The Sale of Goods Act, 1930 — Practice

Question 1

Distinguish a sale from an agreement to sell on at least six named bases, stating the consequence in each case.

Accepted Answer

Definitions. Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale. Where the transfer of the property in the goods is to take place at a future time, or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

Nature of the contract. A sale is an executed contract, the seller having performed his principal obligation of transferring property. An agreement to sell is executory, that obligation remaining to be performed.

Transfer of property. In a sale property passes immediately on the making of the contract, subject to the rules on passing of property. In an agreement to sell it passes at a future time or on the fulfilment of a condition.

Risk of loss. In a sale, risk passes with property, so if the goods are destroyed the buyer bears the loss even though he has neither paid nor taken delivery. In an agreement to sell, property has not passed, so the seller bears the loss.

Nature of the right created. A sale creates a right in rem — a right in the thing itself, good against the whole world, because the buyer has become owner. An agreement to sell creates only a right in personam, enforceable against the seller alone.

Effect of the seller's insolvency. In a sale, the buyer is the owner and may claim the goods from the Official Assignee even though he has not received them. In an agreement to sell, the buyer is merely a creditor and can only prove in the insolvency for any price he has paid.

Effect of the buyer's insolvency. In a sale, the seller must deliver the goods to the Official Assignee and prove in the insolvency for the price. In an agreement to sell, the seller may refuse to deliver unless he is paid.

Remedy for breach. In a sale, the seller may sue for the price, since property has passed and the buyer owes the money. In an agreement to sell, the seller's remedy is a suit for damages for non-acceptance, because the buyer never became owner and so never owed the price as a debt.

The unifying point is that every difference traces to the single fact of whether ownership has passed, which is why the passing of property is the organising question of the whole Act.

Question 2

In each case decide whether property has passed and who bears the loss where the goods are destroyed by fire before delivery: (a) A agrees to sell a specific second-hand machine lying in his godown, payment and delivery to be next month; (b) A agrees to sell a specific machine but must first dismantle and crate it, and it burns before he does so; (c) A agrees to sell 50 tonnes out of a heap of 200 tonnes of coal, nothing having been separated.

Accepted Answer

Provision. Section 26 provides that unless otherwise agreed, the goods remain at the seller's risk until the property in them is transferred to the buyer, but when the property is transferred the goods are at the buyer's risk whether delivery has been made or not. The question of loss is therefore always decided by asking whether property had passed, never by asking who held the goods.

(a) Specific machine in a deliverable state, payment and delivery postponed.

Rule 1 applies: where there is an unconditional contract for the sale of specific goods in a deliverable state, the property passes to the buyer when the contract is made, and it is immaterial whether the time of payment, the time of delivery, or both, is postponed.

The machine is specific — identified and agreed upon at the time of the contract — and is in a deliverable state, being in such a state that the buyer would be bound to take delivery of it. Property therefore passed when the contract was made.

Risk followed property. The buyer bears the loss and remains liable to pay the price, notwithstanding that he has neither paid nor received the machine. This result surprises candidates, which is why the rule is examined.

(b) Specific machine requiring dismantling and crating.

Rule 2 applies: 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 does not pass until that thing is done and the buyer has notice of it.

The seller was bound to dismantle and crate the machine, so it was not in a deliverable state. He had not done so when the fire occurred, and a fortiori the buyer had no notice. Property had not passed.

The seller bears the loss. Note that both limbs of the rule matter: even had the seller completed the crating, property would not have passed until the buyer had notice of it.

(c) 50 tonnes out of an undifferentiated heap of 200 tonnes.

The goods are unascertained. Property in unascertained goods does not pass unless and until the goods are ascertained, and thereafter passes only when goods of that description and in a deliverable state are unconditionally appropriated to the contract with the assent of the other party.

Nothing has been separated from the heap, so the goods remain unascertained and no appropriation has occurred. Property has not passed.

The seller bears the loss. He also remains bound to deliver 50 tonnes, since his obligation is to supply goods answering the description and the destruction of this particular heap does not discharge a contract for unascertained goods unless the contract was confined to that source.

Question 3

Distinguish a condition from a warranty, and state the circumstances in which a breach of condition can only be treated as a breach of warranty. Advise a buyer who has used half a consignment of oil before discovering it does not answer the description, the contract being for a single lot.

Accepted Answer

Distinction. 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. A warranty is a stipulation collateral to the main purpose, the breach of which gives rise to a claim for damages but not to a right to reject the goods and repudiate the contract.

Whether a stipulation is a condition or a warranty depends on the construction of the contract in each case, and a stipulation may be a condition though called a warranty in the contract. The label the parties use does not govern; the question is whether the term goes to the root of the bargain.

On breach of a condition the buyer may reject the goods, refuse to pay and claim damages. On breach of a warranty he must accept the goods and is confined to damages or to setting up the breach in diminution of the price.

When a condition sinks to a warranty. Section 13 provides three situations.

Where the buyer waives the condition, or elects to treat the breach of condition as a breach of warranty. The election is the buyer's, and once made it is binding.

Where the contract of sale is not severable and the buyer has accepted the goods or part of them. Acceptance under an indivisible contract extinguishes the right to reject, and the buyer is left with damages.

Where the fulfilment of the condition is excused by law by reason of impossibility or otherwise.

Application.

The implied condition that goods sold by description shall correspond with the description has been broken. Prima facie the buyer could reject the whole consignment, refuse the price and claim damages.

But the contract was for a single lot and is therefore not severable, and the buyer has used half the consignment. Using the goods is an act in relation to them inconsistent with the seller's ownership, and he is accordingly deemed to have accepted them. He has also plainly had a reasonable opportunity of examining them.

The second situation in section 13 therefore applies. Because the contract is indivisible and the buyer has accepted part of the goods, the breach of condition can only be treated as a breach of warranty.

Conclusion. The buyer cannot reject the consignment or repudiate the contract. He must pay the price, but may claim damages for the breach, measured by the difference between the value of the oil as delivered and its value had it answered the description, or may set up that difference in diminution of the price.

The position would have been different had the contract been severable into separate lots, in which case rejection of the unaccepted lots would have remained open.

Question 4

State the implied condition as to fitness for a particular purpose and its exception. Advise in each case: (a) a buyer tells a dealer he needs a pump to lift water from a 200-foot borewell and the pump supplied cannot lift beyond 100 feet; (b) a buyer asks specifically for a 'Reliant X-40 pump' by name and it proves unsuitable for his borewell.

Accepted Answer

Provision. Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller's skill or judgement, and the goods are of a description which it is in the course of the seller's business to supply, there is an implied condition that the goods shall be reasonably fit for that purpose.

The three requirements are therefore that the particular purpose be made known, that the buyer relies on the seller's skill or judgement, and that the goods are of a description the seller deals in.

The exception. 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. The reason is that a buyer who asks for goods by name has relied on the name and on his own judgement about it, not on the seller's skill — the seller has merely supplied what was demanded.

(a) The buyer who states the purpose.

The buyer expressly made known the particular purpose, namely lifting water from a borewell 200 feet deep. By stating the purpose to a dealer rather than specifying a model, he showed that he relied on the dealer's skill or judgement to select a suitable pump. Pumps are goods it is in the course of a dealer's business to supply.

All three requirements are satisfied and the implied condition of fitness applies. A pump that cannot lift beyond 100 feet is not reasonably fit for the purpose made known.

The buyer may treat the contract as repudiated, reject the pump, recover the price and claim damages, provided he has not accepted the goods within the meaning of section 13.

(b) The buyer who asks for a named model.

The buyer asked for a specified article under its trade name. He did not make known any particular purpose so as to show reliance on the seller's judgement; he identified what he wanted and the seller supplied precisely that.

The exception applies and there is no implied condition of fitness for the buyer's particular purpose. The buyer's remedy fails on this ground.

Two qualifications should be noted, and stating them strengthens the answer. First, the exception removes only the condition of fitness for a particular purpose; the implied condition of merchantable quality survives, so if the pump were defective as a pump of its kind the buyer would still have a remedy. Second, the mere use of a trade name does not automatically exclude the condition — if the buyer describes his purpose and the seller then recommends a particular branded model, the buyer has relied on the seller's judgement in selecting it, and the condition applies notwithstanding that the order was ultimately placed by name.

Question 5

State the rule of caveat emptor and its exceptions, and explain why the exceptions have largely displaced the rule in practice.

Accepted Answer

The rule. Caveat emptor means let the buyer beware. Subject to the Act and to any other law, 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. The seller is under no duty to disclose the faults of his goods, and a buyer who fails to specify what he needs or to examine what he is offered has no remedy if the goods disappoint him.

The rationale is that the buyer is expected to look after his own interests and to make his own enquiries, and that a seller cannot be expected to guess the uses to which goods will be put.

The exceptions.

Where the buyer makes known the particular purpose for which the goods are required, so as to show reliance on the seller's skill or judgement, and the goods are of a description the seller deals in — the implied condition of fitness applies.

Where goods are bought by description from a seller who deals in goods of that description — the implied condition of merchantable quality applies, except as regards defects an examination actually made ought to have revealed.

Where the sale is by sample and the bulk does not correspond with the sample, or the buyer is denied a reasonable opportunity of comparison, or the goods have a defect rendering them unmerchantable not apparent on reasonable examination of the sample.

Where the sale is by sample as well as by description and the goods do not correspond with both.

Where the seller is guilty of fraud or makes a misrepresentation, or actively conceals a defect not discoverable on reasonable examination.

Where a usage of trade annexes an implied condition or warranty as to quality or fitness and the seller deviates from it.

A further head is the implied condition as to wholesomeness in the case of provisions and foodstuffs.

Why the exceptions have displaced the rule. The two principal exceptions — fitness for a stated purpose, and merchantable quality on a sale by description — cover the great majority of modern commercial and consumer transactions. Almost all retail sales are sales by description from a dealer in such goods, and most buyers who have a specific requirement state it. The result is that caveat emptor now operates as a residual rule, applying mainly to private sales between parties who are not dealers, to sales of specific goods the buyer has examined, and to purchases made by trade name where no purpose was disclosed. The rule survives in form but has been substantially reversed in effect.

Question 6

State the rule of nemo dat quod non habet and its exceptions. Advise the true owner in each case: (a) a mercantile agent in possession of goods with the owner's consent sells them in the ordinary course of business to a buyer acting in good faith; (b) a person who obtained goods by fraud sells them before the contract is rescinded to an innocent buyer; (c) a thief sells stolen goods to an innocent buyer.

Accepted Answer

The rule. Where goods are sold by a person who is not the owner of them, and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had. Nemo dat quod non habet — no one gives what he does not have.

The exceptions, each protecting a purchaser in good faith for value without notice: sale by a person the owner is estopped from denying has authority; sale by a mercantile agent in possession with the owner's consent; sale by one of several joint owners in sole possession with the others' permission; sale by a person in possession under a voidable contract not yet rescinded; sale by a seller left in possession after sale; sale by a buyer in possession before property has passed; resale by an unpaid seller; and sale by a finder of goods or a pawnee in the circumstances the Contract Act allows.

(a) Sale by a mercantile agent.

The exception applies. Where a mercantile agent is, with the consent of the owner, in possession of the goods or of the documents of title to them, any sale made by him when acting in the ordinary course of business as a mercantile agent is as valid as if he were expressly authorised by the owner, provided the buyer acts in good faith and has not at the time of the contract notice that the seller has no authority to sell.

All the conditions are met on the facts. The buyer obtains good title, and the true owner cannot recover the goods. His remedy is against the agent personally for the proceeds and for breach of the agency.

The policy is that the owner himself put the agent in possession and thereby clothed him with the appearance of authority, and as between two innocent parties the loss falls on the one who made the fraud possible.

(b) Sale by a person holding under a voidable contract.

The exception applies. When the seller of goods has obtained possession under a contract voidable on the ground of coercion, undue influence, fraud or misrepresentation, but the contract has not been rescinded at the time of the sale, the buyer acquires a good title provided he buys in good faith and without notice of the seller's defect of title.

The crucial fact is the timing. A contract induced by fraud is voidable, not void, so until it is rescinded the fraudster holds a defective but real title, and he can pass what he has to an innocent buyer. Had the owner rescinded before the sale — by taking all reasonable steps to avoid the contract — the fraudster would have had no title left to pass.

The innocent buyer therefore obtains good title, and the owner's remedy is against the fraudster.

(c) Sale by a thief.

No exception applies. A thief obtains no title whatever: the contract by which he purported to acquire the goods does not exist, and there is nothing voidable about his position — it is simply void of any title. This is the difference between goods obtained by fraud, where a voidable title passes, and goods stolen, where none does.

The innocent buyer acquires nothing and must return the goods to the true owner, however much he paid and however careful he was. His remedy is against the thief.

The distinction between (b) and (c) is the point of the question, and it is worth stating expressly: fraud produces a voidable title capable of being passed on before rescission, while theft produces no title at all.

Question 7

Who is an unpaid seller? State his rights against the goods, and distinguish the right of lien from the right of stoppage in transit on named bases.

Accepted Answer

Who is an unpaid seller. A seller of goods is an unpaid seller when the whole of the price has not been paid or tendered; or when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. The term includes any person in the position of a seller, such as an agent of the seller to whom the bill of lading has been endorsed.

Rights against the goods.

The right of lien — to retain possession of the goods until payment or tender of the price, where the seller is in possession of them.

The right of stoppage in transit — to resume possession of goods that have left the seller but not yet reached the buyer, and to retain them until payment.

The right of resale — to resell the goods in defined circumstances.

Where property has not passed to the buyer, the unpaid seller also has a right of withholding delivery, co-extensive with his rights of lien and stoppage.

Distinction between lien and stoppage in transit.

Possession. The right of lien is exercisable while the seller is in possession of the goods. Stoppage in transit is exercisable after the seller has parted with possession but before the goods have reached the buyer. The two are sequential rather than alternative — the moment the seller loses possession his lien ends and stoppage may begin.

Insolvency of the buyer. Lien does not require the buyer to be insolvent; it is available where the goods were sold without any stipulation as to credit, where they were sold on credit and the term has expired, or where the buyer becomes insolvent. Stoppage in transit is available only where the buyer has become insolvent.

Whose possession the goods are in. In lien the goods are in the seller's own possession. In stoppage the goods are in the possession of an independent carrier or other bailee who is neither the seller's agent nor the buyer's.

Object of the right. Lien is a right to retain possession already held. Stoppage is a right to regain possession that has been given up.

How the right ends. Lien is lost when the seller delivers the goods to a carrier for transmission to the buyer without reserving the right of disposal, when the buyer or his agent lawfully obtains possession, or by waiver. Transit for the purpose of stoppage ends when the buyer or his agent takes delivery, when the carrier acknowledges to the buyer that he holds the goods on the buyer's behalf, or when the carrier wrongfully refuses to deliver to the buyer.

Relationship. Stoppage in transit begins where lien ends. A seller who has lost his lien by delivering to a carrier may still stop the goods in transit if the buyer becomes insolvent, which is why the right exists at all.

Question 8

When may an unpaid seller resell the goods? Explain the consequences of reselling with and without notice, and advise a seller who resold goods worth ₹5,00,000 for ₹4,20,000 after the buyer defaulted, without giving notice.

Accepted Answer

When resale is permitted. An unpaid seller who has exercised his right of lien or stoppage in transit may resell the goods in three situations.

Where the goods are of a perishable nature. No notice to the buyer is required, because delay would destroy the value of the goods.

Where the unpaid seller has given notice to the buyer of his intention to resell, and the buyer does not within a reasonable time pay or tender the price.

Where the contract of sale expressly reserves a right of resale in case the buyer should make default.

Consequences of reselling with notice.

The seller may recover from the original buyer any loss occasioned by his breach of contract — the difference between the contract price and the resale price, together with the expenses of resale.

He is not accountable to the original buyer for any profit on the resale; if the goods fetch more than the contract price, the seller keeps the surplus.

The new buyer acquires a good title to the goods as against the original buyer, notwithstanding that no notice of resale was given to him.

Consequences of reselling without notice.

The seller cannot recover the loss on the resale from the original buyer. Having failed to give the buyer the opportunity to pay and take the goods, he cannot charge him with the consequences of a sale the buyer had no chance to prevent.

He must account to the original buyer for any profit on the resale.

The new buyer nonetheless acquires good title, since the protection of a purchaser does not depend on the seller having complied with his obligations to the original buyer.

So notice is not a condition of the validity of the resale as against the new buyer, but it is a condition of the seller's ability to charge the loss to the original buyer.

Application.

The goods were worth ₹5,00,000 under the contract and were resold for ₹4,20,000, producing a loss of ₹80,000. No notice of the intention to resell was given, and the facts do not suggest the goods were perishable or that the contract reserved a right of resale.

The seller cannot recover the ₹80,000 loss from the original buyer. His failure to give notice deprived the buyer of the opportunity to pay the price and take delivery, and the Act denies him the loss for that reason.

The new buyer obtains a good title to the goods and the original buyer cannot claim them.

The seller retains his personal remedies against the original buyer for breach of contract in the ordinary way — but the measure of what he can recover on the resale is what he has forfeited by not giving notice.

The practical lesson, and the reason the point is examined, is that giving written notice of an intention to resell costs the seller nothing and preserves a claim that is otherwise lost entirely.

Question 9

Distinguish a sale from a hire purchase agreement, and explain why finance companies prefer the hire purchase form.

Accepted Answer

Transfer of property. In a sale, property in the goods passes to the buyer immediately or at the time fixed by the contract. In a hire purchase, the hirer takes possession as a bailee with an option to purchase, and property passes only when the last instalment is paid and the option is exercised.

Position of the party in possession. A buyer is the owner from the moment property passes. A hirer is a bailee until the option is exercised, and his possession is that of a person holding another's goods.

Obligation to pay. In a sale the buyer is bound to pay the price, and the seller may sue for it as a debt once property has passed. In a hire purchase the hirer pays hire instalments and is not bound to complete the purchase; he may terminate the agreement and return the goods at any time, subject to the terms as to instalments already accrued.

Power to pass title. A buyer, being the owner, can pass good title to a sub-purchaser. A hirer, not being the owner, cannot pass good title before exercising the option, and a person buying from him ordinarily acquires nothing as against the owner.

Remedy on default. In a sale the seller's remedy is a suit for the price or for damages; the goods belong to the buyer and cannot simply be taken back. In a hire purchase the owner may terminate the agreement and repossess the goods, since they remain his throughout.

Taxation and statutory treatment. A sale attracts the incidents of a sale of goods from the outset; a hire purchase is treated as a bailment with an option, and the transfer of property occurs only at the end.

Why finance companies prefer hire purchase. The decisive advantage is security. Because ownership is retained until the final instalment, the financier can repossess the goods on default without needing to enforce a charge or obtain a decree for the price and execute against the debtor's assets. The goods remain the financier's own property, not merely security over the debtor's property.

The second advantage follows from it: since the hirer cannot pass good title, a third party buying from a defaulting hirer ordinarily takes nothing, so the financier's position is not defeated by an unauthorised sale in the way a mere charge over goods might be. Together these make the hire purchase form substantially safer for the financier than a credit sale supported only by a personal claim for the price.

Question 10

Explain the rules for the passing of property in unascertained and future goods, and the effect of reserving the right of disposal. Advise where a seller in Chennai despatches 100 bales of cotton by rail to a buyer in Delhi, taking the railway receipt to his own order, and the goods are destroyed in transit.

Accepted Answer

Unascertained and future goods — the basic rules.

Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. Ascertainment is the identification of the goods answering the description, and until it occurs there is nothing in which property can vest.

Once ascertained, property passes when goods of that description and 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 assent may be express or implied, and may be given either before or after the appropriation is made.

Appropriation must be unconditional and irrevocable — the seller must have put the goods beyond his own power to substitute others. Weighing out, packing, marking with the buyer's name, or setting aside in a manner from which the goods cannot be withdrawn are all appropriations.

Delivery to a carrier for transmission to the buyer, without reserving the right of disposal, is an unconditional appropriation, so property passes at the moment of delivery to the carrier.

Reservation of the right of disposal.

Where the seller reserves the right of disposal of the goods until certain conditions are fulfilled, the property does not pass to the buyer until those conditions are fulfilled, notwithstanding the delivery of the goods to the buyer, to a carrier or to another bailee for transmission.

The standard means of reserving the right is for the seller to take the bill of lading or railway receipt to his own order, or to the order of his agent, rather than to the buyer's order. Where he does so, he is deemed to reserve the right of disposal.

The purpose is security. The document of title is the key to the goods, and by keeping it in his own name the seller retains ownership until the buyer pays or accepts a bill of exchange drawn on him. The buyer cannot obtain the goods from the carrier without the document, so the seller controls delivery until he is satisfied.

Application.

The seller despatched 100 bales by rail and took the railway receipt to his own order. Taking the document of title to his own order is a reservation of the right of disposal.

Although delivery to a carrier for transmission to the buyer would ordinarily be an unconditional appropriation passing property, the reservation prevents that consequence. Property has not passed to the buyer; the seller remains the owner.

Under section 26, risk follows property. The goods therefore remained at the seller's risk, and their destruction in transit is the seller's loss.

The buyer is not liable for the price. Since property never passed, the seller cannot maintain a suit for the price, and he has no claim against the buyer for goods the buyer never owned and never received.

The seller's recourse, if any, is against the railway as carrier for the loss of goods entrusted to it, and against his insurers. The commercial lesson is that reservation of the right of disposal protects the seller against non-payment but, by keeping ownership with him, also keeps the risk of loss on him — the two consequences are inseparable, which is why sellers who reserve the right of disposal insure the goods in transit.

Had the receipt been taken to the buyer's order, property would have passed on delivery to the railway, risk would have passed with it, and the buyer would have borne the loss and remained liable for the price.

Question 11

State the rule for the passing of property in goods delivered on approval or on sale or return. Advise in each case: (a) the buyer pledges the goods with a pawnbroker; (b) the buyer keeps the goods for four months, no time having been fixed, without saying anything; (c) the goods are destroyed by accident on the second day without any fault of the buyer.

Accepted Answer

The rule. Where goods are delivered to the buyer on approval or on sale or return, or on other similar terms, the property in them passes to the buyer in one of three ways.

When he signifies his approval or acceptance to the seller.

When he does any other act adopting the transaction.

If he does not signify his approval or acceptance but retains the goods without giving notice of rejection, then on the expiration of the time fixed for the return of the goods, or if no time has been fixed, on the expiration of a reasonable time.

Until property passes by one of these routes, the goods remain the seller's and, under section 26, at the seller's risk.

(a) The buyer pledges the goods with a pawnbroker.

Pledging the goods is an act adopting the transaction. A person who pledges goods as security asserts a right to deal with them as owner, which is inconsistent with holding them on approval and with any intention to return them.

Property therefore passed to the buyer at the moment of the pledge, and he became liable for the price. The seller cannot recover the goods from the pawnbroker; his remedy is a suit against the buyer for the price, property having passed.

The same reasoning applies to a resale, to a mortgage, or to any other dealing asserting ownership.

(b) Retention for four months with no time fixed and no communication.

The third limb applies. No time having been fixed for return, property passes on the expiration of a reasonable time if the buyer neither signifies approval nor gives notice of rejection.

What is a reasonable time is a question of fact, depending on the nature of the goods, the practice of the trade and the circumstances. For most goods four months' silent retention would comfortably exceed a reasonable time.

Property has therefore passed and the buyer is liable for the price. He cannot at this stage return the goods and decline to pay, because his own inaction has completed the sale. The rule exists to prevent a buyer from keeping goods indefinitely on the seller's risk while deciding.

(c) Goods destroyed by accident on the second day without the buyer's fault.

Property has not passed. Two days is well within any reasonable time, no approval has been signified, and no act adopting the transaction has been done.

Since property remains with the seller and risk follows property under section 26, the seller bears the loss. The buyer is not liable for the price.

The qualification worth noting is that the buyer's position as a bailee remains. He must take as much care of the goods as a person of ordinary prudence would take of his own goods of the same bulk, quality and value. If the destruction had resulted from his negligence or from an unauthorised use of the goods, he would be liable for the loss notwithstanding that property had not passed — not as buyer for the price, but as bailee for breach of his duty of care.

Question 12

Explain why the question 'when does property pass' is the organising question of the Sale of Goods Act, tracing its consequences through risk, the seller's remedies, the buyer's position on insolvency, and the ability to pass title.

Accepted Answer

The passing of property is not one topic among several in the Act. It is the fact from which most of the Act's other consequences are deduced, and identifying it in a problem usually determines the answer to everything else.

Risk. Section 26 provides that unless otherwise agreed, goods remain at the seller's risk until property is transferred, and once transferred they are at the buyer's risk whether delivery has been made or not.

This means the question 'who bears the loss when the goods are destroyed' is never answered by asking who held the goods. A buyer of specific goods in a deliverable state bears the loss from the moment the contract is made, even though he has neither paid nor received them, because property passed under Rule 1. Conversely a seller who has despatched goods but reserved the right of disposal bears the loss although the goods are hundreds of miles away, because property has not passed. The proviso qualifies this only where delivery has been delayed by the fault of a party, in which case that party bears loss which might not have occurred but for the fault.

The seller's remedies. The unpaid seller may sue for the price only where property has passed to the buyer and he wrongfully neglects or refuses to pay, or where the price is payable on a day certain irrespective of delivery. Where property has not passed, the seller is confined to a suit for damages for non-acceptance.

The practical difference is substantial. A claim for the price is a claim for a liquidated sum and requires no proof of loss. A claim for damages requires the seller to prove his loss, is subject to the duty to mitigate by reselling, and yields only the difference between the contract price and the market price.

The buyer's position on the seller's insolvency. Where property has passed, the buyer is the owner and may claim the goods from the Official Assignee even though he has not received them. Where it has not passed, the buyer is merely an unsecured creditor and can prove only for any price he has paid, ranking with the general body of creditors and usually recovering a fraction.

This is why buyers of goods financed in advance insist on terms passing property early, and why sellers extending credit resist them.

The seller's position on the buyer's insolvency. Where property has passed, the seller must deliver the goods to the Official Assignee and prove for the price, unless he still has possession and can assert his lien, or the goods are in transit and he can stop them. Where property has not passed, he may simply refuse to deliver.

The ability to pass title. A person cannot ordinarily give a better title than he has. So whether a sub-purchaser from the buyer obtains good title depends on whether property had passed to that buyer. This is precisely why hire purchase is structured as it is: because property does not pass to the hirer until the final instalment, he cannot pass title to a third party, and the financier's security survives an unauthorised sale.

The exceptions to nemo dat are best understood in the same frame. Each identifies a situation in which a person without full property is nonetheless allowed to pass good title, and in every case the justification is that the true owner made the appearance of ownership possible — by leaving a seller in possession after sale, by allowing a buyer possession before property passed, or by entrusting goods to a mercantile agent.

The method for a problem. Establish the class of goods, apply the correct rule for the passing of property, state whether property has passed, and then derive the consequences. Answers that begin with the consequence and reason backwards routinely go wrong, because the intuitive answer — that the party holding the goods bears the loss, or that a seller who has not been paid may sue for the price — is exactly what the Act does not say.

Question 13

A seller sells specific machinery to a buyer on 1 March, property passing immediately, delivery agreed for 15 March. The buyer does not collect it. On 20 March a flood destroys the machinery while it stands in the seller's yard. On 25 March the seller discovers the buyer has become insolvent. Advise the seller on all his rights, and explain how the position would differ if the delivery date had been 25 March.

Accepted Answer

Passing of property and risk.

The goods are specific machinery and property is stated to have passed on 1 March. Under section 26, once property is transferred the goods are at the buyer's risk whether delivery has been made or not.

On the face of it, therefore, the buyer bore the risk from 1 March and the destruction on 20 March is his loss.

The effect of the delay in taking delivery.

The proviso to section 26 provides that where delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault.

Delivery was agreed for 15 March and the buyer failed to collect. The delay is the buyer's fault. The flood occurred on 20 March, five days after the goods should have been collected, and had the buyer collected on time the machinery would not have been in the seller's yard when the flood came. The loss might not have occurred but for the buyer's default.

The proviso therefore reinforces rather than displaces the primary rule: the risk was the buyer's under the main rule, and the proviso independently places on him any loss attributable to his own delay.

A further point strengthens the seller's position. Where the buyer fails to take delivery within a reasonable time after being requested, he is liable to the seller for any loss occasioned by his neglect and for a reasonable charge for the care and custody of the goods.

The seller's remedies.

Suit for the price. Property has passed to the buyer and he has wrongfully neglected to pay, so the seller may sue for the price as a liquidated sum. He need not prove any loss. That the goods have been destroyed does not defeat the claim, because they were destroyed at the buyer's risk and were his property.

The seller's lien is of no assistance now, the goods no longer existing.

Stoppage in transit does not arise, the goods never having left the seller.

Resale is impossible for the same reason.

The effect of the buyer's insolvency, discovered on 25 March.

The insolvency does not change the analysis of risk or property, both of which were settled before it was discovered. The seller's claim for the price stands, but it is now a claim against an insolvent, and he must prove in the insolvency along with the general body of creditors, recovering only a dividend.

He has no security. Had the goods still existed and been in his possession, his unpaid seller's lien would have given him a real advantage; had they been in transit, stoppage would have done so. The destruction of the goods has left him with a purely personal claim at the moment it is worth least.

How the position would differ if delivery had been agreed for 25 March.

Property would still have passed on 1 March, so risk would still have been the buyer's under the main rule of section 26, and the buyer would still bear the loss of the flood on 20 March.

What changes is the proviso. Delivery would not have been due until 25 March, so there would have been no delay through the buyer's fault as at 20 March, and the proviso would have no application. The seller could not rely on it, nor claim custody charges or loss occasioned by neglect.

The practical outcome for the price would be the same, because property had passed and risk followed it. The difference is that the seller's case would rest on the main rule alone, and he would lose the additional claims that the buyer's default supports.

Question 14

A buyer orders 500 bags of a named brand of rice by description and by sample. On delivery, 300 bags match the sample but are of a different variety from that described, and 200 bags match the description but contain stones. Advise the buyer on his rights, assuming the contract is severable and he has not yet used any of the rice.

Accepted Answer

The implied terms engaged.

Where goods are sold by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. The bulk must answer both.

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.

Where goods are bought by description from a seller who deals in goods of that description, there is an implied condition that the goods shall be of merchantable quality — that is, fit for the purpose for which goods of that kind are commonly bought, and saleable under that description.

Where the goods are provisions or foodstuffs, there is an implied condition of wholesomeness, that they are fit for human consumption.

All of these are conditions, not warranties, so breach gives a right to treat the contract as repudiated in respect of the goods concerned.

The 300 bags matching the sample but of a different variety.

This is a breach of the condition that in a sale by sample as well as by description the goods must correspond with both. Correspondence with the sample alone is expressly insufficient.

The buyer may reject these 300 bags. He is not obliged to accept goods of a different variety merely because they resemble the sample he was shown, and the seller cannot say that the buyer got what he saw.

The 200 bags matching the description but containing stones.

Rice adulterated with stones is not of merchantable quality: it is not fit for the purpose for which rice is commonly bought, and it would not be saleable under the description without abatement. It also breaches the implied condition of wholesomeness, being foodstuff not fit for human consumption in that state.

The buyer may reject these 200 bags. The defect is not one that an examination of a sample would necessarily have revealed, so the exception for defects that examination ought to have revealed does not assist the seller.

The effect of the contract being severable.

This matters because of section 13. Where a contract of sale is not severable and the buyer has accepted the goods or part of them, a breach of condition can only be treated as a breach of warranty, and the right to reject is lost.

Here the contract is severable and the buyer has accepted nothing and used nothing. He therefore retains the right to reject in full, and may reject the whole consignment of 500 bags — the 300 for non-correspondence with the description, and the 200 for unmerchantable quality and unwholesomeness.

The buyer's remedies.

He may reject the goods, refuse to pay the price, and if he has paid, recover it.

He may treat the contract as repudiated and claim damages for non-delivery, measured by the difference between the contract price and the market price of conforming goods at the date of the breach, subject to his duty to mitigate.

He is not bound to return the rejected goods; it is sufficient that he intimates his refusal to accept them, and the seller must collect them.

Alternatively, if it suits him commercially, he may elect to treat any breach of condition as a breach of warranty, accept the goods and claim damages in diminution of the price. That election is his alone and, once made, is binding.

Question 15

State the rules governing an auction sale. Advise where (a) a bidder withdraws his bid after it is the highest but before the hammer falls; (b) the seller, without notifying a right to bid, employs a person to raise the price; (c) goods are knocked down below the notified reserve price.

Accepted Answer

The rules governing an auction sale.

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.

The sale is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner, and until such announcement is made any bidder may retract his bid.

A right to bid may be reserved expressly by or on behalf of the seller, and where such right is expressly reserved, but not otherwise, the seller or any one person on his behalf may bid at the auction.

Where the sale is not notified to be subject to a right to bid on behalf of the seller, it is not lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer.

The sale may be notified to be subject to a reserve or upset price.

If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.

(a) A bidder withdrawing before the fall of the hammer.

The bid is an offer, and the auctioneer's acceptance is signified by the fall of the hammer. Until then no contract exists, and the Act expressly provides that any bidder may retract his bid before the announcement of completion.

The bidder may therefore withdraw and incurs no liability. The auctioneer's request for bids was an invitation to offer, not an offer, so nothing the auctioneer said bound the bidder to keep his bid open.

The position would be the same however high the bid or however brief the interval, since the rule fixes the moment of contract precisely to avoid such disputes.

(b) The seller employing a person to bid without notifying a right to bid.

This is puffing, and it is unlawful. Where the sale is not notified as subject to a right to bid on behalf of the seller, the seller may not bid himself or employ another to bid, and the auctioneer may not knowingly take such a bid.

The buyer may treat the sale as fraudulent. The sale is voidable at his option: he may avoid it and recover the price, or he may affirm it if he chooses.

The rationale is that an auction represents to bidders that the price is being set by genuine competition among buyers. Secretly introducing a bidder with no intention of buying falsifies that representation and inflates the price the genuine buyer pays.

Had the right to bid been notified, the position would be lawful, but even then only the seller or one person on his behalf may bid — the reservation does not license multiple agents.

(c) Goods knocked down below the notified reserve price.

Where a sale has been notified as subject to a reserve price, the auctioneer has no authority to accept a bid below it. A bid below the reserve is outside his authority, and knocking the goods down on such a bid does not bind the seller.

The buyer acquires no rights, because the auctioneer, as agent, exceeded his authority and the bidder was on notice of the limitation through the notification of the reserve.

The seller may, however, ratify the sale if he chooses, since the act was done on his behalf by an identified principal in existence and competent at the time, and ratification would relate back to the fall of the hammer.

The auctioneer may be personally liable to the buyer for breach of warranty of authority if the seller does not ratify.

Practice — The Sale of Goods Act, 1930

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