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CA Foundation Business Laws Study Material Chapter 3 Consideration

WHAT IS CONSIDERATION?

• Consideration is an essential element in a contract. It is the normal ‘badge of enforceability’. Subject to certain exceptions, an agreement is not enforceable unless each party to agreement gets something. This “something” is called consideration. It is also called as “quidpro quo”
• A promise without consideration is called nudum pactum. The law will not enforce a bare promise (nudumpactum) but only a bargain ie. promise supported by consideration.
• According to Pollock “Consideration is the price for which the promise of the other is bought”. Consideration is also defined as the ‘element of exchange in a contract’.
• In the English case, Curie v. Misa (1875) L.R Ex. 153 consideration was defined as “some right, interest, profit or benefit accruing to one party, or some forbearance, detriment loss or responsibility given, suffered or undertaken by the other”. In simple words, consideration is ‘a benefit to one party or a detriment to the other’.
• Section 2(d) of the Contract Act define consideration as follows:
  (a) “When, at the desire of the promisor,
  (b) the promisee or any other person
  (c) has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something,
  (d) such act or abstinence or promise is called a consideration for the promise. ”

ESSENTIALS OF VALID CONSIDERATION

1. Consideration must move at the desire of the promisor
The act or abstinence must be done at the desire of the promisor. If it is done at the instance of a third party or without the desire of the promisor, it is no consideration. In Durgaprasad v. Baldev 1880 3 ALL 221, the plaintiff, baldev, at the desire and request of the collector of the town expanded money in the construction of a market in the town. Subsequently the de-fendants, Durgaprasad & ors. Occupied the shops in the market. Since the plaintiff had spent money for the construction of the market, the defendants in consideration thereof, promised to pay to plaintiff, a commission on the articles sold through their (defendants) shops in that market. Defendants however, failed to pay the promised commission, the plaintiff brought an action to recover the promised commission. It was held that they were not bound to pay as it was without consideration and hence void)

However, consideration need not be to the benefit of the promisor. In Kedarnath v. Gorie Mohamed (1886) ILR 14 Cal 64, on the strength of the promise of the defendant to give donation the plaintiff started the construction of town hall. It was held that the defendant was liable to pay as the construction work started by the plaintiff was done at the desire of the defendant (the promisor) so to constitute consideration. However, if the plaintiff that is promisee did not incurred any liability on the promise of the donation then the defendant is not liable (Abdul Aziz v. Masum Ali, 1914).

2. Consideration may move from the promisee or any other person
Consideration may be supplied by the promisee or any other person. But the stranger to the consideration will be able to sue only if he is a party to the contract. The leading case is of Madras High Court in Chinnaya v. Ramaya (1882) 4 Mad 137.
An old lady (A) had a highly valued estate. She made a contract with her daughter (R) that the whole of the property shall be gifted to R if R agrees to pay annuity to C (C was the sister of A). R made a contract with C agreeing to pay C annuities. After the death of A, R stopped the payment of annuities on the ground that no consideration had passed from C to R and therefore agreement between C and R was void. The Court held that the consideration had been furnished to R (since the property was gifted to R at the desire of R). It was immaterial that A had furnished this consideration. As long as there is consideration in a contract, it is immaterial as to who has given this consideration.

3. Consideration may be an act or abstinence
A person may promise to do something or not to do something for a promise. To do or not to do something in return is consideration. If A promises to give Rs. 10,000 to B, if B stops smoking, it will be a good consideration.

4. Consideration may be past, present or future
When the consideration of one party was given before the date of the promise, it is said to be past. Past consideration means the consideration for a promise given by a party before the promise is made. It is the consideration given earlier by a party and the promise is made thereafter. Such a consideration given by a party must be at the desire of the promisor. Past voluntary services rendered by a party cannot be said to be the past consideration.
Example: A requests B to search out his lost cow. B searched out and deliver the cow to A. thereafter A promises to pay B Rs. 500 as a reward. Here, the efforts to B at the request of A constitutes a valid past consideration for the promise by A to pay 1500 to B. The consideration by B was given before the promise to pay is made by A.

Consideration which moves simultaneously with the promise is called present or executed consideration. Cash sales are good examples of present or executed consideration. The seller delivers the articles sold and the buyer simultaneously pays the price of them.
When the consideration is to move at a future date, it is called future or executory consideration.
Example: X promise to deliver to Y certain electric appliances as soon as he receives them from the wholeseller at Bombay and Y promises to pay Rs. 5,000 against the delivery of the articles. Here is future consideration which is to be performed by both the parties when supplies are received from Bombay.

5. Consideration need not he adequate
Consideration need not be adequate nor equivalent to promise.
Illustration: A agrees to sell his horse worth Rs. 1,000 for Rs. 10 only. The consideration is valid though inadequate, as there is something of value to be given by the buyer (Attached to Sec. 25).
However, Sec. 25 (Explanation 2) provides that inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.

6. Consideration must be real and not illusory
Consideration must be real or of some value in the eyes of law. It should not be physically impossible or illegal or illusory for e.g. to make a dead man alive.
Instances of good consideration:

1. Forbearance to sue;
2. Compromise of disputed claims
3. Composition with creditors
4. To avoid disputes in future

7.Consideration must be lawful
Consideration given for an agreement must be lawful one. Consideration must not be illegal, immoral or opposed to public policy.

8. Consideration must not be a pre-existing obligation or duty.
Consideration must not be something, which a person is already bound by law to do. Discharging of pre-existing obligation is no consideration. A person may be bound to do something by law, e.g. to give evidence when called by the Courts. Performance of a legal obligation is no consideration for a promise and therefore the witness cannot demand money to give evidence.

‘NO CONSIDERATION NO CONTRACT’ – EXCEPTIONS TO THE RULE

The general rule is “an agreement made without consideration is void” (Opening words of Sec. 25).
Thus where A promises, for no consideration, to give to B Rs. 1000 this is a void agreement.
However, sec. 25 also mentions some exceptions to the general rule. These exceptions are given below:

A. Agreement made on account of natural love and affection [sec. 25(1)]
An agreement made without consideration is enforceable if it is

1. made on account of natural love and affection,
2. between parties standing in a near relation to each other,
   expressed in writing, and
3. registered under the law.

In Rajlakhi Debi v. Bhootnath Mukerjee case (1900) 4 Cal WN 488, a husband promised to pay to his wife, after constant quarrels between them, a fixed monthly amount for her maintenance and separate residence without any consideration. The promise was in writing and registered. When he refused to pay, the wife filed a case. She was not allowed anything by court on the ground that the j exception was not applicable as there was no natural love left between them.

B. Agreement to compensate for past voluntary service [sec. 25(2) ]
A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. The following two situations are covered by this section:
(A) Voluntary Services:
When there is a voluntary act by one party and there is a subsequent promise to pay compensation to the former. E.g. A finds B’s purse. B promises to give him Rs. 500 this promise is enforceable.
(B) Legally Compellable Duty:
Another situation covered by the exception is where the promisee has done something for the promisor, “which the promisor was legally compellable to do”.
A subsequent promise to pay for such an act is enforceable. E.g. T supports the son of E F promises to pay the expenses to T. Here T has done something, which the promisor was legally bound to do. This is a valid contract.

C. Agreement to pay a time-barred debt [sec. 25(3)]
Where there is an agreement,

1. made in writing and
2. signed by the debtor, or by his authorised agent,
3. to pay wholly or in part a debt barred by the law of limitation, the agreement is valid even though it is not supported by any consideration.

A time barred debt is one which remains unpaid or unclaimed for a period of 3 years, hence it can-not be recovered under the Indian Limitation Act and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception.

D. Completed Gift
Gift is transfer of property without consideration. In order to be valid a gift does not require consideration. As per Explanation 1 to section 25, gifts given by donor to donee are valid. Once a gift has been actually given, the donor cannot demand it back on the ground that there was no consideration.
Promise for a donation is not a gift. As such a promise for a donation is invalid for want of consid-eration.

E. Contract of Agency
Sec. 185 of the Contract Act lays down that no consideration is necessary to create an agency.

F. Bailment
Sec. 148 of the Contract Act lays down that no consideration is necessary in case of a gratuitous bailment.

G. Remission.
Sec. 63 of the Contract Act lays down that where a person agrees to receive less than what is due to him, such an agreement is said to be an agreement of remission. No consideration is required for a contract of remission.

H. Guarantee
Sec. 127 of the Contract Act lays down that under the contract of guarantee, no consideration is received by the surety, even then the contract of guarantee is valid.

I. Charity
If the promise undertakes the liability on the promise of the person to contribute to charity, there the contract shall be valid as held in Kedarnath v. Gorie Mohammad.

CAN A PERSON WHO IS NOT A PARTY TO A CONTRACT SUE UPON IT?

The doctrine of Privity of Contract: According to the doctrine of privity of contract only a party to a contract is entitled to enforce a right created by the contract. No one is entitled to or bound by the terms of a contract to which he is not an original party. A third party (stranger to contract) has no locus standi in a contract, he is debarred from interfering with the contractual rights or obligations of the parties. Only a person who is a party to a contract can sue on it. The doctrine of privity of contract prevent imposition of contractual obligations upon a person without his consent.
D bought tyres from Dunlop Rubber Co. and sold them to S, a sub-dealer, who agreed with D not to sell below Dunlop’s list price and to pay to Dunlop co. $ 5 as damages on every tyre he undersells. S sold two tyres at less that the list price, and thereupon, the Dunlop co. sued him for the breach. Will the Dunlop Co. succeed?
No. Dunlop Co. cannot claim the benefit of the contract as against S, a sub-dealer. There is no privicy of contract between the two.

Difference between the right of a stranger to a contract and of a stranger to the consideration.
A stranger to a contract, Le., one who is not a party to it, cannot file a suit to enforce it. A contract between P and Q cannot be enforced by R. But a stranger to the consideration can sue to enforce it provided that he is a party to the contract. A contract between P, Q and R whereby P pays money to Q for delivering goods to R can be enforced by R although he did not pay any part of the con-sideration.
Upon A’s marriage his father and father-in-law entered into a contract to contribute a certain sum of money to be given to A after his marriage. A’s father paid his contribution but his father-in-law failed to pay. Held: A could not sue his father-in-law since he (A) was a stranger to the contract [Tweddle v. Atkinson (1861) 1 B. & S. 393],

Exceptions – There are certain exceptions to the rule that a stranger to the contract cannot sue upon it.
They are as follows:
1. Beneficiaries in the case of trust
An agreement to create a trust can be enforced by the beneficiary (though he was not a party to the contract between the settlor and the trustee). S agrees to transfer certain properties to T to be held by T in trust for the benefit of B. B can enforce the agreement though he was not a party to the agreement.
In Khwaja Muhammad v. Hussaini Begum (1910) 32 ALL 410, A and B made an agreement that A’s son S, and B’s daughter D, would be married, both being minors at the time. In con-sideration of this marriage, A promised to B that he will give to D, his daughter-in-law, an amount in perpetuity as, what is a traditional payment, ‘kharcha-e-paan daan’. He even made his immovable property liable for the payment. After the marriage, S and D separated on ac-count of some quarrel. D filed a case against A for the recovery of the promised amount.
In spite of A’s argument that D was a stranger to his contract with B, court allowed D to recover the amount because A had specifically charged his immovable property for the liability. This charge did not amount to creation of a trust, but the seriousness of the situation was found to be similar to that of the trust.

2. Family settlement
When family disputes are settled by mutual agreement and the terms of settlement are writ¬ten down in a document it is called a Family Settlement. Such agreements can be enforced by members of the family who were not originally parties to the settlement.

3. Assignee of contract
In case of assignment of a contract, when the benefit under a contract has been assigned, the assignee can enforce the contract for e.g., S sell goods to B and is entitled to receive the price. S may by giving notice to B assign his right to receive the price in favour of third party X. X, the assignee, may then sue B for the price of goods. The assignee of an insurance policy can sue even though he was not party to it.

4. Provision for marriage or maintenance.
At the time of partition of property of a joint family, the male members may agree that a certain portion of property shall be kept aside for the benefit of, for example, some elderly person or the education and marriage of a female child. Such beneficiaries may not be party to the arrangement. But, they have been held entitled to enforce the agreement for their benefit (Sundararaja v. Lakshmi Ammal( 1914) 38 Mad 788).

5. Contracts entered into through an agent
The principal can enforce the contracts entered into by his agent provided the agent acts within the scope of his authority and in the name of the principal.

6. Acknowledgement
The person who becomes an agent of third party by acknowledgement or otherwise, can be sued by such third party. (If the promisor acknowledges his liability to the third person, then such a third person can file a suit to recover the benefit.)
Example: X gives to Y Rs. 5,000 again to be given to Z. Y informs Z that the holding the money for him. Later on, Y refuses to pay the money. Z is entitled to recover the money from Y (Lily v. Hays, 1886, HIER 1272).

7. Covenants attached with the land
In case of covenant running with the land, the person who purchases land with the notice that the owner of the land is bound by certain duties affecting the land, the covenant affecting the land may be enforced by the successor of the seller.

MULTIPLE CHOICE QUESTIONS:

1. If there is no consideration, then
(a) The agreement is void
(b) The agreement is valid
(c) The agreement is illegal
(d) The agreement is voidable

2. A valid consideration has the following essential elements :
(a) It must move at the desire of the promisor
(b) Consideration may be supplied by the promisee or any other person
( c) Consideration may be past, present or future
(d) All the above

3. The latin term “quidpro quo” refers to :
(a) Something in return
(b) Stranger to consideration
(c) Something sensible
(d) Something valuable

4. A promise to pay a time-barred debt must be :
(a) Oral
(b) Written and signed
(c) Registered
(d) Written and registered

5. A stranger to a consideration
(a) Can file a suit
(b) Cannot file a suit
(c) Can file, only with consent of court
(d) Is similar to stranger to a contract

6. A stranger to a contract
(a) Can file a suit
( b) Can file a suit only with permission of court
(c) Can file a suit, if contract is in writing
(d) Cannot file a suit

7. An agreement not supported by consideration is called :
(a) Consensus ad idem
(b) Ignoratia juris non execuset
(c) Ab initio
(d) Nudum Pactum

8. Past consideration means
(a) Money received in the past without making even a proposal
( b) The price which is more than the promisee’s expectation
(c) A past act done before the promise is made
(d) None of the above

9. In India, a person who is stranger to the consideration
(a) Can sue on the contract, if he is a party
(b) Cannot sue the contract
(c) Depends on the parties
(d) Depends on the circumstances

10. A promise to pay a time barred debt is enforceable, if some conditions are fulfilled. Which of the following conditions is not required?
(a) It must be signed by the promisor
(b) It must be definite and express
(c) It must be in writing
(d) It must be registered

11. X promised Y, a priest, to pay Rs. 10,000 as charity. The priest on X’s promise incurred certain liabilities towards the repairing of the temple to the extent of Rs. 7,500. Y, the priest, can recover from X
(a) Rs. 10,000
(b) Rs. 7,500
(c) Nothing
(d) Rs. 7,500 plus damages

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Inadequacy of consideration does not affect the validity of a contract.
2. A stranger to the contract can enforce the contract.
3. Consideration need not be material and may even be abstract.
4. Consideration must move simultaneously with promise.
5. A stranger to the consideration can enforce the contract.
6. Forbearance to sue or compromising disputed claim is no good consideration.
7. Consideration is essential for the validity of a contract in all cases.
8. Adequacy of consideration is essential for validity of a contract.
9. No consideration is required to create agency.
10. Past consideration is no consideration
11. According to the doctrine of “Privicy of contract”, a stranger to a contract, if he is beneficiary cannot enforce the contract.
12. Inadequacy of consideration cannot be taken into account by the court in determining whether the consent was given freely.
13. The manufacture of goods can enforce conditions imposed upon the dealer against the sub-dealer.
14. In the Indian Law, consideration must move from the promise only.
15. In discharge of the whole claim, a party to the contract agrees to accept a lesser amount than due, from the other party is a valid contract inspite of inadequate consideration.
16. Consideration may move even from a person who is not a party to the contract.
17. A promise to pay a time barred debt is not enforceable.

Answers:

CA Foundation Business Laws Study Material Chapter 2 Offer and Acceptance

INTRODUCTION

The offer or proposal is the starting point in the formation of a contract. The parties through negotiation & bargaining may strike a deal resulting into acceptance of offer, thereby creating a contract.
However in the modern times, due to enormous increase in the commercial transactions, ‘standard form’ of contracts is used. For example, the insurance company prints the terms of insurance contract in advance on a standard form and the insured person has to simply sign on the dotted lines indicating his acceptance. These terms are not open for discussions or bargaining and the other party has to either ‘take it or leave it’.
Such standard forms of contract containing the various conditions and terms are also called as ‘adhesive contracts’. These contracts have become the order of the day.

WHAT IS AN OFFER?

The Indian Contract Act uses the term proposal, instead of offer. However the words proposal and offer are synonymous and are used interchangeably. Section 2(a) of the Indian Contract Act defines a proposal as:

“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 other to such act or abstinence he is said to make a proposal”.

The definition of proposal has two elements:

1.  It must be an expression/declaration of the willingness to do or to abstain from doing something. For example, A says to B, will you buy my car for Rs. 2 lakh? This is a declaration j to sell the car.
2. This declaration is made with a view to obtain the assent of the other person to such act or abstinence. Thus a casual statement that “I may sell my Maruti car if I can get Rs. two lakh for it” is not a proposal, because this expression is not made with a view to obtain assent of the other person.

The person who makes the offer is called the ‘offeror’or ‘promisor’and the person to whom the offer is made is called the ‘offeree’or ‘promisee’. [Sec. 2(c).]

Illustration – The case of Harveyv. Facey( 1893, AC 552) illustrates nicely the concept of offer. Harvey sent a telegram to Facey “Will you sell us your Bumper Hall Pen? Telegraph lowest cash price”. Facey replied also by telegram, “Lowest price for Bumper Hall Pen pound 900”. Harvey immediately sent second telegram “We agree to buy Bumper Hall Pen for the sum of pound 900 asked by you”. There was no reply from Facey.
Hence, there was no concluded contract between Harvey and Facey. In the first telegram, Harvey asked two questions, first as to willingness to sell and second as to the lowest price. Facey answered only the second question and gave the lowest price. He reserved his answer to the willingness to sell. Thus he made no offer. The second telegram sent by Harvey was an offer to buy, but that was never accepted by Facey. Mere statement of lowest price at which the vendor would sell contains no implied promise to sell at that price to the person making the enquiry.

(A) Legal Rules Regarding Offer
1. An offer may be express or implied
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states, “In so far as the proposal or acceptance of any promise is made in words the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.
Examples:

• When MSRTC bus runs on specific routes there is an implied offer to carry passengers for a certain fare.
• A weighing machine at the railway station is an implied offer to use the machine by inserting the requisite coin. A person who inserts the coin accepts the offer.

2. An offer may be specific or general
When an offer is made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer. When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.
Examples:

• A advertises that whosoever finds and brings his lost briefcase to him shall be paid Rs. 500; it is a general offer and when B finds out the briefcase and brings it to A, it amounts to acceptance of the offer by B.
• The Carbolic Smoke Ball Co., issued an advertisement in which the Company offered to pay pound 100 to any person who contracts influenza, after having used their smoke balls three times daily for two weeks, according to the printed direction. Mrs. Carlill, on the faith of the advertisement, bought and used the balls according to the directions, but nevertheless suffered from influenza. She sued the company for the promised reward. The company was held liable. [Carlill v. Carbolic Smoke Ball Co., (1893) 10 B 256]

3. An offer must be made with a view to create legal relationship
If the offer is made to create only a social or moral obligation, the obligation shall not be legally binding. Mere invitation to dinner is no offer. An offer to go to a picnic or an offer by a father to give a mobile to his son on passing’ C.A. foundation exams are the examples where there is no intention to create legal relationship.

4. Offer must be distinguished from an invitation to offer
Invitation to offer or invitation to treat means supply of information so that the negotiations can start and the other person can be moved to make an offer. It is an indication that the inviter is willing to enter into negotiations but is not yet prepared to be bound. A response to invitation to treat does not lead to an agreement. In fact it generates an offer.
Preliminary negotiations, or expressions of interest will be regarded as invitations to treat, rather than as offers. Thus, a sales person issuing a catalogue or price list informs the customers about the available products and their prices, makes an invitation to offer. Any per¬son desiring to buy any of those products will be making an offer, which may or may not be accepted.
The distinction between an offer and an invitation to offer depends upon the intention of the parties and this must be judged objectively.

OFFER	INVITATION TO OFFER
An offer is an indication by one person that he is prepared to enter into contract on certain terms.	An invitation to offer is a statement made by a person with a view to elicit response and to negotiate a deal, without expressing final willingness to contract.
When an offer is accepted it becomes a promise.	An invitation to offer, when responded generates an offer.

Examples:

• Catalogue of goods is not offer, but only an invitation for offer; so also statement of lowest price in answer to enquiry.
• Display of goods with price tags in a self-service shop is merely an invitation to offer, and when a customer picks up those goods and intends to buy them that amounts to an offer. The shop-keeper is free not to accept that offer.
• A letter from a prospective buyer asking for quotations from a merchant is an invitation for an offer.
• A tender notice does not amount to an offer; it is merely an invitation to contractors for making offers. An advertisement calling for tenders, therefore, is not a proposal within the meaning of the Contract Act. It only invites a proposal It is the submission of a tender which is in the nature of a proposal or an offer.
• A prospectus issued by a company to purchase its shares or debentures is an invitation to offer. Application for the shares amounts to offer to the company. Allotment of shares by the company amounts to acceptance of the offer.
• A menu card in a hotel is an invitation to offer. When the order for eatables is placed it amounts to offer.
• Newspaper advertisements are generally not offers. Thus a newspaper advertisement inviting applications for jobs is not an offer but an invitation to offer. However the newspaper advertisement may be drafted in such a way that they may constitute offer. For example an offer for reward published in a newspaper may constitute an offer and any person who performs the required act accepts the offer and creates an agreement.
• An advertisement inviting intending buyers of goods to come and make bids at the auction is merely invitation to offer. Each bid is an offer, and when a bid is accepted that amounts to acceptance of the offer and results in an agreement.
• A Railway time table is not an offer. The Railway time table usually contains a notice “Railways gives notice that they do not undertake that the trains will arrive at the time specified in the time tables nor will they be accountable for any loss, inconvenience or injury that may arise from the delays or detentions”.

5. An offer must be communicated to the offeree
There can be no acceptance of an offer until the communication of the offer has been made to the offeree.
Example:

• G’s nephew was missing from home. He sent his servant L in search of his nephew. After his servant had left, he announced a reward for anybody who would trace his nephew, L traced the nephew without knowing the announcement of the reward. When he came to know of the reward he claimed it. It was held that he could not recover the reward as the offer containing the reward was not communicated to him. (Lalmatt Shukla v. Gauri Dutt. 11 All j 489).

6. The terms of offer must be certain
The terms of the offer must be certain or capable of being made certain. They should not be vague or ambiguous. For example, A says to B “I will give you a reasonable price if you sell the car”. This is not an offer since it is vague. According to sec. 29, agreements the meaning of which is uncertain are void.

7. An offer may be conditional
An offer may be subject to terms and conditions. In such cases
(a) the conditions must be clearly communicated to the offeree,
(b) the conditions must be reasonable.
Examples:

• A landlord’s offer to rent his house only to a vegetarian family is a conditional offer.
• X delivered one new sari to a laundry for washing. On the back of the printed receipt it was stated that the customer would be entitle to recover only 15% of the market-price of the article in case of loss. The sari was lost owing to the negligence of the laundry. In a suit by X it was held that the term was unreasonable. Such a term would give a premium on dishonesty and is against the public interest. Lily White v. R. Munnuswami. AIR (1966) Mad 13.

8. An offer must not be “negative” in terms
An offer should not contain a term, the non-compliance of which would amount to acceptance. For example. X writes to Y “I shall buy your house for Rs. 20 lakh. If you do not reply I shall assume that you have accepted my offer” This is not a valid offer.

9. Two identical cross offers do not make a contract.
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

• E.g. X, by a letter, offers to sell his car to Y for Rs. one lakh. Y, by a letter, which crosses, X’s letter in the post, offers to buy it for Rs. one lakh. The offers are cross offers and no binding contract will arise. A contract can arise only when acceptance is given after
  the knowledge of the offer.

(B) Kinds of Offer
1. Express or implied Offer:
When the offer is made in words, it is said to be express. An implied offer is one which is inferred from the act or conduct of the party or from the circumstances of the case. Sec. 9 states. “Insofar as the proposal or acceptance of any promise is made in words the promise is said to be express. Insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”.

2. Specific or general Offer:
When an offer is’ made to a specific person or a group of specific persons (for example an offer to doctors), is called a specific offer: When the offer is addressed to public at large, it is called a general offer. A specific offer can be accepted by the specific person only, while a general offer can be accepted by any member of the general public.

3. Standing offer:
A standing offer is a continuous offer. It consists of an offer to supply goods as and when required during a certain period for a certain price. It usually takes the form of a tender. It creates a contract only when an order of specified quantity is given to the tenderer. Thus each order placed creates a separate contract. A Ltd. gives a standing offer to supply cement to Public Works Department (PWD) at Rs. 130 per cement bag for the period of one year with a minimum quantity of 1 lakh bags. This is a standing offer. PWD can place order anytime during the year and purchase cement for Rs. 130 per bag but they will have to buy minimum 1 lakh bags of cement.

4. Cross Offer:
When two persons make an offer to each other on similar terms, without having the knowledge of the offer being made by the other side, it is known as cross offer. Such cross offer does not amount to acceptance of one’s offer by the other and therefore does not constitute a contract.

5. Counter Offer:
It is necessary that the acceptance must match the offer. It must be a mirror image of the offer. If any alteration is made, or anything added, then this will be a counter offer, and will terminate the offer. A counter offer is an implied rejection of original offer. [Union of India v. Bahulal AIR 1968 Bombay 294]

Standard form of contracts:
In the modern times due to ever-increasing growth in trade & commerce, contracts are concluded in standardized forms. Organisation like LIC, GIC, Railways enter into thousands of contracts every day. It is not possible for them to draft separate contracts with every individual. They issue printed forms of contract, which contains a large number of terms and conditions in “fine print” which restrict and often exclude liability under the contract. The individual is bound to sign them whether he likes the terms or not. They are for him to take or leave, he cannot alter those terms or even discuss them. Previously the offerees of such printed forms were helpless against such giant organisations which availed the opportunity to exploit the weak individuals by imposing onerous terms upon them. However in the recent times, in order to protect the oppressed individuals the courts have evolved various modes of protection. In fact in England. The (English)Unfair Contract Terms Act, 1977 was enacted to protect the individuals from unreasonable terms in the printed contracts.

WHAT IS AN ACCEPTANCE?

A contract emerges from the acceptance of an offer. Section 2(b) states that “A proposal when accepted becomes a promise” and defines ‘acceptance’ as “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.” Acceptance converts the offer into a promise and then it is too late to remove it. Acceptance is to offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone.

(A) Legal rules regarding a valid acceptance
1. Acceptance must be absolute and unqualified [Sec. 7(1)]
A conditional or a qualified acceptance is no acceptance at all. There should be 100% acceptance of the terms of the offer. The acceptance must match with the offer. It should be a mirror image of the offer. An acceptance with a variation is no acceptance but is a mere counter proposal, which the original offer or may accept or not.
Merret offered to sell his land to Neale for 280 pounds. Neale accepted the offer and enclosed a cheque for 80 pounds only and promised to pay the balance 200 pounds by monthly instalments of 50 pounds each. Held there was no acceptance. [Neale v. Merret (1930) W.N. 189]

2. Acceptance must be given only by the person to whom the offer is made
In the case of specific offer, it can be accepted only by that person to whom it is made. (Boulton v. Jones (1857) ER 232). In the case of a general offer, it can be accepted by any one by complying with the terms of the offer {Carlill v. Carbolic Smoke Ball Co. (1893)}

3. Acceptance may be expressed or given by conduct.
Acceptance may be expressed in words, spoken or written or it may be implied by conduct.

4. Acceptance must be expressed in some usual and reasonable manner. [Sec. 7(2)]
(a) Acceptance in a prescribed manner. If the offeror prescribes a particular method or type of acceptance, it should be given in that manner. Ex: If the offeror insists that acceptance should be given by telegram, then that method should be followed.
(b) Acceptance in usual and reasonable rpannenli the offeror does not prescribe any particular method of acceptance in that case according to sec. 7(2), the acceptance must be expressed in some usual and reasonable manner.
(c) Consequences of not following the prescribed manner. If the offeree fails to follow the prescribed mode of acceptance, the offeror may accept or reject such acceptance. If the offeror wants to reject it, he must inform the acceptor within a reasonable time that he is not bound by acceptance because it is not in the prescribed manner. If he does not inform the offeree, he is deemed to have accepted the acceptance although it is not in the desired manner. For example; X offers to buy house from Y at a certain price asks Y to send a telegram, if he accepts Y writes a letter accepting the offer. X may insist on a telegram from Y; but if X does not insist, the acceptance is valid.

5. Acceptance must be communicated by the acceptor.
Acceptance is not complete unless and until it is communicated to the offeror (Pawell v. Lee, 1908). Mental acceptance is no acceptance. But the party entitled to get the communication of acceptance can waive that right expressly or impliedly. In the case of unilateral contracts such waiver can generally be assumed. For e.g. a reward for finding a lost bag. If the agreement is signed and kept in the drawer instead of sending it to the other party then there is no acceptance (Brogden v. Metropolitan Railway Co.)
When communication of acceptance not necessary? (Exceptions to the rule that acceptance must be communicated.)
Acceptance can be by conduct. Where an offer takes the form of a promise to pay money in return for an act, the performance of that act will constitute acceptance. For example when a trader sends goods on receiving an order from a customer it is a case of acceptance by conduct. Sec. 8 provides that “performance of the conditions of a proposal is an acceptance of the proposal Similarly the acceptance of any consideration for a reciprocal promise is also an acceptance of the proposal ”

Thus communication of acceptance is not necessary in the following cases: (i.e., acceptance is implied)

1. By performance of conditions:!! the offeree merely performs the conditions of an offer, he will be taken to have accepted it. (Carlill v. Carbolic Smoke Ball Co. (1893) 1 Q.B. 269).
2. By acceptance of consideration: Sometimes offeror may send consideration with offer. If the offeree accepts the consideration, he accepts the offer. A sends a cheque of X one lac to B and offers to purchase his car for X one lac. If B encashes the cheque, he accepts the offer of A.
3. By accepting a benefit or service : Where offeree enjoys or avails the benefits of goods or services.
4. By acceptance of an offer by conduct : E.g. of trader sending goods on receiving an order
5. By waiver of the communication of acceptance : Where the party entitled to get the communication of acceptance waives-the right.

In the modern world contract may well be made by much more sophisticated means of communication than by the post. Telexes, faxes, and e-mail are all widely used, in addition to letters and telephones, as means of transmitting offers, counter-offer, acceptance and rejections. If one of these methods is used for an acceptance, when is it effective? (It takes effect at the point of receipt as held in Enstores Ltd. v. Miles Far East Corporation)

6. Acceptance must be given within a reasonable time and before the offer lapses and or is revoked.
The acceptance must be made when the offer is in force. If any time limit is prescribed in the offer, it should be accepted within that prescribed time limit. However if no time limit is  prescribed, it must be accepted within a reasonable time. What is reasonable time depends upon the facts of each case.

7. Acceptance must succeed the offer.
There is an offer first followed by its acceptance to create a contract. There can be no acceptance without offer. Acceptance in ignorance of the offer is no acceptance.

8. Rejected offers can be accepted only, if renewed
Once an offer is rejected it is dead. Only when the offer is renewed, that it can be accepted.

9. Acceptance cannot be presumed from silence
The acceptance of an offer cannot be taken as implied from the silence of the offeree. A mere silence or inaction of the offeree not evidenced by words or conduct, is in the eye of law no acceptance at all. For example, in Fellkouse v. Bindley (1862) F offered to buy B’s horse and added that if B did not reply within 2 weeks, F would be taken to have become the owner of the horse. The court held that no man can accept an offer by remaining silent.

COMMUNICATION OF OFFER AND ACCEPTANCE

When the contracting parties are face to face and negotiate in person there is instantaneous communication of offer and acceptance. But where services of the post offices are utilised for communication the following rules as laid down in sections 4 and 5 will apply.
Communication of offer (Sec. 4) :
The communication of offer is complete when it comes to the knowledge of the person to whom it is made.

Communication of acceptance (Sec. 4) :
The communication of acceptance has two aspects viz., as against the proposer and as against the acceptor. The communication of an acceptance is complete –

1. as AGAINST THE PROPOSER, when it is put in a course of transmission to him so as to be out of the power of the acceptor, and
2. as AGAINST THE ACCEPTOR, WHEN it comes to the knowledge of the proposer Le., when the letter of acceptance is received by the proposer.

Illustration : B accepts A’s proposal by a letter sent by post on 16th instant. The letter reaches A on 20th instant. The communication of acceptance is complete, as against A (proposer) when the letter is posted, i.e., 16th as against B on 20th Le., when the letter is received by A.
The acceptor becomes bound only when his acceptance comes to the knowledge of the proposer.
After the posting of the acceptance and before its delivery to the proposer, the acceptor has the right to rescind the contract by revoking his acceptance by speedier means.

Communication of revocation when complete Sec. 4

1. as against the person who makes it: When it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it.
2. as against the person to whom it is made: When it comes to his knowledge.

Illustration: A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched. It is complete as against B when B receives it. B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is despatched and against. A when it reaches him.

REVOCATION OF OFFER AND ACCEPTANCE: SEC. 5

Revocation of a proposal: It may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards (Sec. 5). This means that offer can be revoked at any time before the letter of acceptance is posted by the acceptor.
Revocation of an acceptance: It may be revoked a(any time before the communication of its acceptance is complete as against the acceptor, but not afterwards (Sec. 5). This means that an acceptance can be revoked at any time before the letter of acceptance is actually received by the proposer.

2.5 REVOCATION – HOW MADE/LAPSE OF OFFER: SEC. 6

An offer lapses or comes to an end

1. By notice of revocation.Tf the offeror gives notice of revocation to the other party, i.e., expressly withdraws the offer.
2. By passage of time:By passage of a stipulated time and if no time is stipulated, it lapses by the expiry of a reasonable time.
3. By death or insanity: By death or insanity of the offeror if the fact of the death or insanity is known to acceptor.
4. By failure of the acceptor to fulfil a condition precedent to acceptance.
5. By counter offer: An offer is revoked if a counter offer is made to it. A response to an offer which introduces new terms or conditions is a counter offer.
6. By rejection. When an offer is rejected it is dead and cannot be revived by its subsequent acceptance.

MULTIPLE CHOICE QUESTIONS:

1. Partial acceptance of offer result in
(a) counter offer
(b) unqualified acceptance
(c) binding contract
(d) none of the above

2. A tender is –
(a) an offer
(b) invitation to an offer
(c) acceptance of offer
(d) none of the above

3. Death or insanity of the proposer will revoke the proposal –
(a) Automatically.
( b) If the fact of the death or insanity is known to the offeree.
(c) The knowledge of death or insanity is irrelevant.
(d) Only if the family members of the proposer informs the offeree.

4. When counter offer is given, the original offer –
(a) Lapses.
(b) Remains valid.
(c) Is accepted and becomes a contract.
(d) The original offer can also be accepted.

5. For an acceptance to be valid, it must be –
(a) Partial & qualified.
(b) Absolute & unqualified.
(c) Partial & unqualified.
(d) Absolute & qualified.

6. Acceptance takes place as against the proposer, when –
(a) When the letter of acceptance is posted by the acceptor.
(b) When the letter of acceptance is received by the proposer.
(c) When the offeree, writes the letter of acceptance, but doesn’t post it.
(d) All the above.

7. An advertisement for sale goods by auction –
(a) Amounts to an invitation to offer.
(b) Amounts to an offer to hold such sale.
(c) Amounts to an implied offer.
(d) Amount to a general offer.

8. Communication of offer is complete when –
(a) It comes to the knowledge of the offeree.
(b) It is posted to the offeree.
(c) When the offeror writes the letter but does not post it.
(d) None of the above

9. An acceptance will be revoked at any time before the communication of acceptance is complete against the acceptor, but not afterwards –
(a) True
(b) False
(c) Acceptance once given cannot be revoked.
(d) Acceptance can be revoked at any time.

10. Acceptance once given cannot be revoked.
(a) True
(b) False
(c) Incomplete information.
(d) None of the above.

11. A tender and a bid at an auction sale are-
(a) Not offers.
(b) Offers.
(c) Acceptance of the offer.
(d) Invitation to offer.

12. A quotation is:
(a) Not offer.
(b) Offer.
(c) Acceptance of the offer.
(d) Invitation to offer.

13. If the offeree does not accept the offer according to the mode prescribed, then –
(a) The offeror may accept or reject such acceptance.
(b) The offer lapses automatically.
(c) It is a counter offer.
(d) Offeree commits a breach of contract.

14. Communication of offer is complete when –
(a) The letter is posted to the offeree.
(b) The letter is received by the offeree.
( c) The offer is accepted by the person to whom it is made.
(d) It comes to the knowledge of the offeror that the letter has been received by the offeree.

15. A bid at an auction sale is
(a) An implied offer to buy
(b) An express offer to buy
(c) An Invitation to offer to buy
(d) An invitation to come to bid

16. When the offers made by two persons to each other containing similar terms of bargain cross each other in post, they are known as
(a) Cross offers
(h) Implied offers
(c) Direct offers
(d) Expressed offers

17. When the proposal or acceptance is made otherwise than words, the promise is said to be
(a) Expressed
(b) Implied
(c) Accepted
(d) Rejected

18. The communication of an acceptance is complete as against the acceptor
(a) When it is posted by him
(b) When it is put in the course of transmission
(c) When it comes to the knowledge of the proposer
(d) None of these

19. Goods displayed in a shop window with a price label will amount to
(a) Offer
(b) Invitation to offer
(c) Acceptance of offer
(d) None of these

20. A promisee is
(a) A person who makes a promise
(b) A person who monitors the statement of intentions of two parties
(c) A person to whom the promise is made
(d) None of these

21. The person making the proposal is called
(a) Promisor
(b) Promise
(c) Participator
(d) None of these

22. Acceptance in ignorance of the offer is
(a) Valid
(b) Invalid
(c) Void
(d) Voidable

23. When the contract is perfectly valid in its sub¬stance but which cannot be enforced because of certain technical defects. This is called a
(a) Unilateral contract
(b) Bilateral contract
(c) Unenforceable contract
(d) Void contract

24. Is telegraphing lowest price on request a mere invitation for an offer?
(a) Yes
(b) No
(c) Not in normal cases
(d) None of these

25. In the case of proposal and acceptance by telephone conversation, contract is made at place where ………….. is received.
(a) Offer
(b) Consideration
(c) Proposal
(d) Acceptance

26. An offer does not lapse if the
(a) Offeror dies before acceptance
(b) The offeree dies before acceptance
(c) Acceptance is made by the offeree in igno¬rance of the death of the offeror
(d) Acceptance is made by the offeree with knowledge of the death of the offeror

27. When a person without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he makes
(a) Counter offer
(b) Standing offer
(c) Offer
(d) Invitation to treat

28. A subscribed to the “Daily News” for one year. After the expiry of his subscription, the newspaper company continued to send him the paper by mail for 3 years. A continued to use the paper but failed to pay the bills.
(a) A is not liable to pay as non-renewal of the subscription is akin to non-acceptance
( b) Non-payment of bills by A can be construed as non-acceptance of the offer made by sending the newspapers
(c) A is bound to pay as his continued use of the newspaper was an acceptance of the . offer made by sending the newspaper
(d) A fresh contract is to be entered into after the lapse of the first year

29. Which one of the following falls into the category of offer?
(a) Newspaper advertisement regarding a sale
(b) Display of goods by a shopkeeper in his window with prices marked on them
(c) An advertisement for a concert
(d) Announcement of reward to the public

30. The big Corporations like LIC supply ready forms of Contract with all conditions printed; the offeree has either to take all or let go. Such contracts are known as
(a) Company contracts
(b) Corporation contracts
(c) Government
(d) Standard form contracts

31. A dress is displayed in the showroom of a shop with a price tag attached to the dress. A buyer interested in the dress and ready to pay the price mentioned in the tag approached the shopkeeper for purchasing the dress.
(a) The shopkeeper can refuse to sell the dress
(b) The shopkeeper cannot refuse to sell the dress as the buyer has accepted the offer
(c) In case of refusal, the shopkeeper will be liable for breach of contract
(d) The shopkeeper cannot refuse to sell the dress but may charge higher price

32. In one auction sale, ‘X’ is the highest bidder. The auctioneer accepts the offers not by speaking but by striking the hammer on the table. This amounts to
(a) Express acceptance
(b) Implied acceptance
(c) Future acceptance
(d) No acceptance

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. Death or insanity of the proposer automatically revokes the proposal.
2. Crossing of letters of offer in the post for the sale & purchase of the same article constitute a valid agreement.
3. A proposal may be revoked by the proposer before the posting of the letter of acceptance by the acceptor.
4. If an offer is made in the form of a promise in return for an act, the performance of that act, even without any communication thereof, is to be treated as an acceptance of the offer.
5. Counter offer to an offer does not make the original offer lapse.
6. Acceptance can be made even without the knowledge of the offer.
7. A counter offer proposing different terms amount to rejection of the proposal.
8. When the promisee does not accept the offer of performance the promisor is not responsible for non-performance.
9. For an acceptance to be valid it should not be partial or qualified.
10. Acceptance takes place as against the proposer, when a letter is posted, not when it is received.
11. An advertisement for sale of goods by auction amounts to an offer to hold such sale.
12. Communication of offer is complete when it is posted to the offeree.
13. Performance of conditions of a proposal is an acceptance of the proposal.
14. An acceptance will be revoked at any time before the communication of the acceptance is complete against the acceptor, but not afterwards.
15. An offer need not be made to an ascertained person.
16. An agreement to agree in future upon terms to be settled afterwards between the parties is valid.
17. Acceptance once given cannot be revoked.
18. A tender and a bid at an auction sale are not offers.
19. A quotation and an answer to a question or inquiry are not offers.
20. A contract is formed when the acceptor has done something to signify his intention to accept, not when he has made to his mind to do so.
21. If the offeree does not accept the offer according to the mode prescribed by the offeror, the offer does not lapse automatically.
22. Communication of an offer is complete when the letter is posted though it has not reached the person to whom the offer is made.
23. Where the mode of acceptance is prescribed in the proposal, it need not be accepted in that manner.
24. A proposal when accepted becomes a contract.
25. Acceptance takes place when and where the message is received.

Answers:

CA Foundation Business Laws Study Material Chapter 15 Auction Sale

A sale by auction is a public sale where various intending buyers offer bids for the goods and try to outbid each other. Ultimately, the goods are sold to the highest bidder. A bid by the buyer is an offer and it is said to be accepted when the auctioneer announces its completion by the fall of the hammer or in any other customary manner. The words ‘any other customary manner’, takes into account all the manners which may be prevalent to denote acceptance in an auction sale. It may be by shouting one, two, three; or shouting going, going, gone, etc.
A person may himself sell his own goods by auction, or he may appoint an agent, known as auc¬tioneer, to conduct the sale on his behalf.

15.1	Rules of Auction Sale (Sec. 64)	Following rules have been laid down to regulate the sales by auction:
	1. Sale of goods in lots	Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.
	2. Completion of Sale	An auction sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner, and until then the bidder has the right to revoke or retract his bid. If before the fall of the hammer the bidder withdraws, his security amount cannot be forfeited. But if he does so after the fall of the hammer, it amounts to a breach of the contract and his security amount will be liable to be forfeited. If the conditions of sec. 20, namely, the goods should be specific and in a deliverable state, are satisfied, the property in such goods passes to the buyer at the completion of the contract (by the fall of the hammer)
	3. Seller’s Right to Bid	Unless the auction is notified to be subject to a right to bid on behalf of the seller, it is not lawful – (i) for the seller to bid himself or to employ any person to bid at such sale on his behalf and (ii) for the auctioneer to, knowingly take any bid from the seller or any such person. Any contravention of this rule renders the sale as fraudulent.
	4. Pretended bi­ding	If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. However, the seller may expressly reserve the right to bid at the auction and in such case, the seller or any one person on his behalf may bid at the auction. But there should be only one person on behalf of the seller; if there are more than one person, the intention is to raise the price and is fraudulent.        .
	5. Reserve Price	The seller may notify that the auction will be subject to a reserve or upset price, that is, the price below which the auctioneer will not sell. In such a case the auctioneer is not bound to accept the highest bid unless it reaches the reserve price. Further the property in the goods, even if they are specific, will not pass if the highest bid falls short.of the reserve price.
	6. Knock-out agreement	Knock-out agreement is a f arm of combination of buyers to prevent competition among themselves at an auction sale. They agree that they will not raise the bid against each other and only one of them will bid of the auction. When the goods have been purchased they will share the profits. Prima facie, a knock-out agreement is not illegal. However, if the intention of the parties to the agreement is to defraud third party, the third party can claim the damages. The seller may protect his interests against such agreements by reserving his right to bid at the auction, or by fixing a reserved price.
15.2	Upset price	“Upset price” is the Scottish equivalent of “reserved price”.
15.3	Damping	It is an unlawful act by which an intending purchaser is prevented from bidding or raising the price at an auction sale. The damping is usually done in any of the following ways : (i)    By pointing out defects in the goods put up in an auction sale. (ii)  By taking the intending buyers away from the place of auction by some other device. Damping is illegal and the auctioneer can withdraw the goods from auction sale in case he observes that the damping is being resorted to Puffer-A person who is appointed by the seller to raise the price by fictitious bids.
15.4	Incidence of Taxation [Sec. 64A]	♦     Where after a contract has been made but before it has been performed, tax revision takes place, the parties would become entitled to readjust the price of the goods accordingly. Taxes covered are customs or goods and service tax on the goods and any tax payable on manufacture, sale or purchase of goods. ♦      The buyer would have to be pay the increased price if the tax increases and would be entitled to the benefit of reduction if taxes are curtailed. ♦      Thus, the seller may add the increased taxes in the price. ♦     The effect of the provision can, however, is excluded by an agreement to the contrary. It is open to the parties to stipulate anything about the incidence of taxation.

MULTIPLE CHOICE QUESTIONS:

1. An auction sale is complete on the –
(a) delivery of goods
(b) payment of price
(c) fall of hammer
(d) None of the above

2. In the case of sale by auction, where goods are put for sale in lots, each lot is prima facie the subject of—
(a) a single contract of sale
(b) a separate contract of sale
(c) either (a) or (b)
(d) both (a) and (b)

3. Where a right to bid at the auction has been expressly reserved by the seller, the seller can depute —
(a) not more than one agent to bid on his behalf
(b) not more than two agents to bid on his behalf
(c) not more than three agents to bid on his behalf
(d) any number of agents to bid on his behalf

4. Where the sale is not notified to be subject to a right to bid on behalf of seller, it shall not be lawful for the seller—
(a) to bid for himself
(b) to employ any person to bid at such sale
(c) either (a) or (b)
(d) neither (a) nor (b)

5. X purchased a VCD at a public auction. Neither Auctioneer nor X knew at that time that the VCD was a stolen property. In such case, the true owner can —
(a) recover the goods from X
(b) sue the Auctioneer for fraud
(c) both (a) and (b)
(d) either (a) or (b)

6. At an auction sale, the bidder can withdraw his bid –
(a) before fall of hammer
(b) at any time during auction
(c) before payment of price
(d) cannot withdraw bid

7. An act by which an intending bidder is discour¬aged or dissuaded from bidding in the auction sale is called
(a) Puffer
(b) Damping
(c) Dumping
(d) knockout

8. is a form of combination of buyers to prevent competition among themselves at an auction sale.
(a) Knock-out agreement
(.b) monopoly agreement
(c) oligopoly agreement
(d) puffing agreement

9. In pretended bidding, sale is
(a) voidable at the option of the seller
(b) valid
(c) voidable at the option of the buyer
(d) illegal

10. Unless excluded by an agreement to the contrary, where after a contract has been made but before it has been performed, excise duty is increased:—
(a) The buyer would have to pay increased price
(b) The seller cannot charge increased price
(c) The seller can charge increased price
(d) Both ‘a’ and ‘c’

11. Any imposition, increase, decrease or remission of (z) Customs or Excise Duty on Goods and (z’z) Tax on the Sale or Purchase of Goods, subsequent to the sale, in case of decrease of tax, shall be deducted from the contract price by the Buyer and he shall not be liable to pay or be sued for such deduction.
(a) True
(b) Depends on the contract
(c) False
(d) Both ‘a’ and ‘b’

Answers:

IS STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE

1. In case of sale by auction, a bid can be recalled at any time before the fall of hammer.
2. An auctioneer shall be liable for damages if the auctioneer had no authority to sell the goods.
3. If the buyer’s possession is disturbed by the auctioneer or the seller then buyer has a right to claim compensation.

Answers:

CA Foundation Business Laws Study Material Chapter 14 Rights of Buyer & Rights of Unpaid Seller

RIGHTS OF BUYER

A. GENERAL RIGHTS

1. Right to have delivery as per contracts (Secs. 31 & 32).
2. Right to reject the goods if they are delivered in wrong quantities (Sec. 37).
3. Right to refuse delivery of goods by instalments (Sec. 38)
4. Right to notice of shipment in case the goods are sent by sea so that he may get the goods insured (Sec. 39).
5. Right to examine goods for the purpose of ascertaining whether they are in conformity with the contract (Sec. 41)

B. RIGHTS OF A BUYER AGAINST THE SELLER FOR BREACH OF CONTRACT
A seller may breach the contract in any of the following ways:

1. He fails to deliver the goods at the time or in the manner called for in the contract
2. He repudiates the contract.
3. He delivers non-conforming goods and the buyer rightfully rejects the goods or properly revokes acceptance.

A buyer has the following rights against the seller for breach of contract under the Sale of Goods Act.
1. Suit for non-delivery [Sec. 57]
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sure the seller for damages for non-delivery. This remedy would be available even if the property has passed to the buyer.

2. Specific performance [Sec. 58]
Where property has passed to the buyer, he also can exercise another right, viz., a right to sue for specific performance and its limits are regulated by the Specific Relief Act. In such cases the court may in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject-matter of the contract. It should be noted that the remedy is discretionary and will only be granted if the damages are not an adequate remedy or the goods are unique, e.g., rare book, a picture or a rare piece of jewellery.

3. Breach of Warranty [Sec. 59]
Where there is a breach of warranty by the seller (Le. defects in the goods delivered) or where the buyer elects or is compelled to treat any breach of condition on the part of the seller as a breach of warranty, the buyer has the following remedies:

1. He may claim a deduction from the price.
2. He may refuse to pay the price altogether, if the loss equals the price.
3. If the loss exceeds the price, he may not only refuse to pay the price, but also claim the excess, or
4. He may sue the seller for damages for the breach of warranty in addition to the right to claim diminution or extinction of the price.

4. Suit for Anticipatory breach [Sec. 60]
The buyer has the right to sue the seller for damages for anticipatory breach of contract Section 60 lays down that where the seller repudiates the contracts before the date of delivery, the buyer may either treat the contract has subsisting and wait till the date of delivery or he may treat the contract as rescinded and sue for damages for the breach.

5. Suit for interest and recovery of the price [Sec. 61]
If the buyer has already paid the price and the seller fails to deliver the goods, the buyer is entitled to file a suit for the refund of the price. In such a suit, the buyer may also claim interest or special damages from the defaulting seller. In the absence of any other contract to the contrary, the court may award interest at such rate as it thinks fit on the amount of price from the date on which the payment was made.

RIGHTS OF THE UNPAID SELLER

1. Unpaid seller defined [Sec. 45]
2. Unpaid sellers’ rights [Sec. 46]
   1. Unpaid sellers ’ lien [Secs. 47 to 49]
   2. Stoppage in transit [Secs. 50 to 52]
   3. Transfer by buyer and seller [Secs. 53 & 54]
3. Suit for breach of the contract [Secs. 55 to 61 ]

A. Who is an unpaid seller?
The seller is deemed to be an unpaid seller under any of the following circumstances:
(a) If the whole of the purchase price is not paid on the due date.
(b) If payment is made in the form of a negotiable instrument. (Bill of exchange or cheque) and the instrument is dishonoured.

B. Unpaid Sellers’ Rights [Sec. 46] 
Rights of an unpaid seller can be listed as follows:

1. Against the goods
   1. Right of Lien,
   2. Right of Stoppage in Transit, and
   3. Right of Resale
2. Against the buyer personally
   1. Suit for price,
   2. Suit for damages for non-acceptance of delivery,
   3. Suit for damages for repudiation of the contract, and
   4. Suit for interest or special damages

B(a). Right of Unpaid Seller against the Goods
(I) Right of Lien or Vendor’s Lien [Secs. 47-49]
The ‘unpaid seller’ has a lien on the goods for the price while he is in possession, until the payment or tender of the price. A lien is a right to retain possession of goods until payment of the price. He is entitled to lien in the following three cases, namely;

1. where goods have been sold without any stipulation as to credit; Le. cash sale.
2. where goods have been sold on credit but the term of credit has expired; or
3. where the buyer becomes insolvent.

Rules:

1. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer.
2. If the goods have been sold on credit, the seller cannot refuse to part with possession unless the term of credit has expired.
3. Lien can be exercised for non-payment of the price, not for any other charges.
4. Effect of part delivery (Sec. 48): When an unpaid seller has made a part delivery of the goods he can exercise lien on the balance of the goods not delivered unless the part delivery was made under such circumstances as to show an intention to waive the lien.
5. The seller can abandon or waive the lien if he so desires.
6. Termination of lien (Sec. 49): If possession is lost, lien is lost. The unpaid seller of goods loses his lien thereon in the following cases:
   1. When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods;
   2. when the buyer or his agent lawfully obtains possession of the goods; and
   3. where the seller has waived the right of lien. The unpaid seller does not lose his lien by reason only that he has obtained a decree for the price of the goods.
7. Sale not rescinded by lien (Sec. 54): A contract of sale is not rescinded by the mere exercise of the right of lien. The contract still remains live and the buyer can claim delivery of the goods by tendering the price. However, if the buyer defaults, the sellers remedy is to resell the goods and claim damages.

(II) The Right of Stoppage in Transit [Secs. 50-52]
When the buyer of goods becomes insolvent, and the goods are in course of transit to the buyer, the seller can resume possession of the goods from the carrier. This is known as the right of stoppage in transit. The right is exercisable by the seller only if the following conditions are fulfilled:
The seller must be unpaid.

1. He must have parted with the possession of goods.
2. The goods must be in transit.
3. The buyer must have become insolvent.
4. The right is subject to provisions of the Act.

The right of stoppage means the right to stop further transit of the goods to resume possession and to retain the same till the price is paid.
Who is an insolvent?
The term insolvent is used here to denote a person who is financially embarrassed. It is not necessary that the buyer should be declared insolvent by a court of law before the right of stoppage in transit can be exercised. According to section 2(8). The buyer is said to be ‘insolvent’ when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due whether he has committed an act of insolvency or not.

Rules:
The following points are to be noted in connection with the right of stoppage in transit:
1. Duration of transit [Sec. 51]
The goods are deemed to be in course of transit from the time they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them.

2. When does transit end?

1. Delivery before destination:If the buyer or his agent obtains delivery of the goods before their arrival at the appointed destination, the transit is at an end. [Sec. 51(2)]
2. Attornment by carrier to buyer: if after the arrival of the goods at the appointed destination, the carrier expressly or by implication enters into a new agreement to hold the goods for the buyer (for purpose of custody), the original transit comes to an end. [Sec. 51(3)]
3. Goods rejected by biiyer.Af the goods are rejected by the buyer and they continue to be in possession of the carrier or other bailee, then the transit continues even if the seller has refused to receive them back. [Sec. 51(4)]
4. Delivery on ship chartered by buyer: When the goods are delivered to a carrier who is acting as agent of the buyer, e.g. when goods are delivered to a ship chartered by the buyer, the transit comes to an end as soon as the goods are loaded on board the ship. [Sec. 51(5)]
5. Wrongful refusal by carrier to deliver: If the carrier wrongfully refuses to deliver the goods to the buyer, the transit is at an end. [Sec. 51(6)]
6. Part delivery. Where the part delivery of the goods has been made to the buyer the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods. [Sec. gi 51(7)]

3. How stoppage in transit is effected [Sec. 52]
There two modes of stoppage in transit are—

1. By taking actual possession of the goods or
2. By giving notice to the carrier not to deliver the goods to the buyer or his agent.

When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he shall re-deliver the goods to, or according to the directions of, the seller. The expenses of such re-delivery shall be borne by the seller.
Effect of Stoppage: Contract not rescinded- The contract of sale is not rescinded when the seller exercises his right of stoppage in transit. The contract still remains in force and the buyer can ask for delivery of goods on payment of price. [Sec. 54]

Effect of sub-sale or pledge by the buyer [Section 53]
The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or pledge of the goods made by the buyer.
Exceptions: In the following two cases the unpaid seller’s right of lien or stoppage in transit is affected by any sale or pledge of the goods made by the buyer: (i.e., Unpaid seller cannot exercise right of lien or stoppage in transit.)

1. when the seller assents to such sale or pledge; or
2. when the seller has transferred a document of title to the goods, who transfers it by way of a sale, pledge or other disposition for value, to a person who takes it in good faith and for consideration.

Where (i) the seller has issued or lawfully transferred a document of title to goods, e.g. a bill of lading or a railway receipt to a person as buyer and (ii) the buyer transfers the document by way of sale or pledge to a person who takes the document in good faith and for consideration. In such a case if the transfer is by way of sale the unpaid sellers right of lien or stoppage is defeated, and if it was by way of pledge, his right of lien or stoppage can only be exercised subject to the rights of the pledgee.
Thus the effect of the rule is that the seller may still exercise his rights by paying off the pledgee.

DISTINCTION BETWEEN LIEN AND STOPPAGE IN TRANSIT:

1. The essence of lien is to retain possession while the essence of the stoppage in transit is to regain possession.
2. The right of lien is applicable to goods, which are in the possession of the seller. The right of stoppage in transit is applicable to the goods, which are in possession of the carrier.
3. The right of stoppage in transit is applicable to the insolvent buyer. But the right of lien is applicable to all persons, solvent or insolvent.
4. The right of stoppage in transit is applied to the buyer through the carrier. Therefore stoppage means the seller’s right to ‘regain’ the goods. But lien means the right to ‘retain’ the goods. Of course both the rights are applicable to goods only.
5. When the right of lien ends the right to stop in transit begins.

(Ill) The Right of Resale [Sec. 54]
The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods:

1. If the goods are of a perishable nature, without any notice to the buyer, and
2. In other cases after notice to the buyer, calling upon him to pay or tender the price within reasonable time, and upon failure of the buyer to do so.

If the money realised upon such resale is not sufficient to compensate the seller, he can sue the buyer for the balance. But if he receives more than what is due to him, he can retain the excess. A resale does not absolve the buyer from his liabilities to compensate the seller for damages he may 2 have suffered.

B(b). Right of Unpaid seller against the buyer personally
1. Suit for the Price [Sec. 55]
Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods.
Where the property in goods has not passed to the buyer, the seller as a rule cannot file a suit for the price and his remedy is to claim damages.
According to section 55(2), where under a contract of sale the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.

2. Suit for damages for non-acceptance [Sec. 56]
Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance.

3. Suit for damages for repudiation of the contract [Sec. 60]
Where the buyer repudiates the contract before the date of delivery, the seller may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded i and sue for damages for the breach.

4. Claim for interest and special damages [Sec. 61]
The seller may recover interest or special damages in any case where by law interest or special damages may be recoverable. He may also recover the money paid where the consideration for the payment of it has failed.

MULTIPLE CHOICE QUESTIONS:

1. The Seller of Goods is deemed to be an Unpaid Seller —
(a) when the whole of the price has not been paid or tendered.
(b) when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition has not been fulfilled by reason of the dishonour of the instrument or otherwise.
(c) both (a) and (b).
(d) either (a) or (b).

2. The term “Unpaid Seller” includes —
(a) Agent of the Buyer
(b) Agent of the Seller
(c) Agent of the Carrier/Transporter
(d) All of the above

3. The right of lien is available to the Unpaid Seller, only when —
(a) he is not in possession of the goods
(b) he is in possession of the goods
(c) he has delivered the goods to the Carrier/ Transporter
(d) he has delivered the goods to the Buyer

4. The right of lien is available to the Unpaid Seller, u/s 47 of the Sale of Goods Act, when he is in possession of goods —
(a) as an agent of the Buyer
(b) as a Bailee for the buyer
(c) in his own right.
(d) all of the above

5. In which of the following situations, the right of lien available to the Unpaid Seller is lost?
(a) Where the Goods have been sold without any stipulation as to credit;
( b) Where the Goods have been sold on credit, but the credit period has expired;
(c) Where the Buyer becomes insolvent;
(d) Where the Unpaid Seller has parted with the possession of the goods.

6. Where the goods have been delivered to Railways for carriage and the R/R is taken in the name of the seller or his agent :
(a) the seller is prima facie deemed to reserve the right of disposal
( b) the seller did not retain the right of disposal
(c) the seller cannot retain right of disposal
(d) none of the above.

7. When the goods have been sold on credit and the credit period lien can he exercised
(a) has not expired
(b) has expired
(c) has not been extended
(d) has been extended

8. The right of lien can be exercised by the Unpaid Seller in respect of—
(a) Price
(b) Any other expenses, e.g. Godown Charges, Interest, etc.
(c) Both (a) and (b)
(d) Either (a) or (b)

9. The Unpaid Seller to deliver a part of the Goods on payment of a proportionate part of the price by the Buyer.
(a) shall be bound
(b) may refuse
(c) must honour his commitment
(d) shall request the carrier

10. Generally, where an Unpaid Seller has made part delivery of the Goods, he —
(a) may exercise his right of lien on the remainder
(b) has to honour the entire contract
(c) loses his lien on the remainder of the goods
(d) can supply defective goods in respect of the remainder

11. Where the Unpaid Seller has parted with the goods by handing it over to a carrier for transmission, and the goods are in transit, he can reclaim possession thereof. This right is called —
(a) Right of Lien
(b) Right of Stoppage of goods in transit
(c) Right of withholding delivery of goods
(d) Right of Re-sale

12. Right of Stoppage in transit can be exercised by the Unpaid Seller, where he —
(a) has lost his right of lien
(b) still enjoys his right of lien
(c) either (a) or (b)
(d) neither (a) nor (b)

13. Right of Stoppage in transit can be exercised by the Unpaid Seller, where the Buyer—
(a) is solvent
(b) becomes insolvent
(c) acts fraudulently
(d) acts smartly

14. The right of stoppage in transit may be exercised by the Unpaid Seller till—
(a) payment or tender of the price
(b) Buyer becomes solvent
(c) such time as the Carrier may think fit
(d) such time as the Court may think fit

15. Goods are deemed to be in transit from the time they are delivered to the Carrier or other bailee for transmission to the buyer, until —
(a) Buyer becomes solvent
(b) Buyer or his agent takes delivery of the goods
(c) Seller becomes solvent
(d) Seller or his agent takes delivery of the goods

16. If, after the arrival of goods at their destination, Carrier or other Bailee acknowledges to Buyer or his agent that he holds goods on his behalf, and continues possession of the goods, the transit —
(a) is at an end
(b) is deemed to continue
(c) is not at an end
(d) is not affected at all

17. If goods are rejected by the buyer and the Carrier or other Bailee continues in possession of them, and the seller has refused to receive them back, then transit —
(a) is at an end
( b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision.

18. If the Carrier/Bailee wrongfully refuses to deliver the goods to the buyer or his agent, the transit —
(a) is at an end
(b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision

19. Right of Stoppage in Transit may be exercised by the Unpaid Seller, by —
(a) taking actual possession of Goods
(b) giving notice of his claim to the Carrier/ Bailee who holds the Goods.
(c) either (a) or (b)
(d) Both (a) and (b)

20. The Unpaid Seller’s right of lien is to —
(a) re-organize possession of goods
(b) re-sell the goods
(c) regain possession of goods
(d) retain possession of goods

21. The word “perishable” in respect of goods, u/s 54 of the Sale of Goods Act, means —
(a) physically perishable
(b) commercially perishable
(c) both (a) and (b)
(d) either (a) or (b)

22. Where under a contract of sale, the price is payable on a certain day irrespective of delivery and Buyer wrongfully neglects or refuses to pay the price, the Seller can sue the Buyer for the price of goods. For this purpose, goods —
(a) should be appropriated to the contract
(b) need not be appropriated to the contract
(c) should be delivered to the buyer
(d) need not be delivered to the buyer

23. The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods :
(a) If the goods are of perishable nature, without any notice to the buyer
(b) If the goods are non-perishable, by giving notice to the buyer
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ nor ‘b’

24. In case of interest by way of damages and special damages in a suit by the seller u/s 61, the interest may be calculated from —
(a) date of tender of goods
(b) date on which the price was payable
(c) either (a) or (b)
(d) both (a) and (b)

25. When under a contract of sale, buyer has paid the price, but seller neglects to deliver goods, buyer has a right to claim interest on the amount of price. The buyer can claim interest —
(a) only when he can recover the price
(b) only when he is entitled to claim damages
(c) either (a) or (b)
(d) both (a) and (b)

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The term unpaid seller includes buyer’s agent to whom bill of lading is endorsed.
2. Unpaid seller can exercise his right of lien even when property in goods has been passed to the buyer.
3. Once possession is lost, right of lien of the unpaid seller is also lost.
4. Unpaid seller can exercise his right of resale of goods only when property in goods has not passed to the buyer.
5. Where the unpaid seller has obtained a decree for the price of the goods the right of lien cannot be exercised.
6. Nemo dat quad non habet means let the buyer beware.
7. Sub-sale by the buyer with seller’s consent leads to loss of right of stoppage in transit.
8. Unpaid seller’s right of stoppage in transit can be exercised only when the buyer is insolvent.

Answers:

CA Foundation Business Laws Study Material Chapter 13 Performance of Contract: Delivery and Payment

After the conclusion of contract of sale, the next stage is of performance of that contract. The buyer & seller must perform their respective duties and obligations Sec. 31 lays down that it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them in accordance with the terms of the contract of sale.

DELIVERY OF GOODS
Delivery means voluntary transfer of possession of goods from the seller to the buyer. It may be

1. actual,
2. symbolic, or
3. constructive.

Section 33 lays down that delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or the delivery may be made by doing anything which has the effect of putting the goods in possession of the buyer.
Delivery is said to be actual when the seller hands over the goods physically, to the buyer or his agent, authorised to take possession of the goods.

A symbolic delivery
A symbolic delivery takes place when the ‘means of obtaining possession’ is handed over to the buyer. This happens where the goods are bulky and incapable of actual delivery, e.g. a truck is delivered” (symbolically) by handling over its keys to the buyer or the transfer of bill of lading/RR in the name of the buyer entitles him to obtain the goods. Delivery of the key of a godown is symbolic delivery of the goods therein.

A constructive delivery
A constructive delivery takes place when goods are delivered to another person on behalf of buyer, instead of buyer himself. A third party is authorized by buyer to take delivery on his behalf. Such third party may be seller himself or carrier or godown keeper.
Constructive delivery is a delivery by attornment i. e. by formal acknowledgement. It involves change in the possession of goods without any change in,their actual and visible custody. It takes place when the person in possession of the goods acknowledges that he holds.the goods on behalf of and at the disposal of the buyer. Constructive delivery takes place in the following cases:

1. when the seller, who is in possession of the goods, agrees to hold them on behalf of the buyer;
2. when the buyer is already in possession of the goods and the seller agrees to the buyer’s holding the goods as owner;
3. when the goods are in possession of a third person (e.g. a warehouseman, a carrier or any other bailee) who acknowledges to hold them on behalf of the buyer. For instance, A sells 100 bags of sugar to B, A’s stock of sugar-bags is lying in X’s godown. A issues a delivery order to X, asking him to deliver to B or his order 100 bags. X acknowledges the delivery order and agrees to hold 100 bags of sugar on B’s behalf. This is a constructive delivery, even though the goods still continue to be in X’s possession.

Rules as to delivery
1. Duty to deliver [Sec. 31]
It is the duty of the seller to deliver the goods. It is duty of the buyer to accept the goods and to pay for them in accordance with the terms of the contract of sale.

2. Payment and delivery are concurrent conditions [Sec. 32]
Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions.

3. Mode of delivery [Sec. 33]
Mode of delivery may be actual, symbolic or constructive.

4. Part delivery [Sec. 34]
HOW MUCH GOODS MUST BE DELIVERED? (SECTION 34):
The quantity of goods to be delivered is specified in the contract. If the parties have not agreed otherwise, the seller must deliver all the goods in a single delivery. However, where part of the goods have been delivered, and rest of the goods are yet to be delivered, there may be two possibilities:

1. where the part delivery is made in progress of the whole delivery, then it is treated as a delivery of the whole. And the ownership of the whole quantity is transferred to the buyer.
2. Where the part delivery is made with the intention of separating it from the whole, then in is not treated as delivery of the whole, (since each part of delivery is intended to be treated as separate delivery) In such a case the ownership of the whole quantity is not passed to the buyer.

Example: Goods were sold in a lot and the seller instructed the wharfinger to deliver them to the buyer who had paid for them. The buyer thereafter weighed all the goods, accepted them and took away a part. The court held this constituted delivery of the whole – Hommond v. Anderson (1803) 1 Bank P.N.S. 69.

5. Buyer to apply for delivery [Sec. 35]
Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery. The buyer has no cause of action against the seller if he has not applied for delivery. It may be noted here that this provision is intended for the benefit of the seller. The seller may, if he chooses, deliver the goods without any application in that behalf of the buyer. But he is also entitled to wait until the buyer applies for delivery.

6. Place of delivery [Sec. 36(1)]
Whether it is for the buyer to take possession of the goods or for the seller to send them to the buyer is a question depending in each case on the terms of the contract. When nothing is agreed upon, the following rules apply — a) the goods are to be delivered at the place where they were lying, at the time of the sale or at the time of the agreement to sell; b) if the goods are future goods, they should be delivered at the place of manufacture or production thereof.

7. Time for delivery [Sec. 36(2) & 36(4)]
If time is fixed, and the seller is bound to send the goods to the buyer, he must send them within the fixed time. If no time is fixed, then the seller must send them within a reasonable time 36(2). The demand or tender of delivery must be at a reasonable hour 36(4).

8. Goods in possession of third person [Sec. 36(3)]
If the goods are in possession of a third party, there is no delivery until such third party acknowledges to the buyer that he holds the goods on his behalf.

9. Expenses of delivery [Sec. 36(5)]
Unless otherwise agreed, expenses of making delivery are borne by the seller and expenses of obtaining delivery by the buyer.

10. Delivery of wrong quantity [Sec. 37]
Subject to any usage of trade, special agreement or course of dealing between parties, the following rules shall apply when delivery of wrong quantity is made—

1. Short delivery : If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may:
   1. reject the goods, or
   2. accept the goods, if he accepts, he shall pay for the accepted quantity at the rates contracted for.
2. Excess delivery: If the seller delivers to the buyer a quantity larger than he contracted to sell, the buyer may:
   1. reject the whole, or
   2. accept the whole, or
   3. accept the quantity he ordered and reject the rest.
3. Delivery of goods mixed with other goods:Ii the seller delivers to the buyer goods ordered mixed with goods of a different description, the buyer may:
   1. reject the whole, or
   2. accept the agreed goods and reject the remaining goods.

11. Instalment deliveries [Sec. 38]
Unless otherwise agreed, the goods are not to be delivered by instalments. There might be an agreement for delivery by instalments but the price may be payable either on complete delivery or on delivery of each instalment. There will be a breach of such contract in the following cases:
(a) If the seller makes no delivery or makes defective delivery, in respect of one or more instalments; or
(b) If the buyer neglects or refuses to take delivery of or pay for, one or more instalments.
In each of the above breach, it will depend upon the terms of the contract and the circumstances of each individual case whether

1. the whole contract is repudiated, or
2. it is a severable (separable) breach giving rise to a claim for compensation but not to right to treat the whole contract as repudiated [Sec. 38(2)].

12. Delivery to a carrier or wharfinger [Sec. 39]
The delivery of goods to a carrier or a wharfinger in pursuance of a contract of sale, is prima facie deemed to be delivery of goods to buyer. If the contract of sale specifies the name of the carrier, the seller must deliver the goods to such named carrier. If the instructions of the buyer are carried out properly, the risk is with the buyer. If the instructions of the buyer are not carried out properly, the goods remain at the risk of the seller during transit.

While delivering goods to the carrier, it is the sellers duty to do whatever is necessary to secure the carrier’s responsibility for the safe delivery of goods to the buyer so that in the event of the loss, the buyer can claim compensation against the carrier.
Where the goods are sent by sea it is usual fçr the buyer himself to insure. In such a case it is the duty of the seller to give such notice of the shipment to the buyer as may enable him to insure the goods. If he does not, the risk does not pass to the buyer.

13. Buyer’s risk for deterioration of goods in transit [Sec. 40]
Where the seller agrees to deliver the goods to the buyer at a place other than that where they are when sold, the merchantable quality of the goods may be affected due to transit. In such a case any risk of deterioration in the goods necessarily incident to the course of transit shall be borne by the buyer, unless otherwise agreed. e.g. A sold to B a certain quantity of hoop iron which was to be sent by canal at the request of B. It was rusted before it reached the buyer. The sting, however, was not more than what was necessarily incidental to its transmission. It was held that B was bound to accept the goods.

“Force majeure”: Force majeure is a situation in which either of the parties to a contract is prevented from performing its obligations due to circumstances beyond its control. The clause on force majeure usually starts with a description of the events which are considered as events of force majeure. Such events are acts of God, acts of nature (earthquakes, floods, epidemics and fires etc.), acts of governments, wars, riots and civil disturbances, strikes and lockouts etc.
The party who is affected by it, has to notify the other party of the occurrence of the event and the cessation of the event, supported by documentary evidence. If it is a strike or a lockout, the labour departments certificate/statement would act as the evidence.

The force majeure may be short term or long term or prolonged force majeure. For short term force majeure, the normal remedy is to allow extension of the delivery date(s) to the extent the performance is affected by the event. Examples of long-term or prolonged force majeure are natural calamities such as earthquakes, typhoons, severe cyclones, devastating fire/explosion in chemical factories, which may ravage the facilities and prevent the performance of the obligations. The general remedy is to provide for a discussion between the two parties within a time-frame already specified in the clause to explore ways to fulfil all or some obligations and to find a solution. If is not feasible to perform the contract, it may be terminated.

14. Buyers Right of Examining the Goods
A buyer cannot be said to have accepted the goods unless he had an opportunity to examine the goods and ascertain that they are in conformity with the contract, (sec. 41).

15. ‘Delivery of the goods to the buyer does not mean acceptance of the goods’
Delivery of goods to the buyer does not amount to acceptance thereof by the buyer. According to sec. 42 a buyer is deemed to have accepted the goods—

1. When he intimates to the seller that he has accepted them, or
2. When he does an act in relation to such goods which is inconsistent with the ownership of the seller. e.g. pledges or resells, or
3. When, after the lapse of a reasonable time, he retains the goods without intimating the seller that he has rejected the goods.

16. Buyer not bound to return rejected goods [Sec. 43]
Where goods are delivered to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller. It is sufficient if he intimates to the seller that he refuses to accept them. This rule applies when the rejection is rightful and there is no agreement to the contrary.

17. Liability of buyer for neglecting or refusing delivery of good [Sec. 44]
When the property in the goods has passed to the buyer and the seller is ready and willing to deliver the goods and requests the buyer to take delivery, but the buyer fails to take delivery within reasonable time, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for reasonable charge for the care and custody of the goods.

FORMS OF CONTRACT AS REGARDS CARRIAGE BY SEA

The three common forms of contract as regards carriage by sea are –

1. F.O.B. (Free on board),
2. C.I.F. (Cost Insurance & Freight)
3. Ex-ship.

1. Free On Board (FOB):
Transportation term meaning that the invoice price includes delivery at the seller’s expense to a specified point and no further. In other words the seller has to place the goods on board a ship at his own expense. He has only to bear the expenses of loading the goods. The seller must notify the buyer immediately that the goods have been delivered on board, so that the buyer may insure them. If he fails to do so the goods shall be deemed to be at seller’s risk during such sea transit. Thereafter the goods are at the buyer’s risk and he is responsible for freight, insurance and subsequent expenses thus the price is exclusive of freight and insurance.
For example, “FOB our Nagpur warehouse” means that the buyer must pay all shipping and other charges associated with transporting the merchandise from the seller’s warehouse in Nagpur to the buyer’s receiving point.
In a F.O.B. (Free on Board) shipment, the risk passes to buyer at the F.O.B. point. The F.O.B. point can be the seller’s factory or warehouse. In that case, the sale price quoted does not include freight which is the responsibility of the buyer as is the risk from the warehouse onward. If, however, the term is F.O.B. point of destination, seller bears the risk during transit and is responsible for payment of the freight.

FAS (free alongside): The term F.A.S. (Free Alongside) followed by “vessel” at some specific port is a variation of F.O.B. The sale of consummated when the seller delivers the goods alongside the vessel. The difference between the terms “F.O.B. vessel” and “F.A.S. vessel” is that in the F.O.B. the seller bears the risk until the loading has been completed.
FAS means that the seller fulfils his obligation to deliver when the goods have been placed alongside | he vessel on the quay or in lighters at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment. The FAS term requires the buyer to clear the goods for export. It should not be used when the buyer cannot carry out either directly or indirectly all of the export formalities. This term can only be used for sea freight or inland waterway transport.

2. C.I.F. Contracts:
‘C.I.F.’ stands for cost, insurance and freight. A CIF contract is a type of contract where in the price includes cost, insurance and freight charges. “C.I.F. London”, for example, would mean that the quoted price would include the price of the goods plus freight up to London and insurance.
A CIF contract is performed by delivery of the shipping documents relating to the goods and not by actual delivery of goods. Documents of title to the goods (bill of lading) are delivered so as to symbolise the delivery of goods. Under a CIF contract the seller is required to insure the goods, deliver them to the shipping company, arrange for their affreightment and send the bill of lading and insurance policy together with the invoice and a certificate of origin to a bank. The documents are usually delivered by the bank against payment of the price, or against acceptance of the bill. This method protects the seller since he continues to be the owner of goods until the buyer pays for them and obtains the documents. The buyer is equally protected as he is called upon to pay only against the documents and the moment he pays, he obtains the documents, which enable him to get delivery of the goods.

3. Ex-ship Contracts:
“Ex Ship” means that the seller fulfils his obligation to deliver when the goods have been made available to the buyer on board the ship uncleared for import at the named port of destination. The seller has to bear all costs and risks involved in bringing the goods to the named
port of destination.

MULTIPLE CHOICE QUESTIONS:

1. Voluntary transfer of possession from one person to another is called as
(a) Ownership
(b) Delivery
(c) Gift
(d) License

2. Delivery of goods means
(a) Voluntary transfer of possession
(b) Compulsory transfer of possession
(c) Exchange of goods
(d) Voluntary transfer of ownership

3. For a valid contract of sale, delivery may be:
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) All of these

4. Delivery of the keys of a godown where goods are kept amounts to:
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) All of these

5. delivery involves change in the possession of goods without any change in their actual custody.
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) None of these

6. Which of the following is not a form of delivery
(a) Actual delivery
(b) Symbolic delivery
(c) Constructive delivery
(d) Systematic delivery

7. When goods are in possession of third person, delivery is complete:
(a) When such third party acknowledges to the buyer that he holds the goods on his behalf
(b) Even though such third party does not acknowledge
(c) When the physical possession of the goods is given
(d) None of the above

8. Where the part delivery is made in progress of the whole delivery, then:
(a) It is treated as delivery of the whole
(b) It is treated as delivery of the part
(c) It is not treated as delivery at all
(d) None of these

9. Unless otherwise agreed, the expenses of making delivery are borne by:
(a) The carrier
(b) The buyer
(c) The seller
(d) The agent

10. Unless otherwise agreed, the expenses of obtaining delivery are borne by:
(a) The carrier
(b) The buyer
(c) The seller
(d) The agent

11. If the seller delivers to the buyer a quantity less than he contracted to sell, the buyer may
(a) reject the goods,
(b) accept the goods,
(c) either ‘a’ or ‘b’
(d) neither ‘a’ nor ‘b’

12. If the seller delivers to the buyer a quantity larger than he contracted to sell, the buyer may
(a) reject the whole
( b) accept the whole
(c) accept the quantity he ordered and reject the rest X
(d) either ‘a’, ‘b’ or ‘c’

13. If the seller delivers to the buyer goods ordered mixed with goods of a different description, the | buyer may—
(a) reject the whole
(b) accept the agreed goods and reject the remaining goods
(c) either ‘a’ or ‘b’
(d) neither ‘a’ nor ‘b’

14. In case of carriage of goods by sea, where the seller has to put the goods on board a ship at his own expenses, the contract is known as
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

15. In case of carriage of goods by sea, where the seller has to deliver the goods to the buyer at the port of destination, the contract is known as
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

16. Under a contract the seller is required to insure the goods, deliver them to the shipping company, and arrange for their affreightment.
(a) F.O.B. Contract
(b) C.I.F. Contract
(c) Ex-ship Contract
(d) FAS Contract

17. The general principle regarding transfer of title in case of sale of goods is that—
(a) The seller cannot transfer to the buyer a better title than he himself has
(b) The seller can transfer to the buyer a better title than he himself has
( c) The buyer can transfer to the seller a better title than he himself has
(d) The seller’s representative can transfer to the buyer no title

18. Diamond necklace valued Rs. 10 lacs was sent by S to B on sale or return basis. B pledged the diamond necklace with money lender M for Rs. 6 lacs. Discuss the rights and liability of the parties.
(a) B is not bound to pay the price to S
(b) B is bound to pay the price to S and M will remain as pawnee
(c) B is bound to pay the price to S and M will not have rights as pawnee
(d) B is not bound to pay anything to M

Answers:

IS STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. It is not the duty of the seller to deliver the goods.
2. Delivery by acknowledgement is an actual delivery.
3. There are three modes of delivery.
4. Unless otherwise agreed, goods shall be delivered before payment of price.
5. Unless otherwise agreed, the buyer must apply for the delivery.
6. The place of delivery can be the place where the goods are lying at the time of sale.
7. When means of obtaining possession are handed over to the buyer, it amounts to symbolic delivery.
8. When goods are delivered to the buyer and the buyer refuses to accept them, having a right to do so, then the buyer is bound to return them to the seller.
9. It is the duty of seller to take back the goods in case where buyer rightfully refuses to accept the goods.
10. Any risk of deterioration in the goods necessarily incident to the course of transit shall be borne by the „ seller.
11. The delivery of goods to a carrier in pursuance of a contract of sale, is prima facie deemed to be the
delivery of goods to the buyer.

Answers:

CA Foundation Business Laws Study Material Chapter 12 Transfer of Ownership

TRANSFER OF OWNERSHIP:TIME OF TRANSFER

Sale of goods involves transfer of ownership of property from the seller to the buyer. It is necessary to determine the precise moment of time at which the ownership of the goods passes from the seller to the buyer, because of the following reasons:
(a) Risk passes with property
The general rule is that risk prima facie passes with the property. If the goods are lost or damaged by accident or otherwise, then, subject to certain exceptions, the loss falls on the person who is the owner at the time when the goods are lost or damaged.
(b) Action against third parties.
If the goods are damaged by the action of third parties it is the owner who can take action.
(c) What is the effect of insolvency?
In case of insolvency of either the buyer or the seller it is necessary to know’ whether the goods will be taken over by the Official Assignee. The answer depends upon whether the ownership of the goods is with the party who has become insolvent.
(d) Suit for price.
Unless the contract provides otherwise, a suit for price by the seller does not lie unless the
property has passed to the buyer.

LAW RELATING TO PASSING OF RISK IN CASE OF THE SALE OF GOODS
The basic principle is the risk prima facie passes with the ownership. According to section 26—
Unless otherwise agreed, the goods remains at the seller’s risk until the property therein is transferred to the buyer. But when the property therein is transferred to the buyer, the goods are at the buyer’s \ risk whether delivery has been made or not.
Thus risk and ‘property’ (ownership) go together. But it is open to the parties to separate the risk from ownership. For example, the parties may agree that risk will pass sometime after or before the property has passed. The separation of risk from property can be made in the following ways. Firstly, where delivery has been delayed due to fault of seller or the buyer, the goods are at the risk of the party in fault. Secondly, risk and property may be separated by a trade custom. Thirdly, risk and property can be separated by the agreement of the parties.

WHEN DOES PROPERTY IN THE GOODS PASS UNDER THE SALE OF GOODS ACT?

Sections 18 to 25 of Sale of Goods Act lay down the rules which determine when ownership of property passes from the seller to the buyer. These rules may be summarised as follow:

• A. TRANSFER OF PROPERTY IN UNASCERTAINED GOODS
• B. TRANSFER OF PROPERTY IN ASCERTAINED GOODS
• C. TRANSFER OF PROPERTY IN SALE BY APPROVAL
• D. TRANSFER OF PROPERTY WHEN RIGHT OF DISPOSAL IS RESERVED

A. TRANSFER OF PROPERTY IN UNASCERTAINED GOODS
1. When there is a contract for the sale of unascertained goods, property in the goods is not transferred to the buyer unless and until the goods are ascertained. (Sec. 18).
2. How goods are ascertained?
By valid appropriation: Under Section 23(1), in a contract for the sale of unascertained or future goods by description, the property in the goods passes to the buyer when the goods of that description are in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller. The goods are ascertained by appropriation. Until appropriation there is merely an agreement to sell. Appropriation means selection of goods with the mutual consent of the parties.
The following are the essentials of appropriation:

1. The goods should confirm to the description and quality stated in the contract.
2. The goods must be in a deliverable state.
3. The goods must be unconditionally (as distinguished from an intention to appropriate) appropriated to the contract either by delivery to buyer or his agent or the carrier.
4. The appropriation must be
   1. by seller with the assent of buyer or.
   2. by buyer with the assent of seller.
5. The assent may be expressed or implied.
6. The assent may be given either before or after appropriation.

Thus, if A agrees to sell to B 20 tonnes of oil of a certain description in his cisterns and he has more than 20 tonnes of oil of description in his cisterns, then no property will pass to B unless the 20 tonnes are separated from the rest and they are appropriated to the contract.
Delivery to the carrier [Sec. 23(2)] – When the seller delivers the goods, to a carrier for being taken to the buyer, and does not reserve the right of disposal, the property passes to the buyer. The carrier becomes the agent of the buyer and such a delivery amounts to a delivery to the buyer and the risk is, after the delivery of the buyer. The essentials of delivery to a carrier are—

• Delivery must be in pursuance of the contract Le. the goods must be of the de-scription and quality of the goods contracted.
• Seller delivers goods to the buyer or to a carrier or a bailee for transmission to the buyer. This must be pursuant to the contract,
• Seller does not reserve right of disposal.

B. TRANSFER OF PROPERTY IN ASCERTAINED GOODS
Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred [Sec. 19(1)]. For the purpose of ascertaining the intention of the parties regard shall be had to—

• the terms of the contract,
• the conduct of the parties, and
• the circumstances of the case. [Sec. 19(2)]

It is only when the intention of the parties cannot be judged from their contract or conduct or other circumstances that the rules laid dowh in Sections 20 to 24 apply. [Sec. 19(3)]. These rules are as follows:
(a) Specific goods in a deliverable state: [Section 20]

• in case of an unconditional contract for the sale of specific goods in a deliverable state,
• the property in the goods passes to the buyer on making the contract, and
• it is immaterial whether the time of payment of the price or the time of delivery of the goods or both is postponed.

(b) Specific goods to be put in deliverable state: [Section 21]

• where there is a contract for the sale of specific goods and
• the seller is bound to do something to the goods for the purpose of putting them into a deliverable state,
• the property in the goods does not pass until such thing is done and the buyer has the notice thereof.

(c) Specific goods to be Weighed or Measured: [Section 22]

• in a contract for the sale of specific goods in a deliverable state,
• where the seller is bound to weigh, measure, test or do some other act or thing
• with reference to the goods for the purpose of ascertaining the price,
• the property does not pass until such act or thing is done and the buyer has the notice of the same.

C. TRANSFER OF PROPERTY IN SALE BY APPROVAL
When goods are delivered on approval (Sec. 24): When goods are delivered to the buyer on approval or ‘on sale or return,’ or on other similar terms, the property therein passes to the buyer :

1. When he signifies his approval or acceptance to the seller, or
2. When the buyer does any other act adopting the transaction, e.g., pledges the goods or resells them.
3. When the buyer retains the goods, without giving notice of rejection, beyond the time fixed for the return of goods, or if no time has been fixed, beyond a reasonable time. In short, the property passes either by acceptance or by failure to return the goods within specified or reasonable time.

D. TRANSFER OF PROPERTY WHEN RIGHT OF DISPOSAL IS RESERVED
The object of reserving the right of disposal of goods is to secure that the price is paid before the property passes to the buyer. For example, under the VPP (Value Pre Paid) system the ownership passes to the buyer when the price is paid against the delivery of goods, till then the seller retains control over the goods
Section 25(1) lays down that—
in a contract for the sale of specific goods or where goods are subsequently appropriated to the contract,

• the seller may reserve the right of disposal of the goods until certain conditions are fulfilled.
• In such a case, even if the goods are delivered to the buyer himself, or to a carrier or other bailee for transmission to the buyer, the buyer does not acquire ownership until the conditions imposed by the seller are satisfied.
• For example, X sends certain goods by lorry to Y and instructs the lorry driver not to deliver the goods until the price is paid by Y to the lorry driver. The property passes only when the price is paid.

In the following circumstances, the seller is presumed to have reserved the right of disposal:—
(a) By taking a document of title in his own name or his agent’s name. [Sec. 25(2)].
When goods are shipped or delivered to railways for carriage but the document of title le. the bill of lading (in case of carriage of sea) or the railway receipts (in case of carriage by railways) are taken by the seller in his own name or in his agent’s name, the seller is presumed to have reserved the right of disposal. The property passes over to the buyer only when the buyer pays the price in exchange of bill of lading or the railway receipt.
Example : A sold certain bales of paper to B which were to be sent to him by railway. A took the railway receipt in the name of B, and sent them to his own banker to be delivered to B on the payment of the price. Before B paid the price, and received railway receipts, the goods were destroyed by fire. The court held that the seller should suffer the loss as he has reserved the right of disposal and at the time of destruction of bales, their ownership has not been transferred to the buyer – [General Papers Ltd. v. V.P. Mohideen & Bros. AIR 1958 Madras 482.]

(b) When the bills of exchange along with the RR/bill of lading is sent to the buyer. [Sec. 25(3)].
If the goods are delivered to a carrier {Le. the shipping company or railways) and the bill of lading or RR are taken in the name of the buyer. But the seller draws a bill of exchange on the buyer for the price of the goods, and sends the same to the buyer along with the bill of lading or railway receipts to secure the payment of the price. The property in goods does not pass to the buyer until he accepts the bill of exchange or pays the price of the goods. If he retains the goods without accepting the bill of exchange or payment of price the property does not pass.

TRANSFER OF TITLE BY NON-OWNER OR NO ONE CAN GIVE A BETTER TITLE THAN HE HIMSELF HAS

A sale is a contract plus a conveyance. As a conveyance it involves transfer of title of goods from the seller to the buyer. If the seller’s title is defective, the buyer’s title will also be defective. A person can only transfer what he has. No one can transfer a better title to the goods than he himself possesses. This principle is expressed by the Latin phrase, “Nemo dat quad non habet”, which means “none can give who does not himself possess”.
Exceptions
– In each of the following cases, a person who is not an owner, can give to the transferee a valid title to the goods:
1. Transfer of title by estoppel [(Sec. 27)]
When the true owner of the goods by his conduct or words or by any act or omission leads the buyer to believe that the seller is the ownfer of the goods or has the authority to sell them, he cannot afterwards deny the seller’s authority to sell. The buyer in such a case gets a better title than that of the seller.
Example:

1. ‘O’ who is the true owner of the goods, causes the buyer ‘B’ to believe that ‘S’ has the authority to sell the goods. ‘O’ cannot afterwards question the seller’s want of title on the goods.
2. ‘A’ was the true owner of goods. ‘B’ the seller told the buyer ‘C’ that the goods belonged to him. ‘A’ was present but remained silent. ‘C’ purchased the goods from ‘B’. Can ‘A’ question the title of ‘C’ over the goods?

2. Sale by a mercantile agent [Proviso to Sec. 27]
Sale of goods by a mercantile agent gives a good title to the purchaser even in cases where the agent acts beyond his authority, provided the following conditions are satisfied—

1. The agent is in possession of the goods or of a document of title to the goods.
2. Such possession is with the consent of the owner.
3. The agent sells the goods in the ordinary course business. :
4. The purchaser acts in good faith and has no notice that the agent had no authority to sell.

“Mercantile Agent”- ‘Mercantile agent’ means an agent having in the customary course of his business as such agent authority either (1) to sell goods, or (2) to consign goods for the purpose of sale, or (3) to buy goods, or (4) to raise money on the security of goods. [Sec. 2(9)]
Good faith means honestly, whether done negligently or not.

Document of Title to Goods. [Sec. 2(4)]
A document of title to goods is a document representing goods and is used—

• in the ordinary course of business
• as proof of the ownership, possession or control of goods.

It authorises the possessor of such document to receive or transfer the goods represented thereby.
According Sec. 2(4), documents of title to goods includes

1. bill of lading
2. dock warrant
3. warehouse keeper’s certificate
4. wharfinger’s certificate
5. railway receipt (R/R), lorry receipt (L/R)
6. multimodal transport document and
7. delivery order.

Thus, document of title is a document, which is the evidence of full ownership of goods represented by the document. Delivery of document of title is as good as giving delivery of goods. Transfer of document of title is a symbolic delivery of goods to the purchaser. The document of title to goods is transferred by endorsement or by mere ’ delivery and it confers a good title to the transferee if he receives it in good faith. E.g. , Delivery of railway receipt is enough to constitute delivery of goods represented by railway receipt.
Document of title shall be distinguished from document showing title to the goods. In case of document showing title to the goods, ownership cannot be transferred by endorsement or mere delivery unlike as in document of title to the goods.

What is bill of lading?
When the goods are carried by sea, the carrier of goods issues to the shipper a bill of lading. It is a document of title. Transfer of goods can be effected by transfer of bill of lading. The buyer may demand delivery of goods at the destination on the basis of the bill of lading.

Wharfingers certificate. A Wharf is a platform alongside the water for loading and unloading a ship. A wharfingers certificate is a document issued by a wharfingers. It certifies that the j goods specified in it are in the wharf. ,

3. Sale by one of several joint owners [Sec. 28]
This section enables a co-owner to sell not only his own share but also of his other co-owners. If one of several joint owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to any person who buys them from such joint owner provided the buyer acts in good faith and without notice that the seller had no authority to sell.
Section 28 lays down three conditions for validating a sale by one of co-owners :—

1. He must be in sole possession by permission of his co-owners.
2. The purchaser acts in good faith Le. with honesty.
3. The purchaser had no notice at the time of the contract of sale that the seller had no authority to sell.

X, Y & Z own certain truck in common. X is in possession of the truck by permission of his co-owners. X sells the truck to A. A purchases bona fide. The property in the truck is transferred to A.

4. Sale of goods obtained under a voidable agreement [Sec. 29]
When the seller of goods has obtained possession thereof under a voidable agreement but the agreement has not been rescinded at the time of sale, the buyer obtains a good title to the goods, provided he buys them in good faith and without notice of the seller’s defect of title.
It is to be noted that the above section applies when the goods have been obtained under a voidable agreement, not when the goods have been obtained under a void or illegal agreement. If the original agreement is of no legal effect (void ab-initio) the title to the goods remains with the true owner and cannot be passed on to anybody else.

5. Sale by the seller in possession of goods after sale [Sec. 30(1)]
Under this exception, a second sale by the seller remaining in possession of the goods will give a good title to the buyer acting in good faith and without notice. Three conditions should be fulfilled under this exception :

1. The seller must continue in possession of the goods or of the documents of title to the goods as seller. Possession as a hirer or bailee of the goods from the buyer after delivery of the goods to him will not do.
2. The goods must have been delivered or transferred to the buyer or the documents of title must have been transferred to him.
3. Good faith and absence of notice of the previous sale on the part of the second buyer.

6. Sale by buyer in possession of goods over which the seller has some rights [Sec. 30(2)]
This exception deals with the case of a sale by the buyer of goods in which the property has not yet passed to him. When goods are sold subject to some lien or right of the seller (for example for unpaid price) the buyer may pledge, or otherwise dispose of the goods to a third party and give him a good title, provided the following conditions for sell, are satisfied:

1. The first buyer is in possession of the goods or of the documents of title to the goods . with the consent of the seller.
2. Transfer is by the buyer or by a mercantile agent acting for him.
3. The person receiving the same acts in goods faith and without notice of any lien or other right of the original seller.

7. Sale by an unpaid seller [Sec. 54]
An unpaid seller of goods can, under certain circumstances, re-sell the goods. The purchaser of such goods gets a valid title of the goods.

8. Sale under the Contract Act

1. A pawnee may sell the goods of pawher if the latter makes a default of his dues. The purchaser under such a sale gets a good title. [Sec. 176 of Contract Act]
2. A finder of goods can sell the goods under certain circumstances. The purchaser gets a good title. [Sec. 169 of Contract Act]
3. Sale by an Official Receiver of Liquidator of the company will give the purchaser a valid title.

MULTIPLE CHOICE QUESTIONS:

1. Property in the goods ‘in the Sale of Goods Act means’
(a) ownership of goods
(b) possession of goods
(c) asset in the goods
(d) custody of goods

2. It is necessary to determine the precise moment of time at which the ownership of goods passes from seller to the buyer because
(a) risk passes with property
(b) action can be taken only by the owner
( c) suit for price by the seller does not lie unless the property has passed to the buyer
(d) all the above

3. The ownership in specific goods to be put in deliverable state passes—
(a) When the seller has brought the goods into a deliverable state and the buyer has notice thereof
( b) When the goods are brought in deliverable state by the seller
(c) The contract is made
(d) When the intention is clear

4. For passing of property in goods, the goods must be in
(a) deliverable state
(b) manufacturing stage
(c) consumable state
(d) marketing state

5. When the goods are sent on sale or return basis, the property in the goods passes to the buyer:
(a) When the buyer signifies his approval or acceptance to the seller
(b) When the buyer pledges the goods
(c) When the buyer resells the goods
(d) All the above

6. A seller sends the goods and takes the railway receipt in his own name at the buyer’s place the seller has—
(a) Reserved the right of disposal of goods
(b) Not reserved the right of disposal of goods
(c) May reserve the right of disposal of goods
(d) The question of reserving the right of dis-posal does not arise

7. “Nemo dat quad non habet”, means:
(a) no one is greater than god
( b) none can give who does not himself possess
(c) every one can give everything he has
(d) everyone is bound by is habit

8. Sale of goods by a mercantile agent gives a good title to the purchaser even in cases where the agent acts beyond his authority, provided the following conditions are satisfied—
(a) The agent is in possession of the goods or of a document of title to the goods.
(b) The agent sells the goods in the ordinary course business.
(c) The purchaser acts in good faith and has no notice that the agent had no authority to sell.
(d) All the above.

9. For passing of property in respect of specific or ascertained goods, the intention of the parties can be ascertained from —
(a) Terms of the contract
(b) Conduct of the parties
(c) Circumstances of the case
(d) All of the above

10. Under the Sale of Goods Act, 1930, the term “Mercantile Agent” means a mercantile agent, having as such agent, authority to —
(a) sell goods or consign goods for the purposes of sale
( b) buy goods
(c) raise money on the security of goods
(d) do all of the above.

11. Transfer of documents of title to the goods sold to the buyer, amounts to
(a) actual delivery
(b) symbolic delivery
(c) constructive delivery
(d) none of these.

12. A Share Certificate is a —
(a) Document of Title to Goods
(b) Bill of Exchange
(c) Document Showing Title to Goods
(d) Instrument of Transfer

13. A Bill of Lading is a —
(a) Bill of Exchange
(b) Promissory Note
(c) Cheque
(d) Document of Title to Goods.

14. When a bill of exchange in sent together with documents of title, the property in goods passes when the buyer.
(a) Receives the Bill of Exchange
(b) Returns the Bill of Exchange
(c) Accepts the Bill of Exchange
(d) None of these

15. Under the Sale of Goods Act, 1930, “Wharfinger’s Certificate” is a —
(a) Document of Title
(b) Document showing Title
(c) Certificate equivalent to a Negotiable Instrument
(d) Delivery Order

16. Which of these is NOT a Document of Title to Goods?
(a) Bill of Lading
(b) Railway Receipt
(c) Dock Warrant
(d) Bearer Cheque

17. Which of these is NOT a Document of Title to Goods?
(a) Warehouse Keeper’s Certificate
(b) Wharfinger’s Certificate
(c) Bill of Exchange
(d) Dock Warrant

18. Dock Warrant is a—
(a) Document showing title to Goods.
(b) Document of Title to Goods
(c) Bill of Exchange
(d) Warrant for Arrest of a Person

19. For transfer of property in un-ascertained goods, the basic condition is that —
(a) Goods must be ascertained and appropriated.
(b) Goods must be defined by description.
(c) Buyer must receive a sample of the goods
(d) Seller must have produced/purchased the goods

20. The property, in case of sale of un-ascertained goods, passes when—
(a) Delivery Order is entered
(b) Goods are identified and appropriated to the contract
( c) Goods are so far ascertained that the parties have agreed that they shall be taken from some specific larger stock.
(d) Transfer is made in the books of the warehouse man.

21. In case of sale of unascertained goods, the property in goods passes —
(a) when the contract provides that the property in goods shall pass
(b) when the goods are ascertained
(c) when the contract is made
(d) all of the above

22. There was a contract to supply “waste coal and ash for the next six months, as and when the waste is generated by the Seller’s Factory”. The Buyer paid the lumpsum price for the next six months in advance. When does the property in the goods pass to the Buyer?
(a) After the lapse of six months period
(b) At the time of entering into the contract
(c) At the time of paying advance money
(d) As and when the Factory discharges the waste

23. The process of identifying the goods and setting apart as per the intended quality or description is called —
(a) Identification
(b) Procurement
(c) Ascertainment
(d) Allocation

24. In a sale of specific or ascertained goods, the property therein is transferred to the buyer —
(a) upon delivery of goods
(b) upon payment of price
(c) at such time as the parties intend it to he transferred
(d) at such time as decided by the Court.

Answers:

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The general rule of Sale of Goods Act is, risk prima facie passes with the delivery of goods.
2. Risk and ownership cannot be separated.
3. Parties may agree that risk will pass sometimes before the property has passed.
4. Promissory note is a document of title to goods.
5. Pledging of goods obtained under a “sale or return” contract completes the contract of sale.
6. A contract of sale of future goods will always be an agreement to sell.
7. When there is a contract for the sale of un-ascertained goods, the property in the goods is not transferred to the buyer unless and until the goods are ascertained.
8. The seller in possession of the goods after sale can make a valid second sale even if he is not in the possession of the goods or document of title to the goods.
9. A agrees to sell to B 20 tonnes of oil of a certain description in his cisterns and he has more than 20 tonnes of oil of description in his cisterns, then no property will pass to B unless the 20 tonnes are separated from the rest and they are appropriated to the contract.

Answers: