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- Contract Law
Rights of an Unpaid Seller
This article is written by Ashpreet Kaur, IInd year student, B.B.A. LL.B, Symbiosis Law School, NOIDA. In this article, the author discusses about the rights of unpaid seller against the buyer and seller under Sale of Goods Act, 1930.
Introduction
In every contract of sale, a seller is under an obligation to deliver the goods sold and buyer is under an obligation to pay the requisite amount set or quid pro quo i.e something in return , under the contract of sale, by them. This is known as reciprocal promise as per Section 2(f) of the Indian Contract Act . In other words, any set of promises made which forms the consideration or part of the consideration for each other are called reciprocal promises and every contract of sale of goods consists of reciprocal promises.
In certain cases, when a buyer refuses or fails to pay the requisite amount to the seller, the seller becomes an unpaid seller and can exercise certain rights against the buyer. These rights are considered as seller’s remedies in case there is a breach of contract by the buyer. These remedies can be against:
According to Section 45(1) of Sale of Goods Act, 1930 , the seller is considered as an unpaid seller when:
a- When the whole price has not been paid and the seller has an immediate right of action for the price.
b- When Bills of Exchange or other negotiable instrument has been received as conditional payment, and the pre-requisite condition has not been fulfilled by reason of the dishonour of the instrument or otherwise. For instance, X sold some goods to Y for $50 and received a cheque. On presentment, the cheque was dishonoured by the bank. X is an unpaid seller.
Seller also includes a person who is in a position of a seller i.e agent, consignor who had himself paid or is responsible for the price.
Rights against buyer
1- suit for the price.
When any goods are passed on to the buyer and the buyer has wrongfully neglected or refused to pay as per the terms and conditions of the contract, the seller may sue him as per the Section 55(1) because once the property has been passed the buyer is bound to pay the price.
But in the case due date of payment has been passed and goods had not been delivered yet, the seller can sue the buyer for the wrongful neglect or refusal on his part according to clause 2 of Section 55 .
In case the price is due in foreign currency the damages must be calculated at the rate of exchange prevailing at the time when the price was due not on the judgement date.
2- Suit for damages
In case there is a wrongful refusal on the part of buyer for acceptance of goods and payment of money, the seller can sue him for damages of non-acceptance as per Section 56 . For calculating the quantum of damages Section 73 and 74 of the Indian Contract Act applies.
In case the goods have a ready market, the seller has to resell the goods and buyer have to pay the losses if incurred. If the seller does not resell the goods the difference between contract and market price at the day of breach is taken as a measure for damages. If the difference between them is nil seller gets nominal value.
There is a duty of mitigation on the part of the seller, which means that injured has to make reasonable efforts to minimise the loss from that breach. For instance , if the seller can resale the goods, the difference in price in contract and resale price is given to the seller but if the seller deliberately refuses to resale the goods and its market value reduces then the buyer will not be liable for the exaggerated loss.
The nature of the duty of mitigation has been explained by the supreme court in case of M. Lachia Shetty V Coffee Board , where, a dealer who bid at an auction of coffee had been accepted, refused to carry out the contract, consequently, coffee was reauctioned at next best bidding price and dealer who refused the bid have to give the difference in the amount of loss to the board.
3- Suit for interest
As stated under Section 61 , where there is a specific agreement between buyer and seller with regards to interest on the price of goods from the date on which payment becomes due, the seller may recover interest from a buyer. But if there were no such agreement the seller may charge interest from the day he notifies the buyer.
If there is no contract to the contrary, the court of law may award interest to the seller at such rate as it thinks fit on the amount of the price from the date on which amount is payable.
4- Repudiation of the contract before the due date
According to Section 60 , the rule of anticipatory breach contract applies, wherein, if buyer repudiates the contract before the date of delivery the seller can consider the contract as rescinded and can sue for damages of the breach.
According to this Section, if one party repudiates before due date other has two courses of action. Either he may immediately accept the breach and bring the action of damages the contract is rescinded and damages will be assessed according to the prices then prevailing or he can wait for the date of delivery. In the second case, the contract is open at risk and will be a benefit to both parties. May be the party changes is mind and agree to perform and damages will be assessed according to prices on the day of delivery.
Rights against goods
Lien is a right which seller of goods can exercise when a buyer has not paid the price of goods, under this right seller can retain the possession of goods as an agent or bailee for the buyer. The seller can retain his possession as per Section 47 under the following circumstances:
1- In case the buyer is insolvent.
2- When the term of goods sold on credit is expired.
3- Goods sold without any stipulation as to credit.
When the goods are sold on credit the right to lien is suspended during the term of credit and lien exist only for the price of goods, not any additional charges.
According to Section 48 if the seller has delivered a part of unpaid goods he can exercise his right of lien on rest. In Grice V Richardson , the sellers had delivered a part of the three parcels of tea comprised in the sales, and they had not been paid for the part which remained with them. They were allowed to keep it till the payment of the price. Where, however, a part of goods delivered which show an agreement to waive the lien, the seller cannot the remainder.
Termination of lien takes place when the seller losses the possession of goods. As per Section 49 , under following circumstances right of lien is terminated-
1- Waiver of lien-
The right of lien is an implied right attached by law in every contract of sale, the seller has the autonomy to waive this right, it may be expressed or implied from the conduct of the seller.
2- When buyer or agent lawfully obtains possession of goods.
Once the buyer got the possession of goods from the seller, all the rights of the seller in respect to goods are ceased even if the price is not paid. The seller can recover the price as a normal debt because the acceptance of possession gives absolute, unqualified and indefeasible right of goods to the buyer. When the goods are given again to the seller for repair he can not access the right of lien.
3- When the seller delivers goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods.
When the seller has delivered goods to the carrier for transmission, his right of lien is ceased but the right to stoppage in transit is still accessible by him. In case seller regains possession of goods in transit by stoppage his right to lien is revived.
Like in Valpy V Gibson , the goods were delivered to the buyer’s shipping agent, who had put them on board a ship. But the goods were returned to the seller for repacking, while they were still with the sellers the buyer became insolvent and seller being unpaid seller claimed to retain the goods in the exercise of their lien. It was held that they have lost their lien by delivery to the shipping agent. On the contrary , when the seller has reserved the rights of disposal his right of lien continues till the end of the transit. And the seller cannot lose his right to lien just because he has obtained a decree for the price of goods.
b- Stoppage
When the goods have been transferred to carrier or bailee for the purpose of transmission to the buyer, who has become insolvent, the seller has the right to stop the goods in transit in order to protect himself against the loss that may arise due to insolvency. As per Section 50 , there are four essential requirements for stopping the goods in transit:
- Unpaid seller.
- Buyer insolvent.
- Property should have passed to the buyer.
- Property should be in course of transit.
The course of transit depends upon the capacity of middleman to hold the goods. Middleman should be an intervening person between the seller who has parted with the goods and the buyer who has not yet received the goods as held in the case of Schotsmans v Lancashire & Yorkshire Rly co.
Section 5 lays down the rules and regulations related to commencement and end of the transit, this Section is divided into seven sub-Sections which solve all the issues related to commencement and end of transit:
1- Delivery to the buyer- Goods are considered to be in transit from the time when they are delivered to the carrier or other bailee for the purpose of transmission to the buyer, till the goods are received by the buyer himself or his agent takes delivery of them.
For example, in the case of Great Indian Peninsula v Hanmandas , the seller consigned the goods with the GIP Ry Co for transportation to the buyer. On the arrival at the destination, the company had delivered the goods to the buyer who had loaded them on his cart, but the cart had not yet left the railway compound when a telegram was received by the company to stop the goods. The company did not do so and were sued by the seller in damages. It was held that the transit had ended as soon as the goods were handed over to the buyer.
But when the buyer denies accepting the delivery even when it has been landed at the place of destination, the transit does not end. This happened in the case of James v Griffin where on arrival of goods at the port of destination in the river Thames, the buyer sent his son to have goods landed, but told him that on account of his insolvency he did not intend to receive the goods and would like the seller to have them. When goods were so lying the seller’s instruction to stop them was received. The buyer’s trustee in bankruptcy claimed the goods. It was held that the goods were still in transit.
2- Interception by the buyer- When the buyer or the agent takes the delivery of the goods from the carrier, the transit ends even before their arrival at the appointed destination.
In case the carrier delivers the goods before the arrival of the buyer, although it is wrongful and the carrier may be held liable for the damages but the transit ends here.
In the case of Lyons v. Honffnung, the buyer takes his seat as a passenger in a ship which was carrying the goods. The court said that this does not amount to delivery to the buyer before their arrival at the appointed destination.
3- Acknowledgement to the buyer- The transit is considered to come to an end when the goods arrive at the appointed destination and the carrier acknowledges to the buyer or his agent that he is now holding the goods on his behalf. It is immaterial if the gods are still in the carrier or the buyer has indicated another destination. In order to put an end to the original contract of carriage, a very clear acknowledgement is required.
In the case of Whitehead v. Anderson, a quantity of timber was consigned on board. When the ship arrived at the destination, the buyer went bankrupt. The buyer’s agent came to the board and told that he has come to take possession. The captain said that he will deliver only when the freight is paid. Before this could be done, the seller sent a notice to stop and asked to send the goods to be delivered to the agent of the seller. The court said that since the transit has not ended, the carrier was within his rights in returning the goods to the seller. The captain agreed to deliver the goods on a condition and if the condition is not fulfilled, the buyer does not acquire the constructive possession of goods.
4- Rejection by the buyer– When the buyer rejects the goods and the carrier or other bailee continues to possess them, the goods are held to be still in transit. This will also include the case when the seller himself refuses to take back goods.
5- Delivery to ship charted by the buyer- It is a question of fact whether the carrier is acting independently or as an agent of the buyer at the time when the goods are delivered to a ship charted by buyer. As soon as the goods are loaded on the ship, the transit ends if the carrier is acting as an agent of the buyer.
Thus, for instance, Rosewear china clay co ltd, re , the contract was for the sale of china clay at FOB Fowey. The buyer chartered a ship and instructed the seller to load to the goods at Fowey, which was accordingly done. The destination of the ship was not told to the seller nor any bill of lading signed. The seller gave notice stopping the goods.
6- Wrongful refusal to delivery- When the carrier wrongfully denies delivering the goods to the buyer or his agent the transit is at the end. It is obvious that goods should have arrived at their destination because otherwise, the carrier has the right to refuse to deliver them.
In the case of Bird v. Brown, the court discussed as to when it is wrongful to refuse the delivery of goods. In this case, the goods arrived at the destination but the buyer has become insolvent. A merchant was acting for the seller who gave stop notice to the seller without authority.
Subsequently, the trustee of the buyer demanded the goods as the buyer was insolvent. The carrier refused to deliver the goods and handed them to the merchant. The court said that after the formal demand for goods by the trustee, there could be no valid stoppage in transit.
7- Part delivery- in the case when the goods have been delivered partly, the seller has a right to stop the delivery of the rest of the goods unless the part delivery shows an agreement to the possession of the whole. For instance , A sells to B 20kg of wheat, 10kg has been transferred to B but rest 10kg is still in transit, in case B fails to pay A has a right to stop the goods in transit.
Exercising the right of lien or stoppage does not rescind the agreement but reselling of goods does and without this right, the other two rights of lien and stoppage would not be of much usage because he can only retain goods under these right till the buyer pays back the money.
The unpaid seller can exercise his right under following conditions and circumstances-
1- Seller before reselling the goods needs to send a notice to the buyer except in the case of perishable goods, giving him last chance to pay the price and take back the goods within a reasonable time. If the buyer does not pay the money back seller has the right to resell the goods. If the seller fails to give notice of his intention to resell, he cannot claim damages from the buyer and he has to give any profit.
2- If there is any loss in the resale of goods he can claim the loss from the buyer, on the contrary, if there is profit buyer cannot claim it.
3- Seller gives rightful ownership to buyer after the resale it does not matter notice of resale is given or not to defaulted buyer.
4- Sometimes the seller reserves exclusive right to resale the goods if the buyer makes a default in payment, in such cases the buyer cannot ask for profit on resale if no notice is served and seller has the exclusive right to resale.
For instance, R V Ward V Bignall, there was a contract of sale of two cars, vanguard and zodiac for 850$. The buyer deposited 25$ but afterwards did not pay the price despite a reasonable notice. The seller then tried to resell but could be sold only a vanguard for 359$. he then claimed damages for 475$ representing the balance of price and 22$ as advertising expenses. Court held that once the seller resells the goods the contract is rescinded and he cannot claim the money but he can ask for advertising expenses and a shortfall in the price of the vanguard.
Rights against seller
1- damages for non-delivery.
Section 57 states that, whenever any seller or refuses to deliver the goods to the buyer, the buyer may sue for non-delivery of goods. If the buyer has paid any amount he is entitled to recover it. Quantum of damages is decided through market forces, contract and market price on the day of the breach is considered as damages. If the buyer wants to claim that damages he must prove it in the court of law, otherwise, he cannot get a penny more than refund i.e the amount he has already paid. Buyer must try to keep the loss at a minimum by purchasing the goods from other sources instead of waiting for the market to fluctuate.
2- Suit for specific performance
Acc to Section 58 when goods are specific or ascertained and there is a breach of contract committed on the part of the seller then the buyer can appeal to the court of law for specific performance. The seller has to perform the contract and he does not have any option of retaining the goods by paying damages. The power of the court to order specific performance is subject to the provisions of chapter II of Specific Relief Act, 1963.
Thus on the sale of ship buyer was allowed to recover the ship specifically in the case of Behnke V Bede Shopping , there was a ship named the city which holds a unique value to the plaintiff but she was a cheap vessel being old but her engines were new and as to satisfy the German regulations and hence plaintiff could as a German shipowner have her at once put on the German register. A very experienced ship-valuer has said that he knew only one other comparable ship, but that may not be sold. Thus, on sale of a ship buyer was allowed to specifically recover the ship.
3- Suit for breach of warranty
As stated under Section 59 , the buyer cannot reject the goods solely on the basis of breach of warranty on the part of the seller or when a buyer is forced to treat a breach of condition as a breach of warranty. But he may sue the seller for damages or set up against the seller the breach of the warranty in the extinction of the price.
The measure of damages is directly and naturally occurring loss in ordinary events from breach of warranty. Mason V Burningham , the buyer of a second-hand typewriter spends some money on getting it overhauled. Afterwards, the typewriter was seized from her as stolen property. this was a breach on the part of the seller of warranty of quiet possession. She was held entitled to recover damages including the cost of repair. She did a natural thing in having the typewriter repaired and the amount she had spent was a loss directly and naturally resulting from the breach.
4- Suit for anticipatory breach
According to Section 60 , the rule of anticipatory breach contract applies, wherein, if any party repudiates the contract before the date of delivery the other party can consider the contract as rescinded and can sue for damages of the breach.
According to this Section, if one party repudiates before due date other has two courses of action. Either he may immediately accept the breach and bring the action of damages the contract is rescinded and damages will be assessed according to the prices then prevailing or he can wait for the date of delivery. In the second case, the contract is open at risk and will be a benefit to both parties. Maybe the party changes is mind and agree to perform and damages will be assessed according to prices on the day of delivery.
The seller becomes an unpaid seller when either he had not been paid in full or the buyer has failed to meet the maturity of bills of exchange or any other negotiable instrument accepted by seller as a condition precedent. Under this situation, the seller can resell the goods if he had exercised the right of lien or stoppage in transit, after giving notice to the buyer and the new buyer will have good title over the goods. In this case, the seller has the right to sue the buyer for failure to pay the required amount as well as a lien. On the contrary, if the seller fails to deliver goods to the buyer, he may sue the seller for non-performance and can claim damages or specific performance.
- Law of Sales of Goods Act, Avtar Singh.
- Business laws, CA Foundation.
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Rights of an unpaid seller.
An unpaid seller is defined in Sec 45 (1) of the Sale of Goods Act, 1930. A seller of goods is an unpaid seller, when either he has not received the full price of the goods, or he has received a bill of exchange or any other negotiable instrument for price, but the same has been dishonored. Also condition of sale was such that the price has become payable, but he has not received the same. A seller who has obtained money decree against the buyer for the price is still an unpaid seller, if the decree is not yet satisfied or enforced.
The chart below shows the rights of an unpaid seller.
An unpaid seller has rights against the goods. Where the property in the goods has passed to the buyer, the unpaid seller has the following rights against the goods, which the subject matter of the contract of sale :
Right of Lien: (Sec. 47) : This can be exercised as long as the unpaid seller is in possession of the goods.The unpaid seller may refuse to part with the goods until he is fully paid. Right of Lien is available in three situations: (a) When the goods have been sold without any stipulation as to credit, and the seller has not got his price; (b) When the goods have been sold on credit, but the term of credit has expired; (c) When the buyer has become insolvent.
Stoppage in Transit (Sec. 46 and Sec. 50 to 52) : When the unpaid seller has parted with the possession of the goods, he still has a right to resume possession of the goods, which is called stoppage-in-transit. The right to stoppage in transit, is an extension of the right to lien. The difference is, it can be enforced only when buyer has become insolvent, not otherwise.
Right to Resale (Sec.46 and Sec. 54) : An unpaid seller can also resale the goods, which he has come into possession, where the goods are of perishable nature, without giving any notice to the buyer.If the goods are not of perishable nature, then also the unpaid seller can resell the goods after giving a notice to the buyer, whereupon the buyer neither pays the price nor tenders the price within a reasonable time.
Apart from the above rights of the unpaid seller, which is against the goods, the unpaid seller has also some rights against the buyer personally.
a. Under Sec. 55 of the Sale of Goods Act, 1930, he can sue the buyer for price, when he has lost possession of the goods, and when as per the contract, the property in the goods has already passed on to the buyer.
b. If the buyer has not accepted the goods, in spite of ordering, or has not paid price, in spite of accepting the goods, the unpaid seller may sue him against non-acceptance or for price as per Sec.56 of the act.
c. As per Sec. 60, when the buyer has repudiated the contract, before the date of delivery, the seller may repudiate the contract, or wait to see the outcome till the agreed date of delivery, or may choose the contract as rescinded, and file suit for damages, if any, suffered by him.
d. As per Sec. 61, if there are specific interest clause in the contract for sale, the unpaid buyer can also claim the interest from the buyer.
Rights of Unpaid Seller
There are different types of contracts under business law and in every contract of sale, consideration is of utmost importance as it is the essential element of a valid contract . When some goods and services are sold with free consent , the buyer is under an obligation to pay the requisite amount. This is a reciprocal promise in which both the parties made a promise to each other to provide consideration from their side. However, In certain cases, a buyer refuses or fails to pay the promised amount to the seller. In these conditions, the seller becomes an unpaid seller and his legally entitled money gets stuck. Now, the question that emerges is what are the rights of unpaid seller?
In this article, we will explore “ who is an unpaid seller” and what are the rights of unpaid seller against the defaulting party. These rights of unpaid seller can be understood as the seller’s remedies when there is a breach of contract by the buyer.
Table of Contents
Who is an Unpaid Seller?
At the outset, it is very important to understand the meaning of an Unpaid seller. In simple terms, an unpaid seller is a person who has sold the goods but hasn’t received the full amount in exchange for the sale. The legal definition of unpaid seller has been provided under section 45 of the Sale of Goods Act, 1930.
As per the section, an unpaid seller is a person who falls in any of the three below categories-
- When the goods have been sold but the seller hasn’t been paid the full amount. The seller must have a right to take immediate action to get that amount.
- When Bills of Exchange or other such negotiable instrument has been received as a part of conditional payment, and the other essential conditions have not been fulfilled by the drawer of the instrument. For instance – “A” sold some manufacturing goods to B for INR 5,000 and received a cheque in return. When the cheque was presented in the bank to add money to the bank account , the cheque was dishonoured on account of lack of funds. In this condition, A is an unpaid seller.
- In the definition of the unpaid seller , a person who is working on behalf of a seller (agent or consignor) who had himself paid or responsible to pay the price is also included.
Characteristics of an Unpaid Seller
- The seller must be unpaid either in full or in partiality .
- The seller must provide some goods and services to the buyer and possess a legal right to receive such an amount from the buyer.
- The duration agreed for making payment has expired and the seller is yet to be paid.
- The seller must not have refused to accept the payment .
- When the amount is paid through cheque, promissory note or another similar negotiable instrument, the dishonour or failure to pay will also make the seller unpaid.
The rights of an unpaid seller can be divided into 2 parts namely
- Right against buyer
- Right against goods
Rights of unpaid seller against the buyer
Suit to recover the price.
If the goods are sold to the buyer and the buyer is wrongfully neglecting or refusing to pay as per the terms and conditions agreed between the parties in the contract, the unpaid seller has a right to sue such buyer as per Section 55(1) of the Sale of Goods Act. It is important to note that when the goods are delivered or property is passed, the buyer is bound to pay the price for the same. It should be kept in mind that the party has the Capacity to Contract as per section 11 of the Indian contract act.
However, in a situation, when the due date of payment has expired and the buyer has not been notified about the delivery of goods to the seller, then he can sue the buyer as per clause 2 of section 55 for wrongful neglect or negligence.
When the contract of sale involves cross border exchange, the price of foreign currency is also taken into consideration. The price of goods shall be calculated at the rate which was prevalent when the goods were sold to the buyer.
For instance – A person from India sold goods to a person in English. The price of the goods was rupees 10,000 and the conversion rate at that time was 1 GBP = 100 INR. So, legally the seller should receive 100 GBP. However, after a month, the conversion rate changes and it becomes 1 GBP = 120 INR. As per the new exchange rate the buyer had to pay only 83 GBP. But, as per this section, the seller is entitled to receive 100 GBP.
Suit for Recovering the damages
When the buyer wrongfully refuses to accept the goods or the payment of money, the seller has a right to sue as per Section 56 of the Act for receiving damages for non-acceptance of the goods. The quantum of damage is calculated as per Section 73 and 74 of the Indian Contract Act, 1872.
When the goods have a ready market, the seller has to resell the impugned goods, in this situation, the buyer will have to pay the losses if incurred. If the goods are not resold by the seller, the difference between the contract price and the market price of goods is taken into consideration for the computation of damage. If the difference remains minimal, the seller may be deprived of the damage amount.
The law also placed a duty on the shoulders of the seller to mitigate the loss. It means that the seller should make all the plausible efforts to minimise the loss arising from the breach. For instance – if the seller has an opportunity to resell the goods at a handsome price but he refuses to do so with an intention to receive a hefty amount from the buyer, he should resell them as the court may favour the buyer.
The duty of mitigating the loss was very well explained by the supreme court in the case of M. Lachia Shetty V Coffee Board. In this case, a dealer’s bid at an auction of coffee had been accepted but he refused to carry out the contract. So, the court held that the dealer would be liable to pay the difference amount in the next auction bid.
Right of Unpaid Seller to Receive the interest
This is provided under 61 of the Sales of Goods Act. This section states that if there is a contract between buyer and seller regarding the payment of interest from the date the payment becomes due, the seller is legally entitled to receive the same. But, even in the absence of such agreement, the seller may charge interest from the day he notifies the buyer regarding the payment of money.
The law also provides the discretionary remedy to the court to provide interest to the seller at such rate as the court deems fit on the principal amount from the date on which the buyer refuses or fails to pay the amount.
Right of Unpaid seller to Repudiate the contract before the due date
As per Section 60 of the Sale of Goods Act, when the buyer repudiated or is terminated before the completion of the contract, the seller can consider the agreement terminated and will be entitled to receive anticipatory damage from the buyer.
This section provides two courses of action if the party repudiates the contract before the due date of the performance of the contract. These actions include either accepting the breach and bringing an action to claim the damage as the contract is rescinded. The damages will be computed according to the prices prevailing or to wait for the actual delivery. In the second case, the contract is continued at the risk of the seller. Though a party may change his mind and perform the contract, the risk is also very substantial.
Rights of unpaid seller against the goods
Right of lien.
In simple terms, the Right of lien refers to a right that a seller of goods can exercise when the price of goods is not paid by the seller. The right of lien is also used in the contract of bailment . Right to lien enables the seller to retain the possession of the goods as an agent. The condition for retention of goods has been provided under Section 47 of the Sale of Goods Act. These conditions are as follows-
- When the buyer is insolvent;
- When the terms period of contract has expired and the payment hasn’t been made;
- When the Goods have been sold without any stipulation to the credit;
- When the goods are sold on credit, the right of lien is suspended during the term period. But this right can be exercised when this period got extinguished.
As per Section 48 of the Act, if the seller has not delivered a part of the unpaid goods he is legally entitled to exercise his right of lien on rest. In the case of Grice V Richardson, the sellers made a delivery of one part out of the three parcels of tea, and the seller had not been paid for the part which remained with them. They were allowed to keep the goods till the payment of the price is not made in totality.
Termination of Right to lien by the Unpaid Seller
The Termination of a lien occurs when the goods don’t remain in the possession of the seller. Section 49 of the Act enumerates certain conditions in which this right of lien is terminated-
- When the seller voluntarily relinquished the right to lien. This right is an implied right and in every contract of sale, the seller may with its own conduct waive this right. The waiver may be explicit or implicit.
- In case the buyer or the agent has obtained lawful lawful possession of the goods.
- In case, the seller delivers the goods with the help of a carrier or other bailee for the purpose of transmission to the buyer without interfering with the right of disposal of the goods.
It is important to note that when the buyer receives the possession of goods from the seller, all the rights of the unpaid seller pertaining to the goods are waived even though the price is yet to be paid. The acceptance of possession provides unqualified and absolute rights of goods to the buyer. Though the seller can recover the amount as a normal debt, the right of lien can’t be exercised even if the goods are placed with the seller for repair.
When the goods are in transit in the process of delivery, the right of lien ceases to effect. However, the seller still possesses the right to stop the carriage in transit. When the obtains possession in the transit, the right of lien of an unpaid seller is revived.
In the case of Valpy V Gibson, the seller delivered the goods through the buyer’s shipping agent, who in turn places the same on board a ship. During this process, the goods were sent to the seller for repacking. In the meantime, the buyer becomes insolvent and the seller being in possession of goods try to exercise the right to lien. The court held that the right of disposal of his right of lien would continue till the end of the transit. And the seller wouldn’t lose his right just because he has obtained a decree for the price of goods.
Right of Stoppage by the Unpaid Seller
Section 50 of the Sale of Goods Act enumerates four essential requirements for stopping the goods in transit: These conditions are as follows-
- There must be an unpaid seller
- The buyer must be insolvent
- The goods should have been passed to the buyer
- The goods should be in the course of transit.
The course of transit strongly depends upon the ability of the middleman or the agent to hold the goods. In the case of Schotsmans v Lancashire & Yorkshire Rly co, it was held that the Middleman must be an intervening person between the buyer and the Unpaid seller.
For better understanding the course of transit, Section 5 is divided into 7 parts, which are as follows
- Delivery to the buyer
It is presumed that the Goods will be in transit from the time when they are delivered to the carrier or other agent for the purpose of sending them to the buyer. It is not material whether the goods are actually delivered to the buyer or not.
In the landmark case of Great Indian Peninsula v Hanuman Das, the seller transmitted the goods with the help of an agent for transportation to the buyer. At the destination, the company delivered the goods to the buyer and was ready to put them on the cart. When the card was just about to leave the railway station, a telegram was received by the company to stop the delivery of goods. The intervening company did not do so and was sued by the seller to receive the damage. The court held that the course of transition had ended as soon as the goods were handed over to the buyer.
However, in a condition when the buyer refuses to accept the delivery even when it has arrived at the place of destination, the course of transit does not come to an end. It occurred in the landmark case of James v Griffin. When the goods were delivered to the port, the buyer refused to accept the goods on account of his insolvency. The court held that the goods are still in transit.
- The interception by the buyer
In case the buyer or the agent takes the delivery of the goods, the period of transition is completed even before the goods are arrived at the appointed destination. In the case of Lyons v. Honffnung, the buyer was travelling as a passenger in a ship that was carrying the goods. The court opined that it will not result in the delivery of the goods to the buyer before their arrival at the appointed destination.
- Acknowledgement to the buyer
The course of transition will be considered to be completed when the goods have arrived at the destination and the carrier notified the buyer that he was holding goods on his behalf. It will be immaterial that the goods are still with the carrier. The acknowledgement has put the course of transition to an end.
- Rejection by the buyer
If the buyer rejects the goods, but the carrier or other Middleman continues to possess them, it will be considered that the goods are still in transit. This preposition will also apply to the case when the seller himself refuses to take back goods.
- Delivery to a ship chartered by the buyer
The pertinent question related to the course of transit is whether the carrier is acting independently or as an agent of the buyer when the goods are delivered to a ship chartered by the buyer. It is a question of facts, and it is presumed that as soon as the goods are put in transit, the carrier is acting as an agent of the buyer.
In the case of Rosewear china clay co ltd, the contract was related to the sale of china clay. The buyer took a ship and ordered the seller to load the goods to Fowey. The destination was unknown to the seller. Thus, the court favoured the seller.
- Wrongful refusal to deliver
In this case, when the carrier wrongfully refuses to deliver the goods to the buyer or to his agent, the course of the transit doesn’t come to an end. It is well settled that the goods should have arrived at their destination because the carrier may refuse to deliver them.
In the case of Bird v. Brown, the court discussed the jurisprudence to when it is wrongful to refuse the delivery of goods. In that particular case, when the goods arrived at the destination, the buyer got insolvent. A merchant acting for the seller gave a stop notice to the seller. The carrier refused to hand over the goods to the buyer and deliver them to the merchant. The court said that after the formal demand, there could be no valid stoppage in transit.
- Part delivery
when the goods are delivered partly, the seller possesses the right to stop the delivery of the rest of the goods till the part delivery demonstrates an agreement to the possession of the whole.
For instance, X sells to Y 40kg of wheat, out of which 10kg has been transferred to Y, but the remaining 30 kg is still in transit, in case B fails to pay A has a right to stop the goods in transit.
Right of Resale to the Unpaid Seller
The right of lien and stoppage doesn’t extinguish the right of resale. But when the goods are resold by the seller, all the aforesaid right cease to have an effect because lien and stoppage can only exercise on the goods.
The unpaid seller can exercise the right to resale under the following conditions-
- Before reselling the goods, the seller needs to send a notice to the buyer, giving him the last chance to pay the desired price in a reasonable time and get back the goods. if the seller fails to give notice, he cannot claim damages from the buyer and he has to give any profit. However, a notice is not required when the goods are perishable.
- If any loss is incurred during the resale of goods, the unpaid seller doesn’t have the right to recover the same from the buyer. Similarly, if any profit occurs, the buyer can’t claim.
- In some cases, the seller reserves an exclusive right to resale the goods if the buyer makes a default in payment. In such circumstances, the buyer cannot ask for profit even though no notice has been served.
An unpaid seller is a person who has sold the goods but hasn’t received the full price in return. The rights of unpaid seller are provided in the Sales of Goods Act. There are mainly 2 kinds of rights of unpaid seller i.e., right against goods and right against buyers. The unpaid seller can sue the buyer to recover the price, damage and interest on the non-payment of money. It can also exercise the right to lien, stoppage or resale against the goods.
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- Law Q&A
What Is an Unpaid Seller and Its Rights – Sale of Goods Act
Chapter V of the Sale of Goods Act, 1930, deals with unpaid sellers. In a contract of sale, the seller is under an obligation to deliver the goods, and the buyer has to pay for it. If the buyer fails or refuses to pay, such a seller becomes an unpaid seller .
This law article discusses the meaning and rights of an unpaid seller given under the Sale of Goods Act, 1930 (SOGA).
Meaning of Unpaid Seller
Rights of an unpaid seller, i. rights against goods, ii. rights against the buyer personally.
According to section 45(1) of the Sale of Goods Act, 1930 , a seller of goods is called an “unpaid seller”, when:
- The price has not been paid or tendered, or
- A bill of exchange or other negotiable instruments (like a cheque) that was received as conditional payment has been dishonoured.
Section 45(2) expands the definition of a seller to include anyone in a position of a seller (for example, the agent of the seller to whom the bill of lading is endorsed, or a consignor or agent who has paid or is directly responsible for the price).
Example 1 : X sold some goods to Y for Rs 10,000. Y paid Rs 9,900 but failed to pay the balance of Rs 100. X becomes an unpaid seller.
Example 2 : X sold some goods to Y for Rs 5,000 on a cheque for the price as a conditional payment. On presentation, the bank dishonoured the cheque. Here also, X becomes an unpaid seller.
Section 46 of the Sale of Goods Act addresses the rights of an unpaid seller whose property in the goods has not yet been transferred to the buyer. The unpaid seller has the following 3 + 1 = 4 rights:
- Right of lien
- Right of stoppage of goods in transit
- Right to resale the goods
- Withholding delivery (When the possession of the goods has not passed to the buyer, the unpaid seller has an additional right of withholding delivery besides the three rights outlined above.)
Here’s more about these four rights one by one.
1. What Is the Right of Lien
The right of lien means the right to keep possession of the goods until the seller receives the due price.
Section 47 of the Sale of Goods Act provides that an unpaid seller (as agent or bailee of the buyer) in possession of the goods has the right to keep possession of the goods until payment or tender of the price in the following cases:
- Where the goods have been sold with no stipulation to credit, or
- Where the goods have been sold on credit, but the term of credit has expired, or
- Where the buyer becomes insolvent.
Further, section 48 of the Sale of Goods Act provides that despite the partial delivery of goods by the unpaid seller, section 48 authorizes him to exercise his lien right on the rest.
In Grice vs Richardson (1877) , the sellers had delivered a portion of the three bags of tea under a contract of sale but had not been paid for the rest. Therefore, they could keep them until the buyer paid the price.
Termination of Lien
The unpaid seller of the goods loses his right of lien in the following cases:
- When he delivers the goods to a carrier or other bailee for delivery to the buyer without reserving the right of disposal of the goods, or
- When the buyer or his agent lawfully gets possession of the goods, or
- When the seller waives his right of lien, or
- When the buyer disposes of the goods by sale or in any other manner with the consent of the seller, or
- Where a document of title to goods has been issued or lawfully transferred to any person as buyer or owner of the goods, and the buyer then transfers the document by sale to someone taking it in good faith and for consideration .
2. What Is Right to Stoppage of Goods in Transit
The unpaid seller delivered the goods to the carrier for transmission to the buyer, and in the meantime, the buyer becomes insolvent, then the seller has the right to stop and retain the goods in transit. Thus, the unpaid seller resumes possession of the goods as long as it is in transit.
The unpaid seller can exercise the right of stoppage in transit only if he fulfils the following conditions:
- The seller must have parted with the possession of goods, i.e., the goods must not be in the seller’s possession.
- The goods must be in transit.
- The buyer must have become insolvent.
Duration of Transit
As per section 51 of the Sale of Goods Act , the goods are in transit when they are delivered to a carrier or bailee for transmission to the buyer and until the buyer or his agents, on his behalf, take the delivery of those goods.
The unpaid seller loses the right to stoppage in transit in the following cases:
- When the goods reach the destination, or
- If the buyer or his agent on his behalf receives the goods before they reach their destination, or
- If the carrier or other bailee admits to the buyer or his agent that he has the goods on his behalf and continues to possess them after the items arrive at the designated destination, the transit is complete, or
- If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent on his behalf, or
- If they deliver part of the product to the buyer or his agent, the unpaid seller may hold the rest of the shipment in transit if the portion transfer does not enable the buyer to relinquish possession of the goods, or
- If the seller has consented to the sub-sale or other disposition with the buyer.
Section 52 of the Sale of Goods Act provides that the unpaid seller may exercise his right of stoppage in transit either:
- By taking the actual position of the goods, or
- By giving notice of his claim to the carrier or other bailee under whose possession the goods are.
3. What Is the Right to Resale the Goods
As per section 46(1) of the Sale of Goods Act , under the following circumstances, the unpaid seller may resell the goods, if the goods are:
- Of a perishable nature, or
- When the unpaid seller exercised his right to lien or stoppage in transit and gave notice to the buyer of his intention to resale.
We must note here that in such cases, on reselling the goods, it also entitles the seller to:
- Recover the difference between the contract price and the resale price from the original buyer as damage.
- Keep the profit if the resale price is higher than the contract price. But if the unpaid seller does not give any notice, that shall not entitle such unpaid seller to recover such damages, and the buyer can claim the profit on the resale.
4. What Is Withholding Delivery
As per section 46(2) of the Sale of Goods Act , where the property in goods has not passed to the buyer, the unpaid seller has, besides other remedies, a right to withhold the delivery.
It is also known as the seller’s remedy for the breach of a contract of sale. These rights are as follows:
- Suit for price
- Suit for damages for non-acceptance
- Suit for damages for repudiation of the contract
- Suit for interest
Let us learn more about these four rights.
1. Suit for Price
As per section 55 of the Sale of Goods Act , if the property in the goods has passed to the buyer and he neglects or refuses to pay for it according to the contract, the seller may sue him for the price of the goods.
2. Suit for Damages for Non-acceptance
As per section 56 of the Sale of Goods Act , where the buyer wrongfully neglects or refuses to accept the goods and pay for the goods, the seller may sue him for damages for non-acceptance of the goods. For the measure of damages, section 73 of the Indian Contract Act, 1872 applies.
3. Suit for Damages for Repudiation of the Contract
As per section 60 of the Sale of Goods Act , if the buyer repudiates the contract before the due date for delivery, the seller may treat the contract as subsisting (maintain, survive, keep active) and wait until the due date of delivery or treat the contract as rescinded (revoke, cancel) and seek damages for the breach.
4. Suit for Interest
As per section 61(2) of the Sale of Goods Act , a seller may sue the buyer for interest or special damages in the event of a breach of contract while suing for an amount owed to him.
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Rights of Unpaid Seller Against Goods
- Rights of Unpaid Seller Agains...
Rights of Lien
The seller of goods has certain rights against the goods and the buyer. As per the right of lien in the Sale of Goods Act, when a seller delivers the goods to the buyer, the buyer promises to pay the amount decided as per the contract. This is a reciprocal promise that forms the consideration for the contract. When the buyer refuses to pay for the goods, the unpaid seller has certain rights against the goods. This is called the right of lien. Let us understand in detail the rights of unpaid seller against goods and what the right of lien means.
Lien is the right of the seller to hold on to the goods until the payment for those goods has been made by the buyer. The right of lien meaning as per Section 47 (1) of the Sale of Goods Act, 1930 is that an unpaid seller in possession of the goods can retain their possession until payment is made by the buyer.
The Rights to Lien are Applicable in the Following Instances:
The seller has sold the goods without any credit stipulation.
The goods have been sold on credit, the term of which has expired.
The buyer of the goods has become insolvent. In this case, the seller can exercise his right of lien even though goods were offered on credit and the credit duration has not expired.
According to Section 47(2), the unpaid seller can exercise his rights of lien while he is in possession of the goods by acting as an agent or bailee for the buyer. This is called possessory lien and can be exercised by the seller as long as he is in possession of the goods.
Lien in Case of Part Delivery of Goods -Section 48
If an unpaid seller has made part delivery of the goods then he can exercise his right of lien on the remainder of the goods. The rights of unpaid seller against the buyer are applicable only when there is no agreement to the contrary for waiving of the lien of the seller in case of part-delivery of goods.
Lien Termination- Section 49(1)
An unpaid seller loses his lien over the goods:
If the goods have been delivered to a carrier for their delivery to the buyer, without reserving the right to dispose of the goods.
When the buyer or his agent gets lawful possession of the goods.
If the rights of lien are waived.
Section 49(2) states that lien rights can also be exercised by the unpaid seller even if he has received a decree for the price of the sold goods.
Right of the Seller Against the Buyer in Stoppage of Goods in Transit
The seller of goods can exercise the right of stoppage of the goods in transit as an extension to the right of lien. He can regain possession of the goods and retain them until the payment is made by the buyer.
According to Section 50, This Right can be Exercised by the Seller:
If the buyer becomes insolvent while the goods are in transit. The seller can ask the carrier to return the goods to him.
The goods are in transit route- The goods are neither with the seller nor with the buyer or his agent. In this case, the goods must be with the carrier who is acting as an intermediary. This carrier must not be an agent of either the seller or the buyer.
Duration of Transit (Section 51)
The duration of transit for goods starts from the time they are delivered to the carrier by the seller for transmission to the buyer or his agent. The transit of goods ends when:
Delivery of the goods is taken by the buyer or his agent before the goods reach the destination.
The carrier informs the buyer or his agent that the goods have reached the destination and are being held by him.
If the buyer refuses the goods and the seller refuses to take them back it is not considered the end of the transit.
If goods are delivered to a ship chartered by the buyer, it needs to be determined if the master is acting as an agent or carrier of the goods.
If the carrier or bailee wrongfully refuses to deliver the goods to the buyer or his agent, it is considered the end of the transit.
If part-delivery of the goods is done, the delivery of the remaining goods can be stopped by the unpaid seller. It is the end of transit for the remaining goods if there is no agreement to give up the possession of all the goods.
Rights of an Unpaid Seller
A person who has sold goods to another person but has not been paid for the goods or been paid partially is called an unpaid seller .According to section 45 of Sale of goods act An unpaid seller is one who has been given a negotiable instrument like a bill of exchange that has been dishonoured .
Rights Against the goods
Rights Against the buyer of goods
Rights Against the Goods (Section 46)
When the buyer has not paid the full or partial price of goods supplied to him , the seller has the following rights with regard to the goods .
Rights of lien
Rights of Stoppage of goods in transit
Right of resale
A. Rights of lien (Section 47-49)
Lien is the right to retain possession of goods until payment in respect of them is paid. According to Section 47 ,if the seller of goods has not been paid and the ownership of goods has been transferred to the buyer but the goods are in the possession of the seller ,the seller has the right to retain the good .
The seller has this right when the goods have not been sold on credit . When the payment has not been made on the promised date and when the buyer has become an insolvent .
Termination of Lien
According to section 49 the lien of an unpaid seller terminates in the following circumstances.
When the seller delivers the goods to a carrier for the purpose of transmission to the buyer .
When the seller has waived his lien on the goods.
B. Rights of Stoppage of Goods in Transit (Section 50-52)
The seller has the right of stoppage of goods in transit in following circumstances :
The seller must be unpaid .
When the goods are in transit.
Duration of Transit - According to Section 51, when the seller has delivered the goods to the carrier for transmission to the buyer , until the goods are received by the buyer or his agent is the duration of transit .
The Carrier may Hold the Goods -
A seller’s agent , In this case , there is no transit because the goods are under the seller’s lien .
As buyer’s agent .In this case the seller cannot exercise his right of stoppage in transit because the buyer has acquired possession
As an independent contractor .In this case the seller has and can exercise the right of stoppage in transit , it is not necessary that the goods should be actually moving .
The Transit Can End if :
If the buyer or his representative obtains delivery of the items prior to their arrival at the agreed-upon location.
If after the arrival of the goods at the appointed destination ,the carrier or other acknowledges to the buyer or his agent that he holds on his behalf.
If the carrier or other party refuses to deliver the goods to the buyer or his representative for any reason.
Rights of Re- sale (Section 54)
A vendor who has not been paid has the right to resell the items. The general criteria for the resale of goods by an unpaid seller are defined in Section 54. The following are the main guidelines:
The unpaid seller may re -sell the goods if the goods are perishable .
When the unpaid seller has acquired the possession of goods by virtue of lien or stoppage in transit and has given notice to the buyer of his intention to re-sell.
FAQs on Rights of Unpaid Seller Against Goods
1. What are Measures of Damages ?
The gap between the contract price and the market price is used to calculate damages.
2. What is Repudiation of contract ?
According to Section 60, if the buyer repudiates the contract before the due date of delivery he reserves the right to sue the buyer for repudiating the contract .
3. What is the Suit of Interest ?
According to Section 61. The unpaid seller has the right to be paid interest by the buyer for any delay in making the payment.Such interest is effective from the date when the price is payable .
4. What is the Suit of Price ?
According to Section 55 ,if the ownership of goods has been transferred to the buyer and he refuses to make payment the seller has the right to file a suit against the buyer.
5. What Suit for Damages ?
According to section 56 ,if the buyer refuses to accept the defaults in making the payment for them the seller has the right to file a suit against the buyer for damages
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