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Essentials of a Valid Contract of Sale, Elements of a Valid Contract

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Helna is a postgraduate in Commerce who now working as a Manager and also love sharing informative information with her readers.

Essentials of a Valid Contract

 The offer must be made with the intention of creating legal relations otherwise; there will be no agreement.

The offer must be made with the intention of creating legal relations otherwise; there will be no agreement.

Essentials of a valid Contract of Sale

Some essential elements are to be present in a contract that makes the contract of sale valid. If the essential elements are missing, then the contract of sale will not be valid. For example, John agrees to sell his Car to Tom without any consideration. This contract of sale is not valid since there is no consideration.

From Section 4 of the Sale of Good Act, we can understand that the following essential elements must be present in the Contract of Sale.


Essentials of Valid Contract:

Giving below soem important essential of a valid contract:

  1. Offers and Acceptance.
  2. Capacity of Parties.
  3. Lawful Objects.
  4. Possibility of Performance.
  5. Free Consent.
  6. Certainty.
  7. Writing and Registration/Legal formalities.
  8. Not Expressly Declared Void.
  9. Lawful Consideration.
  10. Legal Relationship.


1. Offer and acceptance: A says to B that he will sell his car to him for $999. This is an offer. When B agrees to pay $999 for the Car is his acceptance. An agreement must have a lawful offer by one party and a lawful acceptance by another party. This is one of the essential elements of a contract. The offer must be made with the intention of creating legal relations otherwise; there will be no agreement.


2. Capacity of Parties: As per the Indian Contract Act, a minor (below the age of 18) cannot enter into a contract. The law clearly says that the contract is valid only if the parties are of the age of majority and of sound mind and must not be disqualified from contracting by any law to which they are subject. A contract by a person of unsound mind is void from the beginning. (ab-initio)


3. Lawful Objects: A promise to pay B $10,000 if B kills C. The agreement is illegal, as its object is unlawful. It is necessary that an agreement should be made for a lawful object. An illegal, immoral, fraudulent agreement which opposed to the public interest and implies injury to another person is not a valid contract. Such contracts are illegal and void.

4. The possibility of Performance: An agreement to do an act impossible in itself cannot be treated as an agreement or contract. Therefore, the actions contemplated in the agreement should be capable of performance.

5. Free Consent: Consent to enter into a contract must be free and it is not induced by coercion, fraud, misrepresentation, undue influence, or mistake. Therefore, the contract must have been made with the free consent of the parties involved.


6. Certainty of Meaning: The meaning of the agreement must be clear, otherwise the agreement will not be enforceable by law. For example, If A agrees to sell to B 200 Kg of metal at the rate of $20 per Kg, the agreement is not enforceable as there is nothing to show the type of metal being sold.

7. Necessary Legal formalities: A contract becomes legally valid only when it is done in writing and registered as per the Government regulations and requirements of the country to wherein it is created.

8. Not expressly declared void: In India, agreements in restraint of marriage, agreements in restraint of trade or agreements with uncertain meaning, agreements in restraint of legal proceedings are expressly declared void by the Indian Contract Act. Therefore, the agreement must not have been expressly declared as void.

9. Lawful consideration: A Contract must be made for lawful consideration. X agrees to sell his house to Y for $50,000. X's promise to sell the house to Y is the Y's consideration. Y's promise to pay $50,000 is X's Consideration. Both considerations are legal and valid.

X promise to obtain for Y employment in the Government Service and Y promises to pay $5,000 to X. This agreement is void as the consideration for it is unlawful.

Courts will not enforce a contract that is illegal or violate public policy. Such contracts are considered void. A gambling contract would be illegal in many places. Therefore, the contract must be supported by a lawful consideration on both sides.


10. Legal Relationship: A father promises to pay his son $20 every month as pocket money. Later the father refuses to pay. This is a social agreement and does not carry legal obligations. Whereas A offers to sell his cycle to B for $200 and B agree to buy it at the same price is a contract as it creates a legal relationship between them. In essence, the parties to an agreement must create a legal relationship between them. Agreements of a domestic or social nature do not create legal relationships and hence such contracts do not carry legal validity.

Essential Elements of a Valid Contract

1. There must be at least two parties, i.e. one buyer and the other seller. A person cannot buy his own goods. For example, Tom is the owner of certain goods, but he is not aware of this fact. John pretends to be the owner of the goods and sells them to Tom. Since the goods already belonged to Tom, he cannot buy his own goods, hence there is no sale and the contract is not valid. (Bell V. Lever Bros. Ltd.) There is an exemption in the case of a part-owner. For the purpose of the sale of partnership property, partners are not regarded as separate persons. They cannot be both the seller and the buyer. But a partner may sell goods to the firm or buy goods from the firm. However, a part-owner can sell his ownership to another part owner.


2. The subject matter of Sale must be "goods."
The subject matter of the contract of sale must be movable goods. The sale and purchase of the immovable property are regulated by the Transfer of Property Act. Contracts relating to services are also not treated as a contract of sale. So the subject matter of the contract must be goods which can be movable.

3. Transfer of property in the goods:
It is the ownership that is transferred in a Contract of sale. The ownership is agreed to be transferred in an agreement to sell as in the case of the pledge. According to Section 2 (II) of the Act, property means the general property in the goods and not merely a special property. The general property is transferred from the seller to the buyer in a contract of sale. When the goods are pledged, it is only the special property that is transferred i.e., possession of the goods is transferred to the pledgee while the ownership rights remain with the pledger. You should note that for transferring the ownership of goods, the physical delivery of the goods is not essential.

4. Consideration in Price:
Consideration in a contract of sale has necessarily to be money. Thus, if for instance, goods are offered as consideration for goods, it will not amount to a sale, but it will be called a 'barter'. Similarly, in case there is no consideration, it amounts to a gift and not a sale. However, the consideration may be partly in money and partly in goods.

Sale and Contract for Work and Labor

A Contract of sale of goods has to be distinguished from a contract for work and labor, involving the exercise of skill or labor on some material. The dividing line between the two is very minute. The distinction essentially rests on whether the rendering of the service and the exercise of skill is the essence of the contract or the delivery of the goods is the essence of the contract, although some labor on the part of the seller might also have been out. In the case of the former, it is a contract of work while in the latter case it will be a contract of sale of goods.

The distinction between the two may be understood by referring to the case of Robinson V. Graves. In this case, A engaged an artist to paint a portrait. Canvas, paint, and other necessary articles were to be supplied by A to the painter. Applying the above-mentioned test that whether the application of skill and labor in the production of the portrait is the substance of the contract, it was held that it is a contract for work and labor and not a contract of sale. On the other hand, a contract for providing and fixing four different types of windows of a certain size according to specifications, designs, drawings, and instructions set out in the contract and a contract for making and supplying of wagons or coaches on the underframe supplied by Railways have been held by the Supreme Court to be a contract for work and labor and not a contract of sale.

From the above, it should become clear to you that in a contract of sale ownership and possession of goods is transferred, while in a contract for work and labor through there may be the delivery of goods, yet the emphasis is on the exercise of skill and labor upon the goods.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2010 Helna

Comments

miyandatvtc zambia on July 12, 2013:

when a buyer specifies or allocates the goods he has bought and it is found that the specified goods have been stollen,the buyer will loose out.e.g.mobby buys 6 chickens from chaambwa and has pointed out those chickens,he promises the seller that he will collect them the followingh day,at night when chaambwa was asleep the dog came and ate the 3 chickens.mobby will loose out bcoz property in goods had already passed.chaambwa cant loose what he dont have.miyanda mweemba

Jkamau on October 31, 2012:

In a sale of goods contract, a person cannot give what he does not have. Discuss

Hanna on April 12, 2012:

Thanks

very on April 02, 2012:

nice article but its barter not brater

anand gupta on March 27, 2012:

Very well written and a succint article. There is it seems , a little mix up or asort of "printer's devil" at work in one sentence of the text.

Para 3.

Transfer of property in "goods"

Line 2.

"The ownership is agreed to be transferred in an agreement to sell as "IN THE CASE OF PLEDGE" (???)

Is it not that in a case pf a pledge/pawn only the SPECIAL Property is transferred i.e the actual or constructive delivery of the goods is to be delivered to the pledgee whilst the general property remains with the Pawnor/Pledger

anand9873@yahoo.com

Thanks

A.P.Gupta New Delhi, India

Khalid Abbasi on March 17, 2012:

Very helpful and interesting for us. Thanks

ednah on March 11, 2012:

what is the rule in smith v farrell's trustee 1904 TS 696 relating to sale and pledges

Cyril Kubai on March 10, 2012:

The position in Lee v Griffins and that of Robinson v Graves as concerns the test for establishng a sale of Goods contracts really cannot be reconciled. This doc and the contributions therein are a job well done.

Olayinka on February 16, 2012:

Thanks for the page. It has realy helped me,in getting a right agreemen.

Khadijah abdulrahman on January 07, 2012:

Thank you so much. Really enjoyed the article.

tejasvi saxena on December 21, 2011:

really its too good to understand the sales of goods and specially for the students.....thanks

sarah on November 25, 2011:

dis page realy helped, thanks a lot.

Paradza Obvious on October 25, 2011:

KEEP ON GIVING ANSWERS LIKE THESE THAT'S IT

virinia on September 20, 2011:

was working on a school assignment en you have helped me a great deal.

Blingztt on September 08, 2011:

Iamsam thanx 4 this document.it has helped me a law student to understand more on sale of goods

Prakash on October 17, 2010:

It was really helpful. Thanks to You..

Helna (author) on May 25, 2010:

Thanks suny51 for your visit and leaving a comment.

suny51 on May 25, 2010:

so I agree with you we must have proper documents before making a deal,that's in connection with the immovable property.

Vt on May 21, 2010:

In a contract of sale in which the person taking the goods does not have the option to return the goods, it will be an agreement to buy and not an agreement of hire-purchase, even though the price is payable in instalments and the seller has the power to take the goods back in case of default. In Les v. Butler, a lady hired certain furniture from the plaintiff. The contract provided that the hirer has no option to return the goods and owner can take the furniture back if any instalment was not paid. Before the last instalment was paid, the lady sold the furniture to the defendant. It was held, that the defendant had acquired a good title, the lady being possession of the furniture under an agreement to buy and not under an agreement of hire-purchase because the lady did not have the option to return, but was under compulsion to buy.

Thus, in case of sale by instalment, the buyer cannot terminate the contract and as such is bound to pay the price of the goods. The hire-purchaser, on the other hand has an option to terminate the contract at any stage and cannot be forced to pay the further installments. Furhter, if the agreement is an agreement to sell and under it if the buyer obtains possession of the goods, which the consent of the seller, he can validly sell or pledge the goods and thereby give the transferee or pledgee a good title on the goods provided they have acted in good faith. However, in a contract of hire purchase, the hirer cannot transfer ownership to such buyer even if the latter acts in good faith, because the position of the hirer is that of a bailee only. He becomes the owner when all the installments are paid.

1. A hirer cannot claim the benefit of implied conditions and warranties unless it becomes a sale. However, conditions implied under Hire-Purchase Act, 1972 do apply.

2. Sales-Tax is not leviable on a hire-purchase until it becomes a sale.

3. A contract of sale may be made orally or in writing, but the hire-purchase agreement must be in writing.

on May 21, 2010:

Distinguish between Credit Sale and Hire-Purchase

A transaction of sale has to be distinguished from another apparently similar but different transaction, called hire-purchase agreement. A hire-purchase agreement is and agreement under which the owner delivers his goods on hire basis to a person called hirer and the hirer has the option to buy the goods by paying the agreed amount in specified installments.

A hire-purchase agreement, therefore, entitles the hirer only to possession of the goods. He cannot accordingly pass a good title to another buyer from him. A hire purchase agreement is distinct from sale in which price may be payable by installments. In case of sale, the property in goods passes on as soon as the contract is made, though price may not yet have been paid. A hire-purchase agreement, on the other hand, does not result in passing of the property unless the option to purchase is exercised, usually by payment of all the installments. Till such time, it continues to be a bailment. Thus, it is primarily the option on the part of the hirer to buy or to terminate the hiring that marks the distinction. In K. L. Johar & Co. v. Dy. commercial Tax Officer, the Supreme Court observed as follows:

The essence of a sale is that the property is transferred from the seller to the buyer for a price, whether paid at once or paid later in installments. On the other hand, a hire-purchase agreement has two aspects. There is first an aspect of bailment of goods subject to the hire-purchase agreement and there is next, an element of sale which fructifies when the option to purchase is exercised by the intending purchaser.

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