Rights of Unpaid Seller against Goods

Rights of Unpaid Seller against Goods: 

What are the rights of an unpaid seller?

Abstract

A seller is considered as an “unpaid seller” if he has not paid or received the whole price of the goods sold by him.

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.

Let us jump into the main question “What are the rights of an unpaid seller?”.

Definition of “Unpaid Seller”:

According to “Section 45(1) of the Sale of Goods Act, 1930 a person is called as an “Unpaid seller” –

a) when the whole of the price has not been paid or tendered; 

b) when a bill of exchange or other negotiable instrument has not been received as conditional payment and the condition on which it was received, has not been fully paid by a reason of dishonour of the instrument or otherwise.

Rights of Unpaid Seller (Sections 46- 54):

The rights of the unpaid seller are divided into two main categories:

  1. Rights of the Unpaid Seller against the goods:
  1. Right of lien
  2. Right of Stoppage in Transit 
  3. Right of Resale
  4. Right of Withholding Delivery 

2. Rights of the Unpaid Seller against the Buyer Personally:

  1. Suit for price
  2. Suit for Damages for Non-acceptance
  3. Suit for repudiation of Contract before due date
  4. Suit for interest by the way of damages and special damages.

Rights of Buyer’s Against the Seller:

  1. Damages for Non-delivery (Section 57)
  2. Specific performance (Section 58)
  3. Remedy for a breach of warranty (Section 59)
  4. Suit for anticipatory Breach (section 60)
  1. Rights Of Unpaid Seller against the goods:
  1. Right of lien– 

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 expires.

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 the lien exists 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 comprising 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 loses 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 a buyer or agent lawfully obtains possession of goods- Once the buyer gets 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 the seller regains possession of goods in transit by stoppage his right to lien is revived.

  1. Right of Stoppage in Transit- 

“Stoppage-in-Transit” means, stopping the goods in transit after the possession of such goods has been parted with by the Unpaid seller. Therefore, the right of stoppage-in-transit means the right of stopping the goods in transit after such goods are parted with by the unpaid seller from his possession. The unpaid seller also enjoys the right of resuming the possession of goods, so long as such goods are in the course of transit, and the Unpaid seller also enjoys the right of retaining the possession or the goods until payment or tender of price.

Such Right of stoppage in transit is available to the Unpaid seller in the following situations-

  1. When the buyer becomes insolvent. The buyer is regarded as insolvent when he is unable to pay his debts or he has ceased to pay his debts 

or;

  1. When the goods are in transit.

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 was 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 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 said that he had 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 a ship chartered 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 chartered by the 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.

6) Wrongful refusal to deliver- 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 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 a 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, X sells to Y 20 kg of wheat, 10 kg has been transferred to Y but the remaining 10kg is still in transit, in case Y fails to pay X has a right to stop the goods in transit.  

c) Right of Resale- 

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 rights 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 the last chance to pay the price and take back the goods within a reasonable time. If the buyer does not pay the money back, the 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 the buyer cannot claim it.

3] Seller gives rightful ownership to the buyer after the resale. It does not matter if notice of resale is given or not to the 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.

d) Rights of Withholding Delivery:

According to Section 46(2), the unpaid seller has the right of withholding the delivery when the property in goods has not passed to the Buyer.

2. Rights of the Unpaid Seller against the Buyer Personally:

  1. Suit for price (Section 55)-

The unpaid seller has the right to sue the buyer for the price of the goods when the property in the goods has passed to the buyer under a contract of a sale, and the buyer wrongfully neglects or refuses to pay for the goods.

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.

  1. Suit for Damages for non-acceptance (Section 56)- 

The unpaid seller has a right to sue the buyer for damages for non-acceptances, when the buyer wrongfully neglects or refuses to accept and pay for the goods.

In case there is a wrongful refusal on the part of the 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 the buyer has 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, the seller gets nominal value.

  1. Suit for repudiation of Contract before due dates (Section 60) –

The unpaid seller has a right to repudiate the contract of sale of goods, before the due date of delivery of goods.

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 the due date the 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 its mind and agrees to perform and damages will be assessed according to prices on the day of delivery.

  1. Suit for interest by way of damages and special damages (Section 61)-

According to section 61 of the Act, the unpaid seller has a right to sue the buyer to recover interest or special damages in any case, where the law permits such interest or special damages.

Rights of Buyer’s Against the Seller:

  1. Damages for Non-delivery (Section 57)-

“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”.

  1. Specific Performance (Section 58)

“Subject to the provisions of the Chapter- II of the Specific relief Act, 1963 (47 of 1963),in any suit for the breach of contract to deliver specific or ascertained goods, the court may, if it thinks fit, on the application of the plaintiff, by its decree, direct that the contract shall be performed specifically, without giving the defendant the option of retaining the goods on payment of damages. The decree may be unconditional, or upon such terms and conditions as to damages, payment of the price or otherwise, as the Court may deem just, and the application of the plaintiff may be made at any time before the decree”.

  1. Remedy for the Breach of Warranty (Section 59)-

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 the 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 (Section 60)-

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 its mind and agrees to perform and damages will be assessed according to prices on the day of delivery.

Conclusion-

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.  

From the above discussion, it is clear that the seller becomes an unpaid seller in two cases. First when he has not been paid in full and second when the buyer has failed to meet the maturity of bills of exchange or any other negotiable instrument accepted by the seller of goods as a condition precedent. In this case, the seller has the right to resell the goods if he had already exercised his right of lien or stoppage in transit, after giving proper notice to the buyer. The new buyer will have a good title over the goods.

On the buyer’s failure to pay the requisite amount, the seller can sue the buyer for payment as well as a lien. Contrary to this, if there is a failure on the part of the seller to deliver goods to the buyer, the buyer may sue the seller on account of non-performance and can claim damages or specific performance.

References-

  1. Articles by Prof. prakash mokal
  2. Articles by Jhabvala Series
  3. Law of sales act, 1930 – Avtar singh
  4. https://www.legalbites.in/rights-of-unpaid-seller/
  5. https://blog.ipleaders.in/rights-of-an-unpaid-seller/
  6. Business Laws, CA Foundation

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