CA Foundation Business Laws Study Material Chapter 11 Conditions and Warranties
Sec. 12 of the Sale of Goods Act states that a stipulation (or term) in a contract of sale with reference to goods may be a condition or a warranty.
A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated. [Sec. 12(2)]
For example, A wants to buy a car which can give a mileage of 20 kms/litre. B, the car dealer, points out at a particular car and says “this car will suit you”. A buys the car. But later on he finds that the car is giving a mileage of only 10 kms/litre. THERE IS A BREACH OF CONDITION, because the stipulation made by B forms the very basis of the contract.
A warranty is stipulation collateral to the main purpose of the contract, the breach of which gives rise to claim for damages but not a right to reject the goods and treat the contract as repudiated- I [Sec. 12(3)]
For example : A goes to B, a car dealer, and says, “I want a good car” The car dealer shows him a car and says, “it can give you a mileage of 20 kms/litre”. A buys the car. Later on, A finds that the car is giving a mileage of 10 kms/litre only. THERE IS A BREACH OF WARRANTY, because the stipulation made by the seller was only collateral one.
Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may the a condition, though called a warranty in the contract – [Sec. 12(4)]
Conditions and warranties may be expressly stated or may be implied by law. Implied conditions and warranties are enumerated in sections 14 to 17. They are deemed to be incorporated in every contract of sale unless the terms of the contract show a contrary intention.
When a condition can be treated as a warranty:
Voluntary waiver of a condition [Sec. 13(1)]
1. Where a contract of sale is subject to a condition to be fulfilled by the seller, the buyer may—
- waive the condition, for example a buyer may accept defective goods or accept goods
beyond stipulated time.
- elect to treat a breach of condition as a breach of warranty, i.e. instead of repudiating the contract he may accept performance and sue for damages, if he has suffered any.
Once a buyer decides to waive, he cannot afterwards insist on its fulfilment.
Compulsory waiver of a condition [Sec. 13(2)]
Where a contract of sale is not severable (Le. indivisible) and the buyer has accepted the goods or a part thereof, he cannot repudiate the contract but can only sue for damages. In such a case, the breach of condition can only be treated as a breach of war ranty, unless there is a contract to the contrary. [Sec. 13(2)]
E.g: W bought laptops from M and resold it to C without examining the laptops. The laptops were defective. It was held that W must be deemed to have accepted the goods and therefore he could not repudiate the contract but could claim only damages.
- However, there may be an agreement between the parties which may be contrary to section 13(2). In that case the parties may agree between themselves that the provision of section 13(2) will not apply in their case and the buyer shall have a right to reject the goods even though he has accepted the indivisible goods.
- If the contract of sale is divisible and the buyer has accepted a part of the goods, he can still exercise the right to reject the remaining goods.
- Impossibility [Sec.13(3)] : The above provisions of Section 13(1) and 13(2) do not affect the cases where the fulfilment of any condition or warranty is excused by law by reason of impossibility or otherwise. This means that under section 13(3) the seller has the right to rely upon impossibility as an excused in appropriate cases, if sued by the buyer.
Condition is a term, which is essential to the main purpose of the contract. Warranty is only a collateral term. It is subsidiary to the main purpose of the contract. Breach of a condition gives the aggrieved party a right to repudiate the contract and also to claim damages. Breach of warranty entitles the aggrieved party to claim damages only. He cannot repudiate the contract. A breach of condition may under certain circumstances, be treated as breach of warranty But a warranty cannot become a condition.
IMPLIED CONDITIONS AND WARRANTIES
A stipulation (or term) in a contract of sale of goods may be express or implied. Express terms are those which have been expressly agreed upon by the parties. Implied terms are those which have been enacted in the Sale of Goods Act. Sections 14 to 17 of the Act contain a list of conditions and warranties which are implied in a contract for the sale of goods, unless the circumstances of the contract are such as to show a different intention. The implied conditions and warrants are stated below:
(a) Implied conditions
1. Implied condition as to title. – [Sec. 14]
There is an implied condition on the part of the seller that, in the case of a sale he has the right to sell the goods, and in the case of an agreement to sell, he will have the right to sell the goods at the time when the property is to pass. If the seller’s title turns out to be defective, the buyer is entitled to reject the goods and claim refund of the price plus damages.
- A bought a motor car from B. He used it for 3 months and thereafter the car was detected to have been stolen. A was compelled to return it to the true owner. Could A recover the sale price from B?
- A sells to B tins of condensed milk labelled “Nissly Brand” and this is proved to be an infringement of Nestle Company’s trade mark. Is it a breach of implied condition as to title?
(Ans: When a person sell the goods by infringing a copyrights or trademark of the others, he is considered as not having right to sell such goods.)
2. Implied condition in a sale by description. – [Sec. 14]
Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description. “Correspond with the description” means that the buyer must get the goods that he has asked for. The description may be given—
- by mentioning qualities or characteristics of the goods e.g. Basmati rice.
- by mentioning the trademark or brand name e.g. Videocon TV.
- by the type of packing e.g. 1 kg. packing of tea in plastic jar.
If the buyer does not get the goods he has described he can reject the goods. The rule is “If you contract to sell peas, you cannot oblige a party to take beans. If the description of the article tendered is different in any respect, it is not the article bargained for, and the other party is not bound to take it”. E.g. A car is sold as a “new maruti car”. The buyer finds it to be a used one. The buyer may reject the car or retain the car and claim damages.
3. Implied condition in a sale by sample as well as by description. – [Sec. 15]
When goods are sold by sample as well as by description, the goods shall correspond both with the sample and with the description.
4. Implied condition as to fitness or quality. – [Sec. 16(1)]
The general rule is, there is no implied condition as to quality or fitness for the purpose of the buyer. This is based on the doctrine of “caveat emptor” that is, let the buyer beware. It means that while buying the goods, it is the responsibility of the buyer to check that the goods he is buying would suit his purpose or not. However, in the following situation, the responsibility as to fitness of goods falls upon the seller:
a. where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required,
b. so as to show that the buyer relies on the seller’s skill, or judgment, and
c. the goods are of a description which it is in the course of the seller’s business to supply (whether he is the manufacturer or not), there is an implied condition that the goods shall be reasonably fit for such purpose.
- A contracts to make and deliver a set of false teeth to B. The false teeth do not fit in the mouth of B. B is entitled to reject the goods.
- X places order for lorries to be used for ‘heavy traffic in a hilly country’. The lorries were unfit for this purpose and broke down. It was held that there was breach of condition as to fitness.
Sale under patent or trade name. Proviso to section 16(1) lays down that in the case of a contract for the sale of a specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose. It is so because in such a case the buyer is not relying on the skill and judgment of the seller but relies on the patent name. For example, a hotelier orders ‘Sujeet’ juicer and mixer (patent product) for his business. The juicer and mixer supplied was found to be unsuitable for commercial use. The buyer has no cause of action against the seller, since he purchased the juicer by its patent name.
5. Implied condition as to merchantability. – [Sec. 16(2)]
Where goods are brought by description from a seller who deals in goods of that description, there is an implied condition that goods shall be of merchantable quality. Merchantable means that the goods are commercially saleable and that they are hit for the purpose for which they are generally used.
Where the buyer examines the goods prior to sale, there is no implied condition as to merchantability as regards defects which such examination ought to have revealed. However, inspite of exil amination, if the goods have certain latent defects which no examination could reveal, the implied condition remains.
- X bought a colour TV from M/s Concord Electronics. The TV was defective right from the beginning and it did not work inspite of repairs by expert technicians. There is a breach of implied condition as to merchantability and the dealer will have to take back the defective TV and refund the amount.
- X orders motor horns from a manufacturer. The horns supplied are defective. X is entitled to reject them as unmerchantable.
6. Implied condition in a sale by sample. – [Sec. 17]
When goods are to be supplied according to a sample agreed upon, the following conditions are implied:
- The bulk shall correspond with the sample in quality.
- The buyer shall have a reasonable opportunity of comparing the goods with the sample.
- The goods shall be free from any latent defect ( hidden defect) rendering them unmerchantable. Latent defects are the defects which would not be apparent on reasonable examination of the sample and they can be discovered only when the goods are put to use. If the defect is easily discoverable on inspection and the buyer takes delivery after inspection, he has no remedy.
A sale is by sample where there is a term in contract, express or implied to that effect. The effect of the section is that where goods are sold by sample, there should not be any latent defect therein which renders them unmerchantable.
7. Implied condition as to wholesomeness
In case of food stuff and eatables, in addition to the implied condition as to merchantability, there is another implied condition that the goods shall be wholesome that is fit for human consumption.
X bought milk from Y, a dairy owner. The milk was contaminated with germs of typhoid fever. X’s
wrfe, on taking the milk, became infected and died of it. Y was held liable in damages.
(b) Implied warranties
In the absence of an agreement to the contrary, the following warranties are implied in every con-tract of sale:
1. The buyer must get quiet possession [Sec. 14(b)]
The buyer shall have and enjoy quiet possession of the goods. For e.g.: X has given his car on hire for a period of one month to Y. Thereafter, X sold it to Z without disclosing to him that Y was en-titled to use the car on account of the hire agreement. Z claims the car from Y. Y’s possession is disturbed. He can claim damages from X.
2. The goods must be free from encumbrance [Sec. 14(c)]
There is an implied warranty that the goods shall be free from any charge or encumbrance in favour of a third party not declared or known to the buyer before or at the time when the contract iis made. The effect of this clause is that if the buyer pays off the charge of encumbrance, he will be entitled to recover the money from the seller.
3. Warranty for quality or use by usage of trade [Sec. 16(3)]
A warranty as to fitness for a particular purpose may be annexed to a contract of sale by a custom usage of trade.
4. Disclosure of dangerous nature of goods
Where the goods are dangerous in nature and the buyer is ignorant of the danger, the seller must warn the buyer of the probable danger. If there is a breach of this warranty, the seller may be liable i in damages.
- Express terms – [Sec. 16(4)]: An express warranty or condition does not negate a warranty or condition implied by the Act. (Unless the express terms are inconsistent with the implied conditions). This means that implied warranty or condition may co-exist with express warranty or condition. Thus, for example, where sleepers supplied to a railway company were required to be approved by its experts, it was held that it did not exclude the implied condition of merchantableness.
- Exclusion of implied terms – [Sec. 62]: These implied conditions and warranties may be ex- eluded or modified by the parties to the contract by express contract, by course of dealing i and by usage of trade.
THE DOCTRINE OF CAVEAT EMPTOR
Caveat Emptor is a Latin expression, which means, “Buyers Beware”. The doctrine of caveat emptor means that, ordinarily, a buyer must buy goods after satisfying himself of their quality and fitness. If he makes a bad choice he cannot blame the seller or recover damages from him. This doctrine is stated in the opening words of section 16: Subject to the provisions of this Act and of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale.
- It is buyer’s duty to examine goods thoroughly.
- The buyer should ensure at the time of purchase that the goods conform to his requirements.
- If the goods turn out to be defective, buyer cannot hold the seller responsible.
The doctrine of caveat emptor does not apply in the following situations:
1. Fitness as to quality or use. [Sec. 16(1)]
- Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required,
- soas to show that the buyer relies on the seller’s skill, or judgment, and
- the goods are of a description which it is in the course of the seller’s business to supply (whether he is the manufacturer or not, there is an implied condition that the goods shall be reasonably fit for such purpose.)
In Priest Vs. Last, P purchased a hot water bottle from a chemist. The chemist informed him that the bottle was specially meant for holding hot water. At the time of use, the bottle burst as soon as hot water was poured into it and injured P’s wife. Chemist was held liable to pay damages to P’.
However, this rule does not apply when the goods are sold under a patent or a brand name.
2. Sale of goods by description. [Sec. 16(2)]
Where there is a sale of goods by description, there is an implied condition that the goods are merchantable that is, fit for particular purpose.
3. Trade usage. [Sec. 16(3)]
An implied condition of fitness may be annexed to a contract of sale by usage of trade.
E.g. In readymade garment business, there is an implied condition by usage of trade that the garments shall be reasonably fit on the buyer.
4. Where the seller is guilty of fraud.
Where the seller makes a false representation and buyer relies on that representation, the doctrine of caveat emptor will not apply. In such a case the buyer will be entitled to the goods according to that representation.
5. Where seller actively conceals a defect
Where the seller actively conceals a defect in the goods so that the same could not be discovered on a reasonable examination, the doctrine of caveat emptor will not apply. Such a contract will be voidable.
6. Sale by sample
When goods are purchased by sample, the bulk must correspond with the sample and the buyer must have reasonable opportunity of inspecting the goods.
7. Sale by sample as well as description
The doctrine of Caveat Emptor is not applicable if the goods do not correspond to both, sample as well as description.
MULTIPLE CHOICE QUESTIONS:
1. Conditions are stipulations
(a) essential to the main purpose of the contract
(b) collateral to the main purpose of the contract
(c) either ‘a’ or ‘b’
(d) neither ‘a’ nor ‘b’
2. A warranty is stipulation
(a) essential to the main purpose of the contract
(b) collateral to the main purpose of the contract
(c) very important to the seller
(d) very important to the buyer
3. Breach of a condition gives rise to
(a) claim for damages
(b) a right to treat the contract as repudiated
(c) both ‘a’ and ‘b’
(d) either ‘a’ or ‘b’
4. Breach of a warranty gives rise to
(a) claim for damages
( b) a right to treat the contract as repudiated
(c) both ‘a’ and ‘b’
(d) either ‘a’ or ‘b’
5. What are implied stipulations of a contract?
(a) agreed by the parties.
(b) incorporated by law unless specifically agreed otherwise.
(c) implied by the circumstances
(d) implied by trade customs
6. If the condition as to the title of goods is not fulfilled, the buyer
(a) may reject the goods
(b) has no alternative but to buy the goods
(c) may reject the goods and claim damages
(d) all the above
7. In a sale by sample and description, there is an implied condition
(a) that bulk of the goods correspond with the sample
(b) that bulk of goods must correspond to the j description as well as the sample thereof
(c) the bulk of goods must correspond either to the description or to the sample
(d) the bulk of goods must correspond to the description only
8. “If you contract to sell peas, you cannot oblige a party to have beans”: this statement applies to
(a) a implied condition as to be description of goods
(b) the implied condition as to fitness of goods
for a particular purpose
(c) implied condition as to sample
(d) implied condition as to title
9. Under section 11 of the Sale of Goods Act, 1930, the time of payment can be of the essence of the contract —
(a) by agreement between the parties
(b) by operation of law
(c) both (a) and (b)
(d) either (a) or (b)
10. Whether or not any stipulation other than time of payment is of the essence of the contract depends upon —
(a) application of section 11
(b) operation of law
(c) terms of the contract
(d) all of the above
11. A stipulation in a contract of sale which is collateral to the main purpose of contract is called as
12. Merchantable quality of goods means
(a) that the goods are commercially saleable
(b) they are fit for the purpose for which they are generally used
(c) both ‘a’ and ‘b’
(d) the quality should be of high standard
STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:
1. Where the buyer is deprived to goods by their true owner then the buyer may recover the price for breach of the condition as to title.
2. A stipulation essential to the main purpose of the contract is called as guarantee.
3. There is an implied condition that the goods shall be free from all encumbrances.
4. If a contract of sale contains a stipulation which has become impossible to perform the law excuses such a stipulation by reason of impossibility.
5. Breach of implied warranties leads to the repudiation of a contract.
6. Once the buyer decides to waive the condition he cannot insist on its fulfilment later on.
7. Implied condition as to description can be given by the type of packing.