UnitIV

Law of Sale of Goods

and

Negotiable Instruments

Prof Dr Arvind KumarBhatt

PGDM Batch2022-24
 • Sale of Goods Act is one of very old mercantile law.
INTRODUCTION
• Sale of Goods is one of the special types of Contract.
• Initially, this was part of Indian Contract Act itself. Later, this was deleted in
Contract Act, and separated as Sale of Goods Act.
• In 1930, Sections 76 to 123 of the Contract Act was repealed and a
separate Act known as the Sale of Goods Act, 1930 was passed.
• Sale of Goods Act is complimentary to Contract Act.
• Basic provisions of Contract Act apply to contract of Sale of Goods Act also.
• Basic requirements of contract i.e. offer and acceptance, legally enforceable
agreement, mutual consent, parties competent to contract; free consent,
lawful object, consideration etc. apply to contract of Sale of Goods Act.

PROF DR ARVIND K BHATT 2

SALE OF G O O D S 3
Sale of Goods Act, 1930
Section 4 defines a contract of sale as
“A contract where by the seller transfers or agrees
to transfer the property in goods to the buyer for a
price.”

• A sale is a contract where the consideration for the buyer is the transfer of
ownership and that for the seller is a price incash.

According to Section 4, a contract of sale of goods is a contract whereby the seller:

(i) transfers or agrees to transfer the property in goods,

(ii) to the buyer,
(iii) for a money consideration called the price.

Prof Dr Arvind K Bhatt

 GENERAL PRINCIPLES
Contract of Sale may be of two types

CONTRACT OF SALE

AGREEMENT TO SELL
SALE

Prof Dr Arvind K Bhatt 4

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 Sale and Agreement to Sell

Sale
Agreement to sell
• The ownership in the goods is
• Agreement to sell means a contract
transferred from the seller to the
buyer, it is called a sale. of sale under which the transfer of
• Thus, sale takes place when there is a property in goods is to take place at a
transfer of ownership in goods from future date or subject to some
the seller to the buyer.
conditions thereafter to be fulfilled.
• A sale is an executed contract

PROF DR ARVIND K BHATT 5

 Distinction between Sale and Agreement to Sell
Sale Agreement to Sell
o A sale is an executed contract
o It is an executory contract
o Since the ownership has passed to the buyer,
the seller can sue the buyer for the price of the
o In case of breach, the seller can
goods, if the latter makes a default in payment
only sue for damages, unless the
price was payable at a stated date.
o In case of loss of goods, the loss will fall on the
buyer, even though the goods are in the
o The loss in this case shall be borne
possession of the seller. It is because the risk
by the seller, even though the goods
is associated with ownership
are in the possession of the buyer,
o In case the buyer pays the price and the seller
o In this case, the buyer cannot claim
thereafter becomes insolvent, the buyer can
the goods, but only a rateables
claim the goods from the official receiver or
dividend for the money paid
assignee as the case may be.

Prof Dr Arvind K Bhatt 6

ESSENTIALS OF A CONTRACT OF SALE
From the definition, the following essentials of the contract emerge:

1) There must be at least two parties: a sale has to be bilateral because the
property in goods has to pass from one person to another. The seller and
the buyer must bedifferent persons.

2) Transfer or agreement to transfer the ownership of goods: In a contract

of sale, it is the ownership that is transferred (in the case of sale), or
agreed to be transferred (in the case of agreement to sell), as against
transfer of mere possession

3) The subject matter of the contract must necessarily be goods: the sale of
immovable property is not covered under Sale of Goods Act.

Prof Dr Arvind K Bhatt 7

 ESSENTIALS…….cont.
4) Price is the consideration of the contract of sale: the consideration in a contract of sale
has necessarily to be ‘money’, (i.e. the legal tender money).

o If for instance, goods are offered as the consideration for goods, it will not
amount to sale. It will be called a barter.

o Where goods are sold for a definite sum and the price is paid partly in terms of
valued up of goods and partly in cash, that is sale. These are known as part-
exchangecontracts.

o Payment by instalments: in the case of sale of goods, the parties may agree that
the price will be payable by instalments

5) All other essentials of a valid contract as per the Indian Contract Act, 1872 must be present: the
parties to the contract must be competent of contract, the consent of the parties must be
free, the object of the contract must be lawful and so on.
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Prof Dr Arvind K Bhatt
 “GOODS” UNDER THE SALE OF GOODS ACT, 1930

Definition Of “Goods”

‘Goods’ is defined as per Section 2 (7) of the ‘Act’ as.

“Every kind of movable property other than actionable claims and money; and includes stock
and shares, growing crops, grass, and things attached to or forming part of the land which are
agreed to be severed before sale or under the contract of sale.”

As you can see, shares and stocks are also defined as goods by the Act. The term actionable claims mean those
claims which are eligible to be enforced or initiated by a suit or legal action. This means that those claims where an
action such as recovery by auction, suit, refunds etc. could be initiated to recover or realize the claim.

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1. Existing Goods:The goods that are referred to in the contract of sale are termed as existing
goods if they are present (in existence) at the time of the contract. In sec 6 of the Act, the existing
goods are those goods which are in the legal possession or are owned by the seller at the time of the
formulation of the contract of sale. The existing goods are further of the following types:
A) Specific Goods: According to the sec 2(14) of the Act, these are those goods that are “identified and
agreed upon” when the contract of sale is formed. For example, you want to sell your
mobile phone online. You put an advertisement with its picture and information. A buyer
agrees to the sale and a contract is formed. The mobile, in this case, is specific good.
B) Ascertained Goods: This is a type not defined by the law but by the judicial interpretation. This term
is used for specific goods which have been selected from a larger set of goods. For
example, you have 500 apples. Out of these 500 apples, you decide to sell 200 apples. To
sell these 200 apples, you will need to separate them from the 500 (larger set). Thus you
specify 200 apples from a larger group of unspecified apples. These 200 apples are now
the ascertained goods.
C) Unascertained Goods: These are the goods that have not been specifically identified but have rather
been left to be selected from a larger group. For example, from your 500 apples, you
decide to sell 200 apples but you don’t specify which ones you want to sell. A seller will
have the liberty to choose any 200 apples from the lot. These are thus the unascertained
goods.

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2. Future Goods: In sec 2(6) of the Act, future goods have been defined as the goods
that will either be manufactured or produced or acquired by the seller at the time the
contract of sale is made. The contract for the sale of future goods will never have the
actual sale in it, it will always be an agreement to sell.
For example, you have an apple orchard with apples in it. You agree to sell 1000
apples to a buyer after the apples ripe. This is a sale that has to occur in the future but
the goods have been identified already and the agreement made. Such goods are known
as future goods.

3. Contingent Goods: Contingent goods are actually a subtype of future goods in the
sense that in contingent goods the actual sale is to be done in the future. These goods
are part of a sale contract that has some contingency clause in it.
For example, if you sell your apples from your orchard when the trees are yet to
produce apples, the apples are a contingent good. This sale is dependent on the
condition that the trees are able to produce apples, which may not happen.

Prof Dr Arvind K Bhatt 11

 Introduction
Conditions o Many a times a seller of goods makes certain claims about the
goods he offers for sale. These claims may relate to the quality,
use, suitability, utility, etc., of those goods.

and o The seller and buyer may also agree upon various terms
relating to the subject-matter of the contract. These assurances
may be a mere expression of opinion of the seller and may not

Warranties form part of the contract.

o But, sometimes they may form part of the contract and the buyer
buys the goods on the faith of such assurances. In such a case
they have legal effect on the contract.

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 o An assurance or representation which forms part of the contract of sale is termed as
‘stipulation’. Stipulation state exactly what must be done.

o All such stipulators cannot be treated at the same footing. Some may be intended to
be of a fundamental nature whereas others may be subsidiary or merely an
expression of an opinion. Depending upon whether a representation is fundamental
or subsidiary, it ranks as a ‘condition’ and ‘warranty’.

o If a stipulation forms the very basis of the contract, it is a ‘condition’.

o On the other hand, if the stipulation is collateral to the main purpose of the
contract, i.e., is of a lesser importance, then it is known as a ‘warranty’

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 o The term ‘Condition’ is defined under Section 12(1) of the Sale of
Goods Act, 1930 as “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”.
CONDITIONS o A condition in a contract of sale of goods is of fundamental nature
[Section 12(1)] for breach of which the buyer can repudiate the contract and can
claim damages.
o Non-performance of the condition is non-performance of the contract.

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 A warranty is a stipulation collateral to the main purpose
of the contract, the breach of which gives rise to a claim
WARRANTIES for damages but not to a right to reject the goods and
treat the contract as repudiated.
[Section 12(3)]
o ESSENTIALS OF WARRANTY

➢ Collateral to the main purpose of the contract.

➢ Causes damage to the injured party.
➢ The injured party can only claim damages but cannot
repudiate the contract.

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 Express and Implied Conditions and Warranties
Condition and warranties may either be express or implied.

Express condition and warranties:

Condition and Warranties are said to be express when the terms of the contract expressly
provide for them.
o Thus, where a buyer desires to buy ‘Red Maruti Car’, the colour of the car becomes
an express condition. If the two contracting parties desire they may put
the contents of any specific statement or promisewhich has taken place
between them at par as the description of the thing contracted for. This then shall be
treated as express condition. The parties are at liberty to impose any condition or
warranty by an express agreement in a contract ofsale.
Similarly, you must have noticed companies advertising their products carrying guarantee for a
certain period, for instance, Del Computers - Guaranteed for Two Years’. ‘Sony TVs - Three
Years Guarantee on Picture Tube’.
o All these are example of express warranties.
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PROF DR ARVIND K BHATT 16
Implied conditions

• Conditions and Warranties are said to be implied when the law infers
their existence as understood in the contract even without their
actually having been put in the contract.
• The implied conditions and warranties are enforced because the law
deem: that in the circumstance of the contract the parties desired to
add these stipulations to their contract but did not put them
expressly.

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PROF DR ARVIND K BHATT 17
• Conditions as to title (ownership): Therefore, Section 14 (a) provides that in a contract
of sale, unless the circumstances of the contract are, such as, to show a different intention,
there is an implied condition on the part of the seller that he has a right to sell the goods, and
that in the case of an agreement to sell, he will have a right to sell the goods at the time when
the property (ownership) is to pass.

The following example will clarify the pointfurther.

A purchased a car from B who had no title to it. A used the car for several months.
After that, C, the true owner, spotted the car and demanded it from A. Held, that A
was bound to hand over the car to its true owner. A’s remedy is to sue B, the seller
without title, for the recovery of the price and damages even’though several months
had passed.

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 Rule of Caveat Emptor
“ Caveat Emptor” means LET THE BUYER BEWARE

In a contract of sale, the seller is not duty bound to disclose all the truth
about the goods.
✓ Buyers should thoroughly examine before them.
✓ They mayask the seller all the clarifications required.
✓ If the seller shows the sample and the goods corresponds to the
sample, the buyer cannot blamethe seller anytime thereafter.
✓ In sale of goods on “as is where is” basis, buyer will not have
any subsequent claims

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Prof Dr Arvind K Bhatt 19
 Rights of an unpaid seller

An unpaid seller is one

a) who has not been paid/tendered the price

b) A bill of exchange or other negotiable instrument received but dishonored or

otherwise irregular.

c) Who has got a court decree but not yet satisfied or executed

o An unpaid seller has an immediate right of action for the price.

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Unpaid seller has two kinds of rights:
a) Against the goods
b) Against the buyer personally

❑ Right against the goods

a) When the property in goods has passed: Lien, Stoppage in Transit and Re-sale
b) When the property in goods has not passed: Withholding delivery and Stoppage in Transit

❑ Right against the buyer personally

a) Suit for the price
b) Suit for damages
c) Repudiation of the contract
d) Suit for interest

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Prof Dr Arvind K Bhatt 21
Right of Lien:
• A lien is a right to retain the possession of the goods until the price is paid.
• This right is immediate in case of cash sales.
• In case of credit sales it is after the expiry of the credit period. The
right is also available when the buyer becomes insolvent at any time.
• Lien depends on actual possession and not on title whether as seller
or as his agent or as bailee for the buyer
• Possession of the goods by the seller must not expressly exclude the
right of lien
• Lien can be exercised only for the price and not for other charges (
like taxes, duties)
• Seller having made part delivery of the goods may exercise lien on
the remainder (unless there is a condition to waive the lien)

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Right of stoppage in transit:
• This right is available:
a) when the buyer becomes insolvent and
b) when the goods are in transit.

• Insolvency means failure to pay them on the due date whether he has committed an act of
insolvency or not
• This right is an extension of the right of lien. The carrier may hold goods as an agent of the seller

• If the carrier is holding goods as an agent of the buyer, seller cannot exercise the right of stoppage in
transit.

• If the carrier is holding goods in an independent capacity, the seller has the right of stoppage.
• Stoppage can be effected by taking possession or by giving notice of stopping

• Right of lien or stoppage in transit is not affected by any sale or pledge which the buyer would have
made unless the seller has assented to the same.

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Right of Resale
• When the goods are perishable
• When the notice of resale is given to the buyer but buyer does not respond by
payment /tender of price within a reasonable time
• In case of loss in a resale, seller can claim it from the buyer as damages for
breach of contract
• Notice is a must or there should be clause in the sale contract expressly
reserving the seller’s right of re-sale

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Right of withholding delivery:
• Where the property in goods has not passed to the buyer, the
unpaid seller has a right of withholding delivery
• This right is co-existent with the right of lien and stoppage in
transit

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 The Negotiable Instruments Act,
1881

Came into force from 1 march 1882

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Prof Dr Arvind K Bhatt
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INTRODUCTION
o The law on negotiable instruments operating in India is called the
Negotiable Instruments Act, 1881.

o It recognises three main kinds of instruments— promissory notes,

bills of exchange and cheques.

o A negotiable instrument is made by a person and may change many

hands before being presented for payment.

Prof Dr Arvind K Bhatt

 Negotiable Instruments

Negotiable
Instrument
Transferable Written document
Prof Dr Arvind K Bhatt 28
Negotiable Instruments
o A negotiable instrument is actually a written document.
o This document specifies payment to a specific person or the bearer of the instrument at a specific date.
So we can define as “a document signifying an unconditional promise signed by the person giving
promise, requiring the person to whom it is addressed to pay on demand, or at a fixed date or time, a
certain sum to or to the order of a specified person, or to bearer.”

The word negotiable means ‘transferable by delivery,’ and the word instrument means ‘a written
document by which a right is created in favour of some person.’

According to Section 13 (1) of the Negotiable Instruments Act, “A negotiable instrument means a
promissory note, bill of exchange, or cheque payable either to order or to bearer”.

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PROMISSORY NOTE, BILL OF EXCHANGE AND CHEQUE

• A promissory note is an instrument in writing, undertaking to pay a certain sum of money to a

person, on his demand.
• No person in India, other than the Reserve Bank of India or the Central Government, can make or issue
a promissory note ‘payable to bearer’.

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Parties to a Promissory Note

There are primarily two parties involved in a promissory note.

They are:
i. The Maker or Drawer: The person who makes the note and promises to pay the
amount stated therein. In the above specimen, Sanjeev is the maker or drawer.

ii. The Payee – the person to whom the amount is payable. In the above specimen it
is Ramesh.

In course of transfer of a promissory note by payee and others, the parties involved
may be–
a ) T he Endorser – the person who endorses the note in favour of
another person.
b) The Endorsee – the person in whose favour the note is negotiated by
endorsement.

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Essentails of Promissory Note
1. It must be in writing:
• A promissory note has to be in writing
• An oral promise to pay does not become a promissory note
• The writing may be on any paper or book

Illustrations :A signs instruments in following terms:

• “I promise to pay B or order Rs. 500”
• “I acknowledge myself to be indebted to B in Rs. 1, 000 to be paid on
demand, for value received”
Both the above instruments are valid promissory notes .

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Essentials of Promissory Note

2. It mus t c o ntain a pro mi s e or unde rtaking to pay:

• There must be a promise or an undertaking to pay
• The undertaking to pay may be gathered either from express words or by necessary
implication.

Illus trations :Asigns the instruments in the following terms:

“Mr. B I owe you Rs. 1,000”
“I am liable to pay to B Rs. 500”
The above instruments are not promissory notes as there is no undertaking or
promise to pay.There is only an acknowledgement of indebtedness.
• Where Asigns the instrument in the following terms:
“I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for
value received,” there is a valid promissory note

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Essentials of Promissory Note
3. The promise to pay must be unconditional:
• A promissory note must contain an unconditional promise to pay
• The promise to pay must not depend upon the happening of some uncertain event, i.e., a
contingency or the fulfillment of a condition.
• Illus trations : A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 seven days after my marriage with C”
• “I promise to pay B Rs. 500 as soon as I can”
• The above instruments are not valid promissory notes as the payment is made depending upon the
happening of an uncertain event which may never happen and as a result the sum may never
become payable.

4. It must be signed by the maker:

• It is imperative that the promissory note should be duly authenticated by the ‘signature’ of the
maker.
‘Signature’ means the writing or otherwise affixing a person’s name or a mark to represent
his name, by himself or by his authority with the intention of authenticating a document.

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ESSENTIALS OF PROMISSORY NOTE

5. The maker must be a certain person :

• The instrument must itself indicate with certainty who is the person or are the persons
engaging himself or themselves to pay.
• Alternative promisors are not permitted in law because of the general rule that
“where liability lies no ambiguity must lie”

6. The payee must be certain:

• Like the maker the payee of a pronote must also be certain on the face of the
instrument
• A note in favour of fictitious person is illegal and void
• A pronote mad epayable to the maker himself is a nullity, the reason being the
same person is both the promisor and the promisee

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 Ess entials of Promiss ory Note

7. The sum payable must be certain:

• For a valid pronote it is also essential that the sum of money promised to be payable must be certain and
definite
• The amount payable must not be capable of contingent additions or subtractions
• Illus trations : A signs the instruments in the following terms:
• “I promise to pay B Rs. 500 and all other sums which shall be due to him”
• “I promise to pay B Rs. 500, first deducting thereout any money which he may owe
me”
The above instruments are invalid as promissory notes because the exa ct amount to be pa id by A is
no t certain
8. The amount payable mus t be in legal tender money of India:
• A document containing a promise to pay a certain amount of foreign money or to deliver a certain
quantity of goods is not a pronote

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Bill of Exchange

• Definition:
Section 5 of the Negotiable Instruments Act defines a Bill of Exchange as follows:
“A bill of e xc h ange is an instrument in writing containing an unconditional order,
s ig n e d by the maker, directing a certain p e rs o n to pay a certain sum of money
only to, or to the order of, a certain pers on or to the bearer of the ins trument.”

o No person other than the Reserve Bank of India or the Central Government
can draw or accept other than Bill of exchange, payable to bearer, on
demand.
Illustration:
o Mr. X purchases goods from Mr. Y for Rs. 1000/-
o Mr. Y buys goods from Mr. S for Rs. 1000/-
Then Mr. Y may order Mr. X to pay Rs. 1000/- Mr. S which will be
nothing but a bill of exchange
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 SPECIMEN OF BILL OF EXCHANGE

38 Prof Dr Arvind K Bhatt

Parties to a Bill of Exchange

There are three parties involved in a bill of exchange

(i) The Drawer – The person who makes the order for making
payment. In the above specimen, Rajiv is the drawer.
(ii) The Drawee – The person to whom the order to pay is made. He is generally a debtor of the drawer. It is
Sameer in this case.
(iii)The Paye e – The person to whom the payment is to be made. In this case
it is Tarun.

The drawer can also draw a bill in his own name thereby he himself becomes the payee. Here the words in the
bill would be Pay to us or order.

In a bill where a time period is mentioned, just like the above specimen, is called a Time Bill.
But, a bill may be made payable on demand also. This is called a Demand Bill.

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Essentials of a Bill of Exchange

1. It must be in writing
2. It must contain an order to pay.Amere request to pay on
account, will not amount to an order
3. The order to pay must be unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain. A bill cannot be drawn on two
or more drawees but may be made payable in the alternative to one of two or
more payees
6. The sum payable must be certain
7. The bill must contain an order to pay money only
8. It must comply with the formalities as regards date, consideration, stamps, etc.

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CHEQUE

A cheque is the means by which a person who has fund in the hand of a bank withdraws the
same or some part of it.

A cheque typically involves three parties,

(1)the drawer who writes the check,

(2) the payee, to whose order the check is made out, and
(3) the drawee or payor bank, the bank which has the drawer's checking account from which
the check is to be paid.

A cheque is a kind of bill of exchange but it has additional qualification namely-

1- It is always drawn on a specified banker and
2-It is always payable on demand without any days of grace.

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 difference b/w cheque and promissory note

Prof Dr Arvind K Bhatt

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Prof Dr Arvind K Bhatt

CASE LAWS: Punjab National Bank Ltd v Iqbal Singh Kalyan Singh and Ors1
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Prof Dr Arvind K Bhatt