Sale of Goods: Formation and Subject Matter

A contract of sale of goods is one whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price (S.4, Sale of Goods Act 1930); goods may be existing, future or contingent.

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price (S.4(1), Sale of Goods Act, 1930). The Act is a special law carved out of the Indian Contract Act, so the general principles of contract continue to apply except where the Act provides otherwise.

Legal Framework

Provision	Subject	Key Rule
S.2(7)	Goods defined	Every kind of movable property other than actionable claims and money, including stock, shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale
S.4(1)	Contract of sale defined	Seller transfers or agrees to transfer the property in goods to the buyer for a price
S.4(3)	Sale and agreement to sell	Where property transfers at once it is a sale; where transfer is to take place in future or subject to a condition, it is an agreement to sell
S.5	How a contract of sale is made	By an offer to buy or sell for a price and acceptance; may be immediate delivery, immediate payment, or both postponed
S.6	Existing or future goods	Goods may be existing goods owned or possessed by the seller, or future goods
S.7	Goods perishing before sale but after agreement	Where specific goods perish without fault before the risk passes, the agreement is void
S.8	Goods perishing before sale is completed	Where specific goods perish before the property passes in an agreement to sell, the agreement is avoided
S.9	Ascertainment of price	Price may be fixed by the contract, left to be fixed in an agreed manner, or determined by the course of dealing

Essentials of a Contract of Sale

Element	Explanation
Two parties	There must be a seller and a buyer, who must be different persons
Goods	The subject matter must be movable property within S.2(7)
Transfer of property	Ownership, not merely possession, must pass or be agreed to pass
Price	The consideration must be money; exchange of goods for goods is barter
Agreement	All essentials of a valid contract under S.10 of the Contract Act must be satisfied

Why the parties must be different persons: A person cannot buy his own goods, because there is no property to transfer. The rule has a practical exception in a part-owner selling to a co-owner, and in a sale by a person in one capacity to himself in another, such as an executor selling to himself personally with court sanction.

Why the price must be money: S.4(1) speaks of a price, and S.2(10) defines price as the money consideration for a sale of goods. Where goods are exchanged for goods there is barter, governed by the Contract Act and not the Sale of Goods Act. Where goods are exchanged partly for goods and partly for money, the transaction is generally treated as a sale if a money element is identifiable.

Meaning of Goods (S.2(7))

Goods means 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.

What is Included and Excluded

Included	Excluded
Vehicles, machinery, furniture, livestock	Immovable property
Stocks and shares	Actionable claims, such as a debt
Growing crops and grass	Money as currency
Standing timber agreed to be severed	Trees not agreed to be severed
Water, gas, electricity in certain contexts	Services
Computer software in packaged form	Purely a right to use, without any medium

Why actionable claims and money are excluded: An actionable claim is a right to sue for a debt or a beneficial interest in movable property not in possession, and its transfer is governed by S.130 to S.137 of the Transfer of Property Act. Money as currency is the measure of price, not the subject of sale; treating it as goods would make every payment a sale. Money as a collectible, such as an old coin sold for its rarity, is goods.

**Tata Consultancy Services v State of Andhra Pradesh (2005)** Supreme Court of India

Facts: The question was whether canned or packaged software sold on a medium was goods liable to sales tax, or whether it was an intangible service.

Issue: Can software constitute goods within the meaning of the sales tax legislation and the general concept of goods?

Held: Software, once put on a medium and made marketable, becomes goods. The test of goods is whether the item is capable of abstraction, consumption, use, transmission, transfer, delivery, storage and possession. Intellectual property put on a medium satisfies that test and is goods, irrespective of the fact that intellectual content is intangible.

Relevance: The leading Indian authority extending the concept of goods to intangibles embodied in a medium. Essential for any question on the modern boundaries of S.2(7).

Classification of Goods

Existing Goods (S.6(1))

Goods owned or possessed by the seller at the time of the contract.

Sub-class	Meaning	Example
Specific goods (S.2(14))	Goods identified and agreed upon at the time the contract is made	"This particular car, registration XYZ"
Ascertained goods	Goods identified after the contract is made, in accordance with the agreement	10 bags selected from a larger lot after the contract
Unascertained or generic goods	Goods indicated by description only, not yet identified	"100 quintals of wheat from my godown stock"

Why the distinction dominates the Act: Whether goods are specific, ascertained or unascertained determines when property passes under S.18 to S.23, whether specific performance is available, and who bears the risk of loss. The classification is therefore the gateway to most of the Act's operative rules.

Future Goods (S.6(3))

Goods to be manufactured, produced or acquired by the seller after the making of the contract. A contract for the sale of future goods operates only as an agreement to sell, because a person cannot transfer property in goods he does not yet have.

Contingent Goods (S.6(2))

A species of future goods, the acquisition of which by the seller depends on a contingency which may or may not happen.

**Howell v Coupland (1876)** Court of Appeal

Facts: A farmer agreed to sell 200 tons of potatoes to be grown on a specified field. Blight destroyed most of the crop, and only about 80 tons were produced.

Issue: Was the seller liable for failing to deliver the full 200 tons?

Held: The seller was not liable. The contract related to a specific crop from a specified field, so it was subject to the implied condition that the crop would come into existence. Its partial failure without the seller's fault excused performance to that extent.

Relevance: The classic authority on contingent goods and the implied condition of existence. Contrast with a generic contract for 200 tons of potatoes from any source, where the seller would remain liable.

Effect of Perishing of Goods (S.7, S.8)

Provision	Situation	Effect
S.7	Specific goods perish, or become so damaged as no longer to answer their description, before the contract is made, without the seller's knowledge	The contract is void
S.8	Specific goods perish, or become so damaged, after the agreement to sell but before the risk passes, without fault of either party	The agreement is avoided

Why S.7 produces voidness and S.8 avoidance: Under S.7 the goods were already gone when the parties contracted, so there never was a subject matter and the contract fails for initial impossibility. Under S.8 there was a valid agreement which becomes impossible of performance, so it is discharged prospectively. Both provisions apply only to specific goods; a seller of unascertained goods must find substitutes from any source.

Illustrations

Sale versus barter: A gives B his motorcycle in exchange for B's refrigerator. This is barter, not a sale, because the consideration is not money. The Sale of Goods Act does not apply.
Software as goods: A company sells packaged accounting software on a disc. Applying Tata Consultancy Services v State of Andhra Pradesh (2005), the software is goods, since it is capable of being stored, transmitted, possessed and transferred once embodied in a medium.
Standing timber as goods: A agrees to sell trees standing on his land, on terms that A will fell them and deliver the logs. Since they are agreed to be severed before sale, they fall within S.2(7) and are goods.
Future goods create only an agreement to sell: A agrees in January to sell B 500 shirts to be manufactured in March. This is a contract for future goods under S.6(3) and operates as an agreement to sell. Property cannot pass until the shirts exist and are appropriated.
Contingent goods: A agrees to sell B the mangoes to be produced by a specified orchard in the coming season. A cyclone destroys the crop. Applying Howell v Coupland (1876), A is excused, since the goods were contingent on the crop coming into existence.
Goods perished before the contract, S.7: A agrees to sell B a specific consignment of rice lying in a named warehouse. Unknown to both, the consignment had already been destroyed by fire the previous night. The contract is void under S.7.
Goods perished after the agreement, S.8: A agrees to sell B a specific tractor, delivery in a week, risk to remain with A. The tractor is destroyed by lightning three days later without fault. Under S.8 the agreement is avoided and neither party is liable.

Recall Check

Why must the price in a contract of sale be money, and what is the transaction called if it is not?
Distinguish specific, ascertained and unascertained goods, and explain why the distinction matters.
What is the difference in legal effect between S.7 and S.8?

Key Cases

Tata Consultancy Services v State of Andhra Pradesh (2005) TCS v State of AP 2005
Issue: Whether packaged software constitutes goods.
Rule: An item is goods if it is capable of abstraction, consumption, use, transmission, transfer, delivery, storage and possession.
Held: Software embodied in a medium is goods, notwithstanding that its intellectual content is intangible.

Howell v Coupland (1876) Howell v Coupland 1876
Issue: Whether a seller of a crop to be grown on a specified field is liable when the crop partially fails.
Rule: A contract for goods to be produced from a specific source is subject to an implied condition that they come into existence.
Held: The seller was excused to the extent of the crop failure, there being no fault on his part.

Distinctions

Basis	Sale (S.4(3))	Agreement to Sell (S.4(3))
Transfer of property	Immediate	In future or on a condition being fulfilled
Nature of the right	Jus in rem, a right against the world	Jus in personam, a right against the seller
Risk of loss	With the buyer, since property has passed	With the seller
Seller's insolvency	Buyer may claim the goods	Buyer ranks as a creditor for damages
Buyer's insolvency	Seller must deliver and claim the price	Seller may refuse delivery
Seller's resale to a third party	Buyer may sue the third party in conversion	Buyer's remedy is damages against the seller

Basis	Sale	Barter
Consideration	Money	Goods or other value
Governing statute	Sale of Goods Act 1930	Indian Contract Act 1872
Implied conditions and warranties	S.14 to S.17 apply	Do not apply as such

Basis	Existing Goods	Future Goods	Contingent Goods
Existence at contract date	In existence	Not in existence	Not in existence
Ownership or possession by seller	Yes	No	No
Legal character of the contract	May be a sale	Agreement to sell only	Agreement to sell, subject to the contingency
Provision	S.6(1)	S.6(3)	S.6(2)

Flashcards

Define a contract of sale of goods under S.4(1).

A contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.

How does S.2(7) define goods?

Every kind of movable property other than actionable claims and money, including stock and shares, growing crops, grass, and things attached to the land agreed to be severed before sale.

What is the essential difference between a sale and an agreement to sell?

In a sale property passes immediately; in an agreement to sell it is to pass in future or on fulfilment of a condition (S.4(3)).

Is packaged software goods?

Yes. Tata Consultancy Services v State of Andhra Pradesh (2005) held that software embodied in a medium is goods.

What are contingent goods?

Future goods the acquisition of which by the seller depends on a contingency which may or may not happen (S.6(2)).

What is the effect where specific goods have already perished before the contract is made?

The contract is void under S.7.

What is the effect where specific goods perish after an agreement to sell but before risk passes?

The agreement is avoided under S.8.

Why is an exchange of goods for goods not a sale?

Because the consideration is not money. It is barter, governed by the Contract Act, not the Sale of Goods Act.

Exam Scenario

Problem: On 1 March Mahesh agrees to sell to Nandini: (a) the specific consignment of 200 bales of cotton lying in Shed 4 of his warehouse, (b) 500 quintals of groundnut from the crop to be harvested from his farm in May, and (c) 100 quintals of wheat of standard quality, source unspecified, for June delivery. Unknown to either party, the cotton in Shed 4 had been destroyed by fire on the night of 28 February. In May an unseasonal hailstorm destroys the groundnut crop on Mahesh's farm entirely. In June the wheat market rises steeply and Mahesh refuses to deliver, saying he can no longer source it at a viable price. Advise Nandini on all three.

Step 1: Classify the goods in each limb before anything else

The outcome of each limb is decided by the classification, so do this first.

Limb	Classification	Provision	Result
(a) 200 bales in Shed 4	Specific goods, identified and agreed upon at the time of contracting	S.2(14), S.7	Contract void, price recoverable
(b) 500 quintals of groundnut from Mahesh's farm	Contingent goods, future goods tied to a named source	S.6(2)	Mahesh discharged on total failure of the crop
(c) 100 quintals of wheat, source unspecified	Unascertained generic goods, described only by quality	General law	Mahesh in breach, damages payable

Step 2: The cotton, S.7 makes the contract void

The bales were specific goods under S.2(14). They had perished on 28 February, before the contract was made, and neither party knew it.

S.7 applies and the contract is void. Neither party is liable and any price paid is recoverable.

Step 3: The groundnut, an implied condition of existence

These were future goods whose acquisition depended on a crop from a specified farm materialising, so they were contingent goods under S.6(2).

Apply Howell v Coupland (1876): a contract for goods from a specific source carries an implied condition that they come into existence. The hailstorm destroyed the crop entirely and without Mahesh's fault, so he is discharged and Nandini has no claim.

Step 4: The wheat, market movement is the seller's own risk

No source was specified, so Mahesh undertook to supply wheat of that description from any source. No implied condition of existence attaches.

A rise in market price is neither impossibility nor frustration. It is ordinary commercial risk, which Mahesh assumed.

He is in breach. Damages are the difference between the contract price and the market price at the date of breach.

Two traps in this problem

Do not treat all three limbs alike. Specific goods attract S.7 and S.8. Goods tied to a named source attract the Howell v Coupland implied condition. Purely generic goods leave the risk of market movement on the seller.

A failed source is not the same as a difficult market. Limb (b) succeeds for Mahesh because the identified source failed. Limb (c) fails for him because he was free to buy anywhere and simply found it dear.

Conclusion. Nandini recovers nothing on (a) and (b) beyond restitution of any price paid. She recovers damages on (c), measured by the difference between the contract and market prices at the date of breach.