Introduction

The law relating to contracts is contained in the Indian Contract Act, 1872. For

business executives, contract law is tremendously significant because it underlies or is

related to all major areas of law affecting business.

The general principles of the law of contracts are covered in 75 sections. The

Branch of law which determines the circumstances in which promises made by the

parties to a contract shall be legally binding on them is governed by the Indian Contract

Act, 1872.

The Indian Contract Act is concerned with the most important branch of business

law as it affects all of us in one way or the other at one time or the other. However, it is of

particular importance to business persons as bulk of their transactions are based on

contracts.

The Indian Contract Act, 1872 is not a complete code on the law of contracts.

Further the Indian Contract Act does not affect any usage or custom of trade. Thus, the

parties to a contract, which clearly provide for the application of usages into their

contracts, are expressly saved from the operation of this Act.

Condition and Warranties. In a contract of sale, parties make certain stipulations, i.e.,

agree to certain terms. All stipulations cannot be treated on the same footing. Some may

be intended by the parties to be of a fundamental nature, e.g., quality of the goods to be

supplied, the breach of which, therefore, will be regarded as a breach of the contract.

Section 12(2) defines a ‘condition’ as 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’. A warranty on the other hand, is defined by s.12(3) as a ‘stipulation

collateral to the main purpose of the contract, the breach of which gives rise to claim for

damages but not to a right to reject the goods and treat the contract as repudiated’.

Breach of condition to be treated as breach of warranty (s.13). Under certain

circumstances a breach of condition is to be treated as a breach of warranty, i.e., the right

to repudiate the contract is deemed to have been lost. These circumstances are:

i. Where an contract of sale is subject to any condition to be fulfilled by the seller,

the buyer may either (a) waive the condition, or (b) elect to treat the breach of the

condition as a breach of warranty.

ii. There is also a compulsory treatment of breach of condition as a breach of

warranty.

Express and implied conditions and warranties. Conditions and warranties may be

either express or implied. They are said to the ‘express’ when the terms of the contract

expressly, provide for them.

Implied conditions and warranties are deemed to be incorporated by law in every

contract of sale of goods unless the terms of the contract show a contrary intention. The

implied conditions:

i. Condition as to title

ii. Sale by description

iii. Condition as to quality or fitness for buyer’s purpose

iv. Condition as to merchantable quality

v. Condition as to wholesomeness

vi. Implied condition in the cased of sale by sample

vii. Implied condition in the case of sale by sample as well as description

Condition as to title. Section 14 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 in the case of a sale, he has a right to sell the goods

at the time when the ownership is to pass.

However, this condition as to title may be negative by an express term in the

agreement. The obvious examples are: sales made by custom authorities, courts, etc.

Sale by description s.15. Where there is a contract for the sale of goods by

description there is an implied condition that the goods shall correspond with the

description.

Condition as to quality of fitness (s.16(1)). As a general rule, a buyer is supposed

to satisfy himself about the quality of goods he purchases and is also charged with the

responsibility of seeing for himself that the goods suit the purpose for which he buys

them. It is only in these exceptional circumstances that there is an implied condition as to

quality of fitness: These circumstances are:

i. Where the buyer, expressly or by implication, makes known to the seller

the particular purpose for which the goods are required, so as to show that

the buyer relies on the seller’s skill or judgment and the goods are of a

description which it is in the course of the seller’s business to supply.

The above exception does not apply where the specific goods are sold under their

patient or trade name.

Condition as to merchantable quality (s.16(2)). Another implied condition is that the

goods must be merchantable.

i. Ameer buys a black yarn from Daleep and finds it to be damaged by white ants.

The condition as to merchantability is broken.

ii. There is a contract for sale of Manila hemp. The hemp that is supplied, though

Manila hemp, is so damaged by sea water that no one in the market would accept

it as Manila hemp.

However, in spite of examination, if the goods have certain latent defects which

no examination by a man of ordinary prudence would have revealed, the implied

condition as to merchantability subsists.

The implied condition as to merchantability must, however, be constructed

reasonably and the seller will not be held liable if certain facts are concealed from him

and the unsuitability arises because of those facts.

As mentioned below, in case of food articles, there is an additional implied

condition.

Implied condition as to wholesomeness. The condition of merchantability includes

another condition, namely, that of wholesomeness or soundness in the case of sale of

provisions or foodstuff.

Implied conditions in the case of a sale by sample (s.17). A contract for sale by

sample is one where there is a term in the contract, express or implied, to that effect.

Thus, it should not be assumed to be a sale by sample in all cases where sample is shown.

Examples.

i. Certain shoes are sold by sample. The shoes are found to contain paper not

discoverable by ordinary inspection. The buyer is entitled to the refund to the

price plus damages.

ii. In a contract for the sale of brandy, by sample, the brandy that is supplied has

been coloured with a dye.

Impled condition in the case of sale by description as well as sample (s.15). In a sale by

description as well as sample, the goods must correspond both with the description as

well as with the sample.

Example. There was a sale of ‘foreign refined rape-oil’ warranted only equal to sampl.

The oil supplied was the same as the sample, but it was not ‘foreign refined rape-oil,

being a mixture of it and other oil.

Doctrine of Caveat Emptor. The doctrine of caveal emptor is a fundamental principle of

the law of sale of goods. It means ‘CAUTION BUYER’. i.e., let the buyer beware.

Exceptions to the doctrine of caveat emptor. The doctrine is subject to the following

exceptions:

i. Where the seller makes a false representation and buyer relies on that

representation, the buyer is entitled to the goods according to that representation.

ii. Where the consent of the buyer, in a contract of sale, is obtained by the seller by

fraud or where the seller actively conceals a defect in the goods, so that on a

reasonable examination the same could not be discovered.

iii. Where the buyer makes known to the seller the purpose for which he is buying the

goods and the seller happens to be a person whose businss is to sell goods of that

description, then there is an implied condition that the goods shall be reasonably

fit for such purpose.