Unit 2: Sale of Goods and Negotiable Instruments

A contract of sale is one where the seller transfers or agrees to transfer property in goods to the buyer for a price (Section 4).

• Essentials: two parties, goods (movable property — existing, future or contingent; specific, ascertained or unascertained), price in money, transfer of property, all essentials of a valid contract.
• Formalities (Section 5): made by offer and acceptance; may be in writing, by word of mouth, partly both, or implied from conduct; may provide for immediate or instalment delivery and payment.
• Price (Section 9): fixed by the contract, by agreed manner, or by course of dealing; otherwise a reasonable price.

• Condition (Section 12(2)): a stipulation essential to the main purpose — breach gives the right to repudiate the contract.
• Warranty (Section 12(3)): a stipulation collateral to the main purpose — breach gives only a claim for damages.
• A breach of condition may be treated as a breach of warranty (Section 13) — e.g., when the buyer accepts the goods.

• Implied warranties: quiet possession, freedom from encumbrances, disclosure of dangerous nature of goods.
• Caveat emptor ("let the buyer beware" — Section 16): the buyer must examine goods; exceptions: fitness for purpose when the buyer relies on the seller's skill, merchantability, sale by description, trade usage, fraud, sale by sample.

• Specific goods in a deliverable state: property passes when the contract is made (Section 20).
• Specific goods to be put in deliverable state, weighed or measured: when that is done and the buyer has notice.
• Goods on approval / sale or return: when the buyer signifies approval or retains beyond the time fixed.
• Unascertained goods: when goods are ascertained and unconditionally appropriated to the contract (Section 23).
• Risk prima facie passes with property (Section 26).
• Transfer of title by non-owner — nemo dat quod non habet (no one can give what they do not have); exceptions: mercantile agent, joint owner, voidable contract, seller or buyer in possession.

Performance of the contract of sale (Sections 31–44)

• Duties: seller to deliver goods; buyer to accept and pay — concurrent conditions unless agreed otherwise.
• Rules of delivery: actual, symbolic (keys of a godown) or constructive; place and time as agreed or reasonable; seller bears cost of putting goods in deliverable state; delivery of wrong quantity — buyer may reject or accept with payment at contract rate; instalment deliveries need agreement.
• Buyer's right to examine goods before acceptance; acceptance by intimation, by retaining beyond a reasonable time, or by acts inconsistent with the seller's ownership.

A negotiable instrument (Section 13) means a promissory note, bill of exchange or cheque payable either to order or to bearer.

Classification

• Inland and foreign instruments (Sections 11–12).
• Bearer and order instruments.
• Demand and time (usance) instruments.
• Ambiguous instrument (may be treated as a note or bill — Section 17) and inchoate (incomplete, signed blank stamped paper — Section 20).
• Instruments negotiable by custom — hundis, government promissory notes, share warrants, dividend warrants.

• Holder (Section 8): a person entitled in their own name to possession of the instrument and to receive or recover the amount due. A finder or thief is not a holder.
• Holder in due course (Section 9): a holder who obtained the instrument for consideration, before maturity, and in good faith without sufficient cause to believe any defect existed in the title of the transferor.

Privileges of a holder in due course

• Gets a title free from defects of prior parties.
• Inchoate instrument: prior party cannot plead that it was filled in excess of authority.
• Every prior party is liable to them until the instrument is satisfied.
• Drawer and endorsers cannot deny the payee's capacity to endorse.
• Fictitious payee bill is payable to bearer.

Maturity (Sections 22–25)

• Maturity: the date on which the instrument falls due.
• Three days of grace are added to time instruments (not to demand instruments or cheques).
• Where the date falls on a public holiday, the instrument is payable on the preceding business day.

• Negotiation (Section 14): transfer of an instrument so as to constitute the transferee its holder — bearer instruments by delivery; order instruments by endorsement and delivery.

• Dishonour by non-acceptance (bills) or non-payment; notice of dishonour (Section 93) must be given to all prior parties to make them liable — exceptions: waiver, drawer countermanded payment, impossibility.
• Noting (Section 99): a notary public records the fact, date and reason of dishonour on the instrument within a reasonable time.
• Protest (Section 100): a formal notarial certificate attesting dishonour — compulsory for foreign bills.

A cheque (Section 6) is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand; includes the electronic image of a truncated cheque and a cheque in electronic form.

• Crossing: general (two parallel lines — pay only through a bank), special (bank named), account payee (credit only to the payee's account), not negotiable (transferee gets no better title).
• Validity: 3 months from the date of issue (RBI direction).

Dishonour of cheque — Section 138

• Section 143A: court may order interim compensation up to 20% of the cheque amount.
• Section 148: in appeal, the appellant may be directed to deposit at least 20% of the fine or compensation.
• Offence is compoundable (Section 147).