Contract of Sale of Goods: Formation and Important Clauses

Introduction

The contract for sale is the very basic building unit of business law that deals with transactions, selling and buying of goods. The law governing the sale and purchase of goods in India is The Contract Act, 1872 and The Sale of Goods Act, 1930. The Contract Act, 1872 lays down the foundation for contractual relations and other transactions and transfers are dealt under The Sale of Goods Act, 1930. Any sale of goods is executed under a contract of sale or sale agreement.

What is a Contract of Sale?

According to Section 4(1) of Sale of Goods Act, 1930 ‘A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another’.

In simple terms it is a written contract or formal plus legally enforceable agreement entered into by parties two of whom one is willing to sell the goods and the other is willing to purchase them in return for a specified consideration. It has certain clauses or conditions mentioned according to which the entire sale and purchase is to be governed.

Very often it is also referred to as sale deed, sale agreement, sale’s contract or contract of sale. All of the mentioned terms mean nothing more than a contract under which the selling and buying of goods is to happen for a consideration.

A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by instalments, or that the delivery or payment or both shall be postponed.Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties.[Section 5]

Importance

A contract for sale acts as a legally binding document which throws light on the rights and duties of the parties. It clarifies any confusions and lays down a proper procedure according to which the sale and purchase are to be made.

It erases the chances of miscommunications and provides a legal backup in case of any dispute. If any legal action is required or any contingency arises then this document (i.e. contract) acts as a guiding light.

Essential elements

Following are the essentials for the contract of sale-

Two parties

Contract for sale is a bilateral contract which means that there should be at least two parties involved i.e. a buyer and a seller as it is very obvious that one cannot buy his own goods or can sell them to himself. A ‘buyer’ is a person who buys or agrees to buy goods [Section 2(1)] and a ‘seller’ is a person who sells or agrees to sell goods [Section 2(13)].

For example, Mr. X is a wood merchant and sells wood. He has several customers to whom he sells wood and one amongst them is Ms. Y who is buying 50 wood logs from Mr. X at a cost of 100 INR per log. So, in this case ‘Mr. X is the seller’ and ‘Ms. Y is the buyer’ who is involved in this selling and purchase of wood which will be enforced through a contract.

Goods

For sale there must be goods which will be transferred from the seller to the buyer. 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 part of the land which are agreed to be severed before sale or under the contract of sale [Section 2(7)].

In the example given above the ‘goods’ to be sold is ‘wood logs’.

Consideration or price

Most essential thing for the sale of goods is the consideration or price. It is the amount fixed by the parties for the goods to be bought. It is important to note that the consideration has to be in the form of money and has to be fixed. Although, it can be partly money and partly goods or can be a nominal amount. But, a sale without money is no sale.

If the goods are being supplied without any consideration then it will be classified as a gift. Or, if the goods are bought in exchange of goods then it will be barter and not sale.

The payment can be done in one time or in installments according to the agreement between the parties.

In the given example, the ‘consideration or price’ for the goods (wood) to be paid or given is ‘INR 500 per log’.

Transfer of ownership or delivery of goods

For the completion of sale of goods, the transfer of ownership of the general property of the goods from seller to buyer. General property means absolute ownership of the goods.

In the given example, for completion of sale the ‘transfer of ownership of the wood logs from Mr. X to Ms. Y is necessary’ without which the sale will not be considered complete.

Encompasses both ‘sale’ and ‘agreement to sale’

The ‘contract of sale’ is a generic term and includes both sale and an agreement to sell. The ‘sale’ is an executed or absolute contract whereas ‘an agreement to sell’ is an executory contract and implies a conditional sale.

Other essentials of a valid contract

In addition to the above mentioned elements all the other elements which are necessary for a valid contract are equally essential for the contract of sale also. These essentials are-

Offer
Acceptance
Intention to create legal relation
Free consent
Contractual capacity
Lawful object and consideration
Possibility of performance
Legally enforceable agreement/contract

Prerequisites of a valid sale

There is no proper procedure prescribed by law for the formation of the contract of sale of goods. But, Section 5 of the Sale of goods Act, 1930 lays down some basic guidelines on how the contract will be made and executed. The procedure can be elaborated as follows-

An offer should be made either by the seller to sell the goods or by the buyer to buy the goods on a fixed consideration or price fixed. The offer can be made either in writing, or verbally, or through the conduct.
The offer should be freely accepted by the other party agreeing to all the terms and conditions and for the price offered.
The delivery of the goods should be done so as to ensure the transfer of ownership of general property.
The price of the goods should be paid. The payment should be done according to the agreement.

Important clauses in a contract of sale of goods

There are certain clauses in a contract of sale which are very essential for making it a proper contact from an agreement. Clauses can be listed as follows:

Title

Title basically shows that the document is regarding what matters. It varies according to the nature of the document. For example, for a contract of sale the title will be ‘Contract for the Sale of Goods’ while for a contract for partnership the document will have the title ‘Partnership Agreement’.

Introductory clause

This is just like an introduction that provides the basic details of the document.

Description of parties

This clause contains all the details of the parties involved in the contract which will include their addresses and other details.

Preamble

This is the clause that explains the background and the purpose of entering into the contract.

Description of goods

Under this clause a complete description of goods should be provided which shall include each and every details of the goods. The details to be included are- type, size, quantity, quality, colour, etc.

Price

This clause specifies the price to be paid as a consideration for the goods being purchased. It may also include any other thing related to price. For eg. the payment of taxes or any other duties.

Payment

This clause is about the payment done for the goods which are being purchased. It prescribes the mode of payment: whether it is to be paid in one go or in installments; by what time or during what time the payment is to be done; the date of payment is to be before or after the delivery of goods; etc.

Delivery of goods

The delivery of goods is done or executed through and under this clause. It specifically mentions the mode, time, place, etc for the purpose of the delivery of the goods.

Risk bearing clause

This clause deals with the risk involved in sale and purchase for both the parties. It includes the risk of loss or inspection.

Conditions and Warranties

Condition is sort of pre-requirement on which the contract is formed. Warranty is a sort of promise that the goods supplied will be of the stipulated kind/quality/quantity/others.

Both these clauses play a very vital role any any sale deed as noncompliance of these may have serious effect on the contract.

Obligations of the Parties or Rights and Duties of the parties

This is an important clause concerning the performance of a contract which decides the extent of liability and rights arising out of the contract. This particularly lays down the obligations for the performance of the contract.

Boilerplate/Miscellaneous/General Clause

This clause is added at the end of the contract. These provisions play a vital role because they affect the legal rights under the contract as well as all other clauses.

These boilerplate provisions include:

Rules on how the agreement will be interpreted
Law governing the subject-matter of the contract
Consequences of the invalid provisions in the contract
Whether third parties are deemed to be third party beneficiaries of the agreement
Includes notice provisions, merger provisions, severability clause, waiver provision, etc.

Force Majeure

It addresses all the happenings that are unforeseeable or unavoidable or uncontrollable and how these are to be handled and disputes arising out of such events will be handled.

Jurisdiction

This clause specifies that the dispute(s) arising out of the contract will be admissible to which court. This removes the ambiguity regarding the suit filing and the judicial part.

Severability

Under this clause severability of separability of the agreed contract or transaction is mentioned.

Waiver

This deals with the issue that whether non-insistence on performance of particular contractual provisions imply that the party has waived off its rights.

Notices

This clause prescribes the procedure of giving notices under the contract and their validity.

Termination

This clause mentions how the contract will come to end OR it contains the conditions regarding the condition where one party wants to end the contract before the completion of performance.

Arbitration

This clause sets out the condition where the disputes arising out of the contract are to set out out of the court through the process of arbitration with the help of an arbitrator.

Signatures of the Parties

It is the most important clause that signifies that the contract has assent of both the parties. This means free consent of the parties. Without this clause and signatures under it the contract will not be legally binding and enforceable.

Witnesses

Here, under this clause two persons are asked to sign as witnesses who act as the witness in case the contract is brought into the consideration of court on occurrence of dispute.

Conclusion

A contract is a sine qua non for making a deal legally enforceable and without which the deal provisions will not be binding on the parties to the contract. Also, the clauses here play a very vital role and are to be drafted will be fully conscious as these clauses can affect the deal and rights and duties of the parties associated with the same. Although there exists no specific format of contracts.

Author: Poorva G Chaturvedi,
Modi Law College

Contract of Sale of Goods: Formation and Important Clauses