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.