Rights of Unpaid Seller | Explained

By | April 27, 2021
Rights of Unpaid Seller | Explained

The present article discusses the rights of unpaid sellers against the buyer under the Sale of Goods Act, 1930. To study so, the present article is divided mainly into three parts: the first part extensively discusses who is an unpaid seller under the act, the second part then elaborately discusses the rights of unpaid seller against the buyer and rights against goods with main focus on unpaid seller’s rights of lien, stoppage in transit, and resale. The third part deals with the transfer of goods by buyer and seller and then the article has a suitable conclusion in the end.

I. Introduction

In a contract of sale, the seller is under the contractual obligation to deliver the goods sold and similarly, the buyer is under the contractual obligation to pay the price consideration set or quid pro quo, i.e. something in return from the buyer’ side as consideration. This is called a reciprocal promise as mentioned under section 2(f) of the Indian Contract Act, 1872. In simple words, any set of promises made by the parties which form the consideration or part of the consideration for each other are referred to as reciprocal promises. Every contract of sale of goods consists of reciprocal promises.[1]

In some cases, when the buyer refuses or fails to pay the set requisite amount to the seller of goods, then the seller becomes an unpaid seller. Now, the unpaid seller has certain rights against the buyer and the seller which are considered as the remedy for the seller in case there is any breach of contract from the buyer’s side. The remedies available to the unpaid seller can be against:

  1. Buyer
  2. Goods

II. Who is an unpaid seller?

The term ‘unpaid seller’ is commonly referred to as the seller to whom the full price of the goods sold has not been paid. The legal definition of the term ‘unpaid seller’ is provided under section 45 of the Sale of Goods Act, 1930, as under:

“The seller of the goods is deemed to be an unpaid seller within the meaning of this act:

  1. When the whole of the price has not been paid or tendered;
  2. 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.”[2]

For example, A, the seller has sold some goods to B for $45 and received a check in return from B. On presentment, the check got dishonoured by the bank, so A here becomes an unpaid seller.

It is to further note that a seller also includes a person who is working on behalf of the seller as his agent or consignor who had himself paid or responsible to pay the price. The rights of an unpaid seller against buyer are elaborately discussed as follow:

III. Rights of Unpaid Seller

Rights against buyer

Suit for the price

According to section 55(1) of the Sales of Goods Act, 1930, when any goods are passed on to the buyer who has wrongfully neglected or refused to make the payment in accordance to the terms and conditions of the contract, the seller has the right to sue the buyer. This is based on the principle that once the property has been passed onto the buyer, he is bound to pay the price.

However, section 55(2) of the act says that in case the due date of the payment has been passed and the goods hadn’t been delivered yet, the seller has the right to sue the buyer for the wrongful neglect or refusal on his part.

Suit for the damages

Section 56 of the act says that in case there is a wrongful refusal on the buyer’s part towards acceptance of goods and payment of money, the seller has the right to sue the buyer for damages of non-acceptance. The quantum of damages is calculated as per section 73 and 74 of the Indian Contract Act.

In case, the goods have a ready market the seller of goods has to resell the goods and the buyer will have to pay for the losses, if any incurred. If the seller doesn’t resell the goods, the difference between the price of goods mentioned in the contract and the market price at the day of breach is taken as a measure for damages.

The seller has the duty of mitigation, meaning the injured has to make reasonable efforts to minimize the loss incurred from the breach. For example, if the seller can resale the goods, the difference in contract and resale price is quoted to the seller but if the seller deliberately tries to resale the goods due to which its market value decreases, then the buyer will not be held liable for the exaggerated loss.

The Supreme Court has well demonstrated the nature of the duty of mitigation in the case of M. Lachia Shetty v. Coffee Board[3]. In this case, a dealer who bid at an auction of coffee has first been accepted and later refused to carry out the contract. Due to which the coffee was re-auctioned at the next best bidding price and the court asked the dealer to pay for the difference in the amount of loss to the board.

Suit for interest

Section 61 of the act provides that where the buyer and seller have entered into a specific agreement in respect of the interest on the price of goods from the date on which the payment of goods becomes due, the seller may recover that interest from the buyer. However, in case there is no such agreement, the seller may charge interest on the price of goods from the day he notifies the buyer.

If there is no contract to the contrary, the court may award interest to the seller at such a rate as it deems fit on the amount of the goods from the date on which it becomes payable.

Repudiation of the contract before the due date

As per section 60 of the act, the rule of anticipatory breach of contract applies, wherein; if the buyer repudiates the contract before the date of delivery of goods, then the seller can consider the contract as rescinded and can sue the buyer for the damages of the breach of contract.  The provision implies that if one of the parties to the contract repudiates it before the due date, then the other party has two courses of action.

Either the aggrieved party may immediately accept the breach and bring the action of damages for the contract being rescinded. The damages, in this case, will be assessed as per the then prevailing prices or he can wait for the date of delivery. In the second course of action, the contract is open at risk and will be a benefit to both parties. In case one party changes his mind and agrees to perform, then the damages will be assessed according to prices on the day of delivery.

Rights against goods

Right of lien

Right of lien referred to the rights of an unpaid seller to retain the goods sold until the whole price of the goods is paid or tendered to the unpaid seller. The right of lien can be exercised by the unpaid seller in following circumstances[4]:

  • Where goods have been sold without any stipulation to credit.
  • Where the goods have been sold on credit but the credit period has already expired.
  • Where the buyer has become insolvent, even before the expiry of the period of credit.

Certain essential rules regarding right of lien are as provided below:

Rule 1: Right of lien can be exercised if the seller is in possession of the goods, then the unpaid seller can exercise his right of lien even if the property in goods or documents of title have been transferred. In case only part delivery is made, the seller can still exercise his right of lien on the remainder, however, if the seller has delivered part of goods so as to show an intention to waive the lien.

Rule 2: The unpaid seller can exercise his right of lien only for price consideration and not for any other charges.

Rule 3: The right of lien can be exercised only by the seller of goods.

Rule 4: The unpaid seller can exercise his right of lien even if he is in possession of the goods as a bailee or an agent.

Rule 5: An unpaid seller can’t exercise his right of lien if he has expressly waived his right of lien.

Rule 6: An unpaid seller doesn’t lose the right of lien even where the unpaid seller has obtained a decree for the price of goods

Right of stoppage in transit

According to section 50 of the act, the Right of stoppage in transit is the right of the seller of goods to stop the goods in transit after the unpaid seller has parted with the goods. If the goods are in transit, the seller has a right to resume the possession of the goods as long as they are in the course of transit. The right of stoppage in transit is available to the unpaid seller only when the buyer becomes insolvent and when the goods are in transit.

As per the act there are the following four essentials for the right of the unpaid seller for stopping the goods in transit: unpaid seller, buyer insolvent, the property should have been passed to the buyer, and the goods in property should be in course of transit.[5]

The right of stoppage in transit is exercised by the unpaid seller either:

  • By taking actual possession of the goods sold.
  • By sending notice of claim to the carrier or other bailee in the possession of goods sold. The notice of claim can be sent either to the principal or to the person in possession of goods.

Talking about the duration of transit, the act says that the goods sold are deemed to be in course of transit from the time they are delivered to a carrier or another bailee for the purpose of transmission to the buyer. The carrier may hold the goods as buyer’s agent or seller’s agent. The seller can exercise this right but the transit comes to an end if:

  • The buyer or his agent obtains the delivery of goods before their arrival at the destination.
  • After arrival at the destined location, the carrier acknowledges the buyer or his agent holding the goods on behalf of the buyer.
  • Where the carrier wrongfully refuses to deliver the goods to the buyer of goods.

Right of resale

The exercise of the right of lien or stoppage doesn’t rescind the contract but reselling of goods does. Without the right of resale, the rights of lien and stoppage wouldn’t be of much usage because the seller can retain goods only under these rights until the buyer pays back the money in full.  An unpaid seller can exercise his rights against good resale under the following conditions and circumstances:

  1. The seller needs to send a notice to the buyer before resale, except in the case of perishable goods, when the seller giving him the last chance to pay the price is enough and taking back the goods within a reasonable time is a fair deal. If the buyer doesn’t pay the price back to the seller, he has the right to resell the goods. If there is a seller’s failure to send notice of intention to resell, he can’t claim damages from the buyer and he has to give the profit incurred.
  2. If there is any loss incurred while in the resale of goods, the unpaid seller can claim the loss from the buyer, on the contrary, if there is profit, the buyer can’t claim it.
  3. The seller of goods giving rightful ownership to the buyer after the resale doesn’t matter if notice of resale was sent or not to the defaulted buyer.
  4. The seller has exclusive rights in some cases to resale the goods, if the buyer fails to pay, and then the buyer can’t ask for profit on resale if no notice is given.

In the case of RV Ward v. Bignall[6], a contract of sale was for two cars worth $850. The buyer deposited $25 but afterwards didn’t pay the price despite giving reasonable notice. Then the seller tried to put the cars on resale but was able to resell only one car for $359. The seller claimed damages of $475 as the balance of price and $22 as advertisement expenses. The court, in this case, held that once the seller resells the goods, the contract is rescinded and he can’t claim the money but can ask for advertising expenses and a shortfall in the price of the car sold.

IV. Conclusion

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.

[1] Law of Sales of Goods Act, Avtar Singh.

[2] Section 45 of the Sales of Goods Act, 1930.

[3] (1980) 4 SCC 636.

[4] Section 47 of the Sale of Goods Act, 1930.

[5] Section 50 of the Sales of Goods Act, 1930.

[6] [1967] 1 Q.B. 534.

  1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
  2. Legal Bites Academy – Ultimate Test Prep Destination
Author: Deepshikha

Deepshikha is a law student from National Law University, Odisha.

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