Sales Distinguished from Others

Sale distinguished from Dacion en Pago:

1. Sale, there is no pre-existing credit while Dacion en Pago there is a pre-existing credit.
2. Sale creates obligation while Dacion en Pago extinguishes obligation.
3. Sale the cause or consideration is the price and delivery of the object, while Dacion en
Pago the cause is extinguishment of obligation.
4. Sale greater freedom from fixing the price while Dacion en Pago less freedom in fixing
the price because the amount of pre-existing credit which the parties seek to extinguish.
Sale distinguished from Barter:

Rule partly in money and partly in another thing:

1. A contract shall be one of sale or barter depending upon the manifest of parties.
2. If the intention of parties does not clearly appear.
A. The contract is barter if the value of the thing given exceeds the monetary
consideration.
B. The contract is sale if the monetary consideration is more than or equal to the
value of the thing given as part of the consideration.
Sample:

A and B entered into a written contract which states that A, seller hereby transfers his ring worth
20 000 to B, buyer for B’s cell phone worth 12 000 and cash of 8000.

What is the contract? Contract of Sale

A and B entered into a written contract which states that A, hereby transfers his ring worth 20
000 to B, for B’s cell phone worth 12 000 and cash 8000.

What contract entered into? Barter because it does not clearly states the intention of parties.

Contract “to Sell” vs. Contract “of Sale”

How is a “Contract to Sell” different from a “Contract of Sale”? Such a small
variation in the words, but such a huge difference in meaning and effect.

To the sharp observer, the difference is easy to see. But to the layman, it may not
be easy to spot. It can be as confusing as the zonkey above (it’s both a zebra and
a donkey). In fact, a lot of people really confuse these two. They even use it
interchangeably, thinking they are the same. Let’s try to clarify that here.
 Contract to Sell

A Contract to Sell is an agreement between a buyer and a seller whereby the seller
promises to sell something to the buyer and the buyer promises to buy it. But
generally, in this kind of contract, the ownership of the subject “thing” is not
transferred to the buyer upon the signing of the contract. There are usually conditions
to be complied with by one or both of the parties. And the transfer of ownership will
only happen when those conditions are met.

In real estate transactions, it is quite common for developers or individual sellers to

enter into a Contract to Sell with a buyer. In cases like this, the agreement contained
in the contract basically goes like this:

o The seller/developer promises to build the house or condominium

building.

o The seller/developer promises to sell the house or the subject

condominium unit to the buyer.

o The buyer promises to buy the house or condominium unit. This

can be in installments or in full cash, or in any other arrangement.

o The ownership of the subject property will only be transferred to

the buyer when the house or condominium unit is completely
built AND when the buyer has fully paid its price.

In the above scenario, the conditions are the completion of the building by the
developer and the full payment by the buyer.

 Contract of Sale

A Contract of Sale is an agreement between a buyer and a sellerwhereby the seller

agrees to give or deliver something to the buyer for a certain price which the buyer
agrees to pay. In contracts like this, when the buyer pays and the seller delivers, the
transfer of ownership is also done at the same time.
 This is usually not applicable to situations where the seller is not yet ready to deliver
the thing being sold. Nor is it applicable where the buyer is not yet ready to pay the
price in full.

However, even if the buyer cannot pay in full right away, both parties may still agree
on the transfer of ownership to the buyer. This is, provided that the seller can readily
deliver what he is selling. And subject to what we call a “resolutory condition” that
when the buyer fails with his payment(s), the seller will take back the thing sold.

In real estate transactions, this type of contract is usually executed only when the
property is ready to be turned over and if the buyer is ready to pay the price in full.

Provisions of Cap 31 apply only to a Sale of Goods Contract.

There are 8 transactions that resemble Sale of Goods contract but are not a sale of goods
contract.

1. Contract of Barter or Exchange.

2. Contract of Gifts

3. Contract of Bailment

4. Contract of Hire Purchase

5. Contract of Loan on Security of goods

6. Contract of Supply of services

7. Contract of Agency

8. Contract of Licences of intellectual property such ‘sales’ of computer software and patents.

The distinction is important because the results are critical to the resolution of disputes if they do
go to court.
 Remedies available are different for different types of contracts.

Read Distinction of Sale of Goods from the other 8 contracts.

Sale of Goods Act Cap 31 Laws of Kenya Section 3 (4)

“Where under a contract of sale the property in the goods is transferred from the seller to the
buyer the contract is called a sale; but, where the transfer of the property in the goods is to take
place at a future time or subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell.”

Section 3(5)

“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.”

Section 2 (1)

“action” includes counterclaim and set-off;

means a person who buys or agrees to buy goods;

“contract of sale” includes an agreement to sell as well as a sale;

means voluntary transfer of possession from one person to another.

goods” includes a bill of lading, dock warrant, warehouse-keeper’s certificate or warrant or order for the
delivery of goods, and any other document used in the ordinary course of business as proof of
possession or control of goods, or authorizing or purporting to authorize, either by endorsement
or by delivery, the possessor of the document to transfer or receive goods thereby represented;

means wrongful act or default;

means goods to be manufactured or acquired by the seller after the making of the contract of
sale;
 includes all chattels personal other than things in action and money, and all emblements,
industrial growing crops and things attached to or forming part of the land which are agreed to
be severed before sale or under a contract of sale;

includes a defendant counterclaiming;

means the general property in goods, and not merely a special property;

includes their state or condition;

includes a bargain and sale as well as a sale and delivery;

means a person who sells or agrees to sell goods; “specific goods” means goods identified and
agreed upon at the time a contract of sale is made;

means an agreement with reference to goods which are the subject of a contract of sale, but
collateral to the main purpose of the contract of sale, the breach of which gives rise to a claim
for damages, but not to a right to reject the goods and treat the contract as repudiated.

1. Sale of Goods Distinguished from Barter

In a sale of goods contract or in any sale, there must be a consideration and in the case of sale
of Goods it must meet all the criteria of a contract. The consideration must be money
consideration.

The term Goods is defined to exclude money in the Act.

Barter Exchange is a contract where goods are exchanged for goods or where the consideration
is anything but money. No money is involved in barter. It is a valid contact but it is not a Sale of
Goods Contract because it does not entail money. You cannot buy money but you can
exchange one currency for another. There are occasions when money as a collector’s coin can
be sold so long as it has ceased to be legal tender. You can exchange the collector’s coins for
money.

SALE OF GOODS DISTINGUISHED FROM GIFT

Gift is transfer of property without any consideration. It is not binding unless it is made by a
deed i.e. in writing. It is not easy to distinguish gifts from sale of goods.
Esso Petroleum Limited V. Commissioners of Customs & Excise [1976] Vol 1 AER 177

The Esso petrol station put out on the signboard the following advert “free gift of a coin bearing
the likeness of a footballer to anyone buying 4 gallons of petrol.” The Defendant bought petrol
from this petrol station and when the petrol station was required to pay taxes by the Customs
Department, the argument was whether this transaction consisted a sale of goods or a
gift. Their Lordships were confused

“Although the transaction was not a gift, in as much as the garage was contractually bound to
supply coins to anyone buying 4 gallons of petrol… but it was not a sale of goods contract
either.

It was not a sale of goods and it was not a gift. Getting the coin there was no money involved
the consideration

“There was no intention to create legal relationship between Esso and the customers

“In substance it was a collateral contract existing alongside a contract for the sale of petrol.”

If there were a Sale of Goods, then the company would have been liable to pay taxes.

SALE DISTINGUISHED FROM BAILMENT:

A bailment is a transaction under which goods are delivered by one party (the bailer) to another
(the bailee) on terms, which normally require the bailee to hold the goods and ultimately to
redeliver them to the bailor or in accordance with his directions. The property in the goods is
not intended to pass and does not pass on delivery, though it sometimes be the intention of the
parties that it should pass in due course, as in the case of the ordinary hire-purchase
contract. But where goods are delivered to another on terms which indicate that the property is
to pass at once, the contract must be one of sale and not bailment.
In bailment, the goods are delivered by the bailer to the bailee on terms which normally require
the bailee to hold the goods and ultimately deliver those goods in accordance with the
instructions of the bailer. There is no intention in bailment that property in ownership is to pass
from the bailer to the bailee. The bailee only has custody for a small fee to take care. The
bailee is empowered to sell the goods only for purposes of recouping the demurrages.

Chapman Bros V. Verco Bros & Co. Ltd [1933] Vol. 49 CLR P306

Farmers delivered bags of wheat to a company carrying on business as millers and wheat
merchants. The wheat was delivered in unidentified bags which were identical to those in which
other farmers delivered wheat to the company. The terms of the transaction required the
company to buy and pay for the wheat on request by the farmer or failing such a request, on a
specified date, to return an equal quantity of wheat of the same type; but there was no
obligation to return the identical bags. Although the contract referred to the company as
‘stores’, it was held by the Australian High Court that this transaction was necessarily one of
sale as the property passed to the company on delivery. Property must pass even if not at
once. That is the nature of transaction and this transaction seems inconsistent with the
possibility of a bailment.

The question was whether this was a sale of goods contract in terms of the ownership of the
bags. The court held it to be an agreement of sale within Section 2 (1) of Cap 31

One of the difficulties is that where goods are given to the buyer before the buyer has paid for
those goods, where this happens, then we say that he is a buyer in possession because the
seller has agreed to transfer the property.

In conversion if you went to a car dealer who allowed you to test drive it but instead of test
driving it you advertised by putting adverts on the car, that is behaviour inconsistent with the
owner’s wishes and you will be converting.

SALE OF GOODS DISTINGUISHED FROM HIRE PURCHASE:

Contracts of hire-purchase resemble contracts of sale very closely and, indeed, in practically all
cases of hire-purchase the ultimate sale of the goods is (in a popular sense) the real object of
the transaction. A contract of hire-purchase is a bailment of the goods coupled with an option to
purchase them which may or may not be exercised. Only if and when the option is exercised is
there a contract of sale.

A contract of Hire Purchase is a bailment of goods coupled with an option to purchase those
goods. That option may or may not be exercised. Only after the option has been exercised
does hire purchase become sale of goods contract. In a sale of goods contract there is no
option to acquire property of goods you have no option of whether to retain goods or not but in
Hire Purchase you have the option to become the owner of the goods by exercising the option
of paying the nominal fee. You are given possession and enjoyment of the goods before you
finish payment and even before you have expressed your intentions to own. The risk in Hire
Purchase there is the intention that if the hirer opts to own the goods, they can become owners
but in Sale of Goods there is no option of owning or not owning, you pay for the goods you own
them. Possession is usually after payment.

The owner of the goods in Hire Purchase undertakes the risk that the seller transfers or agrees
to transfer to the buyer and by virtue of possession of the goods the owner of the goods takes
the risk that the owner may sell the goods to a third person and the only safe area is with
durable goods such as a car where to sell the car again you need to transfer the logbook.

Section 2 (1) and Section 23 (2) (a) 47

The fear of a financier is that having given possession or documents of title in durable goods
then any disposition by the person who has acquired possession with consent of the owner if
they sell the goods to another person who is without notice and for value, the 2 nd buyer acquires
better title than the first buyer.

SALE OF GOODS DISTINGUISHED FROM A LOAN ON SECURITY OF THE GOODS

This is a transaction that is designed to enable someone ‘A’ who owns some goods to borrow
money from ‘B’ and give possession of those goods to the money-lender. The goods can only
be reclaimed upon completion of repaying the loan. This transaction does not mean that the
person borrowing the money has delivered the goods to the money-lender but only delivers the
 goods to the money lender to hold as security. He has not sold the goods but has only given
them to operate as security. The understanding is that A will retain possession of the goods and
the borrower will repay the lender capital plus the agreed interest and lastly the borrower will
have the right to take back the goods if he has repaid or paid all the claims by the lender to
him. The lender has no right at all to resell the goods unless the borrower has defaulted. This
transaction differs from hire-purchase contract which is designed to enable a person to acquire
goods on credit. A loan on security is designed to enable someone who already owns goods to
borrow money on the security of the goods.

SALE OF GOODS DISTINGUISHED FROM CONTRACT OF SUPPLY OF SERVICES

Historically contracts for supply of services were divided into two:

1. Contracts for Skill and labour

2. Contracts for labour and material.

It was also assumed that the applicable law was not the Sale of Goods Law for example
services of a lawyer. When you contract a lawyer to draw a will, you pay for the services of the
lawyer making the will but you receive a document which is incidental. The contract is for the
services of making a will and the document that you receive is incidental.

In the United Kingdom until 1954, the law required that contracts for sale of goods of £10 or
more be evidenced in writing. If the goods were valued at over £10, it had to be in writing for
services there was no value limit.

A contract in which one party is to manufacture goods and then supply the same as a finished
product. Is it a contract in Sale of Goods or is it a contract for services?

A more general reason why it may be necessary to distinguish between a contract of sale of
goods and a contract for services is simply that provisions of the Sale of Goods Act do not in
general apply to contracts for services. The other reason concerns the implied duties of the
seller or supplier as to the quality and fitness of the goods or services supplied. If the contract
was for the supply of services only then, insofar as the services themselves were concerned,
the supplier’s duties were generally duties of due care only where in the contract for sale of
goods the duties remain, prima facie duties of strict liability, that is to say the seller is
responsible for defects in the goods, even in the absence of negligence.
For supply of services, you apply the law of torts and the measure is reasonable care. The test
in supply of services is due or reasonable care but in Sale of Goods, goods are of a particular
perceivable quality. They are tangible.

The test for deciding whether a contract falls into the one category or the other is to ask what is
‘the substance’ of the contract. If the substance of the contract is the skill and labour of the
supplier, then the contract is one for services, whereas if the real substance of the contract is
the ultimate result – the goods to be provided, then the contract is one of sale of goods.

The law of Sale of Goods was developed and has developed as a consumer protection
mechanism. It came in to bridge the gap between the seller and the buyer. The seller is
supposed to have more knowledge than the buyer and the buyer is no longer bound by ‘caveat
emptor’.

Goods must be fit for the purpose. The sale of goods law was meant to bridge the gap in terms
of product knowledge between the seller and the buyer.

Cap 31 has been overtaken by technological development. It is difficult for the buyer to know all
the information about for instance a computer just by looking at it. The protection has to keep
pace with the changes and buyers cannot keep up.

Robinson V. Graves [1935] Vol. 1 KB P 579

The issue in this case was the distinction between sale of goods and supply of services.

The contract here was one whereby an artist agreed to paint a portrait of his client’s wife. It
would appear that such a transaction should be regarded as one of sale. In the event however
this transaction was held as one for services and in reaching this conclusion, the court sought to
identify the prime purpose of the contract. In the often quoted words of LJ Greer: -

“If the substance of the contract … is that skill and labour have to be exercised for the
production of the article and … it is only ancillary to that that there will pass from the artist to his
client or customer some material in addition to the skill involved in the production of the portrait,
that does not make any difference to the result, because the substance of the contract is the
skill and experience of the artist in producing the picture.”
This case lays down an elastic test of this nature for distinguishing contracts of sale from
contracts for skill and labour, and a similar approach may sometimes be justified here.

SALE OF CONTRACT DISTINGUISHED FROM PATENTS

Items of intellectual property such as copyrights, patents and trademarks are not ‘personal
chattels or corporeal movables and so fall outside the definition of goodsalthough goods may
exist which embody these intellectual property rights. In modern times, an important point, not
yet wholly resolved, is whether computer software may constitute ‘goods’ within the meaning of
the Act. Software is normally embedded in some physical form, such as disks or as part of a
package in which it is sold along with computer hardware, that is computer or computer parts. It
is protected as a literary work by the law of copyright.

Usually only the medium in which the software is embedded, e.g. a disk is sold. The copyright in
the software remains in the software house which developed it. The software house licences the
user to make working copies of the disks and to load the software into a computer, acts which
otherwise would be infringements of copyright. Software can also, of course, be delivered on-
line subject to licensing terms.

The question as to whether or not a supply of computer software is a sale of goods was
answered by the Court of Appeal in Beta Computers (Europe) Ltd v. Adobe Systems (Europe)
Ltd. The Defendant had ordered from the pursuer by telephone a standard computer package
to upgrade its existing software. The software was delivered in a package, which bore the
words ‘Opening the Informix S.I. software package indicates your acceptance of these terms
and conditions’. These were the terms and conditions of Informix’s copyright licence, Informix
being the proprietor of the software. The defendant did not return, and sued for payment of the
price. The pursuer argued that it was not concerned with the terms of the licence imposed by
the authors of the software. The defender argued that acceptance of the licence conditions was
an implied suspensive of its agreement with the pursuer. Lord Penrose held that the supply of
proprietary software for a price was a single contract sui generis though it contained elements of
contracts such as sale of goods and the grant of a licence. It was an essential feature of such
a contract that the supplier undertook to make available to the purchaser both the medium on
which the program was recorded and the right to access and use the software. There could be
no consensus ad idem until the conditions of use stipulated by the copyright owner were
produced and accepted by the parties, which could not occur earlier than the tender of those
conditions to the purchaser. Furthermore, whether the tender of software subject to conditions
for use was regarded as a breach of a previously unconditional contract, or as being subject to a
suspensive condition entitling the purchasers to reject if the conditions for use were
unacceptable, or as made when there was no concluded contract, the defender was entitled to
reject.

SALE & AGENCY:

Distinction between a Sales of Goods Contract and a contract of agency is a difficult one. For
example where A asks B a commercial agent, to obtain goods for him from a supplier or from
any other source, and B complies by sending the goods to A, it may well be a fine point whether
this is a contract under which B sells the goods to A, or is a contract under which B acts as A’s
agent to obtain the required goods from other sources. In an agency contract there may be
privity of contract between the buyer and the agent’s supplier, which will enable action to be
brought between them. On the other hand, if it is a sale, there will be no privity between the
buyer and the seller’s own supplier. The duties of a commission agent are less stringent than
those of a seller and, in the event of a breach of contract; the measure of damages may also be
different. Thus if a seller delivers less than he is bound to under the contract, the buyer can
reject the whole, but if despite his best endeavours, a commission agent delivers less than his
principal has ordered he has committed no breach of contract and the principal is bound to
accept whatever is delivered. Should the commission agent deliver goods of the wrong quality
he will only have to pay as damages the actual loss suffered by the buyer but should a seller be
guilty of such a breach he may have to pay damages for the buyer’s probable loss of profit. The
contract is not a Sale of Goods.