Business Law - Unit 2

Mr.T.SOMASUNDARAM
DEPARTMENT OF MANAGEMENT
KRISTU JAYANTI COLLEGE
BENGALURUUnit 2 – Contract Laws 1
UNIT 2 – CONTRACT LAWS

2
INDIAN CONTRACT ACT, 1872
Unit 2 – Contract Laws

UNIT 2: CONTRACT LAWS
Indian Contract Act 1872, Definition of
Contract, Essentials of a Valid Contract (all
essentials need to be explained in great detail),
Classification of Contracts, remedies for breach
of contract.
Indian Sale of Goods Act 1930, Definition of
contract of sale and agreement to sell,
Essentials of contract of sale, conditions and
warranties, Rights and duties of buyer, Rights
of an unpaid seller. 3Unit 2 – Contract Laws

THE INDIAN CONTRACT ACT 1872
Introduction:
 Indian Contract Act came into force on first day of September
1872.
 This act is mainly on English Common Law which is to large
extent made up of judicial precedents.
 These acts relating to negotiable instruments, transfer of
property, sale of goods, partnership, insurance, etc.
Scheme of Act (Scope):
1. Different stages in formation on contract (Sec. 1 to Sec. 75).
2. Contracts of Indemnity and Guarantee (Sec. 124 to Sec. 147).
3. Contracts of Bailment and Pledge (Sec. 148 – Sec. 181).
4. Contracts of Agency (Sec. 182 – Sec. 238).
4Unit 2 – Contract Laws

Objectives of the Act:
 To ensure that the rights and obligations are honoured, that the
expectations created by promises of parties to an agreement are
fulfilled.
 It enables businessmen to plan ahead with the knowledge that
what has been promised to them will be performed by promisors
failing which they will be made to pay compensation for the loss
suffered.
Basic assumptions underlying the act:
1. Subject to certain limiting principles, there shall be freedom of
contract to contracting parties and law shall enforce only what
the parties have agreed to be bound.
2. Expectations created by promises of the parties shall be fulfilled
and their non – fulfillment shall give rise to legal consequences.

THE INDIAN CONTRACT ACT 1872
Definition:
Contract: (Sec.2 h)
“An agreement enforceable by law is a contract. A
contract is an agreement, the object of which is to create a
legal obligation (i.e.) a duly enforceable by law”.
Contract consists of two elements -
a) Agreement:
“As per Sec. 2(e), Every promise and every set of promises,
forming the consideration for each other.”
* Characteristics:
a) at least two persons.
b) both parties to an agreement must agree.
b) Legal obligation: An agreement to become a contract must give
rise to a legal obligation (i.e.) duly enforceable by law.

Promise: (Sec.2 b)
“When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted.
A proposal, when accepted, becomes a promise”.
* Promisor – person making the proposal.
* Promisee – person accepting the proposal.
Reciprocal Promises: (Sec.2 f)
“Promises which form the considerations or part of
consideration for each other are called reciprocal promises”.
Agreement (Sec.2 e):
“Every promise and every set of promises, forming a
consideration for each other, is an agreement”.
Proposal: (Sec.2 a)
“When one person signifies to another his willingness to do
or to abstain from doing anything, with a view to obtaining the
assent of that order to such act is said to make a proposal”. 7

Consideration for Promise:
Steps involved in a Contract:
* Proposal & its communication.
* Acceptance of the proposal & its communication.
* Agreement by mutual promises.
* Performance of contract.
Acceptance must be absolute: (Sec.7)
1. be absolute.
2. be expressed in a usual & reasonable manner.
Promises, Express (or) Implied:
- If acceptance of promise made in words is called express.
- If acceptance is made otherwise than in words called implied.
(Sec.9)
8

Essential elements of a Valid Contract:
- Sec. 10 of Indian Contract Act.
1. Offer and acceptance. 2. Intention to create legal relations.
3. Lawful consideration.
4. Capacity of parties. (Sec.11)
- age of majority & sound mind.
5. Free Consent.
“Consent means that the parties must have agreed upon the
same thing in the same sense”.
6. Lawful object. 7. Writing and Registration.
8. Certainty. (Sec.29)
9. Possibility of performance. (Sec.56)
10. Not expressly declared void. (Sec.24 – 30) 9

1. Offer and Acceptance:
Definition:
“As per Sec. 2a, When one person signifies to another
his willingness to do (or) to abstain from doing anything,
with a view to obtain the assent of the other party to such
act, is said to make a proposal”.
* Person making proposal (or) offer – ‘Promisor’(or)
‘Offerer’
* Person to whom the offer is made – ‘Promisee’ (or)
‘Offeree’ (or) ‘acceptor’
10

Legal rules regarding a Valid Offer:
1. An offer may be ‘express’ (or) ‘Implied’.
2. Intention to create legal relations.
3. Legal consequences.
4. Assent of other party.
5. Offer must be addressed.
6. Terms.
7. Communication.
- in person, oral or writing, by post, by telephone, by
telegram.
8. Invitation for offer is different from legal offer. 11

Acceptance: (Sec.2 b)
“As per Sec.2b, When the person to whom the
proposal is made signifies his assent thereto, the
proposal is said to be accepted”.
* Two elements -
i) offeree should communicate the acceptance to
the offerer.
ii) acceptance should be absolute.
12

Legal rules regarding a Valid Acceptance:
1. Acceptance must be given only by the person to
whom the offer is made.
2. Acceptance must be absolute [Sec.7(1)].
3. Acceptance must be expressed in some usual and
reasonable manner.
4. Acceptance must be given with reasonable period.
5. Acceptance must be given before lapse of the offer.
6. Acceptance cannot be presumed from silence.
13

2. Intention to create Legal relationship:
“When two parties enter into an agreement, their interaction
must be to create legal relationship between them. In the
absence, such intention the agreement cannot be enforced.”
3. Lawful Consideration:
Definition:
“As per Sec.2d, When at the desire of the promisor, the
promisee or any person has done or promises to do, such an act
or promise is called Consideration for promise”.
Components:
- act / promise must be done at desire of promisor.
- it must be done by promisee.
- it have been already executed (or) the process may be still
executory.
- it must done as per law which gives value.
14

Elements:
1. Consideration must move at desire of promisor.
2. Consideration may move from promisee (or) any other person.
- this is called as “Doctrine of Constructive Consideration”
under English Law.
* Some Exception to the privacy rule –
- trust, change on property, settlement.
- family arrangements, acknowledgement.
3. Consideration may be for past, present (or) future act.
* Past consideration [Sec.25(2)] – something done before date of
the arrangement.
(E.g.) ‘A’ is a doctor, ‘B’ is a patient. ‘B’ was brought to A’s clinic,
A rendered his services for ten days. After ten days ‘B’ promised
to compensate ‘A’ for the services rendered to him. It is a past
consideration. ‘A’ can recover the promised amount.
15

* Present consideration – which moves simultaneously with
promise.
* Future consideration – consideration move at future date.
(E.g.) ‘B’ is a bookseller and ‘C’ is publisher, ‘B’ requests C to
deliver some books within a week’s time and the book seller
would pay the amount of the book after one month, C agreed. It
is future consideration.
4. Consideration must be ‘of something’.
* Exceptions to the rule, “No consideration, No Contract”.
i) Agreement made on account of natural love and affection.
- expressed in writing.
- register under law, close relation.
ii) Agreement to compensate for past voluntary service.
iii) Contribution to charities.
16

4. Capacity of the Parties:
Definition:
According to Sec.11, “Every person is competent
to contract who is the age of majority according to
law which is subject to and who is of sound mind”.
* Person is incompetent -
i) if person is minor.
ii) if he is unsound mind.
17

Incapacity:
I) Minor: (Under 18 – minor, completed 18 – major)
* Minor’s agreements.
* No estoppels against a minor.
* Minor’s liability for necessaries.
* Minor & special contract.
a) Minor partner. b) Minor agent.
c) Minor & Insolvency. d) Surety of Minor.
II) Persons of unsound mind: (Sec.11 & 12)
- Idiocy, Lunacy, Drunkenness, Hypnotism, Mental Decay.
III) Disqualified persons:
* Alien enemies. * Convict. * Insolvent.
* Foreign sovereigns & Ambassadors. 18

5. Free Consent:
Definition:
“As per Sec.13, Two or more persons are said to consent
when they agree upon the same thing in same sense”.
Free Consent: (Sec.14)
“Consent is said to be free when it is not caused by –
i) Coercion. ii) undue Influence.
iii) Misrepresentation. iv) Fraud. v) Mistake.
i) Coercion: (Sec.15)
“Coercion is the committing or threatening to commit,
any act forbidden, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter
into an agreement”. 19

ii) Undue Influence: [Sec.16 (1)]
“A contract is said to be induced by undue influence
where –
i) relation subsisting between the parties such that one of the
parties in position to obtain unfair advantage over the other”.
Sec.6 (2) – person is in position to dominate will of another –
a) where he holds a real / apparent authority.
b) where he stands in fiduciary relation to other.
c) where he makes a contract with person whose mental
capacity is temporarily affected.
20

Coercion Vs Undue Influence:
Coercion Undue Influence
- Consent by party obtained - consent of party by
by committing. domination of person.
- Coercion is physical character. - moral character.
- No presumption of coercion - there is presumption due
under any circumstances. to relationships.
iii) Misrepresentation: (Sec.18)
Misrepresentation means –
a) Positive assertion, in manner not warranted by information the
person making it.
b) Breach of duty without intent to deceive.
c) Causing however innocently to make mistake. 21

Essentials:
- must be material facts, must be false.
- must include other party to enter.
- must be addressed by one party.
iv) Fraud: (Sec.17)
“Fraud – any of the acts committed by a party to contract or
with his connivance, by his agent with intent to deceive, to enter
into the contract.
Essential:
1. Person should be active / knowledge.
2. Promise made without intention of performing it.
3. Any other act fit it. 4. Such act declares to be fraudulent.
5. Intentional misrepresentation is also fraud. 22

Fraud Misrepresentation
Consent is not free. Consent of one of party also not
free.
False representation / an
intention to deceive.
False representation / no intention
to deceive.
Voidable contract (i.e.) consent
by fraud.
Voidable contract (i.e.) consent by
misrepresentation.
Intentional statement. Innocent statement.
Party rescind contract but claim
damages.
Cannot claim damages.
False statement made to deceive. Statement without any intention.
Statement doesn’t believe to be true. Believes it to be true.
Excuse can’t be raised. Can’t avoid contract in case of truth. 23

v) Mistake:
“Mistake may be defined as an erroneous belief
concerning something”.
Types:
a) Mistake of Law.
i) Mistake of law of the country:
According to Sec.21, “a contract is not voidable because
it is caused by a mistake of law in force in India.”
(i.e.) when a party enters into a contract, without the
knowledge of the law in the country, the contract is affected
by such mistakes, but it is not void contract.
ii) Mistake of foreign law.
24

b) Mistake of fact:
i) Bilateral Mistake: (Sec.20)
“Both the parties to an agreement are under a mistake
as to a matter of fact essential to the agreement, then it is
void”.
* Conditions – both parties must be under a mistake. (i.e.) the
mistake must be mutual.
- both parties should have misunderstood each other so as to
signify the consent.
(E.g.) ‘A’ having two cars X & Y, offers to sell car X and ‘B’
not knowing that ‘A’ has two cars, thinks of car Y and
agrees to buy it. Here there is no real consent and the
agreement is void. 25

ii) Unilateral Mistake: (Sec.22)
“A contract is not voidable merely because it was
caused by one of the parties to it being under a mistake as
to matter of fact”.
In following cases of unilateral mistake will lead an agreement
to be void -
1. Mistake about identity of parties – mistake as to identity
occurs where one of the parties to contract represents
himself to be some person other than who he really is.
2. Mistake about nature of an agreement – where there is a
mistake with regard to nature of transaction, there cannot be
a contract. 26

6. Lawful Object:
* As per Sec.23, The word ‘Object’ means ‘Purpose’
(or) ‘design’.
* It is necessary that the parties to an agreement must
agree for a lawful object.
* As per Sec.23, the object for an agreement must not
be fraudulent or illegal or opposed to public policy
or injured to person or property of another.
27

The object of an agreement is Unlawful in following cases -
1. If it is forbidden by law. (i.e.) agreements declared as illegal
by law.
2. If it is permitted in such a nature then it affect law or defect
the provisions of law.
3. If it is fraudulent.
4. If it involve / implies injury to person / property of another.
5. If court regards it as immoral. (i.e.) wrong behaviour or
wrong activities or illegal purpose.
6. If court regards it as ‘opposed to public policy’.
28

7. Writing and Registration:
 As per Indian Contract Act, a valid contract must
be in oral or writing and in some special cases, it
must be in writing and registered.
 Arbitration agreement must be in writing as per
Arbitration and Conciliation Act 1996.
 An agreement for a sale of immovable property
must be in writing and registered under Transfer of
Property Act, 1882.
29

8. Certainty:
• As per Sec.29, “Agreements, the meaning of which is
not certain or capable of being made certain, are void
contract or void agreement.
• Valid contract should not give rise to vague or
uncertain agreement.
• It must be possible to ascertain the meaning of
agreement, otherwise it cannot be enforced.
(E.g.) ‘A’ agrees to sell ‘B’, a hundred tons of oil. There is
nothing whatever to show what king of oil was intended.
Thus the agreement is void due to uncertainty. 30

9. Possibility of Performance:
 A valid contract must be capable of performance.
 As per Sec.56, “An Agreement which is impossible
to perform is a void.
10. Not expressly declared void:
 An agreement must not have been expressly
declared to be void under the Act.
 Sec. 24 – 30 specify certain types of agreements that
have been expressly declared to be void.
 (E.g.) agreement in restraint of a trade. 31

CLASSIFICATION OF CONTRACTS
Classification of Contracts:
Contracts may be classified into the following three main
categories -
I) According to enforceability (i.e.) Legal validity:
a) Valid Contract:
As per Sec.10 of Indian Contract Act, a contract which
satisfies all the legal requirements, is known as a valid
contract.
b) Void Agreement:
As per Sec.2(g), “An agreement not enforceable by law
is said to be void”. A void agreement has no legal effect.
(E.g.) An agreement with a minor is void agreement from
the beginning. 32

c) Void contract:
As per Sec.2(i), “A contract which ceases to be
enforceable by law becomes void when it ceases to be
enforceable”.
(E.g.) ‘A’ promised to marry ‘B’. Later on B died. In this case,
the contract becomes void on the death of B.
d) Voidable contract:
As per Sec.2(i), “An agreement which is enforceable by
law at the option of one or more of parties thereon, but not
at the option of other or others, is a voidable contract”.
(i.e.) contract become voidable when consent of one of the
parties is obtained by coercion, undue influence or fraud.33

e) Illegal Agreement:
An agreement is illegal and void if its object of
consideration is –
i) forbidden by law.
ii) if permitted, it would defeat provision of law.
iii) fraudulent & involves any injury or damage to other party.
iv) court regards it is immoral. (Sec.23).
f) Unenforceable contract:
“A contract which is not enforced as per Court of law
because of some formalities to be fulfilled”. (E.g.) contract must
be writing or registered, or properly stamped, or attested, etc. if
such formalities not done, then it is unenforceable contract. 34

II) According to Formation (i.e.) Mode of creation:
a) Express Contract:
As per Sec.9, “the Proposal or acceptance of any promise
is made in words, the promise is said to be express, which
result in express contract”.
(E.g.) ‘A’ writes a letter to ‘B’ that he offers to sell his car for
Rs.60,000 and ‘B’ in reply informs ‘A’ that he accepts the
offer.
b) Implied Contract:
As per Sec.9, “Proposal or acceptance is made otherwise
than in words, the promise is said to be implied”.
35

(E.g.) Mr.X went to a restaurant and took a cup of coffee. In
this, there is an implied contract that he will pay for the cup
of coffee, even though he makes no express promise to do
so.
c) Quasi Contracts:
“Certain obligations which are not in truth contractual
in the sense of resting on agreement, but which the law
treats as if they were”.
(E.g.) ‘A’ is a lunatic and has some property. ‘B’, son of ‘A’
met with an accident. Moved by the pitiable condition of the
boy B, X spends Rs.1000/- for his treatment and medicines.
X can claim this amount from ‘A’. X can also claim this
amount against A’s property.
36

III) According to Performance:
a) Executed contract:
‘When the both parties have completely performed their
respective obligations under a contract, is said to be
Executed Contract’.
b) Executory contract:
‘The obligations of the parties are to be performed at a
later time or both the parties have not performed their
respective obligations under contract, is said to be executory
contract’. (E.g.) Mr.A agrees to sell his bus to B for a certain
amount. Delivery and payment are to be made in the
following months. 37

c) Unilateral contract:
“When One party has to fulfill his obligations, whereas
other party already performed his obligations, such a
contract is called unilateral contract or one sided contract”.
(E.g.) Mr.A has lost his son. He offers by advertisement a
reward of Rs.50,000 to any person who will bring his son
safely home. Mr.B who comes across the advertisement,
finds boy and bring him to A. As soon as B does this act, the
contract comes into existence. Now only A has to fulfill his
part of obligation by paying Rs.50,000 to B, because B had
already performed his part of obligation by finding the boy.
38

d) Bilateral contract:
“When the obligation on part of both the parties to
the contract is outstanding at the time of formation of
contract, is said to be bilateral contract”.
It is similar to executory contracts and are known as
contracts with executory consideration.
(E.g.) Mr.A promised to paint B’s house for a sum of
Rs.500. It is a bilateral contract as there is an exchange
of promise and obligation on both the parties at the time
of formation of contract.
39

Contingent Contract:
Sec.31 defines “A Contingent contract is a
contract to do or not to do something if some event,
collateral to such contract does or doesn’t happen”.
Contingent Contract is a conditional contract its
performance being dependent upon happening or
non – happening of an event.
(E.g.) ‘A’ contracts to pay ‘B’ Rs.10,000 if ‘B’ house is
burnt. This is a contingent contract.
40

Essentials of a Contingent Contract:
1. There must be a valid contract.
2. Performance of contract must depend on happening
or non – happening of some future event.
3. Event must be uncertain.
4. Event must be collateral to the main contract.
5. Event should not be discretion of promisor.
41

Rules regarding enforcement of Contingent Contracts:
(Sec.32 – 36)
1. Contingent Contract dependent on happening of future
uncertain event. (Sec.32)
(E.g.) ‘A’ makes a contract with ‘B’ to buy B’s horse if ‘A’
survives ‘C’. This contract cannot be enforced unless ‘C’
dies in A’s lifetime.
2. Contingent Contract dependent on non happening of
future event.
(E.g.) ‘A’ agrees to pay ‘B’ a sum of money if certain ship
does not return. The ship is sunk and the contract can be
enforced as the return of ship is impossible. 42

3. Event linked with human conduct. (Sec.34)
“If the future event on which a contract is contingent is the
way in which a person will act at an unspecified time, the
event shall be considered to become impossible when such a
person does anything which renders it impossible that he
should so act within any definite time, or otherwise than
under further contingencies.”
(E.g.) ‘A’ agrees to pay sum of money is ‘B’ marries ‘C’. But
‘C’ married ‘D’ and the marriage between ‘C’ and ‘B’
become impossible although ‘C’ can marry ‘B’ after D’s
death.
43

4. Contingent Contract upon happening of a Specified event
within a fixed time. (Sec.35)
“Contingent contract to do or not to do anything if a
specified uncertain event happens within a fixed time,
becomes a void, if at expiration of time fixed, such event
has not happened, or before time fixed, such event becomes
impossible.”
(E.g.) ‘A’ promises to pay ‘B’ a sum of money if a certain ship
returns within a year. Contract may be enforced if the ship
returns within a year and becomes void if ship is sunk
within the year.
44

5. Contingent Contract upon the Non happening of specified
event within a fixed time. (Sec.35)
“Contingent contracts to do or not to do anything if a
specified uncertain event does not happen within a fixed
time may be enforced by law when the time period has
expired.”
(E.g.) ‘A’ promises to pay ‘B’ a sum of money if the ship does
not return within a year. The contract can be enforced if the
ship does not return within a year or destroyed within a
year.
6. Agreements contingent upon impossible event. (Sec.36)
45

Difference between Contingent Contract and Wagering
agreement:
Both contingent contract and wagering agreement are
dependent on uncertain event.
Some of the differences between two are –
1. Mutual promise.
2. Performance.
3. Interest in subject matter.
4. Future event.
5. Validity.
6. Nature. 46

QUASI - CONTRACTS
Meaning:
The term ‘Quasi Contract’ is derived from Roman Law
‘Obligation quasi excontractu’, English law calls them
‘quasi – contracts’ or ‘implied contracts’ or ‘constructive
contracts’.
It has become ‘Certain relations resembling those created by
contracts’ under the Indian Law.
(i.e.) In contracts, there is an agreement between two parties,
where the consent of parties is essential, whereas in quasi
contracts it is not necessary to give consent by parties. In
quasi contracts, the liability exists independent of agreement
and rests upon equity, justice and good conscience. 47

Essential elements:
1. It is imposed by law & not created by operation of a contract.
2. It is strictly available against a person & is not available against
all in the world.
3. The person, who incurs expenses is entitled to receive the money.
Types of Quasi – contracts: (Sec.68 – 72)
1. Necessaries supplied to persons incapable of contracting.
(Sec.68)
2. Reimbursement of person paying money due to another. (Sec.69)
3. Obligation of persons enjoying benefit. (Sec.70)
4. Responsibilities of finder of lost goods. (Sec.71)
5. Liability of persons to whom money is paid. (Sec.72)

Breach of Contract:
Breach of Contract means, if any party to a contract refuses or
fails to perform his part of contract within fixed time or fails to
perform remaining part of contract.
Remedies for Breach of Contract:
The following remedies available for breach of contract -
1. Rescission of the contract:
“When there is a breach of contract by one party, the other
party may rescind the contract and need not perform his part
under the contract.”
(E.g.) ‘A’ had contract with ‘B’ regarding supply of 100 kg of
goods for Rs.8000 on April 15, 2018. If ‘A’ doesn’t supply the
goods on agreed day, ‘B’ need not to pay the amount. In this
case, ‘B’ may treat the contract as rescind and also he can file a
case for rescission and claim damages.

2. Suit for damages.
“Damages are monetary compensation allowed to an
injured party for the loss suffered by him as a result of
breach of contract. The fundamental principle underlying
damages is not punishment but compensation.”
Different kinds of damages:
a) Ordinary damages or General damages or Compensatory
damages: (i.e.) damages arising naturally from a breach.
“When a contract has been broken, injured party can
recover damages from the guilty party, is called ordinary
damages or general damages.”
 This damages may fairly and reasonably considered in
usual course from breach of contract.
50

b) Special damages:
“Special damages are those which arise on account of
the special or unusual circumstances affecting the party.”
 These special damages can be claimed if the special
circumstances which would result in a loss in case of
breach of contract by bringing notice to other party.
(E.g.) There was a book exhibition at Bangalore on June 19.
Publisher handed the books to the carrier and informed him
that the books must reach Bangalore on or before the date of
exhibition. But the carrier delivered the books after exhibition.
Now publisher is entitled to claim compensation as special
damages.

c) Exemplary damages or Vindictive damages:
 These damages are of punishment in nature which is
awarded with a view to punish the guilty party for the
breach.
 It is the cardinal principle of law of damages for a breach of
contract is to compensate the injured party for loss suffered
and to punish the guilty party.
d) Nominal damages:
“Nominal damages are those which are awarded only
for name sake, where injured party has not in fact suffered
any loss, nominal damages are awarded for breach of
contract.”

3. Suit upon Quantum Meruit:
 The phrase ‘Quantum meruit’ literally means ‘as much as is
earned” or “in proportion to the work done’.
 A right to sue upon quantum meruit usually arise when a
part is performance of the contract performed by one party
and there is a breach of contract, or contract is declared as
void or becomes void.
4. Suit for Specific Performance:
 It means the actual carrying out of the contract as agreed.
 Under certain situation, aggrieved party may file a suit for a
specific performance (i.e.) for a decree (judgement) by the
court directing the defendant (person complained against) to
perform the promise that he has made.

Specific performance is not granted in following cases –
i) Where monetary compensation is an adequate relief.
ii) Where the court can’t supervise the actual execution of
contract. (E.g.) a building construction contract.
iii) Where the contract is for personal services.
5. Suit for an Injunction:
 Injunction is an order of a court restraining a person from
doing a particular act.
 A party is in breach of negative term of contract, court issue
injunction, restrain him from doing, what he promised not
to do.
 Injunction is a preventive relief & it is applicable where
damages would not be an adequate relief. 54Unit 2 – Contract Laws

THE SALE OF GOODS ACT, 1930
Introduction:
 Sale of Goods Act came into force on 1st July 1930.
 This provision of act extend to whole of India.
 Contract of sale of goods consideration must be by way of
‘Price’ being the only money consideration.
Definition:
As per Sec.4(1), Sale of Goods Act defines the contract of
sale of goods as “A contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a
price”.
(i.e.) it is a contract whereby a seller transfers the ownership of
goods to the buyer or agrees to transfer it for a price.
Auction Sale:
“Auction sale is a special mode of sale. A sale is made in
open after making a public announcement”. 56

Sale Vs Agreement to Sell:
Sale Agreement to Sell
1. Nature: A sale is an executed
contract.
1. Nature: An agreement to sell is
an executory contract.
2. Transfer of Property: Goods
passes from seller to buyer so that
seller is no longer the owner of
goods sold.
2. Transfer of property: transfer
or property in goods is to take
place at future time or subject to
certain conditions.
3. Risk of loss: If the goods are
destroyed, the loss falls on buyers.
3. Risk of loss: If goods are
destroyed, the loss falls on seller.
4. General and Particular
property: It is against whole
world.
4. General and Particular
property: It is right against
specified person only.
5. Performance: Performance of
a sale is absolute & without any
condition.
5. Performance: Performance is
conditional and is made in future.
57

Sale Vs Agreement to Sell:
58
Sale Agreement to Sell
6. Right of resale: The property is
with the buyer such that the seller can’t
resell the goods.
6. Right of resale: The property in the
goods remains with the seller and he
has right to dispose goods.
7. Insolvency of buyer: If buyer
declared insolvent before making
payment of price of goods, seller in
absence of lien over goods, have to
deliver goods to official receiver and
can claim only ratable dividend.
7. Insolvency of buyer: If the buyer
who is declared insolvent has not paid
the price, seller is not bound to deliver
the goods.
8. Insolvency of seller: If the seller is
declared insolvent, the buyer has to
recover goods from official receiver.
8. Insolvency of seller: The buyer
who has paid the price, can’t claim the
title of goods from seller, if he is
declared insolvent.
9. Consequences of breach: If buyer
wrongfully neglects or refuses to pay
price, the seller can sue for price.
9. Consequences of breach: If buyer
fails to accept goods, the seller can
only sue for only damages and not for
price.

Sales Vs Hire – Purchase:
Sales Hire – purchase
It may be made either orally or in
writing.
It must be in writing.
Ownership of goods is transferred
from seller to buyer.
-Ownership of goods is
transferred from seller to hirer.
Position of buyer is that of owner. Position of hire – purchaser is that
of bailee.
Buyer in a sale can resell the
goods.
Hire – purchaser can’t resell
unless he has paid all installments
of hire purchase.
It is governed by Sale of Goods
Act, 1930.
It is governed by Hire Purchase
Act, 1972.
Seller takes the risk of any loss
resulting from insolvency of
buyer.
Owner takes no such risk, if hirer
fails to pay in installment, owner
has right to take back the goods. 59

Essential characteristics of Contract of Sale:
1. Two parties:
 Two parties should be involved – buyer and seller.
 It is a bilateral contract where the goods has to pass from
one party to another.
 Person’s goods are sold in execution, he himself may buy
goods.
2. Transfer of property:
 ‘Property’ here means ‘Ownership’.
 Seller must either transfer or agree to transfer the sale of
ownership of goods to the buyer.
60

3. Goods:
 As per Sec.2(7), Goods 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 a part of land under contract of sale.
4. Price:
 Consideration of contract of sale must be money
consideration called ‘Price’.
 If goods are sold or exchanged for other goods, transaction
is barter and goods sold partly for goods and partly for
money, the contract is sale of goods.
61

5. All essential element of a valid contract:
 It must be present in a contract of sale like agreement,
free consent, consideration, etc.
6. No formalities to be observed:
 As per Sec.5, sale of goods act doesn’t prescribe any
particular form to constitute a valid contract of sale.
 Contract of sale of goods can be made mere offer and
acceptance.
 Neither payment nor delivery is necessary at time of
making contract of sale.
62

Subject matter of Contract of Sale:
The subject matter in sale of goods act is ‘Goods’. It is
classified (types of goods) into –
1. Existing goods:
“A goods are physically in existence at the time of sales
and in possession of seller, the goods are called ‘Existing
Goods”.
It is classified into -
a) Specific goods – goods identified and agreed upon at time
of making of contract of sale are called specific goods.
(E.g.) If Peter agrees to sell his horse to John, it is a sale of
specific goods.
63

b) Unascertained goods – goods which are not separately
identified at the time of making of contract, are known
unascertained goods.
(E.g.) If Peter agrees to sell to B one bag of sugar out of one
hundred bags lying down in his godown, it is a sale of
unascertained goods because it is not known which bag is to
be delivered.
c) Ascertained goods – as soon as particular bag is separated
from the lot of delivery, it becomes ascertained or specific
goods.
 These types of goods is important in connection with rules
regarding ‘transfer of property’ from seller to buyer. 64

2. Future goods:
“A future goods are goods to be manufactured or
produced or yet to be acquired by a seller.”
 There cannot be a present sale in respect of future goods,
because the property cannot be delivered immediately.
(E.g.) ‘A’ agrees to sell to ‘B’ all the milk that his cow may
yield during the coming year. This is a contract for the sale of
future goods.
3. Contingent goods:
“Though it is a type of future goods, the acquisition by
the seller depends upon a contingency, which may or may
not happen”. 65

Effect of perishing of goods:
‘Perishing’ means not only physical destruction of goods
but it also covers –
i) Damage to goods so that the goods ceased to exist in
commercial sense. (E.g.) cement is spoiled by water and
becomes almost rock-hard, sugar becomes sherbet and
these are unsaleable as cement or sugar.
ii) Loss of goods by theft.
iii) Loss of commercial value.
Performance of contract of sale:
 It implies delivery of goods by seller & acceptance of goods
and payment for them by the buyer.
 The contract deals with the terms like time, place and
manner of delivery of goods, price as per sale of goods act.66

CONDITIONS AND WARRANTIES
Conditions: [Sec.12 (2)]
“A Condition is a stipulation essential to the
main purpose of the contract, the breach of which
gives the aggrieved party a right to repudiate the
contract itself”.
Warranty: [Sec.12 (3)]
“A Warranty is a stipulation collateral to the
main purpose of the contract, the breach of which
gives the aggrieved party a right to sue for damages
only, and not to avoid the contract itself”.
67

Condition and Warranty:
Condition Warranty
1. Stipulation is essential to the
main purpose of contract.
1. Stipulation is subsidiary or
collateral to the main purpose
of contract.
2. Contract of sale can’t
fulfilled unless conditions to it
are fulfilled.
2. It is fulfilled even warranty
is not fulfilled.
3. Breach of condition gives
aggrieved party the right to
repudiate the contract and also
claim damages.
3. Breach of warranty gives the
aggrieved party a right to claim
only for damages.
4. Breach of condition is
treated as breach of warranty.
4. Breach of warranty can’t
treated as Breach of condition.
68

Rights of an Unpaid seller:
An unpaid seller has two rights -
I) Rights of Unpaid seller against goods:
An unpaid seller has following right against the goods –
1. Right of Lien:
“Lien means the right to retain possession of goods and
refuse to deliver them to the buyer until the price due in
respect of them is paid”.
An unpaid seller in possession in goods sold is entitled to
exercise his lien on goods in following cases –
a) where goods sold without any stipulation as to credit.
b) where goods have been sold on credit and term of credit has
expired. 69

c) where buyer becomes insolvent, even though period of
credit may not have yet expired.
 Unpaid seller’s lien is a possessory lien (i.e.) the lien can be
exercised as long as the seller remains in possession of the
goods.
 This right of lien can be exercised only for the non –
payment of the price and not for any other charges.
2. Right of Stoppage of goods in transit:
“The right of stoppage in transit means the right of
stopping the goods while they are in transit to regain the
possession and to retain them till the full price is paid.”
70

Unpaid seller may exercise his right of stoppage in transit
in anyone of the following two ways –
i) By taking actual possession of the goods.
ii) By giving notice of his claim to the carrier or other
bailee who possesses the goods.
3. Right of Resale:
“The right of resale is a valuable right given to an
unpaid seller.”
 This rights only entitle the unpaid seller to retain the
goods until paid by the buyer.
71

Unpaid seller a limited right to resell the goods in following
cases -
a) where goods are of perishable nature.
b) where such a right is expressly reversed in contract in case
the buyer should make a default.
c) where the seller has given notice to buyer of his intention to
resell and the buyer does not pay or tender the price within
a reasonable time.
II) Rights of Unpaid seller against Buyer personally:
Unpaid seller has following rights against buyer personally –
1. Suit for price – when buyer neglects or refuses to pay the
price for goods according to terms of contract, seller is
entitled to sue the byer for price. 72

2. Suit for damages for non acceptance – where buyer
neglects or refuses to accept and pay for the goods, seller
may sue him for damages for non acceptance.
* Suit for special damages & interest. (Sec.61)
“Seller to sue the buyer for ‘special damages’ and
also for such loss ‘which the parties knew, when they
made the contract, to be likely to result from the breach of
it’.
“As per Sec.73, it recognizes an unpaid seller’s right
to get interest at a reasonable rate on the total unpaid
price of goods sold, from time it was due until it is
actually paid. 73

III) Buyer’s rights against the Seller:
The rights available to the buyer have been shown below -
a) Suit for damages for non – delivery (Sec.57) – where seller
wrongfully neglects or reflects to deliver the goods to the buyer,
then the buyer may sue the seller for damages for non – delivery.
b) Suit for specific performance (Sec.58) – in case of breach of
contract to deliver specific goods, court may direct that the
contract shall be performed specifically.
c) Suit for Breach of Warranty (Sec.59) – where there is a breach
of warranty by seller, the buyer is entitled to reject the goods.
Buyer entitled to reject the goods in certain cases like –
i) sue against seller for breach of warranty in extinction of price.
ii) sue the seller for damages for breach of warranty.
74

(E.g.) Peter sold second hand Radio to John who spent Rs.100
on repair of this Radio. This radio was seized by police as it
was a stolen one. John filed a case against Peter for recovery
of damages for breach of warranty including the cost of
repairs. It was held that John was entitled to recover the
same.
d) Right to treat contract as rescinded (Sec.60) – in case or
repudiation of contract by seller before due date or date of
delivery, buyer may treat the contract as subsisting and wait
till date of delivery or he can rescind the contract and sue
for damages for breach.
e) Suit for Interest [Sec.61 (2)] – in case of breach of contract
on part of seller, the buyer may sue seller for interest from
date on which payment was made. 75

Business Law - Unit 2

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Business Law - Unit 2