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Delivery by Instalment in Sale of Goods

Updated: May 6


Delivery by Instalment in Sale of Goods
Delivery by Instalment in Sale of Goods

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Legal Framework


As per Section 38(1) of the Sale of Goods Act,


"unless otherwise agreed, the buyer of goods is not obligated to accept delivery in instalments."

This implies that instalment deliveries are permissible or can be requested only if stipulated in the contract.


In cases where the sale contract stipulates instalment deliveries with separate payments, complexities arise if the seller fails to deliver an instalment, delivers defective goods in one instalment, or if the buyer refuses to accept or pay for an instalment.


The issue then becomes whether the breach, by either party, concerning one or more instalments constitutes a breach of only a portion of the contract or of the entire contract.


Section 38(2) clarifies that this determination depends on the specific terms of the contract and the circumstances surrounding the case. Whether the breach amounts to repudiation of the entire contract or constitutes a severable breach entitling the aggrieved party to seek compensation is a matter of fact.


Consequently, this issue cannot be raised for the first time before the Supreme Court, as it necessitates a detailed examination of contractual terms and factual circumstances.

 
 

Factors in Determining the Nature of Breach


When assessing whether a breach of contract pertains to the entirety or only a portion, two key  factors come into play.


Firstly, one must consider the quantitative proportion that the breach represents in relation to the entire contract.


Secondly, the likelihood of the breach recurring is a crucial consideration.


In simpler terms, if the failure to fulfil a particular aspect of the contract fundamentally undermines the essence of the entire agreement, it may be construed as a breach of the entire contract.


Conversely, if the contract is divisible, and the failure to fulfil one part does not impede the performance of the remainder, then the breach should be deemed applicable only to that specific part.


This distinction hinges on whether the failure in performance strikes at the core of the contractual relationship or if it is isolated and doesn't affect the fulfilment of the remaining obligations.


For example, if the buyer fails to make payment for one delivery in a manner suggesting an inability to pay for subsequent deliveries, or if the seller delivers goods that deviate from the contract specifications, with indications suggesting an inability or unwillingness to fulfil future obligations, the affected party is not obligated to wait and observe further developments.


Instead, they have the right to immediately terminate the contract and extricate themselves from the situation. 


The extent to which the parties have already fulfilled their obligations under the contract becomes pivotal. The more advanced the performance of the contract, the less likely it is for one party to claim discharge due to a single breach.


Additionally, the interconnectedness of delivery instalments plays a role in determining whether a breach warrants contract termination.


Merely failing to make one payment in a series or missing one delivery, without indication of prospective refusal, typically does not absolve the other party from their contractual obligations.


Case Laws


In the case of Motilal v. The Netha Coop. Spinning Mills Ltd. (AIR 1975 A.P. 169), a contract was established for the supply of 500 bales of cotton. While the first instalment of 50 bales was delivered and accepted, the buyers rejected the second instalment of 50 bales due to adulteration with waste cotton mix.


Subsequently, they informed the sellers to cease further supplies. The court ruled in favour of the buyer, justifying their repudiation of the entire contract.


In Aryavart Overseas Pvt. Ltd. v. M/s. Kay Aar Biscuits [AIR 1983 NOC 14 (Del)], despite the sellers being obligated to supply biscuits worth approximately Rs. 1.5 crores, the buyers failed to timely pay Rs. 55,000 for previous deliveries.


However, the buyers assured timely future payments. In this context, the court held that if a breach in any instalment is relatively minor in comparison to the overall contract and there is little likelihood of recurrence, it does not warrant the other party treating it as a breach of the entire contract.


In Maple Flock Co. Ltd. v. Universal Furniture Products Ltd. (1934) ‘1 KB 148, a contract was made for the supply of 100 tons of flock in instalments. While the first 15 instalments adhered to the contract specifications, the 16th instalment did not meet the description.


However, the subsequent four instalments were satisfactory. Despite the defect in the 16th instalment, which comprised only 1 1/2 tons out of the total 100 tons to be delivered, and considering the negligible chance of recurrence, the buyers were not entitled to rescind the contract.

 
 

In a contract where delivery occurs in specified instalments, if the seller fails to deliver subsequent instalments, the buyer retains the right to return the initial deliveries.


However, if the buyer chooses to retain the goods from the first instalment beyond the agreed-upon delivery period for the remaining instalments, the seller retains the right to seek compensation for those goods.


In the case of Withers v Reynolds (1831) 2 B & Ad 882, where the buyer had implicitly agreed to make payment for each instalment upon delivery but subsequently defaulted on payments for multiple instalments and then requested credit from the seller, it was determined that the seller had the right to consider the contract repudiated and refuse further deliveries.


Conversely, in instances where payment for only one instalment was withheld, and that too based on the mistaken belief that the buyer was entitled to set off compensation for delayed delivery of earlier instalments, the seller was found to not be relieved of the obligation to fulfil the contract.



Vishnu Sugar Mills v. Rameshwar Jute Mills 


In the case of Vishnu Sugar Mills v. Rameshwar Jute Mills (AIR 1970 Pat 323), a contract was established for the sale of 60,000 bags between the respondent and the appellant. Initially, the buyer took delivery of the first consignment comprising 20,000 bags.


However, a dispute arose regarding the quality of the bags, leading the buyer to refuse acceptance of further supplies to fulfil the remaining quantity as per the contract. Consequently, the seller filed a suit seeking damages for breach of contract.


The central question revolved around whether the buyer's breach constituted a repudiation of the entire contract or if it was a severable breach, entitling only a claim for compensation under Section 38(2) of the Act. Notably, the contract included a provision stating that "each month's delivery to be considered as a distinct and separate contract."


The court provided clarity on the matter, stating, "The main tests for determining whether a breach is vital... are


(i) the quantitative ratio of the faulty instalments to the whole contract, and


(ii) the degree of probability of a repetition of the breach."


It emphasised that if the breach substantially alters the performance of the contract from what was initially agreed upon, the affected party has the right to consider the entire contract as repudiated.


In this particular case, the court held that there was no breach of contract by the seller, as the defect in the quality of the bags supplied was deemed insubstantial. Conversely, the buyer's refusal to accept delivery of the remaining bags constituted a breach of contract.


Considering the express term in the contract treating each month's delivery as a separate contract, the buyer was not entitled to refuse further deliveries. Even if there was a breach by the seller regarding the initial 20,000 bags, it was deemed a severable breach, warranting only a claim for compensation, not repudiation of the entire contract.


Conclusion


Section 38 of the Sale of Goods Act plays a vital role in outlining the rights and obligations regarding instalment deliveries and breaches therein. Through a thorough examination of case laws, the application of legal principles emerges with clarity, offering guidance to those involved in contractual disputes.


By taking into account factors such as the severity of breaches and the probability of recurrence, courts strive to deliver fair and balanced judgments, instilling confidence in the legal framework governing commercial transactions. 

 
 




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