BUSINESS CONTRACTING

Learning Outcomes

At the end of this topic, you should be able to:

1. Distinguish between different types of sale contracts;

2. Explain the elements of the contract of sale;
3. State and explain the types of goods covered under these contracts;
4. Explain the terms of the contract of sale( conditions and warranties; and
5. Explain the doctrine of Caveat Emptor.

Introduction

Business Contracting relates to the sale of goods and related transactions. It deals with the contractual
relationships arising between businesses and all those whom they supply. It is therefore of critical
importance in understanding business law – for it lies at the heart of commercial activity.

The primary objective of business activities is the provision of goods and services for consumers.
Consumption of goods and services meets the primary needs of individuals. We all as primary consumers
make regular purchases of goods and services to satisfy one demand for a wide range of necessities and
luxuries. Goods and services are also demanded by business organizations who acquire them to meet their
own internal requirements, as well as for the purpose of resale to other businesses in the chain of production
or to consumers. The legal rules relating to inter-business contracting are in many cases identical to those
which apply where a business deals with a private consumer. However the law has increasingly sought to
compensate for the relative economic weakness of individual consumers by developing a framework for
consumer protection.

Types and Nature of Business Agreements:

The various types of contracts which are encountered in business, especially those involving the supply of
goods appear similar to those covered under business contracts but are governed by different values. The
distinction between them may depend upon the provisions in the contract relating to the transfer of
ownership or the time for payment. Distinguishing between the various types of contracts will remove the
danger of applying the wrong legal rules.

i. Contracts for the Sale of Goods:

These are the most significant category of business agreement because they are the types that are
most commonly encountered in the commercial world. A sale goods contract is basically one that
goods are exchanged for money. Example of this type of contracts range from the sale of a loaf of
bread for 20/= to the purchase of an aircraft for millions of shillings.

The law relating to contracts for the sale of goods is contained in the Sale of Goods Act (Cap 31).
As a general rule the principle of freedom of contract applies to them. Essentially therefore the
buyer and the seller are free to negotiate the terms of the contract and make whatever bargains to
suit their own purposes. Many of the rules contained in Cap 31apply only where the parties have
not expressly made their intentions clear on the matter in the contract. Some of the provisions of
the Act however cannot be overridden by agreement between the parties. A contract for the sale of
 goods is defined in the Act as follows: This is the contract by which the sellers transfers or agrees
to transfer the property in goods to the buyer for a money consideration called a price.

From this, the essential elements of a contract of sale are therefore:

1. There must be a contrast – The formation of the contract is governed by the ordinary principles
of the law of contract. No special formalities are required. A contract of sale maybe in writing
(with or without a seal), or by word of mouth or maybe implied from the conduct of the parties.

2. The seller transfers or agrees to transfers – The act distinguishes between a sale in which property
is transferred to the buyer on making of the contract and thus the seller’s consideration is
executed, and an agreement to sell in which property is transferred to the buyer on making of the
contract and thus the seller’s consideration is executary.

3. Property – This means full legal ownership and is also sometimes referred to as title. This must
be distinguished from mere physical possession of goods which does not necessarily signify
ownership (right of ownership moves from seller to buyer
4. Goods – This includes any form of personal property which is tangible and moveable e.g. a car,
computer or ship. The definition does not extend to land or to intangible property rights such as
intellectual property, shares or debts.

5. Money consideration – In order for a contract to come within the definition above, the price from
the goods must include an element of money consideration. For this reason contracts of exchange
or barter are not covered by this Act. However where goods are exchanged for a combination of
money and other goods, a part exchange, the contract will come within the definition.

ii. Auction Sales:

Where goods are sold at auction the contract of sale will be governed by the Sale of Goods Act. In
relation to the formation of the contract of sale the auctioneer makes an invitation to treat when
asking for bids. Each bid is a separate offer and no contract is concluded until a bid is accepted by
the auctioneer therefore:

A sale by auction is complete when the auctioneer announces its completion by the fall of the
hammer, or in the customary manner; and until the announcement is made any bidder may retract
his bid.

The seller is also allowed to place a reserve price on the goods and instruct the auctioneer not to
sell below that price. The seller must expressly reserve his right before the auction before the
auction sale and bidders must be notified.

In an auction sale, there are three separate contracts:

a) between the seller and the buyer

b) between the seller and the auctioneer
c) between the auctioneer and the buyer

i) Contract Between the Seller and the Buyer:

This is governed by the common law rather than the Sale of Goods Act. The rights and obligations of
the parties are a matter for agreement between the auctioneer and the buyer, that is the terms of the
 contract are laid down in the law implies the following terms into the contract unless the parties have
expressly agreed on contrary terms:

a) the auctioneer has the seller’s authority to sell the goods

b) the auctioneer may retain possession of the good until the full price is paid or tendered
c) neither the auctioneer nor the seller will interrupt the buyer’s quite possession of the
goods
d) the auctioneer knows of no reason by which the seller is legally unable to sell the goods

iii. The Contract between the Auctioneer and the Seller:

This contract is governed also by common law and its terms will be those which have been agreed
between the auctioneer and the seller. Again these will usually be laid down in the auctioneer’s
printed conditions of contract. In the absence of agreed terms to the contrary, the common law
implies a promise on the part of the auctioneer that he will not give the buyer possession as the
goods without receiving payment. He will be personally liable to the seller for the price if the buyer
takes possession without making payment. The auctioneer has a common law lain on the proceeds
of sale of the goods.

This means that he is entitled to deduct his agreed fees from any sums which are due to the seller
before making payment to him.

3. Contract of Barter:
This is one involving the exchange of goods or services for other goods or services – in which no
money actually changes hands. Such a contract is not governed by the Sale of Goods Act because
of the absence of money consideration.

4. Contract of Hire:
The essence of a contract hire is that the hirer in return for some consideration usually an agreed
fee or the periodical payment of a sum of money enjoys the possession and the use of goods
belonging to someone else, the owner. It is never intended that the hirer shall become the owner of
the goods himself under the terms of the contract. Such contracts are fairly common in the business
world and the period of use by the hirer may range from hours to years.

5. Contracts for the Supply of Services:

This usually involves the exchange of an individual’s time, skill or effort in return for money. A
person providing a service could do so by engaging in such diverse activities as valuing a house,
turning a car engine, transporting commodities or providing legal advice.

6. Contracts for Work Done and Materials Supplied:

Where services are provided and goods are supplied under the same contract, there may be some
difficulty in classifying the contract. It could be a contract for the provision of services or a contract
for the sale of goods. The court will decide to which category the contract falls by trying to identify
the main purpose of the contract.

In Yonny and Marten vs. McMannus Childs 1968, the House of Lords held that a contract for the
laying of tiles on the roof of a house was not a sale of goods contract even through the tiller supplied
the tiles. The main purpose of the contract was not within the scope of the Sale of Goods Act.

In Robinson vs. Graves 1935 the Court of Appeal held that a contract under which an artist agreed
to paint a client’s portrait was not a contract for the sale of goods. The transfer of ownership of the
 canvas to the client was incidental to the main substance of the contract which was the provision
by the artist of his skill, experience and labor.

7. Contracts for the Sale or Supply of Goods on Credit Terms:

These are various forms of credit transactions which provide ways of getting goods – ranging from
contracts of hire purchase, credit sales and conditional agreements to the use of plastic money.
Credit transactions were aptly characterized by one county court judge who complained that most
of his time was taken up by:

“The people who are persuaded by persons whom they do not know to enter into contracts that they
do not understand to purchase goods that they do not want with money that they do not have.”

Although this statement is somewhat exaggerated, it helps us to highlight some of the problems
with which the law has had to deal arising from such

a) Contract of Hire Purchase – This combines the contract of hire which gives one party – the hirer
an option to purchase goods from the other at the end of a period of hire. During the period of the
agreement the debtor (hirer) pays the creditor by installments and the ownership of the goods
remains with the creditor. The ownership of the goods will be transferred to the debtor if and when
he exercises the option to purchase and pays all the installments.

b) Credit Sales and Conditional Sale Agreements – These are credit transactions under which the price
of goods is payable in installments. They will often be financed by a finance company in exactly
the same way as a hire purchase agreement. At common law the credit sale agreement is broadly
similar to a conditional sale agreement. Each is a contract of sale under which the buyer commits
himself at the outset to the purchase. However, there are some differences:

i) In a credit sale agreement ownership of the goods is not transferred to the buyer as soon as the
contract is made – whereas,
ii) In conditional sale agreement ownership of the goods is not transferred to the buyer until some
condition (usually the payment of the final installment) is met.

Transfer of Ownership/Title

As a general rule, the Sale of Goods Act provides that unless otherwise agreed the buyer is entitled to
delivery only upon payment for the goods. Ownership, on the other hand can be transferred at any time
depending upon the terms of the contrast. It may be at the time of making the contract, or after the buyer
has paid the price, or at the same time.

It is important to know exactly when ownership of goods is transferred under a contract of sale for a number
of reasons – i.e.

i) The risk of accidental loss or damage is transferred to the buyer when property or title passes to
him unless otherwise agreed. The party which bears the risk of accidental loss or damage will
probably wish to insure the goods.

ii) The seller can normally only sue for the price after property has passed to the buyer.

iii) In considering whether the contract has been frustrated due to perishing of the goods, such a
contract cannot be frustrated if the property has passed to the buyer before the goods perish.
 i) In the event of the insolvency of the buyer, the seller may be able to retake possession of the
goods if property has not passed to the buyer.

v) If the buyer resells the goods immediately as a general value, the sub-buyer will get a good title
only if property has previously passed to the buyer.

Sale of Goods

The sale of goods is the most common of all commercial contracts. A contract of sale of goods is one
whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. The contract
of sale thus includes both sale and agreement to sell.

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 when the transfer of the property in the goods is to take place in the future or
subject to some conditions thereafter to be fulfilled, the contract is called an AGREEMENT TO SELL. An
agreement to sell becomes a sale when the time lapses or the condition, subject to which the property in the
goods is to be transferred, is fulfilled.

Property here refers to the right of ownership – i.e. the seller ceases to be and the buyer becomes the owner
of the goods.

Essentials of a Contract of Sale:

1. There must be two distinct parties, i.e. a buyer and a seller, to effect a sale and they must be
competent to contract.

2. There must be some goods the property in which is or is to be transferred from the seller to the
buyer. The goods which form the subject matter of the contract of sale must be movable. Transfer
of immovable property is not regulated by the Sale of Goods Act.

3. The consideration for the contract of sale, called PRICE must be MONEY. When goods are
exchanged for goods, it is not a sale but a barter. There is however nothing to prevent the
consideration from being partly in money and partly in goods.

4. There must be a transfer of general property as distinguished from special property in goods from
the seller to the buyer. If A owns certain goods, he has general property in the goods. If he pledges
them with B, B has special property in the goods.

5. All the essential elements of a valid contract must be present in the contract of sale.

Conditions and Warranties

Before a contract of sale is entered into, a seller frequently makes representations or statements which
influence the buyer to clinch the bargain. Such representations differ in character and in importance.
Whether any statement or representation made by the seller with reference to the goods is a stipulation
forming part of the contract or is a more representation (such as an expression of an opinion) forming no
part of the contract depends on the construction of the contract. If there are no such representations the
ordinary rule of law of – CAVEAT EMPTOR – let the buyer be aware - applies. This means the buyer gets
the goods as they come and it is no part of the seller’s duty to point out the defects in the goods to the buyer.
A stipulation in the contract of sale with reference to goods may be a condition or warranty.

Condition

A condition is a stipulation which is essential to the main purpose of the contract. It goes to the root of the
contract and its non fulfillment upsets the very basis of the contract. It is defined by Fletcher Moulton as an
obligation which goes so directly to the substance of the contract or is so essential to its very nature that its
non-performance may fairly be considered by the other party as a substantial failure to perform the contract
at all. If there is a breach of a condition, the aggrieved party can treat the contract as repudiated.

Warranty

A warranty is a stipulation which is collateral to the main purpose of the contract. It is not of such vital
importance as a condition. It is not of such vital importance as a condition. It is thus an obligation which
through it must be performed is not vital that a failure to perform it goes to the substance of the contract. If
there is a breach of a warranty the aggrieved party can only claim damages and it has no right to treat the
contract as repudiated.

Whether a stipulation in a contract is a condition or a warranty depends in each case on the construction of
the contract as a whole. The court is not to be guided by the terminology used by the parties to the contract.
A stipulation may be a condition through it is called a warranty in the contract.

A breach in a condition may be treated as a breach in warranty, i.e. when the aggrieved party is contented
with damages only. But a breach in warranty cannot be treated as a breach of a condition.

Conditions Treated as Warranties

Those who draw up contracts do not always use the correct terminology and in any dispute it is for the
courts to construe the contract. Thus a stipulation that, ‘it is a condition of the contract, etc’ may in fact
prove to be only a warranty while a stipulation stated to be a warranty may be found by the court to go to
the root of the contract and in fact be a condition.

Example in Cahare NV vs. Bremer Handlesg – esellschaft mbh: The Hansa Nord 1976.
A written contract stated specifically that a shipment was to be made in good condition. Some of the goods
were not in good condition and the buyers rejected the goods for breach of what they held to be a condition
of the contract. Held – the buyers could not reject the goods as only a breach of warranty had been
committed; the buyer were entitled to damages only.
If a contract is conditional upon an act being performed by the seller and he does not perform it the buyer
may waive the condition or treat it as only as a warranty and consequently may insist that the seller fulfills
the contract. If the contract of sale is not severable into parts and the buyer has accepted the goods or part
of them, the breach of a condition by the seller cannot be used by the buyer as a reason for repudiating the
contract, but may only be treated as a breach of warranty, unless the contract is absolutely clear that the
buyer is entitled to treat the contract as repudiated.

Express and Implied Conditions and Warranties

In a contract of sale of goods conditions and warranties may be expressed or implied. Express conditions
and warranties are those which are agreed upon between the parties at the time of the contract. Implied
conditions and warranties are those which are implied by law unless the parties stipulate to the contrary.

Implied Conditions
 i) Condition as to Title:
In a contract of sale, there is an implied condition on the part of the seller that:
a) In the case of a sale, he has a right to sell the goods
b) In the case of an agreement to sell, he will have a right to sell the goods at the time when the
property is to pass.

ii) Sale of Description:

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. If the sale is by sample as well as by description, the
goods must correspond as by description, the goods must correspond both with the sample and the
description.

iii) Sale by Sample:

In the case of a contract for sale by sample, there is an implied condition that:
a) the bulk shall correspond with the sample in quality
b) the buyer shall have a reasonable opportunity of comparing the bulk with the sample
c) the goods shall be free from any defect rendering them unmerchantable-
Unsellable-which would not b e apparent on a reasonable examination often sample.

iv) Condition as to Quality or Fitness:

This is implied where:

a) the goods sold are such as the seller deals in the ordinary course of his business
b) the buyer relies on the seller’s skill or judgment as to the fitness of the goods for any
particular purpose
c) the buyer expressly or implied makes known to the seller that he wants the goods for a
particular purpose.
v) Condition as to Merchantability:
Thornett and Fehr vs. Beers and Son (1919); where goods are bought by description from a seller
who deals with goods of that particular description; whether he is a manufacturer or producer or
not, there is an implied condition that the goods shall be of a commercially saleable quality under
the description by which they are known in the market at their full value.

vi) Condition as to Wholesomeness:

In the case of eatables and provisions the goods should be wholesome and fit for human
consumption. If C bought a bun that had a stone which broke his tooth he could recover damages.
Chaproniere vs. Mason (1905).

vii) Condition Implied by Custom:

An implied condition as to quality and fitness for a particular purpose may be annexed by the usage
of trade in the locality concerned.

Implied Warranties:

a) Warranty of quiet possession:

The buyer shall have and enjoy quiet possession of the goods. If he is in any way disturbed in the
enjoyment of the goods in consequence of the seller’s defective title to sell, he can claim damages
from the seller.

b) Warranty of Freedom from Encumbrances:

 The buyer is entitled to a further warranty that the goods are not subject to any charge or right in
favor of a third party. If this possession is in any way disturbed by reason of the existence of any
charge or encumbrances on the goods in favor of any third party, he shall have a right to claim
damages for breach of this warranty.

c) Warranty to Disclose Dangerous Nature of Goods:

Where a person sells goods, knowing that the goods are inherently dangerous or they are likely to
be dangerous to the buyer and that the buyer is ignorant of the probable danger otherwise he will
be liable in damages.
CAVEAT EMPTOR

The means let the buyer beware. The doctrine of caveat emptor states that the in sale of goods, the seller is
under no duty to reveal unflattering truth about goods sold. Therefore when a person buys some gods, he
must examine them thoroughly. If the goods turn out to be defective or do not suit his purpose or if he
depends upon his own skill and judgment and makes a bad selection, he cannot blame anybody except
himself.

For example:

i) H bought wheat from S, sample of which had been shown to H. H erroneously thought that the
wheat was old. The wheat was however new. Held, H could not avoid the contract.
ii) X sent to market 32 sheep to be sold by auction. The sheep were sold to W “with all faults and
errors of description.”X knew that the sheep were suffering from a fever but he never disclosed
this to W. Held, there was no implied warranty by X and the sale was good. X was not liable
in damages.

Exceptions:

The doctrine of Caveat Emptor has certain important exceptions. These include:

i) Fitness for buyer’s purpose – where the buyer expressly or by implication makes known to the
seller the particular purpose for which he requires the goods and relies on the seller’s business
to supply, the seller must supply the goods which shall fit for any particular purpose.
ii) Sale under a patent or trade name – in this case, there is no implied warranty that the goods
shall be reasonably fit for any particular purpose.
iii) Merchantable or resalable quality – where the goods are bought by description, there is an
implied condition from a seller who deals in goods of that description, there is an implied
condition that the goods shall be of merchantable quality. But if the buyer has examined the
goods there is no implied condition as regards defects which such examination ought to defects
revealed.
iv) Usage of trade – i.e. annexed by the usage of trade.
Consent by fraud – where consent of the buyer is obtained by the seller by fraud or where the
seller knowingly conceals a defect which could not be discovered on a reasonable examination,
this doctrine does not apply