AFRICA LAW CENTRE: SALE OF GOODS LAW NOTES

The law relating to the sale of goods is contained in the Sale of Goods Act (Cap. 31). This Act is mainly based on English Sales of Goods Act 1893. At the same time, the general rules of contract law apply to contracts for the sale of goods.

Definition

Section 3(1) of the Act defines a contract for the 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”.

The essential characteristics of a contract of sale of goods are as follows:

1. There must be two distinct parties to a contract of sale viz, a buyer and a seller.

2. There must be a transfer of property. Property here means ‘ownership’. A seller must either transfer or agree to transfer the property in goods to the buyer.

3. The subject-matter of the contract of the sale must be goods. “Goods’ 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 the contract of sale. It means every king of movable property other than actionable claims and money, are called as goods.

4. The consideration for a contract of sale must be money consideration called the price. If goods are sold or exchanged for other goods the transaction is barter and not sale of goods.

5. The term contract of sale includes both a sale and an ‘agreement to sell’.

Distinction Between Sale and Agreement to Sell:

Section 3(4) of Act provides that:

“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”.

The following are the main points of distinction between a ‘sale’ and ‘an agreement to sell”.

1. Transfer of property (ownership):

In a ‘sale’ the property in goods passes to the buyer immediately at the time of making the contract. In other words, a sale implies immediate conveyance of property so that the seller ceases to be the owner of the goods and the buyer becomes the owner thereof.

In ‘an agreement to sell’ there is no transfer of property to the buyer at the time of the contract. The conveyance of property takes place later so that the seller continues to be the owner until the agreement to sell becomes a sale either by the expiry of certain time or the fulfillment of some condition.

2. Risk of loss:

The general rule is that unless otherwise agreed, the risk of loss prima facie passes with property. Thus in case of sale, if the goods are destroyed the loss falls on the buyer even though the goods may never have come into his possession because the property in the goods has already passed to the buyer. On the other hand, in case of an agreement to sell where the ownership in the goods is yet to pass from the seller to the buyer, such loss has to borne by the seller even though the goods are in the possession of the buyer.

3. Consequences of breach:

In case of sale, if the buyer wrongfully neglects of refuses to pay the price of the goods, the seller can sue for the price, even though the goods are still in his possession. In case of an agreement to sell, if the buyer fails to accept and pay for the goods, the seller can only sue for damages and not for the price, even though the goods are in the possession of buyer.

4. Right of resale:

In a sale, the property is with the buyer and as such the seller (in possession of goods after sale) cannot resell the goods. If he does so, the subsequent buyer having knowledge of the previous sale does not acquire a title to the goods.

In an agreement to sell, the property in the goods remains with the seller and as such he can dispose of the goods as he like and the original buyer can sue him for the breach of contract only. In this case, the subsequent buyer gets a good title to the goods irrespective of his knowledge of previous sale.

5. Insolvency of buyer before he pays for the goods:

In a sale, if the buyer is adjudged insolvent before he pays for the goods, the seller, in the absence of a ‘right of lien’ over the goods, must deliver the goods to the Official Receiver or Assignee. The seller is entitled only to a ratable dividend for the price of the goods. But in an agreement to sell, in these circumstances, the seller may refuse to deliver the goods to the Official Receiver or Assignee unless paid for, as ownership has not passed to the buyer.

6. Insolvency of seller if the buyer has already paid the price:

In a sale, if the seller is adjudged insolvent, the buyer is entitled to recover the goods from the Official Receiver of Assignee, as the property in the goods rests with the buyer. On the other hand, in an agreement to sell, if the buyer has already paid the price and the seller is adjudged insolvent, the buyer can only claim a ratable dividend (as creditor) and not the goods because property in them still rests with the seller.

Distinction Between Sale and Contract for Work and Material

A distinction has to be made between a contact of sale and contract for work and material. The Sale of Goods Act does not apply to contracts or work and material. When property in the goods is intended to be transferred and goods are ultimately to be delivered to the buyer, it is a contract of sale even though some labour on the part of the seller of the goods may be necessary. Where, however, the essence of the contract is rendering of serve and exercise of skill and no goods are delivered as such, it is a contract of work and material and not for sale.

Illustrations

(a) A dentist agreed to make a set of false teeth for a lady and fit it into her mouth. Held: it is a contract for the sale of goods (Lee vs Griffin).

(b) An order for making and fixing curtains in a house is a contract of sale of goods, though it involves some work and labour in fixing the same (Love vs Norman Wright (Builders Ltd).

(c) G engaged an artist to paint a portrait and supplied the necessary canvas and paint. Held: it is a contract for work and labour as the substance of the contract is the application of the skill and labour in the production of the portrait (Robinson vs Graves). If the canvas and paint are also to be supplied by the painter, it will become a contract of sale of goods.

The distinction between a sale and a contract for work and material is important due to the following two reasons:

1. A contract for work and material does not require to be in writing; while a contract for sale of goods in Kenya must be in writing if the value of goods is sh. 200 or more.

2. The implied conditions and warranties under the sale of Goods Act do not apply to contracts of work and material.

Capacity to Buy and Sell:

Section 4 of the Act deals with the capacity to buy and sell. Under this section, the capacity to buy and sell is governed by the general law concerning capacity to contract and to transfer and acquire property. Infants and persons of unsound mind must pay a reasonable price for necessaries and not necessarily the agreed price.

Necessaries are defined by section 4(2) as goods suitable to the condition in life of such infant or minor or other person, and to his actual requirements at the time of sale and delivery.

Form of Contract

Section 5 of the Act states that a contract of sale may be made in writing (either with or without seal) or by word of mouth, or partly in writing and partly by word of mouth, or may be implied by the conduct of parties. Under this section of the Act, a contract for the sale of any goods of the value of two hundred shillings or upwards shall not be enforceable by action unless the buyer accepts part of the goods so sold, and actually receives them, or gives something in earnest to bind the contract or in part payment, or unless some not or memorandum in writing of the contract is made and signed by the party to be charged or his agent in that behalf.

Subject Matter of Contract:

Sections 7, 8 and 9 of the Act relate to the subject matter of contract. Goods form the subject matter of a contract of sale. Goods may be existing goods or future goods. These are explained as under:

Existing Goods:

Goods which are physically in existence and which are in seller’s ownership and/or possession, at the time of entering the contract of sale are called ‘existing goods’. Where seller is in possession, say as an agent or a pledge, he has a right to sell them.

Existing goods may again be either ‘specific’ or ‘unascertained’.

Future Goods:

Goods to be manufactured, produced or acquired by the seller after the making of the contract of sale are called ‘future goods’. These goods may be either not yet in existence or be in existence but not yet acquired by the seller. It is worth noting that there can be no present sale of future goods because property cannot pass in what is not owned by the seller at the time of the contract. So even if the parties purport to effect a present sale of future goods, in law it operates only as an ‘agreement to sell’.

Contingent Goods:

Goods, the acquisition of which by the seller depends upon an uncertain contingency are called ‘contingent goods’. Obviously they are a type of future goods and therefore a contract for the sale of contingent goods also operates as ‘an agreement to sell’ and not a ‘sale’ so far as the question of passing of property to the buyer is concerned. In other words, like the future goods in the case of contingent goods also the property does not pass to the buyer at the time of making the contract. It is important to note that a contract of sale of contingent goods is enforceable only if the event on the happening of which the performance of the contract is dependent happens, otherwise the contract becomes void.

Perishable Goods:

Under section 8, where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, contract is void.

Section 9 of the Act states 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 Price:

The money consideration for a sale of goods is knows as ‘price. We have already seen that the price is an essential element in every contract of sale of goods, that is, no valid sale can take place without a price. The price should be paid or promised to be paid in legal tender money, unless otherwise agreed. It may be paid in the form of a cheque, draft, bank deposit etc. For, it is not the mode of payment of a price but the agreement to pay a price in money that is requisite to constitute a valid contract of sale.

Under section 10 of the Act, the price may be expressly fixed by the parties in the contract of sale, or may provide for the method in which the price is to be fixed. Where the price is not stated in the contract, nor is any provision made for its determination, the buyer must pay a reasonable price, and what is a reasonable price is a question of fact dependent on the circumstances of each particular case.

Section 11 of the Act provides that the price may also be left to be fixed by the valuation of a third party, provided he accepts the duty and performs it. But if the third party fails to make such valuation, the agreement is avoided. If in pursuance of the contract the goods or any part thereof have been delivered by the seller and accepted by the buyer, he must pay a reasonable price for them. In case the third party is prevented from making the valuation by the seller or the buyer, the innocent party may maintain an action for damages against the party in fault.

CONDITIONS AND WARRANTIES

A contract of sale of goods contains various terms or stipulations regarding the quality of the goods, the price and the mode of its payment, the delivery of goods and its time and place. But all of them are not of equal importance. Some of these stipulations may be major terms which go to the very root of the contract, and their breach may frustrate the very purpose of the contract, while others may be minor terms which are not so vital that their breach may seem to be a breach of the contract as such. In law of sale, major terms are called ‘conditions’ and minor terms are called ‘warranties’.

Condition Defined:

A ‘condition’ is a stipulation essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate the contract itself [Sec. 13(2)]. In addition, he may maintain an action for damages for loss suffered, if any, on the footing that the whole contract is broken and the seller is guilty of non-delivery.

Warranty Defined:

A ‘warranty’ is a stipulation collateral to the main purpose of the contract, the breach of which gives the aggrieved party a right to sue for damages only, and not to avoid the contract itself. [Sec. 13(3)].

Under the Act, a buyer may elect to waive the condition or may elect to treat the breach of such condition as a breach of warranty and not as a ground for treating the contract as repudiated, [Sec. 13(1)].

Express and Implied Conditions and Warranties:

Conditions and warranties may be either express or implied. They are said to be express when at the will of the parties they are inserted in the contract, and they are said to be implied when the law presumes their existence in the contract automatically though they have not been put into it in express words. Implied conditions and warranties may, however, be negatived or varied by express agreement, or by course of dealing between the parties, or by usage of trade. This provision is merely an application of the general maxim of law, ‘what is expressly done puts an end to what is tacit or implied’, and ‘custom and agreement over-rule implied conditions and warranties.

Implied Conditions:

Unless otherwise agreed, the law incorporates into a contract of sale of goods the following implied conditions:

Right to sell [Sec. 14 (a)]:

In every contract of sale, the first implied condition on the part of the seller is that, in the case of a sale, he has the right to sell the goods and that, 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. Ordinarily the seller has the right to sell the goods if either he is the owner of the goods or he is owner’s agent. As a result of this condition, if the seller’s title turns out to be defective the buyer is entitled to reject the goods and to recover his price. Notice that in the case of breach of condition as to title, the buyer has no option to treat the breach of warranty and accept the goods and sue the seller for damages. In this case he must return the goods to the true owner. He can of course recover the price from the seller because of a total failure of consideration.

Illustration

R purchased a motorcar from D and used the same for several months. D had no title to the car and, therefore, R was compelled to return the car to the true owner. R sued D to recover back the price which he had already paid. He was held entitled to recover the whole of the price paid by him despite the fact that he had used the car for some months (Rowland vs Divall 1923).

2. Conditions in a sale by descriptions: (S.15)

“Where there is a contract of sale of goods by description, there is an implied condition that the goods shall correspond with the description……” Lord Blackburn observed “If you contract to sell peas, you cannot oblige a party to take beans. If the description of the article tendered is different in any respect, it is not the article bargained for, and the other party is not bound to take it.” It is important that the goods must correspond with the description whether it is a sale of specific goods or of unascertained goods. Further, the fact that the buyer has examined the goods will not affect his right to reject the goods, if the deviation of the goods from the description in such which could not have been discovered by casual examination, i.e., if the goods show any latent defects.

The description may be in terms of the qualities or characteristics of goods, e.g., long staple cotton, white maize basmati rice or may simply mention the trade mark, brand name or type of packing, etc.

Illustration

(a) Where there was a contract for the supply of ‘new singer cars’ and one of the cars supplied having already run a considerable mileage was not new, there was a breach of condition on the part of the seller and the buyer was held entitled to reject the car (Andrews Bros. vs Singer & Co;. 1934).

(b) M agreed to supply to L 3,000 tins of canned fruit, to be packed in cases each containing 30 tins. M tendered a substantial portion in cases containing 24 tins. It was held that the mode of packing constituted a part of the description and, therefore, L was entitled to reject the whole consignment (Re Moore & Co., and Landaure & Co. 1921).

3. Condition in a sale by sample: (S: 17)

When under a contract of sale, goods are to be supplied according to a sample agreed upon, the implied conditions are:

(i) that the bulk shall correspond with the sample in quality;

(ii) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;

(iii) that the goods shall be free from any defect, rendering them un-merchantable, which would not be apparent on reasonable examination of the sample. In other words, there should not be any latent defect in the goods. If the defect is patent one, that is, easily discoverable by the exercise of ordinary care, and the buyer takes delivery after inspection, there is no breach of implied condition and the buyer has no remedy.

Illustrations

(a) Two parcels of wheat were sold by sample. The buyer went to examine the bulk a week after. One parcel was shown to him but the seller refused to show the other parcel which was not there in the warehouse. Held: the buyer was entitled to rescind the contract (Lorymer vs Smith 1822).

(b) Some mixed worsted coatings were sold by sample. The goods when supplied corresponded to the sample but it was found that owning to a latent defect in the cloth, coats made out of it would not stand ordinary wear and were therefore unsaleable, The same defect existed in the sample also but could not be detected on a reasonable examination. Held: the buyer was entitled to reject the cloth (Drummond & Sons Van Lngen (1887)

4. Condition in a sale by sample as well as by description: (S. 15)

When goods are sold by sample as well as by description, there is an implied condition that the bulk of goods shall correspond both with the sample and with the description. If the goods supplied correspond only with the sample and not with the description or vice versa, the buyer is entitled to reject the goods. The bulk of the goods must correspond the both.

Illustrations

(a) There was a contract of sale by sample of seeds described as ‘common English sainfoin’. The contract contained a term excluding all warranties express or implied. The seed was sown and when the crop was ready it was discovered that the seed supplied and the sample shown were a different and inferior variety known as’ giant sainfoin’. It was held that there was a breach of condition and the exemption clause did not protect the sellers. The buyer was, therefore, entitled to recover damages (Willis vs. Pratt 1911).

(b) N agreed to sell G some oil described as ‘foreign refined rape oil, warranted only equal to sample. The oil supplied, though corresponded with the sample, was adultered with hemp oil Held: that since the oil supplied was not in accordance with the description the buyer was entitled to reject the same (Nichol vs Godts, 1854).

5. Condition as to fitness or quality: [S. 16(1)]

Ordinarily, in a contract of sale there is no implied condition or warranty as to quality or fitness for any particular purpose of goods supplied; the rule of law being ‘Caveat Emptor’, that is, let the buyer beware. But an implied condition is deemed to exist on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them, if the following conditions are satisfied:

(i) The buyer, expressly or impliedly, should make known to the seller the particular purpose for which the goods are required; and

(ii) The buyer should rely on the seller’s skill or judgement; and;

(iii) The goods sold must be of a description which the seller deals in the ordinary course of his business whether he be the manufacturer or not.

The purpose must be made known expressly if the goods to be supplied can be used for several purposes, otherwise the condition as to fitness will not be implied and the buyer will have no right to reject the goods merely because they are unfit for the specific purpose he had in mind.

Illustration:

A buyer ordered for the Hessian cloth, which is generally used for packing purposes, without specifying the purpose for which he wanted the same. The cloth was supplied accordingly. On receiving the cloth the buyer found that it was not suitable for packing food products as it had an unusual smell. Held: that the buyer had no right to reject the cloth as it was suitable for packing purposes alright. The buyer ought to have disclosed his particular purpose to the seller in order to make him liable for the breach of implied condition as to fitness (Re Andrew Yule & Co., 1932).

The purpose need not be told expressly if the goods are fit for one particular purpose only or if the nature of the goods itself tells the purpose by implication. In such cases the purpose is deemed to be made known to the seller impliedly.

Illustration:

(a) A, a draper, who had a special knowledge of hot water bottles, went to the shop of a chemist and asked for a hot water bottle. He was shown an American rubber bottle which the chemist said would not sand boiling water, but was meant for hot water, A bought the bottle. After a few days, while being used, it burst and injured his wife. It was found that the bottle was not fit for use as hot water bottle. It was held that since the bottle could be used only for one particular purpose, there was a breach of implied condition as to fitness and the seller was liable to pay damages (Priest vs Last, 1903).

(b) Where a buyer demands tinned fruit juice, it is implied from the nature of the product itself that he wants it for consumption and if later on it is found to contain poisonous matter, there is a breach of implied condition as to fitness and the seller is liable in damages.

6. Condition as to merchantability: [S.16 (b)]

This condition is implied only where the sale is by description. We have already seen that there is an implied condition in such cases, that the goods should correspond with the description. This sub-section lays down another implied condition in such cases, that is, that the goods should be of ‘merchantable quality’. But for making this condition applicable, not only that the sale must be description, but the following conditions must also be satisfied:

(i) The seller should a dealer in goods of that description, whether he be the manufacturer or not; and:

(ii) The buyer must not have any opportunity of examining the goods or there must be some latent defect in the goods which would both be apparent on reasonable examination of the same.

If the buyer had an opportunity of making the examination but he avoids to examine or if he has examined the goods, there is no implied condition as to merchantability as regards defects which such examination ought to have revealed.

They phrase ‘merchantable quality’ means that the goods are of such quality and in such condition that a reasonable man, acting reasonably, would accept them under the circumstances of the case in performance of his offer to buy those goods, whether he buys them for his own use or to sell again. Stated briefly, in order to be ‘merchantable’ the goods must be such as are reasonable under the description by which they are known in the market.

Illustrations:

(a) Where the underwear’s supplied contained certain chemicals which could cause skin disease to a person wearing them next to skin, it was held that because of such a defect the underwear’s were not of merchantable quality and the buyer was entitled to reject the goods (Grant vs Australian Knitting Mills Ltd. 1936).

(b) Where A purchases a certain quantity of black yarn from B, a dealer in yarn, and finds it damaged by white ants, the condition as to merchantability has been broken and A is entitled to reject it as un-merchantable.

(c) R ordered for some 600 motor horns of varying description. Some of the horns were dented and badly polished and R rejected the whole of the consignment. Held: the defects in the horns had rendered them un-merchantable and therefore the buyer was justified in rejecting the whole consignment as the contract is indivisible (Jackson vs Rotax Motor and Cycle Co. 1910).

Implied Warranties:

Unless otherwise agreed, the law also incorporates into a contract of sale of goods the following implied warranties:

1. Warranty of quiet possession: [S. 14 (b)]

In every contract of sale, the first implied warranty on the part of the seller if that “the buyer shall have and enjoy quiet possession of the goods.” If the quiet possession of the buyer is in any way disturbed by a person having a superior right than that of the seller, the buyer can claim damages from the seller. Since disturbance of quiet possession is likely to arise only where the seller’s title to goods is defective.

Illustration:

The plaintiff, a lady purchased a second hand typewriter from the defendant. She thereafter spent some money on its repair and used it for some months. Unknown to the parties, the typewriter was a stolen one and the plaintiff was compelled to return the same to its true owner. She was held entitled to recover from the sellers for the breach of this warranty damages reflecting not merely the price paid but also the cost of repair (Moson vs Burningham” 1949).

2. Warranty of freedom from encumbrances: [Sec. 14 (c)]

The second implied warranty on the part of the seller is that “the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made”. If the goods are afterwards found to be subject to a charge and the buyer has to discharge the same, there is breach of warranty and the buyer is entitled to damages. It is to be emphasized that the breach of this warranty occurs only when the buyer in fact discharges the amount of the encumbrance, and he had no notice of that at the time of the contract of sale. If the buyer knows about the encumbrance on the goods at the time of entering into the contract, he becomes bound by the same and he is not entitled to claim compensation from the seller for discharging the same.

Illustration:

A, the owner of the watch, pledges it with B. After a week, A obtains possession of the watch from B for some limited purpose and sells it to C. B approaches C and tells him about the pledge affair. C has to make payment of the pledge amount to B. there is breach of this warranty and C is entitled to claim compensation from A. [Notice that in the instant case the buyer (i.e. C) cannot allege breach of implied condition as to title against the seller (i.e. A) because the seller in fact had a title to the goods, though subject to the rights of the pledge].

3. Warranty or disclosing the dangerous nature of goods to the ignorant buyer:

The third implied warranty on the part of the seller is that in case the goods sold are of dangerous nature he will warn the ignorant buyer of the probable danger. If there is breach of this warranty the buyer is entitled to claim compensation for the injury caused to him.

Doctrine of Caveat Emptor:

The maxim of ‘caveat emptor’ means “let the buyer beware”. According to the doctrine of caveat emptor, it is the duty of the buyer to be careful while purchasing goods of his requirement and, in the absence of any enquiry from the buyer, the seller is not bound to disclose every defect in goods of which he be aware. The buyer must examine the goods thoroughly and must see that the goods he buys are suitable for the purpose for which he wants them. If the goods turn out to be defective or do not suit his purpose, the buyer cannot hold the seller liable for the same, as there is no implied undertaking by the seller that he shall supply such goods as suit the buyer’s purpose. If, therefore, while making purchases of goods the buyer depends upon his own skill and makes a bad choice, he must curse himself for his own folly, in the absence of any misrepresentation or fraud or guarantee by the seller.

Illustration:

A, purchases a horse from B. .A, needed the horse for riding but he did not mention this fact to B. The horse is not suitable for riding but is suitable only for being driven in the carriage. Caveat emptor being the rule, A can neither reject the horse nor can he claim any compensation from B.

Exceptions

The doctrine of ‘caveat emptor’ is subject to the following exceptions:

1. Where the seller makes a mis-representation and the buyer relies on it, the doctrine of caveat emptor does not apply. Such a contract being voidable at the option of the innocent party, the buyer has a right to rescind the contract.

2. Where the seller makes a false representation amounting to fraud and the buyer relies on it, or where the seller actively conceals a defect in the goods so that the same could not be discovered on a reasonable examination, the doctrine of caveat emptor does not apply. Such a contract is also voidable at the option of the buyer and the buyer is entitled to avoid the contract and also claim damages for fraud.

3. Where the goods are purchased by description and they do not correspond with the description.

4. Where the goods are purchased by description from a seller who deals in such class of goods and they are not of ‘merchantable quality’ the doctrine of caveat emptor does not apply.

5. Where the goods are bought by sample, the doctrine of caveat emptor does not apply if the bulk does not correspond with the sample, or if the buyer is not provided an opportunity to compare the bulk with the sample, or if there is any hidden or latent defect in the goods.

6. Where the goods are bought by sample as well as by description and the bulk of the goods does not correspond both with the sample and with the description, the buyer is entitled to reject the goods.

7. Where the buyer makes known to the seller the purpose for which he requires the goods and relies upon the seller’s skill and judgement but the goods supplied are unfit for the specified purpose, the principle of caveat emptor does not protect the seller and he is liable in damages.

8. Where the trade usage attaches an implied condition or warranty as to quality or fitness and the seller deviates from that, the doctrine of caveat emptor does not apply and the seller is liable in damages.

TRANSFER OF PROPERTY IN GOODS

The phrase “transfer of property in goods” means transfer of ownership of the goods. ‘Property in goods’ is different from possession of goods. Possession refers to the custody over the goods. So the property may pass from the seller to the buyer but the goods may be in possession of the seller either as unpaid seller or as a bailee for the buyer. In other cases the property in goods may still be with the seller although the goods may be in possession of the buyer or his agent or a carrier for transmission to the buyer.

The precise moment of time at which property in goods passes from the seller to the buyer is of great importance from various points of view:

Rules Regarding Transfer of Property:

We shall be studying the rules regarding transfer of property under the following two heads:

1. Transfer of property in specific or ascertained goods.

2. Transfer of property in unascertained and future goods.

Transfer of Property in Specific or Ascertained Goods:

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. For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case [Sec. 19(1)(2)]. Thus, in the case of specific goods, the transfer of property takes place when the parties intend to pass it. The parties may intend to pass the property at once at the time of making of the contract or when the goods are delivered or when the goods are paid for.

It is only when the intention of the parties cannot be judged from their contract or conduct or other circumstances that the rules laid down in Section 20 apply. These rules are as follows:

1. When goods are in a deliverable state: [S. 20(a)]

Where there is an unconditional (i.e., not subject to any condition precedent to be fulfilled by the parties) contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer as soon as the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods, or both are postponed.

Illustrations:

(a) A, buys a bicycle for sh. 3,000 on a month’s credit and asks the shopkeeper to send it to his house. The shopkeeper agrees to do so. The bicycle immediately becomes the property of A.

(b) P buys a table for sh. 1000 on a week’s credit and arranges to take delivery of the table the next day. A fire broke out in the furniture mart the same evening and the table is destroyed. The property in the table has passed to P and he is bound to pay the price.

The goods are said to be in ‘deliverable state’ when they are in such a state that he buyer would, under the contract, be bound to take delivery of them. For example, in illustration (b) above, if the seller has to polish the table to make it acceptable to the buyer, it is not in a deliverable state until it is so polished, and the buyer does not acquire property at the time of the contract.

2. When goods have to be put into a deliverable state: (Sec. 20 (b)]

Where there is a contract for the sale of specific goods and the seller is bound to do ‘something’ to goods for the purpose of putting them into a deliverable state, the property does not pass until such things is done and the buyer has notice thereof. The word ‘something’ here means an act like packing the goods, or loading them on rail or ship, or filling them in containers or polishing them in order to give a finished shape, etc. It is to be noted that merely putting things in a deliverable state would not result in the transfer of property in the goods from the seller to the buyer. It is further necessary that the buyer must have notice thereof, i.e. the fact that goods have been put in a deliverable state must come to the knowledge of the buyer in some way or the other.

Illustrations:

A, agrees to sell B the whole of turpentine oil lying in a cistern. It is further agreed that the oil is to be put into casks by A and then B is to take them away. Some of the casks are filled in the presence of B, but before any are removed or the remainder filled, the whole is destroyed accidentally by fire. B must bear the loss of oil which had been put into the casks because in all these casks the property has passed to him as nothing further remained to be done to them by the seller. But the property in the casks not filled up remained in the seller, at whose risk they continued (Rugg vs Minett 1809).

3. When the goods have to be measured etc., to ascertain price: [Sect 20(c)]

Where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof.

Illustrations:

A, sold to B 289 bales of goat skin, each bale containing five dozens, and the price was for certain sum per dozen skins. It was the duty of A to count the goat skins in each bale. Before A could do the same, the bales were destroyed by fire. Held: that the property in the goods had not passed to the buyer (i.e., B) as something still remained to be done by the seller (i.e., A) for ascertaining the price, and as such the loss caused by fire had to be borne by the seller (i.e., A) (Zagury vs Furnell 1809).

It may be noted that if the seller has done all what he was required to do under the contract and nothing remains to be done by him, the property passes to the buyer even if the buyer has to do something for his own satisfaction.

Illustrations:

A contracted with B to sell him 975 bags of rice, the whole content of a certain ‘golah’. B paid the entire price but agreed to remove the rice after weighing (for his own satisfaction) before a certain date. After delivery was taken of a part of the rice the other part was destroyed by fire. Held: the ownership had passed to the buyer because nothing remained to be done by the seller to ascertain the price, and therefore B, the buyer, must suffer the loss (Shoshi Mohum Pal vs Nobo Kristo Poddar).

4. When goods are delivered on approval: [S. 20 (d)]

When goods are delivered to the buyer on approval or ‘on sale or return’, or on other similar terms, the property therein passes to the buyer:

(i) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction, e.g., pledges the goods or resells them;

(ii) If he does not signify his approval or acceptance to the seller but retains the goods, without giving notice of rejection, beyond the time fixed for the return of goods, or if no time has been fixed, beyond a reasonable time.

Illustrations:

(a) A, delivered a horse to B on the terms of ‘sale or return’ within 8 days.’ The horse died on the third day without any fault on the part of B. Held: A was to bear the loss as the horse was still his property when it perished (Elphick vs Barnes 1880)

(b) A, delivered a horse to B on trial for 8 days. B continued to retain the horse even after the expiry of 8 days without giving notice of rejection to A. B had automatically become the owner of the horse on the expiry of 8 days.

Transfer of Property in Unascertained and Future Goods:

The rule relating to transfer of property in unascertained and future goods is contained in Section 20(e)(i) & (ii). This section provides that where goods contracted to be sold are not ascertained or where they are future goods, the property in goods does not pass to the buyer unless and until the goods are ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state, either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such assent may be expressed or implied, and may be given either before or after the appropriate is made.

It must be noted that the above rule (as contained in Section 20(e) (i) & (ii) is a fundamental rule and it applies irrespective of what the parties intended. Until goods are ascertained or appropriated there is merely ‘an agreement to sell.’ Thus a sale of ten quintals of wheat from a granary containing a large quantity, has not the effect of transferring property in the ten quintals to the purchaser. It amounts only to ‘an agreement to sell’. It is only when ten quintals are appropriate to the contract by the seller and the buyer has notice thereof, that property shall pass from the seller to the buyer.

The process of ascertainment or appropriation consists in ear-marking or setting apart goods as subject-matter of the contract. It involves separating, weighing, measuring, counting or similar acts done in relation to goods with an intention to identify and determine the specific goods to be delivered under the contract. The distinction between ‘ascertainment’ and ‘appropriation’ is that whereas ‘ascertainment; can be a unilateral act of the seller, that is, he alone may set apart the goods, ‘appropriation’ involves the element of mutual consent of the seller and the buyer.

Reservation of right of disposal: (Sec. 21)

Reservation of the right of disposal means reserving a right to dispose of the goods until certain conditions (like payment of the price) are fulfilled. When the seller reserves such a right the property in the goods does not pass until those conditions are fulfilled. The seller may reserve such a right expressly while making a contract or while making appropriation of unascertained goods. He may also reserve this right by implication, for example, when the seller while transporting goods takes the railway receipt or the bill of lading in his own name or where the seller has taken the R/R or B/L in the name of the buyer but has delivered the same to his bank with the instructions that the document is to be delivered to the buyer only when he makes payment of the price or accepts the bill of exchange, the right of disposal is said to be reserved impliedly.

TRANSFER OF PROPERTY IN GOODS

Any society that allows private ownership of property and encourages trade, and therefore the transfer of property, will inevitably have its share of disputes concerning competing claims of ownership. The common law developed principles to determine these disputes. The basic rule, now embodied in the Sale of Goods Act s. 23 (SGA) is known as the nemo dat rule.

A primary rule in the law relating to the sale of goods is nemo dat quod non habet – literally “nobody gives what he does not have”

The precise moment of time at which property in goods passes from the seller to the buyer is of great importance from various points of view:

Rules Regarding Transfer of Property:

We shall be studying the rules regarding transfer of property under the following two heads:

1. Transfer of property in specific or ascertained goods.

2. Transfer of property in unascertained and future goods.

Transfer of Property in Specific or Ascertained Goods:

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. For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case [Sec. 19(1)(2)]. Thus, in the case of specific goods, the transfer of property takes place when the parties intend to pass it. The parties may intend to pass the property at once at the time of making of the contract or when the goods are delivered or when the goods are paid for.

It is only when the intention of the parties cannot be judged from their contract or conduct or other circumstances that the rules laid down in Section 20 apply. These rules are as follows:

1. When goods are in a deliverable state: [S. 20(a)]

Illustrations:

~~(a)~~(c) A, buys a bicycle for sh. 3,000 on a month’s credit and asks the shopkeeper to send it to his house. The shopkeeper agrees to do so. The bicycle immediately becomes the property of A.

~~(b)~~(d) P buys a table for sh. 1000 on a week’s credit and arranges to take delivery of the table the next day. A fire broke out in the furniture mart the same evening and the table is destroyed. The property in the table has passed to P and he is bound to pay the price.

2. When goods have to be put into a deliverable state: (Sec. 20 (b)]

Illustrations:

3. When the goods have to be measured etc., to ascertain price: [Sect 20(c)]

Illustrations:

4. When goods are delivered on approval: [S. 20 (d)]

When goods are delivered to the buyer on approval or ‘on sale or return’, or on other similar terms, the property therein passes to the buyer:

~~(i)~~(iii) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction, e.g., pledges the goods or resells them;

~~(ii)~~(iv) If he does not signify his approval or acceptance to the seller but retains the goods, without giving notice of rejection, beyond the time fixed for the return of goods, or if no time has been fixed, beyond a reasonable time.

Illustrations:

Transfer of Property in Unascertained and Future Goods:

The rule relating to transfer of property in unascertained and future goods is contained in Section 20(e)(i) & (ii). This section provides that where goods contracted to be sold are not ascertained or where they are future goods, the property in goods does not pass to the buyer unless and until the goods are ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state, either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such assent may be expressed or implied, and may be given either before or after the appropriate is made.

Reservation of right of disposal: (Sec. 21)

Transfer of Title on Sale:

The general rule relating to the transfer of title on sale is that “the seller cannot transfer to the buyer of goods a better title than he himself has”. If the title of the seller is defective the buyer’s title will also be subject to the same defect. Section 23 also lays down to the same effect and provides that “where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had…” this rule is expressed by the maxim, “nemo dat quod non habet” which means that no one can give what he has not got as mentioned on page 1 of this handout..

The general rule aims at protecting the interests of the true owner and is deemed necessary in the larger interest of society. So if a thief disposes of stolen property, the buyer acquires no title though he may have purchased the goods bonafide for value, and the real owner of the goods is entitled to recover possession of goods without paying anything to the buyer. Similarly, where a hirer of goods under a hire-purchase agreement sells them before he had paid all the instalments, the buyer though acting in good faith, does not acquire the property in the goods against the true owner and, on default of payment by the hirer the true owner can recover the goods from the buyer (Whiteley & Co. Vs Hilt 1918).. There is also the case Ingram v Little (1961) cited in Ogola (Business Law) on page 371

Thus a buyer cannot get a good title to the goods unless he purchases the goods from a person who is the owner thereof or who sells them under the authority or with the consent of the owner.

Transfer of Title by Non-Owners:

The above general rule as to title (the nemo dat rule) is subject to the following exceptions where the buyer gets a better title to the goods than what the seller himself possesses:

1. An unauthorized sale by a mercantile agent (see s.26(3) re definition) & the Factors act 1889 (FA 1889);

A mercantile agent means an agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. Thus as a rule a mercantile agent having an authority to sell goods coveys a good title to the buyer. But by virtue of this provision, a mercantile agent can convey a good title to the buyer.

2. Transfer of title by estoppel:

The estoppel exception is clearly discernible in s. 23(1) SGA…unless the owner of the goods is by his conduct precluded from denying the seller’s authority to sell.

So where the true owner, by words or conduct, leads a purchaser to believe that the seller is the true owner or has the authority to sell, he will be estopped from denying the seller’s authority to sell.

In the words of Lord Halsbury: “Estoppel arises when you are precluded from denying the truth of anything, which you have represented as a fact, although it is not a fact”. Thus, estoppel means that a person who by his conduct or words leads another to believe that certain state of affairs existed, would be estopped from denying later on that such a state of affairs did not exist. The basis of estoppel is that it would be unfair or unjust to allow a party to depart from a particular state of affairs which he has permitted another person to believe to be true. In such circumstances, the buyer gets a better title.

3. Sale by person in possession under voidable contract:

When a person has obtained possession of the goods under a voidable contract and he sells those goods before the contract has been rescinded, the buyer of such goods acquires a good title to them provided the buyer acts in good faith and without notice of seller’s defect of title.

4. Sale by seller in possession after sale:

Where a seller, after having sold the goods continues to be in possession of the goods or of the documents of title to them and again sells or pledges them either himself or through a mercantile agent, he will convey a good title to the buyer or the pledge provided the buyer or the pledge acts in good faith and without notice of the previous sale. For the application of this exception it is essential that the possession of the seller must be as seller and not as hirer or bailee.

5. Sale by buyer in possession after ‘agreement to buy’:

Where a buyer has agreed to buy the goods and has obtained possession of the same or the documents of title to them with the consent of the seller, resells or pledges the goods either himself or through a mercantile agent, he will convey a good title to the buyer or the pledge provided the person receiving the goods acts in good faith and without notice of any lien or other right of the original seller in respect of those goods.

6. Resale by an unpaid seller:

Where an unpaid seller, who has exercised his right of lien or stoppage in transit, resells the goods (of which ownership has passed to the buyer), the subsequent buyer acquires as good title thereto as against the original buyer, even though the resale may not be justified in the circumstances, i.e. no notice of the resale has been given to the original buyer.

PERFORMANCE OF THE CONTRACT

“It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale”. (Sec. 28). Thus, the performance of a contract of sale implies delivery of goods by the seller and acceptance of the delivery of goods and payment for them by the buyer, in accordance with the contract. The parties are free to provide any terms they like in their contract about the time, place and manner of delivery of goods, acceptance thereof and payment of the price. But if the parties are silent and do not provide anything regarding these matters in the contract then the rules contained in the Sale of Goods Act are applicable.

Delivery:

Delivery of goods means voluntary transfer of possession of goods from one person to another (Sec. 2). If transfer of possession of goods is not voluntary, i.e. possession is obtained under pistol point or by theft, there is no delivery:

Rules to Delivery of Goods:

Rules to delivery of goods are given in section 30 of the Act. These are as follows:

1. Place of delivery

The place of delivery may be stated in the contract of sale, and where it is so stated, the goods must be delivered at the named place during business hours on a working day. But where no place is mentioned in the contract, the following rules must be followed:

(i) In the case of sale, the goods are to be delivered at the place at which they are at the time of sale.

(ii) In “an agreement to sell,” the goods are to be delivered at the place where they are at the time of the agreement to sell.

(iii) In the case of future goods, the goods are to be delivered at the place at which they are manufactured or produced.

2. Time of delivery

Where under the contract of sale the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable, time. Further, demand of delivery by the buyer or the tender of delivery by the seller should be made at a reasonable hour. What is a reasonable hour is a question of fact.

3. Delivery of goods where they are in possession of a third party:

Where the goods at the time of sale are in the possession of a third person, there is no delivery by the seller to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf. Such a delivery is known as “constructive delivery” or “delivery by attornment” and requires the consent of all the three parties, the seller, the buyer and the person having possession of the goods. Where the seller hands over the ‘delivery order’ to the buyer, there is no delivery unless the seller’s agent holding the goods has assented thereto.

4. Expenses of delivery:

Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne by the seller.

Delivery of Wrong Quantity:

Under section 31 of the Act, a seller is duty bound to deliver the goods to the buyer strictly in accordance with the terms of the contract. A defective delivery, i.e. delivery of a quantity less or more than that contracted for a delivery of goods mixed with the goods of a different description not included in the contract, entitles the buyer:

(i) to reject the whole, or

(ii) to accept the whole, or

(iii) to accept the quantity and quality he ordered and reject the rest of the goods so delivered.

Remember that in case of rejection of goods because of defective delivery the buyer is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them. Further, the right to reject the goods is no equivalent to right to cancel the contract. If the buyer rejects the goods, the seller has a right to tender again goods of contract quality and quantity subject to the terms and conditions of the contract and the buyer is bound to accept the same.

Where the buyer accepts the goods, he must pay for what he has actually accepted, at the contract rate. In case the buyer has accepted short delivery he is entitled to claim damages for the same from the seller.

Delivery by Installments:

Section 32 of the Act deals with the delivery by instalments. Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by instalments. If the parries so agree then only the delivery of the goods may be made by instalments.

When the parties agree that the delivery is to be made by instalments and each installment is to be separately paid for, and either buyer or seller commits a breach of contract in respect of one or more instalments, there arises a question as to whether such a breach amounts to a breach of the whole of the contract or a breach of only a part of it? The answer to this question depends upon the terms of the contract and the circumstances of the case.

Generally, failure to deliver or pay for one installment does not amount to a breach of the whole contract, unless from the special circumstances of the case (e.g., the factory is closed because of a labour strike or the buyer becomes insolvent) it can be inferred that similar breaches will be repeated.

Acceptance:

Under section 36 of the Act, the buyer is deemed to have accepted the goods in the following circumstances:

a) When he intimates to the seller that he has accepted the goods.

b) When the goods have been delivered to him, and he does not act to the goods which is inconsistent with the ownership of seller.

c) When he retains the goods, after the lapse of a reasonable time, without intimating to the seller that he has rejected them.

Section 37 states that where the buyer rejects the goods having the right to do so, he is not bound to return them to the seller. However, he must intimate to the seller that he refuses to accept.

Under Section 38, if a seller is ready and willing to deliver the goods but the buyer does not take delivery within a reasonable time then the buyer is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods.

RIGHTS OF UNPAID SELLER

Unpaid Seller Defined:

The seller of goods is deemed to be an ‘unpaid seller’ s39 (1)(a) when the whole of the price has not been paid or tendered; or (b) where a bill of exchange or other negotiable instrument has been received as a conditional payment, i.e., subject to the realization thereof, and the same has been dishonoured.

Rights of an Unpaid Seller:

An unpaid seller has two-fold rights, viz:

(a) Rights of unpaid seller against the goods, and:

(b) Rights of unpaid seller against the buyer personally.

(a) Rights of unpaid seller against the goods, and:

An unpaid seller has the following rights against the goods not-withstanding the fact that the property in the goods has passed to the buyer (s. 40(1) ):

Right of lien;

Right of stoppage of goods in transit;

Right of resale.

Unpaid Seller’s Lien

(Definition of Lien: A lien’ is a right to retain possession of goods (but not to resell them) until the contract price has been paid)

1. Right of Lien (Sec. 41):

‘Lien’ is the right to retain possession of goods and refuse to deliver them to the buyer until the price due in respect of them is paid or tendered. An unpaid seller in possession of goods sold is entitled to exercise his lien on the goods in the following cases:

(a) where the goods have been sold without any stipulation as to credit;

(b) where the goods have been sold on credit, but the term of credit has expired;

In the case of buyer’s insolvency, the lien exists even though gods had been sold on credit and the period of credit has not yet expired. When the goods are sold on credit the presumption is that the buyer shall keep his credit goods. If, therefore, before payment the buyer becomes insolvent, the seller is entitled to exercise this right and hold the goods as security for the price.

The unpaid seller’s lien is possessory lien, i.e. the lien can be exercised as long as he seller remains in possession of the goods. He may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer.

It should be emphasised that a lien depends on possession. S.41 and S42 apply only where the unpaid seller is in possession. If he loses possession he loses his lien or right of retention. Termination of Lien:

Section 43 states that the unpaid seller of goods loses his lien in the following cases:

(a) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods; or

(b) when the buyer or his agent lawfully obtains possession of the goods; or

An implied waiver takes place when the seller grants fresh term of credit or allows the buyer to accept a bill of exchange payable at a future date or assents to a sub-sale which the buyer may have made.

2. Right of Stoppage of Goods in Transit or Stoppage in Transitu:

The right of stoppage in transit means the right of stopping further transit of the goods while they are with a carrier for the purpose of transmission to the buyer, resuming possession of them and retaining possession until payment or tender of the price. Thus, in a sense this right is an extension of the right of lien because it entitles the seller to regain possession even when the seller has parted with the possession of the goods:

When can this right be exercised? (Sec. 44)

An unpaid seller can exercise this right only when:

the buyer becomes insolvent. The buyer is said to be insolvent when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he is declared an insolvent or not; and.

the property has passed to the buyer. If property has not passed to the buyer then this right is terms as the “right of withholding delivery”; and

the goods are in the course of transit. This means that goods must be neither with the seller nor with the buyer nor with their agent. They should be in the custody of a carrier as an independent middleman (i.e., in his own right as a carrier) e.g., railway and common carriers whose business is to transport goods or others. The carrier must not be either seller’s agent or buyer’s agent. Because if he is seller’s agent, the goods are still in the hands of seller in the eye of law and hence there is no transit, and if he is buyer’s agent, the buyer gets delivery in the eye of law and hence question of stoppage does not arise.

Duration of transit: (Section 45)

Since the right of stoppage in transit can be exercised only so long as the goods are in the course of transit, it becomes necessary to know as to when the transit begins and when it comes to an end. When the transit comes to an end, the right to stoppage cannot be exercised.

According to Section 45, goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them. Thus the transit continues so long as the goods are not delivered to the buyer or his agent no matter whether they are lying at the destination with the carrier awaiting transmission or are in actual transit. The goods are still deemed to be in transit if they are rejected by the buyer and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back.

The transit is deemed to be at an end and the seller cannot exercise his right of stoppage in the following cases:

(a) When the buyer or his agent takes delivery of the goods after the goods have reached destination.

(b) When the buyer or his agent obtains delivery of the goods before their arrival at the appointed destination.

(c) When the goods have arrived at their destination and the carrier acknowledges to the buyer or his agent that he holds the goods on his behalf.

(d) When the goods have arrived at their destination but the buyer instead of taking delivery requests the carrier to carry the goods to some further destination and the carrier agrees to take them to the new destination.

(e) When the carrier wrongfully refuses to deliver the goods to the buyer or his agent.

(f) When part delivery of the goods has been made to the buyer with an intention of delivering the whole of the goods, transit will be at end for the remainder of the goods also which are yet in course of the transit.

How right of stoppage is exercised? (Sec. 46)

The unpaid seller may exercise his right of stoppage in transit either:

(a) by taking actual possession of the goods, or

(b) by giving notice of his claim to the carrier or other bailee in whose possession the goods are.

Such notice may be given either (a) to the person in actual possession of the goods, or (b) to his principal. In the latter case, notice must be given well in advance to enable the principal to communicate with his agent or servant in time, so as to prevent delivery to the buyer.

It is the duty of the carrier, after receiving due notice, not to delivery the goods to the buyer but to redeliver them to, or according to the directions of the seller. If by mistake he delivers the goods to the buyer, he can be made liable for conversion. The expenses of redelivery are to be borne by the seller.

Lien and Stoppage in Transit Distinguished:

The main points of distinction between these two rights of an unpaid seller are as follows:

The seller’s lien attaches when the buyer is in default, whether he be solvent or insolvent. The right of stoppage in transit arises only when the buyer is insolvent.

Lien is available only when the goods are in actual possession of the seller while right of stoppage is available when the seller has parted with possession and the goods are in the custody of an independent carrier.

The right of lien comes to an end once the seller hands over possession of the goods to the carrier for the purpose of transmission to the buyer. On the other hand, the right of stoppage in transit commences after the seller has delivered the goods to a carrier for the purposes of transmission to the buyer and continues until the buyer has acquired their possession.

The right of lien consists in retaining the possession of the goods while the right of stoppage consists in regaining of the goods.

Effects of Rights of Lien and Stoppage in Transit:

The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or other disposition of the goods which the buyer might have made. For example, P sells certain goods to R and delivers them to a carrier for transmission to R. before the goods reach their destination P comes to know that R has become insolvent. In the meanwhile R sells those goods to Q. the sale of goods between R and Q will not affect the right of P to stop them in transit.

But there are two exceptional cases when these two rights of the unpaid seller are affected by a sale or other disposition of the goods by the buyer. These exceptions are:

When the seller has assented to the sale or other disposition which the buyer may have made. (s.47)

When a document of title to goods (e.g., a bill of lading or railway receipt) has been issued or transferred to a buyer, and the buyer transfers the document to a person who takes the document in good faith and for consideration, then:

if such last mentioned transfer was by way of sale, the unpaid seller’s right of lien or stoppage in transit is defeated, and

if such last mentioned transfer was by way of pledge, the unpaid seller’s right of lien or stoppage in transit can only be exercised subject to the rights of the pledge. But in this case the unpaid seller may require the pledge to satisfy his claim against the buyer first out of any other goods or securities of the buyer in the hands of the pledge.

See also the case of Leask v Scott Bros (1877) – Lecturer’s 2^nd casebook pg 158.

3. Right of Resale:

The right of resale is a very valuable right given to an unpaid seller. In the absence of this right, the unpaid seller’s other rights against the goods, namely, ‘lien and ‘stoppage in transit’, would not have been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the buyer. If the buyer continues to remain in default, then should the seller be expected to retain the goods indefinitely, specially when the goods are perishable? Obviously, this cannot be the intention of the law. Section 48 therefore, gives to the unpaid seller a limited right to resell the goods in the following cases:

where the goods are of a perishable nature; or

where such a right is expressly reserved in the contract in case the buyer should make a default; or

where the seller has given a notice to the buyer of his intention to resell and the buyer does not pay or tender the price within a reasonable time.

If on a resale there is a loss to the seller, he can recover it from the defaulting buyer. But if there is a surplus on the resale, the seller can keep it with him because the buyer cannot be allowed to take advantage of his own wrong. If, however, no notice of resale [as required in case (c) above] is given to the buyer, the right of seller to claim loss and retain surplus, if any, is reversed. In other words, if the unpaid seller fails to give notice of resale to the buyer, where neither the goods are of perishable nature nor such a right was expressly reserved, he cannot recover the loss from the buyer and is under an obligation to hand over the surplus, if any, to the buyer, arising from the resale. Thus, it will be seen that giving of notice to the buyer, when so required, is very necessary to make him liable for the breach of contract. It is so because such a notice gives an opportunity to the buyer either to pay the price and have the goods, or, if he cannot pay, to supervise the sale to see that the same is properly made.

It is important that absence of notice, when so required, affects the rights of the unpaid seller himself only as discussed above and it does not affect the title of the subsequent buyer who will acquire a good title to the goods. Section 48(3) specially declares “Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title thereto as against the original buyer, notwithstanding that no notice of the resale has been given to the original buyer”.

Rights of Unpaid Seller against the Buyer Personally:

The unpaid seller, in addition to his rights against the goods as discussed in the previous Right of Resale (s.48) Handout, has the following three rights of action against the buyer personally:

1. Suit for price: (Sec. 49)

Where property in goods has passed to the buyer; or where the sale price is payable ‘on a day certain’, although the property in goods has not passed; and the buyer wrongfully neglects or refused to pay the price according to the terms of the contract, the seller is entitled to sue the buyer for price, irrespective of the delivery of goods.

2. Suit for damages for non-acceptance: (Sec. 50)

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance. The seller’s remedy in this case is a suit for damages rather than an action for the full price of the goods.

RIGHTS OF THE BUYER

The buyer has the following rights against the seller for breach of contract:

1. Suit for damages for non-delivery: (Sec. 51)

Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery. The measure of damages hall be the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller’s breach of contract. If the goods in question have a ready market the measure of damages is prima facie to be ascertained by the difference between the contract price and market price on the date of breach.

2. Suit for specific performance: (Sec. 52)

Where there is breach of a contract for the sale of specific or ascertained good, the buyer may file a suit for the specific performance of the contract. This remedy is discretionary and will only be granted when damage would not be an adequate remedy, for instance, the subject-matter of the contract is rare goods, say, a picture by a dead painter.

3. Suit for damages or breach of warranty: (Sec. 53)

Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat breach of condition as breach of warranty, the buyer is entitled to file a suit for damages if the price has already been paid. But if the buyer has not yet paid the price he may ask the seller for a reasonable reduction in price.

4. Suit for rescission of contract and for damages for breach of ‘condition’:

The breach of ‘condition’ entitles the buyer to treat the contract as repudiated. Accordingly, where there is a breach of ‘condition’ by the seller, the buyer is entitled to file a suit for rescission of the contract. Also, he may claim damages for loss suffered on the footing that the whole contract is broken and the seller is guilty of non-delivery.

5. Suit for recovery of the price together with interest: (Sec. 53)

If the buyer has already paid the price of the goods to the seller and the goods are not delivered or they are stolen one, he can sue the seller for the refund of the price and also for the interest at reasonable rate from the date of payment to the date of refund.

AUCTION SALE

In an auction sale, the auctioneer invites bids from prospective purchasers and sells the goods to the highest bidder. Section 58 lays down the following rules relating to an auction sale:

Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale.

The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary manner, say, by saying words like “one, two, three” and, until such enouncements is made, any bidder may retract his bid. On the other hand, the auctioneer is also not bound to accept the highest bid if he feels that is much below his expectation. Of course, his not accepting the highest bid would injure his business reputation because it is the custom of trade that goods must be sold to the highest bidder.

The seller or any one person on his behalf can bid at the auction, provided such a right to bid has been expressly reserved at the time of notifying the auction sale.

The sale may be notified to be subject to a reserved or upset price. It is a price below which the auctioneer will not sell, and if he by mistake knocks down the lot for less than the reserved price, no valid contract comes into existence and he can refuse to deliver the goods to the highest bidder.

CONTRACT OF AGENCY

An agent is someone who is employed by a principal to make contracts on his behalf with third parties. An employee who makes contracts on behalf of his employer is acting as a gent. A shop assistant, for example, is in this category. Alternatively, an agent may be an independent contractor who is engaged for his specialist skills and knowledge. A person who wishes to sell shares will usually employ the services of a stockbroker to arrange the sale for him. Travel agents, estate agents, auctioneers, insurance brokers are all examples of agents.

An agent may fall into one or more of the following categories:

A general agent has powers to act for his principal in relation to particular kinds of transactions, e.g. an estate agent.

A special agent is limited to acting for the principal in respect of one specific transaction.

A mercantile agent or factor is defined under s(1) of the Factor of Act 1889 as an ‘agent having in the customary course of his business as such agent authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods’.

A del credere agent is an agent who, in return for extra commission, guarantees that if the third party he has introduces fails to pay for goods received the agent will indemnify the principal.

Formation of agency

An agency is usually created by agreement between the principal and agent, but in some situations an agency can be treated without such an agreement. The main ways in which an agency can be formed are as follows:

Express appointment. This is the main way in which an agency is created. A principal will expressly appoint an agent either to carry out a particular job or to undertake a range of transactions. The relationship between the principal and agent will usually b e contractual.
By implication. This form of agency is a pre-existing agency relationship and it is assumed by a third party that the principal has given the agent authority to act as an agent in matters not covered by the express appointment. This implied or ostensible authority may arise from the position held by the agent. For example, a company secretary has implied authority to enter into contracts on behalf of a company which are related to the day to day operation of the business.
By ratification. This arises where a principal retrospectively adopts a contract made on his behalf by an agent. ratification will only b effective if strict conditions are met:

The agent must have disclosed that he was acting for a principal.
the principal must have been in existence when the agent entered into the contract, e.g. if the principal is a company, the certificate of incorporation must have been issued;
the principal must have had the capacity to enter into the contract not only when the contract was made but also at the time of ratification;
the principal must ratify the whole contract;
Ratification must take place within a reasonable time.

By necessity. This type of agency arises where a person takes urgent action on behalf of another in the event of an emergency. There will normally be some kind of pre-existing contractual relationship between the parties, e.g. a contract to transport perishable goods. the person who purports to act as an agent of necessity must show that he acted in the best interests of the ‘principal’, his actions were reasonably necessary in the circumstances, and that it was impossible to contact the ‘principal’ to obtain instructions.
By estoppel. This arises where a principal represents that a person is acting as his agent. The principal will be prevented (estopped) from later denying that the person has authority to act as his agent (see Freeman & Lockeyer v Buckhurst Park Properties (1964).

The rights of the parties

Even the most straightforward agency creates complicated legal rights between three parties: the principal, the agent and a third party. The rights of the third party depend largely on whether the third party is aware that he is dealing with an agent. If the agent discloses that he is dealing with an agent, he will drop out of the picture and the third party can only sue and be sued by the principal. As we have already seen in chapter 7, the rules relating to privity of contract do not apply in agency situations. If the agent does not reveal that he is an agent, either the agent or the principal can sue on the contract. When the third party discovers the agency, he can choose whether to sue the agent or the now revealed principal. Once he has made his choice of whom to sue, the election is binding and he cannot change his mind if, for example, the person he has chosen to sue cannot or will not pay.

Sometimes an agent will act without authority or he may exceed his actual implied authority. The principal will only be bound by the agent’s actions if the agent is acting within the scope of his apparent (ostensible) authority or through necessity or the principal ratifies the contract. If none of the situations apply the agent will be liable to the third party for breach of warranty of authority.

The duties of the principal and agent

The agent owes a number of duties to his principal. These include:

· a duty to carry out the wishes of the principal in accordance with the agency agreement;

· to exercise reasonable care and skill;

· to carry out his duties personally unless there is express or implied authority for him to delegate his duties;

· to account for all money and property received on behalf of the principal and to keep proper accounts;

· not to take bribes or make a secret profit;

· to avoid a conflict of interest.

The agent has the following rights against the principal:

· to be paid the agreed amount or, if no fee is agreed, a reasonable amount;

· to be indemnified for any expenses incurred in performing his duties;

· to exercise a lien over the principal’s goods and to stop them in transit where payment is outstanding.

Termination of agency

The agency may come to an end either by the actions of the parties or by operation of the law.

Termination by the parties. The principal and agent may terminate their relationship by mutual agreement or the agency contract may allow either party to terminate by giving notice. Even if the contract does not provide for termination by notice either party can end the contract unilaterally by giving reasonable notice.
Termination by operation of the law. The relationship will come to an end automatically with the death or insanity of either party or by the bankruptcy of the principal. The agency can also come to an end because of frustration or illegality.

AGENCY (DETAIL)

Agency law is a special branch of the law of contract. According to the provision of the Law of Contract Act (Cap. 23), the English common law of contract is applicable in Kenya. The date of reception of the common law of contract of England is 12^th August 1897. English decisions after this date are only of persuasive authority. The agency law of England based on common law of contract is also applicable in Kenya.

Definition:

“An agent is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is represented, is called the principal”.

The contract which creates the relationship of ‘principal’ and ‘agent’ is called ‘agency’. Thus where A appoints B to buy ten bags of sugar on his behalf, A is the ‘principal’, B is the ‘agent’ and the contract between the two is ‘agency’. If, in pursuance of the contract of agency, the ‘agent’ purchases the bags of sugar from C, a wholesale dealer in sugar, on credit, then in the eye of law the ‘principal’ and the wholesale dealer are brought into direct contractual relations.

Under a contract of agency the agent is authorized to establish privity of contract between the principal (his employer) and a third party. As such the function of an agent is essentially to bring about contractual relations between the principal and third parties. In a way, therefore, an agent is merely a connecting link. After entering into a contract on behalf of the principal with a third party, the agent drops out and ceases to be a party to the contract and the contract binds the principal and the third party as if they have made it themselves.

Capacity of Agent:

An agent is supposed to create contractual relations between his principal and a third party. The principal and the third party must possess contractual capacity and it is not necessary whether the agent himself has contractual capacity or not. It means even a minor can be appointed as an agent and he can bind his principal in a contract with a third person.

CLASSES OF AGENTS

The agents may be classified from the point of view of:

(a) the extent of their authority

(b) the nature of work performed by them

Various classes of agents are as follows:

(a) The Extent of their Authority:

1. General agent:

A general agent is one who is employed to do all acts connected with a particular business or employment, e.g., a manager of a firm. He can bind the principal by doing any thing which falls within the ordinary scope of that business, whether he is actually authorized for any particular act or not, is immaterial, provided the third party acts bonafide. Third parties may assume that such an agent has power to do all that which is usual for a general agent to do in the business concerned.

2. Special Agent:

A special agent is one who is employed to do some particular act or represent his principal in some particular transaction, e.g., an agent employed to sell a motor car. As soon as the act is preformed, the authority of such an agent comes to an end. If a special agent does anything outside his authority, the principal is not bound by it, and third parties are not entitled to assume that the agent has unlimited powers. They should, therefore, make proper enquiry as to the extent of his authority before entering into any contract with him.

3. Universal agent:

A universal agent is said to be one whose authority is unlimited i.e., who is authorized to do all the acts which the principal can lawfully do and can delegate. He enjoys extensive powers to transact every kind of business on behalf of his principal. This type of agency is very rare.

(b) Nature of Work:

1. Brokers:

A broker is an agent who represents a buyer or seller in negotiating a purchase or sale without physically handling the goods involved. He is only concerned with making bargains and contacts between other parties. A broker receives a commission or brokerage for his services. Each broker tends to specialize in a particular line of goods or services. As an intermediary, a broker has the following features:

(i) He is concerned with bargains and connecting the buyer to the seller, he does not possess the goods and has limited power over the price and terms of sale. He does not sell in his own name.(ii) A broker has no authority to receive payment and discharge goods sold as they are not in his possession, and cannot change the principal’s terms and price. Examples of brokers are stock brokers, insurance brokers, taxi brokers whose boss is the principal.

2. Factors:

A factor is an agent who sells goods in his possession and under his control on behalf of his principal. He is referred to as a commission salesman. Unlike the broker, a factor possesses the goods he sells, sells in his own name, receives payment and gives valid receipts. He may give credit to a reasonable extent and pledge the goods. A factor has a general lien on the goods in his possession for all charges and expenses incurred by him.

3. Commission Agents:

A commission agent is a person who is employed to buy or sell goods for the principal at the best possible price. He gets commission as his remuneration. Mostly, commission agents are employed by foreign merchants. Their main business is to receive orders from foreign buyers to buy goods from the local manufacturers and traders. They act in their own names but for the account of their foreign principals. In addition to purchasing goods for his principal, the commission agent undertakes the work connected with the dispatch of goods such as booking space in ships, preparation of bills of lading, undergoing customs formalities and insuring goods against risks.

4. Del Credere Agents:

A del credere agent is employed to sell the goods of his principal. He gives an undertaking to his principal to make good the losses that may arise from the failure of parties to whom he sells goods under the agency business. Over and above the usual commission, the principal has to give a del credere agent an extra remuneration called del credere commission for giving the undertaking that the principal will not have to incur any loss arising from the failure of buyers to pay their dues.

5. Forwarding Agents:

Forwarding agents are persons who act as agents of either exporters or importers. They are employed to collect and deliver goods on behalf of others. When they act as agents of exporters, they collect the goods and attend to the packing and marking and dispatch of the goods to the proper destination. When they act as agents of importers, they take delivery of the goods at the port of importation, examine their quantity and quality and attend to their proper warehousing or transportation to the place of business of the importers. Forwarding agents possess specialized knowledge of customs and other formalities connected with import and export traders. They render a great service to the exporter and the importer by relieving them of the difficult task of collecting and forwarding the goods.

6. Auctioneers:

An auctioneer is an agent employed usually to sell goods at a public auction. Where the auctioneer is appointed to sell goods “without reserve”, he has the implied authority to sell to the highest bidder. He has a lien on the goods in his possession for his charges.

7. Non-Mercantile Agents:

They include advocates, attorneys, insurance agents etc.

CREATION OF AGENCY

Agency may be created in any one of the following ways:

(i) By Express Agreement.

(ii) By Implied Agreement.

(iii) By Necessity.

(iv) By Ratification

These are explained as under:

Agency By Express Agreement:

Normally agency is created by an express agreement, specifying the scope of the authority of agent. The agent may, in such a case, be appointed either by word of mouth or by an agreement in writing. However, in certain cases, e.g., to execute a deed for sale or purchase of land, the agent must be appointed by executing a formal ‘power of attorney’ on a stamped paper.

Agency by Implied Agreement:

Implied agency arises when there is no express agreement appointing a person as an agent, but instead the existence of agency is inferred from the circumstances of the case, or from the conduct of the parties on a particular occasion, or from the relationship between parties. Such an agency may take the following forms:

(a) Agency by estoppel;

(b) Agency by holding out;

(a) Agency by Estoppel:

Such agency is based on the ‘doctrine of estoppel’ which may briefly be stated thus, “where a person by his words or conduct has willfully led another to believe that certain set of circumstances or facts exists, and that other person has acted on that belief, he is estopped or precluded from denying the truth of such statements, although such a state of things did not in fact exist.”

When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of agent’s authority.

An agency by estoppel is created when the alleged principal by his conduct or by words spoken or written, leads willfully the other contracting party into an honest belief that the supposed agent had authority to act as such and bind the principal. Such a principal will be estopped from denying subsequently his agent’s authority, although the agent did not in fact possess any authority whatever.

Illustrations:

(a) T and M in the presence and within the hearing of N that he (T) is N’s agent. N does not contradict this statement and keeps quiet. Later on M enters into a transaction with T believing honestly that is N’s agent. N is bound by this transaction and he will be estopped from denying the existence of the agency, even though such an agency did not in fact exist. Notice that by virtue of the doctrine of estoppel an apparent or ostensible agency becomes as effective as an agency deliberately created.

(b) A consigns goods to B for sale and gives him instruction not to sell under a fixed price. C being ignorant of B’s instruction, enters into a contract with A to buy the goods at a price lower than the reserved price. A is bound by the contract.

(a) Agency by holding out;

Such an agency is based on the “doctrine of holding out” which is a part of the law of estoppel. In this case also the alleged principal is bound by the acts of the supposed agents, if he has induced their persons to believe that they are done with his authority. But, unlike an ‘agency by estoppel’, an ‘agency by holding out requires some affirmative or positive act or conduct by the principal to establish agency subsequently. Thus, where an employer has been accustomed to pay for goods bought on his behalf by his employee from P the employer may be liable for a purchase made in the customary manner, even though it is made by the employee fraudulently after he was left the employment. The employer’s conduct in ‘holding out’ his employee to be his agent (paying for purchases made by the employee on previous occasions) estops him from denying that his authority was not still in existence.

It may be noted that where the agent is ‘held out’ as having only a ‘limited authority’ to do acts, the principal is not bound by an act outside the authority.

Agency By Necessity:

In certain circumstances, the law confers authority on one person to act as agent for another without any regard to the consent of the principal. Such an agency is called an agency of necessity. Bowstead has rightly observed: “An agency by necessity is conferred by law in certain cases, where a person is faced with an emergency in which the property or interests of another are in imminent danger, and it becomes necessary in order to preserve the property or interest, to act before the instructions of the owner can be obtained. The law assumes the consent of the owner to the creation of the relationship of principal and agent”. Thus, the conditions which enable a person to act as an agent of necessity of another are as follows:

(i) There should be a real necessity for acting on behalf of the principal.

(ii) It should be impossible to communicate with the principal within the time available.

(iii) The alleged agent should act bonafide in the interests of the principal.

Generally the ‘agency by necessity’ arises in the following cases:

(i) Where the agent exceeds his authority, bonafide, in an emergency.

For example, Where ‘A’ consigns fruits to B at Nairobi with directions to send them to C at London, and B, finding that the fruits are perishing rapidly, sells them at Nairobi itself for the best price obtainable, the sale will bind the principal and the agent cannot be held liable for exceeding his authority as under the circumstances of the case there arises agency of necessity.

(ii) Where the carrier of goods acting as a bailee, does anything to protect or preserve the goods, in an emergency, although there is no express authority in that regard. Thus a master of a ship is entitled, in cases of accident and emergency, to sell or pledge the goods in order to save their value and the sale or pledge will bind the cargo owners. Similarly, a land carrier of goods, in case of accident or emergency, becomes an agent of necessity, for example, if a public carrier develops an engine trouble, the driver can pledge a part of the goods loaded thereon in order to raise the money necessary for repairs and the pledge will be binding on the owner of goods. Notice that in these cases it is not practicable to communicate with the principal.

(iii) Where a husband improperly leaves his wife without providing proper means for her survival. In a special circumstances the case of husband and wife also provides an instance of agency by necessity. When the wife has been deserted by the husband and thus forced to live separate from him, the wife is regarded as the agent of necessity of the husband and she has the authority of pledging her husband’s credit for necessaries even against her husband’s wishes. However, this rule does not apply where the wife improperly leaves the husband.

It is relevant to state that in the ordinary course of things there is an implied agency between the husband and wife and the wife is presumed to have implied authority to pledge her husband’s credit for necessaries suiting to the couple’s joint style of living. But a husband enjoys no corresponding right to pledge his wife’s credit for necessaries.

Agency by Ratification:

Ratification means the subsequent adoption and acceptance of an act originally done without instructions or authority. Thus where a principal affirms or adopts the unauthorized act of his agent, he is said to have ratified that act and there comes into existence an agency by ratification retrospectively.

Illustration:

A buys 5 bags of wheat on behalf of B.B did not appoint A as his agent. B may, upon hearing of the transaction, accept or reject it. If B accepts it, the act is ratified and A becomes his agent with retrospective.

Ratification relates back to time of contract: By ratifying the unauthorized act of the agent, the principal becomes bound by the act as if it had been originally done by his authority. Thus ratification amounts to ‘prior authority’. It relates back to the original making of the contract. This means that the agency comes into existence from the moment the agent acted and not from the time when the principal ratified.

Illustration:

The managing director of a company, purporting to act as agent on company’s behalf, but without its authority, accepted an offer made by L, the defendant, for the purchase of some sugar works belonging to them. L, subsequently withdrew the offer but the company ratified the managing director’s acceptance. Held: L was bound. The ratification, related back to the time of managing director’s acceptance, and so the withdrawal of the offer was inoperative. An offer once accepted cannot be withdrawn.

Ratification may be express or implied. Ratification may be express or may be implied in the conduct of the person on whose behalf the acts are done.

Illustrations:

(a) A, without authority, buys goods for B. afterwards B sells them to C on his own account. B’s conduct implies a ratification of the purchase made by A for him.

(b) A, without B’s authority, lends B’s money to C. Afterwards B accepts interest on the money from C. B’s conduct implies a ratification of the loan.

Essentials of a valid ratification:

A valid ratification must fulfill the following conditions:

1. The agent must purport to act as agent for a principal who is in contemplation. The agent must expressly contract as an agent for a principal in the knowledge of third parties. The principal must be named or must be ‘identifiable’ and it is not sufficient to indicate simply that he is acting as agent of some one. The word ‘identifiable’ here means that there must be such a description of the principal as shall amount to a reasonable designation of him. An undisclosed principal cannot step in and ratify acts done by a third person.

2. There should be an act capable of ratification. The act to be ratified must be lawful one. There can be no ratification of an illegal act or an act which is void. Thus, the shareholders of a company cannot ratify an ‘ultra vires’ contract made by the directors.

3. The principal must be in existence. For a valid ratification it is essential that the principal must be in existence at the time when the original contract is made, because rights and obligations cannot attach to a non-existent person.

4. The principal must be competent to contract. The principal must have contractual capacity both at the time of original contract and at the time of ratification.

5. The principal must have full knowledge of material facts. No valid ratification can be made by a person whose knowledge of facts of the case is materially defective. Thus to constitute a valid ratification, the principal must, at the time of ratification, have full knowledge of all material facts.

6. Whole transaction must be ratified. Ratification must be of the whole contract. Once a part is accepted, it is an implied acceptance of the whole. There cannot be partial rejection and partial ratification. The principal cannot reject the burdens attached and accept only the benefits.

7. Within reasonable time. A ratification to be effective must be made within a reasonable time after the original contract is made. Where a time is expressed fixed for the performance of the contract, ratification must be made within that time.

8. Ratification must not injure a third person. A ratification cannot be effective whether its effect is to subject a third person to damages or terminate any right or interest of a third person.

Extent of Agent’s Authority

The authority of an agent means his capacity to bind the principal to third parties. The agent can bind the principal only if he acts within the scope of his authority. The scope of an agent’s authority is determined by his:

1. Actual authority:

An agent can do all such acts as have been assigned to him either expressly or impliedly and thereby bind the principal to third parties by acts done within the scope of his ‘actual’ or ‘real’ authority. The authority is said to be express when it is given by words spoken or written. The authority is said to be implied when it is inferred from the circumstances of the case or the ordinary course of dealings.

2. Ostensible or apparent authority:

An agent can also bind the principal to third parties by acts done within his apparent authority; (although the act is in excess of his actual authority); provided the third party acts bonafide and without knowledge of the limitation of the agent’s apparent authority. Thus ‘actual’ and ‘apparent’ authority stand on the same footing.

Ostensible authority means an authority which the third parties dealing with the agent can presume to be with the agent in relation to a particular business ordinarily. In other words, such an authority implies authority to do an act usually necessary in the course of conducting similar business in accordance with the customs and usages of the particular place, trade or market. Thus if it is the usual practice of hotel managers to purchase liquors and cigarettes, then purchases of this nature shall be deemed within the scope of the manager’s apparent authority and the principal will be bound by such purchases, notwithstanding limitations, as between the principal and agent, put upon that authority.

3. Authority in emergency:

An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence in his own case, under similar circumstances.

DUTIES OF AGENT

An agent has the following duties towards the principal:

1. Duty to follow principal’s directions or customs:

The first duty of every agent is to act within the scope of the authority conferred upon him and perform the agency work according to the directions given by the principal. When the agent acts otherwise, if any loss be sustained, he must make it good to the principal, and if any profit accrues, he must account for it.

Illustration:

(a) Where the principal instructed the agent to warehouse the goods at a particular place and the agent warehoused them at a different warehouse which was equally safe, and the goods were destroyed by fire without negligence, it was held that the agent was liable for the loss because any departure from the instructions makes the agent absolutely liable.

(b) An agent being instructed to insure goods neglects to do so. He is liable to compensate the principal in the even of their being lost.

If the principal has not given any express or implied directions, then it is the duty of the agent to follow the custom prevailing in the same kind of business at the place where the agent conducts business. If the agent makes any departure, he does so at his own risk. He must make good any loss so sustained by the principal.

Illustrations:

(a) A, an agent, engaged in carrying on for B a business; in which it is the custom to invest from time to time at interest, the moneys which may be in hand, omits to make such investments, A must make good to B the interest usually obtained by such investment.

(b) B a broker, in whose business it is not the custom to sell on credit, sells goods of on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A, irrespective of his intentions.

2. Duty to carry out the work with reasonable skill and diligence:

The agent must conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. Further, the agent must act with reasonable diligence and to the best of his skill.

If the agent does not work with reasonable care, skill (unless the principal has notice of his want of skill) and diligence, he must make compensation to his principal in respect of ‘direct consequences’ of his own neglect, want of skill or misconduct. But he is not so liable for indirect or remote losses.

Illustration:

(a) A an agent for the sale of goods, having authority to sell goods on credit, sells to B on credit, without making the proper and usual enquiries as to the solvency of B. B, at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained.

(b) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B.

3. Duty to render accounts:

It is the duty of an agent to keep proper accounts of his principal’s money or property and render them to him on demand, or periodically if so provided in the agreement.

4. Duty to communicate:

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions, before taking any steps in facing the difficulty or emergency.

5. Duty not to deal on his own account:

An agent must not deal on his own account in the business of agency; i.e. he must not himself buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal; without obtaining the consent of his principal after disclosing all material facts to him. If the agent violates this rule, the principal may repudiate the transaction where it can be shown that any material fact has been knowingly concealed by the agent, or that the dealings of the agent have been disadvantageous to the principal. The principal is also entitled to claim from the agent any benefit which may have resulted to him from the transaction.

6. Duty not to make any profit out of his agency except his remuneration:

An agent stands in a fiduciary relation to his principal and therefore he must not make any profit (secret profit) out of his agency. He must pay to his principal all moneys (including illegal gratification, if any) received by him on principal’s account. He can, however, deduct all moneys due to himself in respect of his remuneration or/and expenses properly incurred. If his acts are not bonafide, he will lose his remuneration and will have to account for the secret profit to his principal.

7. Duty on termination of agency by principal’s death or insanity:

When an agency is terminated by the principal dying or becoming of unsound mind, the agent must take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of the interests entrusted to him.

8. Duty not to delegate authority:

An agent cannot delegate his powers or duties to other persons except in the following circumstances:

(i) Where the principal has expressly permitted delegation of such power.

(ii) Where the principal has impliedly, by his conduct, allowed such

delegation of authority, e.g. where the principal knows that the agent intends to delegate his authority but does not object to it.

(iii) Where by the ordinary custom of trade, a sub-agent may be employed.

Thus stock exchange member brokers generally appoint clerks to transact

business on behalf of their clients.

(iv) Where the very nature of agency makes it necessary to appoint a sub-agent. For example, a manager of a shop may employ sales assistant.

(v) Where the acts to be done are purely ministerial and do not involve the exercise of discretion, e.g. clerical or routine work.

(vi) Where unforeseen emergencies arise rendering appointment of the sub-agent necessary.

RIGHTS OF AGENT

An agent has the following rights against the principal:

1. Right to receive remuneration:

The agent is entitled to receive his agreed remuneration, or if nothing is agreed, to a reasonable remuneration, unless he agrees to act gratuitously. In the absence of any special contract, the right to claim remuneration arises only when the agent has done what he had undertaken to do. It is important that the agent an claim remuneration once he has completed his work even though the contract is never executed on account of breach either by the principal or the third party. For example, where an agent is appointed to secure orders for the manufacturer, he can claim commission on orders actually obtained by him although the manufacturer is unable to execute them owing to a strike by the workmen.

Effect of misconduct:

An agent who is guilty of misconduct in the business of the agency is not entitled to any remuneration in respect of that part of the business which he has misconducted. In addition, he is liable to compensate the principal for any loss caused by the misconduct.

2. Right of retainer:

An agent has the right to retain, out of any sums received on account of the principal, all moneys due to himself in respect of his remuneration, or advances made or expenses properly incurred by him in conducting the business of agency.

3. Right of lien:

An agent has the right to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him.

4. Right to be indemnified against consequences of lawful acts:

An agent has also the right to be indemnified against the consequences of all lawful acts done by him in exercise of the authority conferred upon him.

Illustration:

B, at London, under instructions from A of Nairobi, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend the suit. B defends the suit and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses.

5. Right to be indemnified against consequences of acts done in good faith:

An agent has a right to be indemnified against the consequences of an act done in good faith though it turns out to be injurious to the rights of third persons:

Illustration:

B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this and hands over the proceeds of the sale to A. afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and to B’s own expenses.

6. Right to compensation:

The agent has a right to be compensated for injuries sustained by him due to the principle’s neglect or want of skill.

Illustration:

A employs B as a bricklayer in building a house, and put up the scaffolding himself. The scaffolding is unskillfully put up and B is in consequence hurt. A must make compensation to B.

Rights and Duties of Principal:

The duties of an agent are indirectly the rights of a principal and the rights of an agent are indirectly the duties of a principal. The duties and rights of an agent have already been discussed in this chapter.

Principal’s Liability for the Acts of the Agent:

The extent of principal’s liability to third parties for the acts of the agent is determined by the following rules:

(a) The principal is liable for all acts of the agent within the scope of his actual and apparent (ostensible) authority.

(b) When agent exceeds his actual or apparent authority, the principal has option either to disown the unauthorized acts or to ratify the same.

(c) The principal is liable for misrepresentation made or fraud committed by the agent acting within the scope of his actual or apparent authority.

Liability of Unnamed Principal:

Unnamed principal means a principal whose existence is disclosed by the agent but the name is not disclosed. Once it is disclosed by the agent that he is an agent, the contract made by the agent binds the principal and the agent drops out of the transaction despite the fact that the principal for whom he acted has not been named. On being discovered, the legal position of the unnamed principal is the same as where the principal is named, unless there is a trade custom making the agent personally liable e.g., in case of stock exchange transactions, a jobber can make a broker personally liable. If, however, the agent declines to disclose the identity of the principal, he becomes personally liable on the contract. Also if the agent could not disclose the identity of the principal, say, because of his sudden death, his estate will be liable to third parties. In both cases the agent himself is deemed as a contracting party and therefore he is made liable to the third parties.

Liability of Undisclosed Principal:

Where an agent, having authority to contract on behalf of another, makes the contract in his own name (as for he is the principal himself), concealing not only the name of his principal but also the fact that there is a principal, his principal is called “undisclosed principal”. In such a case neither the existence nor the name of the principal is disclosed and the agent gives an impression to the third party as if he himself is the contracting party although the agent has authority in fact and is contracting on behalf of another.

In the case of an undisclosed principal, the mutual rights and liabilities of the principal, the agent and the third party are as follows:

1. Since the agent has contracted in his own name, he is liable to the third party personally. The agent may be sued on the contract and he has the right to sue the third party, if the undisclosed principal remains undisclosed. (Of course as between the principal and the agent, the agent has every right against the principal).

2. If the third party comes to know the existence of the principal before obtaining judgement against the agent, he may sue either the principal or the agent or both.

Illustration:

A, enters into a contract with B to sell him 100 bales of cotton and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.

It may be noted that the liability of the principal and agent is “joint and several” in such a case. If the third party elects to sue the gent and the claim remains partially unsatisfied, he may afterwards sue the principal for the balance.

Further, if the third party decides to sue the principal, he must allow the principal the benefit of all payments received by him from the agent.

3. The principal, if he likes, may intervene and sue the third party for non-performance of the contract. But he cannot exercise this right to the prejudice of the third party and the third party has, as against the principal, the same rights as he would have had as against the agent if the agent had been the principal, e.g., right of set off can be claimed by the third party. Further, the principal must allow to the third party benefits of all payments made by the third party to the agent. “The principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract”.

Illustration:

A, who owes sh. 500 to B, sells sh. 1,000 worth of rice to B. A is acting as agent of C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set-off A’s debt.

4. If the principal discloses himself before the contract is completed, the third party may refuse to fulfill the contract, if he can show that if he had known who was the principal in the contract of if he had known that the agent was not a principal, he would not have entered into contract.

Personal Liability of Agent to Third Party:

It has already been observed that an agent is appointed to bring the principal into contractual relations with third parties and the acts of the agent are the acts of the principal. As a rule, therefore, an agent cannot personally enforce contracts entered into by him on behalf of the principal, nor can he be personally held liable for them, unless there is a contract to the contrary. The principal is the right person to enforce such contracts and to be held liable therefore.

There are, however, certain exceptions to this rule, where an agent is presumed to be personally liable, unless a contract to the contrary exists.

At the very out set it is worth noting that in certain cases where the agent is personally liable, a person dealing with him may hold either him or his principal or both of them liable. In other words, the liability of the principal and the agent is ‘joint and several’ in some cases. Even where the agent is personally liable, the principal is also liable to third parties and hence the saying. “The law which superadds the liability of an agent does not detract from the liability of the principal” The third party dealing with an agent who is personally liable can choose between (a) suing both principal and agent jointly, (b) electing to sue one of them. It is important that a judgement obtained against one only and remaining unsatisfied is no bar to a second suit against the other party; i.e., if the third party sues the agent and obtains no satisfaction he may afterwards sue the principal because the liability is ‘joint and several’.

An agent is presumed to be personally liable, unless a contract to the contrary exists, in the following cases.

1. Where the agent expressly agrees:

If an agent, while contracting with a third party, expressly agrees to be personally liable on the contract, he can be held personally liable for any breach of contract.

2. Where the agent acts for a foreign principal:

Where an agent contracts for the sale or purchase of goods for a merchant residing abroad, he is presumed to be personally liable.

3. Where the agent acts for an unnamed principal:

Where an agent acts for an unnamed principal, he is personally liable to the third party, if he declines to disclose the identity of the principal or if he could not disclose the identity of the principal, say, because of his sudden death.

4. Where the agent acts for an undisclosed principal:

Where an agent acts for an undisclosed principal and contracts in his own name, he is personally liable to the third party. But if the third party comes to know the existence of the principal, he may hold either the agent or the principal or both of them liable.

5. Where the agent acts for a principal who cannot be sued:

An agent is also presumed to incur personal liability where he contracts on behalf of a principal who, though disclosed, cannot be sued. For example, where an agent acts for an ambassador or foreign sovereign, he is personally liable. Similarly, where promoters contract for a projected company, they are held personally liable for that, as the company, being non-existent at the time of the contract, cannot be sued.

6. Where the agent exceeds his authority:

When an agent acts in excess of his real as well as apparent authority, and in this way commits a breach of warranty of authority, he will be personally liable to the third party for the excess part, if it can be separated from authorized part, otherwise for the whole transaction.

7. Where there is a trade usage or custom:

An agent also incurs personal liability where there is a trade usage or custom to that effect. For example, a jobber may hold a broker personally liable as per the custom of trade in a stock exchange.

8. Where agent’s authority is coupled with interest:

Where the contract with the third party relates to a subject-matter in which the agent has a special interest, agent is personally liable to the extent of his interest because he is really a principal for that interest.

It should be noticed that in second, third, fifth and sixth cases mentioned above, the third party can hold only the agent personally liable and not the principal.

TERMINATION OF AGENCY

An agency may be terminated in any of the following ways:

A. By act of the parties, or

B. By operation of law.

We will consider these methods one after another.

A. Termination by Act of the Parties:

An agency comes to an end by act of the parties in the following cases:

1. Agreement:

An agency, like any other contract, can be terminated at any time by the mutual agreement between the principal and the agent.

2. Revocation by the principal:

The principal can revoke the authority of the agent at any time before the agent has exercised his authority so as to bind the principal, unless the agency is irrevocable. Further, revocation may be expressed or implied in the conduct of the principal. Thus where A empowers B to let A’s house and afterwards lets the house himself, it is an implied revocation of B’s authority Revocation of authority by the principal is, however, subject to the following conditions:

(i) In the case of a continuous agency, the principal may revoke it for the future. It cannot be revoked with regard to acts already done in the agency. Again, before revoking the authority for the future, reasonable notice of the same should be given to the agent and also to third parties. If reasonable notice is not given, the principal will be liable to compensate the agent for damages resulting thereby (i.e. for the agent’s loss of salary if no immediate job is available), and be bound by the acts of the agent with respect to third parties.

(ii) Where an agency has been created for a fixed period and the principal revokes the authority of the agent before the expire of the period, without sufficient cause, the principal is bout to pay compensation to the agent for the resulting loss, even if the authority is revoked after reasonable notice.

An agency is irrevocable in the following cases:

(a) Where the agent has himself an interest in the subject-matter of agency, the agency is said to be coupled with interest. Such an agency is created with the object of protecting or securing any interest of the agent. So where a creditor is employed for valuable consideration as an agent to collect rents due to the principal (debtor) for adjusting the amount towards his debt, the principal thereby confers an interest on the agent and the authority cannot be revoked unilaterally during the subsistence of the interest, in the absence of an express contract to the contrary.

(b) Where an agent has incurred a personal liability in accordance with the terms of the contract of agency, the principal cannot be allowed to revoke the agency leaving the agent exposed to risk or liability he has incurred.

3. Renunciation by the agent:

An agency may also be terminated by an express renunciation by the agent because a person cannot be compelled to continue as agent against his will. But he must give a reasonable notice of renunciation to the principal, otherwise he will be liable to compensate the principal for any damage resulting thereby. If the agency is for a fixed period and the agent renounces it without sufficient cause before the expiry of the period, he shall have to compensate the principal for the resulting loss, if any.

B. Termination by Operation of Law:

An agency comes to an end automatically be operation of law in the following cases:

1. Completion of the business of agency:

An agency automatically comes to an end when the business of agency is completed. Thus, for example, an agency for the sale of a particular property terminates on the completion of the sale. Similarly, where a lawyer is appointed to plead in a suit, his authority comes to an end with the judgement.

2. Expiry of time:

If the agent is appointed for a fixed term, the expiration of the term puts an end to the agency, even though the business of the agency may not have been completed.

3. Death of the principal or the agent:

An agency is terminated automatically on the death of the principal or the agent. After coming to know about the principal’s death although the agency terminates but the agent must take all reasonable steps for the protection of the interests of the late principal entrusted to him.

4. Insanity of the principal or the agent:

An agency also stands terminated when the principal becomes of an unsound mind. Here also it is the duty of an agent to protect the interest of the former principal by taking all reasonable steps. Likewise when the agent becomes insane during the agency, his authority terminates at once and the agency comes to an end. It is interesting to mention that a person of unsound mind can be initially appointed as an agent.

5. Destruction of the subject-matter:

An agency which is created to deal with certain subject-matter will be terminated by the destruction of that subject-matter. For example, where the agency was created for the sale of a house and the house is destroyed by fire, the agency ends.

6. Dissolution of a company:

If the principal or agent is an incorporated company, the agency automatically ceases to exist on dissolution of the company.

7. Principal or agent becomes alien enemy:

If the principal and agent are nationals of two different countries and a war breaks out between the two countries, the contract of agency is terminated. The outbreak of war renders the continuance of the principal and agent relationship unlawful because now the principal or agent becomes an alien enemy.

8. Bankruptcy of the principal:

An agency is also terminated by the insolvency of the principal.

AFRICA LAW CENTRE

SALE OF GOODS LAW NOTES

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