Monday 6 February 2017

CONDITIONAL CONTRACT OF SALE OF GOODS



Section 3 (3) of the Sale of Goods Act, CAP 31 of the Laws of Kenya provides that a contract of sale maybe absolute or conditional. A conditional contract of sale is one in which performance of the contract is based on a certain condition specified in the agreement between the parties. If the condition is not fulfilled, the party not at fault is relieved from performance as the contract is deemed cancelled.
The condition might be something to be performed by the buyer or by the seller or it may be the happening of a future event beyond the control of the parties, or it may be an agreement for the leasing or bailment of goods by which it is agreed that the bailee or lease has the option of becoming the owner of such goods upon the fulfillment of the terms of the contract. As was observed by the Court in the case of Kukal Properties Development Ltd v Tafazzal H. Maloo & 3 others Civil Appeal No. 155 of 1992, it is trite law that where the contract is subject to a future event, there is no binding contract until and unless that condition subsequent is fulfilled.
A common conditional contract of sale is a contract which contains a Retainer Clause. Retainer Clauses generally give the seller the right to retain the title to the good until a certain condition in the contract is fulfilled by the buyer. An example is where the seller retains the title to the goods until the full purchase price is paid by the buyer. In such a case the condition in the contract is full payment of the purchase price and failure to fulfill this condition means that the title to the good will not pass to the buyer.
In conditional contracts of sale parties are deemed to have intended to become contractually bound on fulfillment of conditions subsequent so that the contract does not come into existence until those conditions are fulfilled. As was stated in the case of Aberfoyle Plantations Ltd v Cheng [1959] 3 All ER 910, which was a case of a conditional contract;
Until the condition is fulfilled, there is no contract of sale to be completed, and, accordingly………the parties must by implication be regarded as having agreed that the contract must become absolute through performance of the condition.
Section 21 (1) of the Sale of Goods Act provides that where there is a contract for the sale of specific goods, or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; and in that case, notwithstanding the delivery of the goods to a buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled.
While some conditions may be implied from the provisions of the Act, some conditions have to be specifically provided for in the agreement between the parties. Some of the conditions that may are implied in the sale of goods act include;
·         Section 11 (1) of the Act states that where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party, and the third party cannot or does not make a valuation, the agreement is avoided (provided that if the goods or any part thereof have been delivered to and appropriated by the buyer he must pay a reasonable price therefore). The effect of this section is that where the price of the goods is to be set by a third party, it is a condition that it will be done, and if the valuation does not happen, the contract is avoided.
·         Section 17 of the Act which provides on sale by sample provides that In the case of a contract for sale by sample there is—
(a) An implied condition that the bulk shall correspond with the sample in quality;
(b) An implied condition that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
(c) An implied condition that the goods shall be free from any defect rendering them unmerchantable which would not be apparent on reasonable examination of sample.
Failure for any other above conditions to be fulfilled relieves the buyer from performance of the contract and the seller cannot sue for specific performance.
·         Section 18 of the Act provides where there is a contract for the sale of unascertained goods; no property in the goods is transferred to the buyer unless and until the goods are ascertained. The aspect of ascertainment makes this a conditional contract in which performance is not obligated until ascertainment has been done.
Other implied conditions include contracts of sale by description (section 15 CAP 31) and the condition that the seller has the right to sell the goods (section 14 CAP 31).
The Sale of Goods Act does not specify or limit the nature of conditions which may render a contract not absolute. Determining the conditions to the specific contract is left to the contracting parties provided the parties operate within public policy standards. The right of parties to impose conditions into a contract of sale is based on the principle of freedom of contract.  As was held by Sir George Jessel MR in Printing and Numerical Registering Co. versus Sampson (1875) 19 Eq 462
If there is one thing, which more than another, public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforceable by Courts of Justice.
Although this principle was later analysed and in some ways curtailed by Courts of Justice in order to align with the public policy standards, the law still stands that parties to a contract are allowed the freedom to set their own terms to a contract, which means that parties may put conditions to their contract. The important thing to ensure when setting conditions in a contract is that those conditions are not contrary to public policy standards. As was held by Lord Denning MR in George Mitchell Ltd versus Finney Lock Seeds Ltd (1983) 2 AC 803, courts have the power to control unfair terms in a contract and scrap them off on the ground that one party had unequal bargaining power.
Courts will be ready to uphold the conditions parties choose to include in their contract. Performance will be excused if the party failing to perform can show that indeed his actions and the reason for non-performance were well within the terms of the contract. As was stated by Kukal Properties Development Ltd v Tafazzal H. Maloo & 3 others Civil Appeal No. 155 of 1992 where the contract is in writing and its terms are clear and unambiguous, no extrinsic evidence may be called to add or detract from it, and the court will be ready to uphold those terms.

A CONDITIONAL CONTRACT OF SALE AS AN AGREEMENT TO SELL



A conditional contract of sale only comes into existence when the conditions are performed. Parties are not liable to perform their obligations in the agreement until and unless the conditions have been fulfilled. It therefore means that a conditional contract of sale is an agreement to sell that only becomes a sale when the conditions have been fulfilled. In short, it would be right to state that an absolute contract of sale is a sale, while a conditional contract of sale is simply an agreement to sell.
Section 3 (5) of CAP 31 provides that an agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. Whether an agreement to sell is grounded on passage of time or happening of an event or something to be done by one of the parties to the contract, this makes it a conditional contract. Take for example, a contract that states that time is of essence and then requires certain action to be taken within a stipulated amount of time, this is a conditional contract in which the condition is, first the performance of the condition and secondly performance of the condition within the time agreed upon. Should either of those two conditions fail to be fulfilled, the contract will be deemed cancelled and the parties will be relieved from performance.
An agreement to sell is in itself only an expression of intention premised on the performance or happening or a condition. It does not transfer any property to the buyer. The intention will turn into a contract when the condition is fulfilled. There may be a contract premised on the seller acquiring the goods subject of the contract. These may be goods to be manufactured or in any other manner, goods to be acquired by the seller after the making of the contract (section 2 CAP 31). This are called future goods. Where there is such a contract, the condition is the seller acquiring the goods. Should the seller fail to acquire the goods, the contract is deemed cancelled and the buyer has no duty to fulfill any obligations he had in the contract. As is expressed under section 7 (3) of CAP 31 where by a contract of sale the seller purports to effect a present sale of future goods, the contract operates as an agreement to sell the goods.
An agreement to sell precedes a sale agreement. So that once the conditions stipulated in the agreement to sell are fulfilled, the parties then get into a sale agreement in which the seller agrees to transfer the property in the goods to the buyer in exchange for the consideration to be furnished by the buyer. In some instances parties will use the same instrument to cater for both the agreement to sell and the sale agreement. So that the agreement provides that the seller agrees to transfer the property to the buyer if certain conditions are fulfilled. So that parties do not have to execute two different documents. In such a case, the document will function both as an agreement to sell and a sale agreement depending on the circumstances at hand.
Where it is a contract for the sale of existing goods, the buyer may take possession of the goods under an agreement to sell. However, property does not transfer to the buyer until he fulfills the conditions in the agreement, for example paying of the full purchase price. This makes the agreement between the parties a conditional contract of sale.
Section 19 (1) CAP 31 provides that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. This creates a leeway for the parties to make their agreement a conditional agreement. Take the example given above; where the parties agree that the property will not be transferred until the purchase price is paid, this makes it a conditional contract. It also makes it an agreement to sell. It is not a sale yet until the full purchase price is furnished. There is however an agreement that binds both parties, so that as long the buyer is paying the purchase price as agreed upon the seller has no authority to sell the same goods to another party.
There are however events beyond the control of the parties that may halt a conditional agreement and relieve parties from performance. This may be expressly stated in the agreement or implied from the law. Take for instance section 9 of CAP 31, it provides that where there is an agreement to sell specific goods, and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided. The effect of this is that in addition to failure to fulfill the set conditions and failure of the contemplated events happening, there is an implied condition that the goods under an agreement to sell will not perish. Should they perish, the agreement is deemed cancelled and the parties do not have to proceed to the stage of entering into the sale agreement.
What this means is that conditional agreements are not only subject to the conditions stipulated by the parties, they are also subject to the conditions implied by the law. It also means that the law has power to make an agreement between parties a conditional agreement and thus only an agreement to sell but not a sale agreement. Primarily, a force majeure clause turns a contract of sale into a conditional contract. Performance of the agreement is conditional on the events stated in the force majeure clause not happening i.e. it is an agreement to sell the goods if those events don’t occur. If those events happen, at that stage the agreement does not mature to a sale agreement, the contract is avoided and the parties are relieved from performance.

Thursday 26 January 2017

SALE OF GOODS CONTRACT



By Mercy Maina

Section 3 of the sale of goods act, cap 31 laws of Kenya defines a contract of sale of goods as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price. This definition brings six elements into the meaning of a contract of sale of goods, namely;
a)      A seller
b)      Transfer
c)      Agreement to transfer
d)     Property in goods
e)      A buyer
f)       Price

SELLER

Section 2 of the Sale of Goods Act, Cap 31 Laws of Kenya defines a seller as a person who sells or agrees to sell goods. The Black’s law dictionary defines a seller as one who sells anything; the party who transfers property in the contract of sale. Section 3 of the Sale of Goods Act, cap 31 Laws of Kenya defines a contract of sale of goods as a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer………… It therefore follows that for a contract of sale of goods to exist there must be a seller who is transferring or agreeing to transfer the property in the goods to a buyer. A seller can therefore be simply defined as the person who transfers or agrees to transfer property in goods to another under a contract of sale.
Who a seller is in a contract will depend on the terms of the contract, in some contracts a seller maybe be defined to include his agents, representatives, employees etc. this however does not negate the fact that at the end of the day the seller is the entity or person who has the responsibility to transfer the property in the goods.
To determine who a seller is in a contract, it is therefore prudent to look into who bears the legal obligation to transfer property in the goods. Though it may be done on his behalf by an agent or representatives and though payment for the goods may be received by another on his/its behalf, the seller of goods is the person who is directly obligated to transfer property in the goods as the terms of the contract.
In the case of Geoffrey Munyua v Mombasa Centre Complex & John Felix Kariuki [2014] eKLR, the 1st Respondent claimed that the agreement of sale subject of this case exited between the Appellant and the 2nd Respondent as the 1st Respondent’s seal had not been used in execution of the contract. The court however found from evidence tendered that the 2nd Respondent worked for the 1st Respondent and he executed the contract on behalf of the 1st Respondent. The court found that the contract existed as between the Appellant and the 1st Respondent as the 2nd Respondent was merely an agent of the 1st Respondent. In reaching this conclusion the court relied on Section 38 of the Companies Act which states that
“a document or proceeding requiring authentication by a company may be signed by a director, secretary or other authorized officer of the company, and need not be under its common seal.”
The general rule is that where a person contracts as agent for a principal, the contract is the contract of the principal and not that of the agent so that, the only person who may sue or be sued and to whom all rights and obligations in the contract vest is the principal and not the agent as was held in Montgomerie versus United Kingdom Mutual Steamship Association (1891) 1QB 370.
A seller is therefore in whom the obligation to ensure a transfer of the property to the buyer vests. All others whether agents, representatives or employees simply act on behalf of the seller and cannot therefore are deemed to be the seller. Similarly, even in contracts where parties get into a contract upon the introduction of another party, the third party falls out of the contract and the only parties existing as seller and buyer is the supplier of the goods (seller) and the consumer (buyer).

TRANSFER

The Black’s law dictionary defines transfer as the passing of a thing or of property from one person to another. It is an act of the parties or of the law by which the title to property is conveyed from one person to another.
John Bouvier's 8th edition law dictionary of 1914 defined a transfer as "the act by which the owner of a thing delivers it to another person, with the intent of passing the rights which he has in it to the latter". A mere change of possession does not amount to transfer.
Transfer is only complete when ownership changes from one person to another. While possession is a de facto relationship in which one has the physical control over a good or property, ownership is a de jure relationship that denotes one’s legal control over a good. Transfer is concerned with change of ownership.

Transfer is closely intertwined with the power of control. The question to be asked in determining transfer is, who has control over the good? The point was decided in the taxation case of Estate of Sanford v. Commissioner, 308 US 39 - Supreme Court 1939 where it was held that a gift upon trust, with power in the donor to revoke it is not taxable as a gift because the transfer is incomplete, and that the transfer whether inter vivos or at death becomes complete and taxable only when the power of control is relinquished.

Similarly, according to the court in Burnet v. Chicago Portrait Co., 285 U.S. 1, 16, 20, a transfer is only complete when "the transferor has so parted with dominion and control as to leave in him no power to cause the beneficial title to be revested in himself."
Whether a transfer has been effected and is complete is a question of control over the good. Even where a party purports to have transferred a good to the buyer, the transfer will not be complete if he holds power and control over the good. This is so especially in contracts with a Retention of Title Clause, where property in the goods only vests in the buyer upon the fulfillment of a condition such as full payment of the purchase price. In such contracts, though possession of the goods may change hands from the seller to the buyer, transfer is not complete when the condition is fulfilled and the clause becomes ineffective in the contract.
As the court observed in the case of Burnett versus Guggenheim, 288 U.S. 280, 287, the essence of a transfer is the passage of control over the economic benefits of a good rather than technical changes. The court in Corliss versus Bowers, 281 U.S. 376, 378 was of a similar view when it stated that “retention of control over the disposition of the property……………..renders the transfer incomplete until the power is relinquished……………..”

PROPERTY

Too often the term property is used to refer to things that belong to someone. It is common for people to refer to property as a tangible thing. But in law, property denotes the relationship existing between a person and a thing. It is the bundle of rights that one has over something. As was stated by the court in Yanner versus Eaton (1999) 201 CLR 351;
The word "property" is often used to refer to something that belongs to another. But in the law, "property" does not refer to a thing; it is a description of a legal relationship with a thing. It refers to a degree of power that is recognised in law as power permissibly exercised over the thing. The concept of "property" may be elusive. Usually it is treated as a "bundle of rights". But even this may have its limits as an analytical tool or accurate description, and it may be that "the ultimate fact about property is that it does not really exist: it is mere illusion". Considering whether, or to what extent, there can be property in knowledge or information or property in human tissue may illustrate some of the difficulties in deciding what is meant by "property" in a subject matter. So too, identifying the apparent circularity of reasoning from the availability of specific performance in protection of property rights in a chattel to the conclusion that the rights protected are proprietary may illustrate some of the limits to the use of "property" as an analytical tool. No doubt the examples could be multiplied.
Property consists primarily in control over access. Much of our false thinking about property stems from the residual perception that 'property' is itself a thing or resource rather than a legally endorsed concentration of power over things and resources. There is a huge difference between property and possession. One of the property interests that one may have is ownership, it consist of legal rights that one has over a thing, possession on the other hand denotes physical control over a thing. Possession is often times controlled and limited by ownership.
"Property" is a term that can be, and is, applied to many different kinds of relationship with a subject matter. It is not "a monolithic notion of standard content and invariable intensity". That is why, in the context of a testator's will, "property" has been said to be "the most comprehensive of all the terms which can be used, inasmuch as it is indicative and descriptive of every possible interest which the party can have".
Because "property" is a comprehensive term it can be used to describe all or any of very many different kinds of relationship between a person and a subject matter. To say that person A has property in item B invites the question what is the interest that A has in B? The statement that A has property in B will usually provoke further questions of classification. Is the interest real or personal? Is the item tangible or intangible? Is the interest legal or equitable?
“Ownership" connotes a legal right to have and to dispose of possession and enjoyment of the subject matter. As Holmes J said in Missouri v Holland “possession is the beginning of ownership." Property is most often understood to mean ownership as ownership is the most exclusive property right one can have. As was observed by the court in Manrell versus Canada (2003) FCA 128, "It is implicit in this notion of property that property must have or entail some exclusive right to make a claim against someone else. A general right to do something that anyone can do, or a right that belongs to everyone, is not the property of anyone."
Property comprises legal relations not things, and those sets of legal relations need not be absolute or fixed.  In Yanner versus Eaton (1999) 201 CLR 351 Hohfeld said this of "property”:
"Sometimes it is employed to indicate the physical object to which various legal rights, privileges, etc., relate; then again - with far greater discrimination and accuracy - the word is used to denote the legal interest (or aggregate of legal relations) appertaining to such physical object. Frequently there is a rapid and fallacious shift from the one meaning to the other. At times, also, the term is used in such a 'blended' sense as to convey no definite meaning whatever."
While property entails legal right that can one have over property, it does not include any and every right that one can have. As was stated in Vaillancourt v. Deputy M.N.R., [1991] 3 F.C. 663 (C.A.), property has a very broad meaning but it is not a word of infinite meaning. Consider the case of a person who is injured in a car accident caused by the negligence of another person. The injured person has the right, possibly a valuable right, to claim damages against the negligent person. Suppose that claim is released in consideration of the payment of a sum of money. One could say that the right to claim damages was disposed of. But no one would accept the argument that the payment is the proceeds of disposition of capital property.

Possession is an element of property that one has over a good, though it is limited. It is a de facto relationship; it denotes physical control over a good and not legal right over it. Possession can easily be defeated by a claim of a de jure relationship. Ownership is a de jure relationship. It entails legal rights that one has over property, it is the most exclusive legal right that one can have over a thing. That is why ‘property’ is commonly taken to mean ‘ownership’.
Ownership gives one the right to deal with the good as he so wishes in exclusion of all others. The principles of ownership include;
·         Control over the use of the good
·         Right to take any benefit from the good
·         Right to transfer or sell the good
·         Right to exclude others

In a contract, the rights that one gets over a good depend on the agreement between the parties and the terms of the contract. While for example, a sale of goods contract is intended to eventually transfer property absolutely to the buyer, Retention of Title Clause may reduce the right that the buyer gets to merely possessory until a certain condition be fulfilled.
Section 3 of the Sale of Goods Act, defines a contract of sale of goods as contract where a party agrees to transfer the property in goods to a buyer. This implies that a contract of sale does not entail transfer of possession but deals in transfer of ownership. If the end goal of an agreement is not to transfer the ownership of the goods to the buyer, this cannot be described as a contract for sale of goods.

BUYER

A buyer is a person who buys or agrees to buy goods. To buy is simply to agree to have the property in a good transferred to you pursuant to a contract. In determining who a buyer is in a contract, regard must be had to the terms of the contract. The terms of the contract should show the intention of the parties as to who was meant to supply goods (seller) and who was meant to receive supply of those goods (buyer).
In the case of John Nderebe Kahuthia t/a Kirurumo Filling Station v Jaribu Farmers Co-operative Society Ltd [2016] eKLR the court observed that a contract can only exist between the supplier and the consumer. Payment may be made by the consumer or another third party on behalf of the consumer but that cannot be implied as giving rise to a contract between the supplier and the third party. The contract will still be between the supplier and the consumer.
In the case of John Nderebe Kahuthia t/a Kirurumo Filling Station v Jaribu Farmers Co-operative Society Ltd [2016] eKLR the issue of who a buyer was in a contract arose out of an agreement which was evidenced by a letter which read in part;
“Please issue fuel worth 3,500/= daily to  Jaribu Farmers Co-operative Society. They have been contracted by NKCC to transport milk for Passenga Scheme and Siranga Scheme.  Payments will be made monthly by themselves on payment of their milk transport dues.
Yours faithfully
For New KCC LTD
The Respondents denied the existence of the contract claiming that the contract existed between the appellant as the seller and NKCC as the buyer. The court held that as per the wording of the letter, the supplier of fuel was the Appellant while the consumer was the Respondents. In that regard the court concluded that the Respondent was the buyer.
In determining who a buyer is, the court will give regard to the wording of a contract. As was stated in Jiwaji & Others -vs- Jiwaji & Another (1968) EA 547:
“--- where there is no ambiguity in an agreement it must be construed according to the clear words actually used by the parties, and it would be wrong to adopt a different construction or to imply a term to contrary effect. --- I think I am not entitled to put into the instrument something which I did not find there in order.”
Therefore, who a buyer is in a contract will largely depend on the intention of the parties as expressed in the terms of their agreement. The easy and quick way to discover who a buyer is in a contract is to evaluate who is receiving the goods. Even if the goods are received on his behalf by a third party or payment made by a third party on his behalf. The buyer will still be the person who the parties intended to supply the goods to.

PRICE

Section 3 of the Sale of Goods Act defines a contract of sale of goods as one where property is transferred for a money consideration called the price. Consideration is anything of value promised to another in exchange of what the other is providing when making a contract. I use the word promised because though Section 29 of the Sale of Goods Act provides that delivery and payment are concurrent conditions, in that the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the goods; the two do not have to happen at the same and their happening does not affect the time of passing of property. Section 19 of the Sale of Goods Act provides that where there is a sale of ascertained goods, property passes at such time as the parties intend it to pass. It therefore follows that consideration is anything of value promised to be given, and the time of giving it depends on the intention of parties.
A sale of goods contract is characterized by a money consideration. It should be money. It has to have an economic value though it need not be ‘adequate’, and it has to move from the buyer to the seller.
The question then is; what is money?
The Black’s Law Dictionary defines money as a generic term that embraces every description of coin or bank-notes recognized by common consent as a representative of value in effecting exchanges of property or payment of debts. It goes ahead to quote the case of Hopson versus Fountain 5 Humph Tenn 140 in which the court stated “Money is used in a specific and also in a general and more comprehensive sense. In its specific sense, it means what is coined or stamped by public authority, and has its determinate value fixed by governments. In its more comprehensive and general sense, it means wealth.”
The court in Moss v Hancock ([1899] 2 QB 111, England), in defining money sated;
"Money ... (is) that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment of commodities."
Similarly, the court in Re Alberta Statutes ([1938] SCR 100) defined money as
"Any medium which by practice fulfills the function of money and which everyone will accept as payment of a debt is money in the ordinary sense of the word even though it may not be legal tender."
If the parties to a contract have not fixed a price, their agreement cannot fall under the sale of goods. The consideration is a sum of money combined with another thing; it will still be good consideration. As was held in Chappall & Co. versus Nestle Co Ltd (1960) money plus chocolate wrappers would amount to good consideration because part of the consideration was in the form of money.
Objects other than money will not form a good consideration and a contract based on consideration of any kind other than money will not be enforceable in court. An example is the case of Bret v JS & Wife (1600) Cro Eliz 756 where the court held that good consideration in law did not include natural affection.
Consider also the case of White v Bluett (1853) 23 LJ Ex 36, where a father lent a son money and told the son that if he stopped complaining about how the father wanted to distribute his property, then he did not need to refund the money. The son pleaded in court that “not complaining” was good consideration and he therefore did not have an obligation to refund the money, the court held;
“The plea is clearly bad. …………….the father said, if you will promise me not to complain, I will give up the note. If such a plea as this could be supported, the following would be a binding promise: A man might complain that another person used the public highway more than he ought to do, and that other might say, do not complain, and I will give you five pounds. It is ridiculous to suppose that such promises could be binding…………….. In reality, there was no consideration whatever. The son had no right to complain, for the father might make what distribution of his property he liked; and the son's abstaining from doing what he had no right to do can be no consideration.”