State of Madras v. Gannon Dunkerley and Co. (Madras) Ltd (1959)

Section 4(1) of the Sale of Goods Act defines a contract of sale as one whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. That definition marks off the contract of sale from three neighbours the syllabus asks you to distinguish: barter, where there is no money price; bailment, where no property passes; and the contract for work and labour, where goods are used but not sold.

Gannon Dunkerley is the leading authority on the third distinction. A builder who constructs a house uses bricks, cement and steel, and is paid a lump sum. Has he sold the materials? The Supreme Court said no, and gave two independent reasons — no agreement to sell the materials as such, and no passing of property in them as movables. Either reason alone defeats the argument, and a good answer gives both.

The respondents were a private limited company doing business in the construction of buildings, roads and other works and in the sale of sanitary ware and sundry goods. The proceedings concerned the assessment of sales tax for the year 1949-1950.

Two items were in issue: a sum of Rs 29,51,528-7-4 representing the value of the materials used by the respondents in the execution of their works contracts, calculated in accordance with the statutory provisions; and a sum of Rs 1,98,929-0-3, the price of foodgrains supplied by the respondents to their workmen.

The Madras General Sales Tax Act 1939 had originally defined sale as every transfer of the property in goods by one person to another in the course of trade or business for cash, deferred payment or other valuable consideration. In 1947 an amending Act altered the scheme in three ways. The definition of goods was enlarged to include materials used in the construction, fitting out, improvement or repair of immovable property, or in the fitting out, improvement or repair of movable property. The definition of sale was enlarged to include a transfer of property in goods involved in the execution of a works contract. And an Explanation to the definition of turnover provided that the amount for which goods are sold shall, in relation to a works contract, be deemed to be the amount payable to the dealer for carrying out the contract, less a prescribed portion representing the usual proportion of the cost of labour to the cost of materials. A definition of works contract was also inserted.

The constitutional question was whether that enlargement was within the legislative entry taxes on the sale of goods in the provincial list.

Is the supply of materials in the execution of an entire and indivisible building contract a sale of goods, so that a legislature empowered to tax sales of goods may tax it?

For the State. Even if the supply of materials under a building contract is not a sale under the Sale of Goods Act, the contract is a composite agreement under which the contractor undertakes to supply materials, contribute labour and produce the construction. It is open to the State, in exercise of its taxing powers, to split the agreement into its constituent parts, single out the part relating to the supply of materials and tax it as a sale. That, it was said, is a power ancillary to the substantive power to tax sales. It was further argued that the concept of sale is latent in a building contract, because when a contractor prevented from completing sues on a quantum meruit the form of the action is for work done and materials supplied.

For the respondents. Even if the agreement could be split as suggested, the resultant would not be a sale in the sense of the Sale of Goods Act, because in a works contract there is neither an agreement to sell materials as such, nor does property in them pass as movables.

The supply of materials in an entire and indivisible building contract is not a sale of goods.

The nature of the expression

The Court began with the character of the words being construed. The expression sale of goods is a nomen juris — a term of law — and its essential ingredients are an agreement to sell movables for a price, and property passing in them pursuant to that agreement. Both elements must be present; neither alone will do.

First reason: no agreement to sell the materials as such

In a building contract the parties agree that the contractor shall produce a building. They do not agree that he shall sell bricks and cement. The subject matter of the bargain is the completed work, not the components.

The Court disposed of the quantum meruit argument in a sentence that repays learning. A claim in quantum meruit is a claim for damages for breach of contract, and the value of the materials is a factor relevant only as furnishing a basis for assessing the amount of compensation. The claim is not for the price of goods sold and delivered but for damages — and that, the Court added, is also the position under s. 65 of the Indian Contract Act. So the form of the action proves nothing about the nature of the bargain.

Second reason: no property passes in the materials as movables

There is a further and independent difficulty. The property in the materials used in a building contract does not pass to the other party as movable property. It would so pass if that were the agreement between the parties; but if there was no such agreement and the contract was only to construct a building, the materials become the property of the other party only on the theory of accretion.

When the work to be executed is a house, the construction imbedded on the land becomes an accretion to it on the principle that whatever is planted in the soil goes with the soil, and it vests in the other party not as a result of the contract but as the owner of the land.

The Court dealt with the objection that the maxim has not been accepted in India. The decisions relied on concern the rights of persons who, not being trespassers, bona fide put up constructions on land belonging to others; as to such persons the maxim does not apply, and they may remove the superstructures, the landowner paying compensation if he elects to retain them. That exception does not apply to buildings constructed in execution of a works contract, and as to those the title passes to the owner of the land as an accretion.

Accordingly there can be no question of title to the materials passing as movables in favour of the other party. In a building contract, the theory that the contract can be broken up into its component parts and that as regards one of them there is a sale fails on both grounds — no agreement to sell the materials as such, and no passing of property in them as movables.

The reservation about movable products

The Court added a qualification that later cases have built on. It may be, as counsel suggested, that where the thing to be produced under the contract is movable property, any material incorporated into it might pass as a movable; and in such a case the conclusion that no taxable sale results from disintegrating the contract could rest only on the ground that there was no agreement to sell the materials as such. The Court was concerned with a building contract, where both grounds apply.

That reservation is why the question keeps coming back on different facts, and why the later cases in this course — on rolling shutters, on aircraft manufacture, on photographic processing and on elevators — turn on whether, on the particular contract, there was an agreement to sell goods at all.

Sale of goods is a term of law whose essential ingredients are an agreement to sell movables for a price and the passing of property in them pursuant to that agreement. In an entire and indivisible building contract there is no sale of the materials, both because there is no agreement to sell them as such and because property in them passes to the landowner by accretion and not as movables. A claim in quantum meruit for work done and materials supplied is a claim for damages, not for the price of goods sold, and does not show that a sale is latent in the contract.

The two ingredients the Court isolated are the two limbs of s. 4(1): an agreement to transfer, and the property in goods. The requirement of a money price comes from s. 2(10); the requirement that the subject matter be movable property from s. 2(7); and the moment of passing from ss. 19 to 24.

The case therefore gives you the test to apply to every one of the distinguish-this-from-a-sale questions in Module 3:

• Sale or barter? Look for a money consideration under s. 2(10).
• Sale or bailment? Ask whether the general property is to pass under s. 2(11), or only possession.
• Sale or contract for work and labour? Ask the two Gannon Dunkerley questions: is there an agreement to sell the materials as such, and does property in them pass as movables?