In this article, let us compare contract of sale with other forms of contracts like bailment, Hire purchase agreement, contract of work and labour, etc.
Sale and Bailment:
A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and one receiving is called bailee. The bailment of goods as security for payment of a debt or performance of a promise is called pledge. Section 148-171 of Indian Contract Act, 1872 deal with bailment.
Let us distinguish contract of sale and bailment
| Sale | Bailment |
| Sale literally means “transfer of absolute interest in property (it may be movable or immovable) from seller to buyer in lawful consideration of price paid. | Bailment means change of possession voluntarily from bailor to bailee. |
| The object of sale is permanent transfer to the purchaser. | The object of Bailment is temporary possession of the goods in the hands of the Bailee |
| This is a contract between a Seller and a Buyer. | This is a contract between a Bailor and a Bailee. |
| A contract of sale is governed by the Sale of Goods Act, 1930. | A bailment contract is governed by the Indian Contract Act, 1872. |
| A seller-buyer relationship exists between the parties that enter into a contract of sale. | Sometimes, a bailor-bailee relationship may arise even without a contract, |
| The goods may or may not be delivered at the time of contract of sale. | The goods are generally delivered at the time of contract of bailment. |
| In contract of sale, the Purchaser becomes owner. The seller does not possess any connection with the property sold. | In Bailment the ownership does not change. The Bailor is the owner of the goods before, during and after the period of Bailment. |
| In contract of sale, the transferee shall have to pay the full market value of the property to buy property. | In Bailment, the Bailor pays some nominal charges to the Bailee for the services rendered by him. Sometimes, he is not required to pay any charges. |
| Consideration for a sale is the price given by the buyer in terms of money. | Bailment can be either gratuitous or non-gratuitous. That is, it may be for free or in exchange for consideration. |
| The purchaser can appropriate the property purchased by him. | The Bailee cannot appropriate the property bailed to him. |
| In contract of sale, the seller of the property has no such right of lien. However, an unpaid seller of goods can exercise lien or stoppage in transit | In bailment, on certain occasions, the Bailee can exercise his right of lien over the goods bailed. |
Sale and Contract for Work or Labour:
According to Sec 2(43) TNVAT Act “Works Contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.
In State Of Andhra Pradesh vs Kone Elevators (India) Ltd on 17 February, 2005 case, the three Judge Bench of the Hon’ble Supreme Court applied the “Dominant nature test” and finally ruled that the assessee (Kone Elevator India Private Limited) carries on business of selling lifts and elevators and the major component of the end product is the material consumed in producing the lift to be delivered and the skill/ labour employed for converting the main components into the end product are incidentally used. Therefore, the delivery of the end product by the assessee has to be constituted as a “Sale” and not a “Works contract”.
In Kone Elevators (India) Ltd v. State of T N, (2014) 7 SCC 1 case, the larger bench of the Supreme Court held that a contract for supply and installation of lift is a composite contract for supply of goods as well as provision of service and that the service element is obvious is such a contract. Thus, the activity of supply and installation of lift would constitute to be a works contract. The Larger Bench, thus, reversed its earlier decision based on the logic that the major component was the lift and that the skill and labour employed was only incidental to the supply of lift and that this is a contract for sale of goods.
In Larsen and Toubro Limited and another v. State of Karnataka and another, 26 September, 2013 case, It is held by the five Judge Constitution Bench of the Hon’ble Supreme Court of India that four concepts have emerged from various SC judgments, which are:
- The Works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;
- The concept of “Dominant nature test” or for that matter, the “Degree of intention test” or “Overwhelming component test” for treating a contract as a Works contract is not applicable;
- The term “Works contract” as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of Works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and
- Once the characteristics of Works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.
Dominant nature test” or “overwhelming component test” or “the degrees of labour and service test” are really not applicable. If the contract is a composite one which falls under the definition of Works contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.
| Contract of Sale | Contract for Work and labour |
| Property in goods is transferred from the seller to the buyer. | It is a contract for performing some work and not for transferring the property in goods. |
| It involves the delivery of goods. | It involves exercise of skill and labour in rendering some work. It involves “the uses by means of money consideration”. |
Sale and Hire Purchase:
| Sale | Hire Purchase |
| Property in goods is transferred to the buyer immediately at the time of contract | The goods passes to the hirer upon payment of the last instalment. |
| Position of buyer is that of owner of goods. | Position of hirer is that of a bailee till he pays the last instalment. |
| Payment is done in lump-sum | Payment is done in instalments. |
| It is governed by Sale of Goods Act, 1930 | It is governed by Hire Purchase Act, 1972 |
| Buyer cannot terminate the contract and is bound to pay the price of the goods | Hirer may terminate the contract by returning the goods to owner without any liability to pay the remaining instalments. |
| Seller takes the risk of any loss resulting from the buyer’s insolvency | Owner takes no such risk for if hirer fails to pay the instalment, he has the right to take back the goods. |
| Repair of goods must be done by buyers | Repairs of goods are carried out by vendor. |
| The buyer can resell the goods. | The hirer does not enjoy such right to resell the goods unless he has paid all the instalments. |