CONTRACT OF SALES
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 11th 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)
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