into the obligation under the judgment

d.      Bankruptcy: Most debtors may voluntarily enter into a federal court of bankrupt or be compelled to do so by creditors.   The trustee in bankruptcy then takes position of the debtor’s property and distributes it as far as it will go among the creditors. After this is done, the court grants the debtor a discharge in bankruptcy if it is conclude that, the debtors has  acted  honestly and has not attempted to defraud creditors.

e.       Statutes of limitation(lapse of time): statutes provides that after a certain number of years have passed a contract claim is barred.

f.       Contractual limitation: some contract such as insurance contract, contain a time limitation within which suit may be brought.

A contract may also require that notice of any claim be given within a specified time. A part which fails to give notice within the time specified by the contract is barred from suing thereon and failure to give notice is not excused because it was wrongly believed that there was no any claim about which to give notice.

5.      Discharge by acceptance of breach.

There is a breach of contract whenever one part or both parties fail to perform the contract. A contract is discharged by breach if, when one part breaks the contract, the other party accepts the contract as ended.

BREACH OF CONTRACT AND REMEDIES

When a contract obligation is not performed, it is said that the party who failed to perform as agreed has broken or breached the contract. The other party is given certain legal remedies for such breach.

a.       REMEDIES FOR BREACH OF CONTRACT

What are the Remedies for Breach of Contract?

There are several remedies for breach of contract, such as award of damages, specific performance, rescission, and restitution. In courts of limited jurisdiction, the main remedy is an award of damages. Because specific performance and rescission are equitable remedies that do not fall within the jurisdiction of the magistrate courts, they are not covered in this tutorial.

What Damages Can Be Awarded?

There are two general categories of damages that may be awarded if a breach of contract claim is proved. They are:

1. Compensatory Damages. Compensatory damages (also called “actual damages”) cover the loss the nonbreaking party incurred as a result of the breach of contract. The amount awarded is intended to make good or replace the loss caused by the breach.

There are two kinds of compensatory damages that the nonbreaking party may be entitled to recover:

A. General Damages. General damages cover the loss directly and necessarily incurred by the breach of contract. General damages are the most common type of damages awarded for breaches of contract.

Example: Company A delivered the wrong kind of furniture to Company B. After discovering the mistake later in the day, Company B insisted that Company A pick up the wrong furniture and deliver the right furniture. Company A refused to pick up the furniture and said that it could not supply the right furniture because it was not in stock. Company B successfully sued for breach of contract.

The general damages for this breach could include:

• Refund of any amount Company B had prepaid for the furniture; plus

• Reimbursement of any expense Company B incurred in sending the furniture back to Company A; plus

• payment for any increase in the cost Company B incurred in buying the right furniture, or its nearest equivalent, from another seller.

B. Special Damages. Special damages (also called “consequential damages”) cover any loss incurred by the breach of contract because of special circumstances or conditions that are not ordinarily predictable. These are actual losses caused by the breach, but not in a direct and immediate way. To obtain damages for this type of loss, the nonbreaking party must prove that the breaching party knew of the special circumstances or requirements at the time the contract was made.

Example: In the scenario above, if Company A knew that Company B needed the new furniture on a particular day because its old furniture was going to be carted away the night before, the damages for breach of contract could include all of the damages awarded in the scenario above, plus:

• payment for Company B’s expense in renting furniture until the right furniture arrived.

2. Punitive Damages. Punitive damages (also called “exemplary damages”) are awarded to punish or make an example of a wrongdoer who has acted willfully, maliciously or fraudulently. Unlike compensatory damages that are intended to cover actual loss, punitive damages are intended to punish the wrongdoer for egregious behavior and to deter others from acting in a similar manner. Punitive damages are awarded in addition to compensatory damages.

Punitive damages are rarely awarded for breach of contract. They arise more often in tort cases, to punish deliberate or reckless misconduct that results in personal harm.

(Read more on BUSINESS LAW by Ronald A. Anderson. Page 254)