Introduction to sale of goods notes

Introduction to Sale of Goods

  • Meaning of the sale of goods agreement
  • Warranties and conditions in a sale of goods agreement
  • Types of contracts under the sale of goods agreement
  • Rights and duties of parties in a sale of goods agreement
  • Transfer of goods
  • Terms of trade
  • Ways through which a contract of sale can be terminated

Introduction

Businesses and consumers are usually free to contract on whatever terms they see fit. However, contracts involving sales of goods can be subject to a range of statutory provisions. It is important to distinguish between sale of goods and other forms of conveying, such as barter trade, bailment, hire purchase, pledges, supply of services and gifts. The distinction is important as it sheds light on the resolution of disputes if they go to court.

NATURE OF THE CONTRACT

A contract of sale of Goods can be defined as contract in which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration called a price.

Property means the general property in goods, and not merely a special property. These contracts can be separated into two:

  1. Sale contract – goods passes to the buyer once the contract is concluded
  2. Agreement to sell- goods or property passes on the fulfillment of a particular or upon the expiration of a specified condition

Sale of good should be distinguished from the following transaction

  1. Contract of Barter or
  2. Contract of Gifts
  3. Contract of Bailment
  4. Contract of Hire Purchase
  5. Contract of Loan on Security of goods
  6. Contract of Agency
  7. Contract of Licenses of intellectual property such „sales‟ of computer software and patents.
  8. Contract of Supply of services

The difference will in most cases be in money consideration called price and the condition in which property comes to pass

The following should be clearly understood when it come to understanding the nature of sale of goods contracts

  1. Seller- This is the person who sells or agrees to sell
  2. Property –This is the general property in goods or ownership. It signifies the bundle of rights that a person has in relation to a subject matter .Eg. Right to use, misuse and to dispose
  3. Goods- this is includes
    1. All chattels personal other than things in action and money
    2. And all implements
    3. Industrial growing crops
    4. Things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale

Types of Goods

  1. Ascertained/Specific goods and Unascertained
  2. Existing and Future Goods

Specific or Ascertained Goods

These are goods that have specifically been identified and agreed upon by the parties at the time when the contract of sale is made. Other goods which haven’t been identified are unascertained goods

Existing Goods

These are goods owned or possessed by the seller at the time when the contract of sale is made.

Future Goods

These are goods to be manufactured or acquired by the seller after the contract of sale is made.

Buyer- This is the person who buys or agrees to buy goods

Price- This is the consideration that passes from the buyer to the seller to support the contract of sale of goods. The consideration must be

Note

In a contract of sale of Goods, price is determined or fixed:-

  1. By the contract itself
  2. In the manner thereby agreed
  3. By the course of dealing

If the price is not so fixed, the buyer pays a reasonable price.

 

FORMALITIES OF THE CONTRACT

A contract of sale may be:-

  1. Oral
  2. Written with or without seal
  3. Partly oral and partly written
  4. Implied from the conduct the parties

The Capacity for one to enter into a contract of sale of Goods is governed by the General Law of contract. However, if an infant, drunken person or a person of unsound mind is supplied with necessaries, he is liable to pay a reasonable price.

Void contracts of sale of goods

Certain contracts of sale of goods are void:

  1. Where there is a contract for the sale for the specific goods which without the seller‟s knowledge have perished at the time the contract is made, the contract is void.
  2. Where there is an agreement to sell specific goods which subsequently perish without the fault of either party before risk passes the buyer, the agreement is avoided.
  3. Where in an agreement to sell specific goods, price is to be fixed by the valuation of a 3rd party who fails to do so, the agreement is

TERMS OF SUCH CONTRACTS (IMPLIED TERMS)

The terms in these contracts can be classified as conditions and warranties. Since express terms are dependent upon the contracting parties we shall look at implied terms.

Implied terms are terms which though not expressly agreed to by the parties, are an integral part of the contract.

These terms may be implied by statutes or by a court of law.

 

TERMS IMPLIED BY STATUTES CONDITIONS

  1. Seller has the right to sell the goods when property in the goods is to pass.
  2. In case of sale by description the goods shall correspond to the description. This condition applies where the sale is solely by description. If the buyer sees the actual goods before the sale then it cannot be relied upon:

Harlington & Leinster v Christopher Hull Fine Art (1991)

The claimant purchased a painting from the defendant for £6,000. The painting was described in an auction catalogue as being by German impressionist artist Gabrielle Munter. Both the buyers and the sellers were London art dealers. The sellers were not experts on German paintings whilst the buyers specialised in German paintings. The purchasers sent their experts to inspect the painting before agreeing to   purchase. After the sale the buyers discovered that the painting was a fake and   worth less than £100. They brought an action based on s.13 Sale of Goods Act in that the painting was not as described.

Held: By sending their experts to inspect the painting this meant the sale was no longer by description. S.13 only applies to goods sold by description and therefore the buyers had no protection.

Note: this is simply concerned with description and not quality as was made clear in:

Re Moore & Landauer (1921)

A contract for the sale of 3,100 tins of peaches described the tins as being packed in cases of 30. When they arrived the tins were packed in cases of 24 although the agreed overall number of tins was supplied.

Held: The purchaser was entitled to reject the goods as they were not as described.

 

  1. Where the buyer expressly or by implication makes known to the seller the particular purpose for which the goods are required so as to rely on the seller’s skill and judgment, there is an implied condition that the goods shall be reasonably fit for that purpose.
  2. Where goods are bought by description from a person who deals in such goods in the ordinary course of business whether a seller or manufacturer, there is an implied condition that the goods will be of merchantable
  3. in a contract for sale by sample there is an implied term-
    • That the bulk will correspond with the sample in quality
    • That the goods will be free from any defect, making their quality unsatisfactory, which would not be apparent on reasonable examination of the sample.

 

WARRANTIES 

  1. The goods are free from any undisclosed charge or
  2. The purchaser will enjoy quiet possession of the goods. This acts as an ongoing assurance that no one will interfere with the buyer’s right to possess or use the goods.

Microbeads v Vinhurst Road Markings (1975)

The claimant purchased some road marking machines from the defendant. After the purchase a third party was granted a patent right in the machines. This meant the claimant could not use the machines unless they were granted a license to do so. There was no breach of condition as at the time of the sale the seller had the right to sell the goods. However, there was a breach of warranty in that the buyer could not enjoy quiet possession of the goods.

TERMS IMPLIED BY COURTS OF LAW

Courts of law is usually reluctant to imply terms in contracts as it is the duty of the parties to agree as to what the contractual terms shall be.

There are circumstances however, that courts are called upon to imply terms in contract reasons being:

  1. To give effect to the intentions of the
  2. To facilitate commercial transactions or give business efficiency. Courts of law imply terms in contracts on the basis of:
  3. The reasonable by standard
  4. Trade usages and

 

TRANSFER OF PROPERTY

The question “When does property in goods pass from the seller to the buyer?” is very important to contracts of sales of goods.

As we have already established property means the general property in goods or ownership. It signifies the rights a person has in relation to a subject matter. It is important to be clear   on when property in goods passes from the seller to the buyer for the following reasons:

  • It is the purpose of the contract of sale of Goods that property passes to the
  • It determines when risk passes to the buyer and hence the party liable in the extent of loss or
  • It determines what remedies are available to the seller e.g. the seller cannot sue for the price before property in the goods passes to the Property in goods passes to the buyer at different times in different contracts hence the passage of property is governed by various rules or principles.

 

RULES RELATING TO TRANSFER OF PROPERTY

  • Sale of Unascertained Goods- property passes to the buyer when the goods are ascertained.

These good include;

  1. Goods to be manufactured by the
  2. Crops to be grown by the
  3. Purely generic
  4. An unidentified portion of a special bulk or
  • Sale by Auction- property passes when the Auctioneer announces its completion by the fall of the hammer or in any other customary

Rules Governing Sale by Auction

  1. If goods are offered in lots, each lot is deemed to be the subject matter of a separate
  2. If the right of the seller to bid is not expressly reserved, he cannot bid or do so through another
  3. A sale by auction may be the subject to an agreed price
  4. The right of the seller to bid may be reserved, in which case he may do so at the auction
  • Unconditional Sale of Specific Goods in a deliverable state- Property passes when the contract is
  • Sale of Specific goods not in a deliverable State- Where specific goods are to be put in a deliverable state, property passes when they are in this state and the buyer is
  • Sale of specific goods to be weighed, measured, tested etc- if specific goods are to be weighed, measured, and tested or that other thing is to be done for the purpose of determining the price, property passes when the thing is done and the buyer is
  • Sale by approval or On Sale or Return- where goods are delivered to the buyer by approval or on sale or return or on such other term, property in them passes to the buyer:
  1. When he signifies his acceptance or approved to the
  2. When he does any act adopting the transaction e.g. selling
  3. When he retains the goods even after expiration of the stipulated or reasonable time without signifying his

PERFORMANCE OF THE CONTRACT

Unless otherwise expressed, it’s the duty of the seller to deliver the goods and the buyer to accept and pay for them, in accordance to the contract of sale. Generally payment and delivery are concurrent conditions, that is, they both take place at the same time.

Forms of Delivery

This is the voluntary transfer of possession from one person to another. It may take any of the following forms;

  • Physical transfer of the
  • Delivery of the means of control e.g.
  • Delivery of the documents of
  • Delivery to a common
  • Delivery by atonement: This is a situation where a seller of goods retains them as bailor for the

  

Rules of delivery

  1. Whether it is for the seller to transmit the goods to the buyer or for the buyer to take delivery at the seller’s premises depends on the agreement between the
  2. Unless otherwise agreed, the cost of and incidental to putting the goods into a deliverable state is borne by the
  3. Unless otherwise agreed the place of delivery is the seller’s place of business if not then his
  4. Where specific goods are in some other place known to both parties, that other place is the place of delivery
  5. If the goods are in the hands of a 3rd party, delivery is complete when the 3rd party notifies the buyer that he holds the goods on his
  6. If the seller is bound to transmit, the goods to the buyer, he must do so within the stipulated time if any or within a reasonable
  7. If the seller delivers less goods, the buyer may reject them or accept and pay at he contract rate
  8. If the quantity delivered is more, the buyer may reject the goods, or accept those included in the contract or accept all and pay at the contract
  9. If the goods delivered are mixed with those of a different description, the buyer may, Reject the goods or Accept those included in the contract
  10. Unless otherwise agreed, the buyer is not compelled to accept delivery by installment
  11. Where delivery is by installment to be paid for separately and the seller makes one or more defective deliveries or the buyer refuses to take delivery or pay for one or more installment whether such breach entitles the innocent party to treat the contract as repudiated or is severable depends on the terms of the contract and the circumstances of the case.
  12. If the buyer rejects the goods as of right, he is not bound to return the same to the seller but must notify him the fact of

ACCEPTANCE 

The term acceptance can be used in two senses

  1. The buyer’s acceptance of the goods which will deprive him the right to reject them for breach of condition
  2. The buyer has contractual duty to accept delivery of goods in accordance to the contract.

The buyer will be considered to have accepted the goods if;

  1. He intimates to the seller his acceptance
  2. He does any act in relation other goods which is inconsistent with the seller’s ownership
  3. He retains the goods after the expiration of the stipulated or reasonable time without intimating his

 

TRANSFER OF TITLE BY A NON-OWNER (NEMO DAT QUOD NON HABET) 

The nemo dat rule is that the transferor of goods cannot pass a better title than he himself possesses. In simpler terms one cannot give what he/she does not have.

The principle of Nemo dat was developed by the Common Law to protect the true owners of goods. However, its strict application interferes with commercial transaction in that the bona fide purchaser cannot acquire a good title if the seller had none.

In the words of Lord Denning in Bishop Gate Motor Finance Corporation v. Transport Brakes Ltd,

“In the development of our law, two principles have striven for mastery. The first is for the protection of property: no one can give a better title than he himself possesses. The second  is the protection of commercial transactions: the person who takes in good faith and for value without notice should get a good title. The first principle has held sway for a long time, but it has been modified by the common law itself and by statute so as to meet the needs of our own times.”

Subject to this Act, where goods are sold by a person who is not their owner, 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, unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.

The rule can be demonstrated by the case of

Greenwood v Bennett

In this case the original owner of a Jaguar car (Bennett) entrusted it to a man named Searle for repairs to be carried out. Searle then used the car for his own purposes, crashed it and caused extensive damage. Searle then sold the car to Harper, who  owned a garage, for £75. Harper did not realise that Searle was not the owner of the car. Harper then spent £226 repairing the car and sold it on to a finance company. It was held by the court that the car belonged to Bennett as Searle did not have title and could therefore not transfer that title to Harper. For the same reason, Harper could not transfer title to the finance company. Bennett was therefore able to recover the car but had to compensate Harper for the work done to it.

However, although the nemo dat rule in its essential form may be clear, it is not always fair, as it is an innocent party buyer who will suffer, and nor is it necessarily in keeping with the needs of modern commerce and trade.

Exceptions:-

  1. Estoppel

A non-owner can pass a good title if the true owner is by his conduct precluded from denying the seller’s authority to sell. This is the equitable doctrine of estoppel. If the true owner of goods makes it appear that some other person is the owner, the true owner is estopped from denying the apparent ownership of the other.

  1. Sale by Mercantile Agent or Factor

A factor is a mercantile agent who is entrusted with possession of goods and who sells in his own name. A factor passes a good title, even if he has no authority to sell provided he sells the goods: –

  1. In his capacity as mercantile agent
  2. In the ordinary course of business
  3. To a bona fide purchase for value without notice
  4. Of which he has possession of with the owner’s
  5. Resale by Seller in Possession

If the seller who has already sold goods but retains their possession or documents of title, sells them to a 3rd party who takes in good faith for value without notice of the previous sale, the seller passes a good title.

  1. Sale by buyer in Possession

Where seller who has bought or agreed to buy goods, obtains their possession or documents of title with the seller’s consent before title passes to him and as a consequence he transfers them to a bona fide purchaser who takes them in good faith and with notice of the original seller’s lien on the goods, he passes a good title.

  1. Sale Under Statutory Power

A sale made in exercise of a power conferred by an Act of parliament passes a good title

 

CAVEAT EMPTOR

It literally means “buyer beware”

This is a Common Law principle to the effect that in the absence of fraud or misinterpretation, the seller is not liable if the goods sold do not have the qualities the buyer expected them to have. A buyer buys goods as they are.

The principle was developed by the Common Law to protect manufacturers by ensuring that their goods were sold irrespective of their quality. Sellers of goods at Common Law would not guarantee anything about the goods unless a buyer demanded a warranty.

However, these principles turned out to be very harsh to the consumers and exception had to be developed.

Exceptions to Caveat Emptor include the Conditions and Warranties Implied by the Sale of Good Act such as;

  1. In a sale by description, the goods must correspond to the description
  2. Implied Condition of Fitness for purpose
  3. Under Sec. 16 (b) it implied that good should be of merchantable
  4. In a sale by sample it is implied that:-
    1. The bulk shall correspond with the sample in quality
    2. The buyer shall be afforded a reasonable opportunity to compare the bulk and sample.
    3. The goods shall be free from my defect rendering them unmerchantable

However, the effectiveness of these exceptions in protecting consumer is questionable in that:-

  1. Parties are free to contract outside the implied
  2. The stronger party may use exemption clauses in the
  3. The condition of fitness for purpose is not implied if the goods are sold under a patent or other trade
  4. The condition as to merchantable quality is not implied if the buyer has examined the goods but failed to detect defects which such examination ought to

 

DUTIES OF THE PARTIES

The contract of Sale of goods imposes upon the parties certain obligations:

Duties of the seller 

  1. Put the goods into a deliverable state-The seller is bound to ensure that the goods are in a condition in which the buyer is bound to take delivery when the contract is made and unless otherwise agreed, the cost of doing so is borne by the
  2. Pass a good title- It is the duty of the seller to pass a clean title to the buyer failing which he is liable in
  • Deliver the goods
  1. Supply goods of the right quality- The seller is bound to ensure that the quality of the goods supplied is consistent with the terms of the
  2. Supply goods of the right quantity –The seller must deliver goods of the quantity agreed to by the

 

Duties of the buyer

  • Take delivery- it is the duty of the buyer to take delivery of goods, the subject matter of the contract, failure to which he is liable in damages
  • Pay the price-it is the duty of the buyer to pay the price of the goods failure to which the seller may maintain an action against him for the price

REMEDIES FOR BREACH OF CONTRACT 

Remedies available to the seller

In this type of contracts the remedies available to the injured party can be classified into two, i.e.

  • Real remedies
  • Personal remedies

 

REAL REMEDIES 

These are remedies against the goods and are enforceable without any court action.

  1. Lien

This is the right of unpaid seller in possession of the buyer’s goods to retain them as a security for the price.

Lien is exercisable in the following circumstances:

  1. Where goods have not been sold on credit
  2. Where goods have been sold on credit but the term of credit has
  3. If the buyer becomes insolvent

 

Loss of Lien

The unpaid seller losses the right to retain the buyer’s goods in the following ways: –

  1. by waiver thereof
  2. If the buyer or his agents obtain lawful possession of the
  • If the seller delivers the goods to a common carrier for transmission to the buyer without reserving the right of
  1. Payment for

Stoppage in transit

This is the right of unpaid seller who has already parted with possession of the goods to resume the same as long as the goods are still in the course of transit to the buyer. The exercise of this right enables the seller to resume possession of the goods. The rights are exercisable by the seller only if the buyer becomes insolvent.

Loss of the Right of Stoppage 

The seller right of stoppage in transit will be defeated or is lost when transit ends. Transit ends if:-

  1. The buyer or his agent intercepts the goods before arrival at the agreed destination
  2. Upon arrival the carrier notifies the buyer or his agents that he holds the goods on his behalf.
  3. The carrier wrongfully neglects or refuses to deliver the goods to the buyer or his agents.

Rights of Resale

Unpaid seller in possession of the buyer’s goods is entitled to re-sell them to recover the price. A re-sale of the goods by the seller passes a good title to the buyer in the following circumstances:

  1. Where the goods are of a perishable
  2. Where the right to resale is expressly reserved by the contract
  3. When the seller notifies the buyer his intention to resale the goods but the buyer does not pay or tender the price within a reasonable

 

PERSONAL REMEDIES

 These are remedies against the buyer and are enforceable by court action namely: –

  1. Action for Price
  2. Damages for non-acceptance

Remedies Available To the Buyer

  1. Damages for Non-Delivery
  2. Specific Performance- if the seller refuses to deliver specific goods, the buyer may maintain an action for the decree of specific performance which the court may grant if circumstances
  3. Damages for the Breach of warranties
  4. Recovery of price paid
  5. Rejection of Goods

The buyer is entitled to reject the goods delivered by the seller in certain circumstances without incurring any liability. For instance;

  1. If the quantity delivered is greater than that contracted for
  2. If the quantity delivered is less than that contracted for
  3. Where the goods delivered are mixed with goods of another

 

INTERNATIONAL CONTRACTS OF SALE:

 FAS, FOB, CIF, FCA, CPT, CIP, DAT, DAP, DDP, CFR, DAF, DES, DDU, EX- WORKS AND EX-SHIP 

Incoterms

What are Incoterms

Incoterms – a.k.a. Trade Terms are key elements of international contracts of sale. They tell the parties what to do with respect to carriage of the goods from buyer to seller, and export & import clearance. They also explain the division of costs and risks between the parties.

The difference between the 2000 and the 2010 version is the number of Incoterms has been reduced from 13 to 11. Four Incoterms (DAF, DES, DEQ, DDU) have been replaced by two new Incoterms (DAT, DAP). The replaced Incoterms DAF, DES and DEQ were not used much in day to day trading.

EXW – ExWorks (2000 and 2010)

This term represents the seller’s minimum obligation, since he only has to place the goods at the disposal of the buyer. The buyer must carry out all tasks of export & import clearance.

Carriage & insurance is to be arranged by the buyer.

FCA – Free Carrier (2000 and 2010)

 This term means that the seller delivers the goods, cleared for export, to the carrier nominated by the buyer at the named place. Seller pays for carriage to the named place.

FAS – Free Alongside Ship (2000 and 2010)

This term means that the seller delivers when the goods are placed alongside the vessel at   the named port of shipment. The seller is required to clear the goods for export. The buyer  has to bear all costs & risks of loss or damage to the goods from that moment. This term can be used for sea transport only.

FOB – Free On Board (2000 and 2010)

 This term means that the seller delivers when the goods pass the ship’s rail at the named port of shipment. This means the buyer has to bear all costs & risks to the goods from that point. The seller must clear the goods for export. This term can only be used for sea transport. If the parties do not intend to deliver the goods across the ship’s rail, the FCA term should be used.

CFR – Cost and Freight (2000 and 2010)

 This term means the seller delivers when the goods pass the ship’s rail in the port of shipment. Seller must pay the costs & freight necessary to bring the goods to the named port of destination, BUT the risk of loss or damage, as well as any additional costs due to events occurring after the time of delivery are transferred from seller to buyer. Seller must clear goods for export. This term can only be used for sea transport.

CIF – Cost, Insurance, Freight (2000 and 2010)

 The seller delivers when the goods pass the ship’s rail in the port of shipment. Seller must pay the cost & freight necessary to bring goods to named port of destination. Risk of loss & damage same as CFR. Seller also has to procure marine insurance against buyer’s risk of loss/damage during the carriage. Seller must clear the goods for export. This term can only be used for sea transport.

CIP – Carriage and Insurance Paid (2000 and 2010)

 This term is the same as CPT with the exception that the seller also has to procure insurance against the buyer’s risk of loss or damage to the goods during the carriage. This term may    be used for any mode of transportation.

CPT – Carriage Paid To (2000 and 2010)

 This term means that the seller delivers the goods to the carrier nominated by him but the seller must in addition pay the cost of carriage necessary to bring the goods to the named destination. The buyer bears all costs occurring after the goods have been so delivered. The seller must clear the goods for export. This term may be used irrespective of the mode of transport (including multimodal).

DAF – Delivered At Frontier (2000)

This term means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export but not cleared for import, at the named point & place at the frontier – but before the customs border of the adjoining country. To be used when delivering to a land frontier.

DES – Delivered Ex Ship (2000)

Seller delivers when goods are placed at the disposal of the buyer on board the ship, not cleared for import at the named port of destination. The seller bears all costs & risks in bringing the goods to the named port before discharging. This term can only be used when the goods are to be delivered by sea.

 

DEQ – Delivered Ex Quay (2000)

This terms is the same as DES with the exception that the seller is responsible to place the goods at the disposal of the buyer, not cleared for import, on the quay (wharf) at the named port of destination. Seller bears all costs & risks as in DES plus discharging the goods on  the quay. This term can only be used in sea transport.

DDU – Delivered Duty Unpaid (2000)

This term means the seller delivers the goods to the buyer, not cleared for import, and not unloaded from arriving means of transport at the named place of destination. The seller bears all costs & risks involved in bringing the goods to the named place other than “duty” (which includes the responsibility for customs formalities & payment of those formalities, duties & taxes) for import into the country of destination. Buyer is responsible for payment of all customs & duties & taxes.

DDP – Delivered Duty Paid (2000 and 2010)

This term represents maximum obligation to the seller. This term should not be used if the seller is unable to directly or indirectly to obtain the import license. The terms means the same as the DDU term with the exception that the seller also will bear all costs & risks of carrying out customs formalities including the payment of duties, taxes & customs fees.

DAT – Delivered at Terminal (named terminal at port or place of destination) (2010)

Seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.

DAP – Delivered At Place (named place of destination) (2010)

Seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.



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