ICAI Notes- Unit 4: Unpaid Seller | Business Laws for CA Foundation PDF Download

 Page 1


 
 
a
    
 
3.73 
THE SALE OF GOODS ACT, 1930 
 
LEARNING OUTCOMES 
UNIT – 4: UNPAID SELLER 
 
 
After studying this unit, you would be able to understand- 
? The concept of Unpaid Seller 
? The rights of Unpaid Seller 
? Effect of sub-sale or pledge by the buyer 
? Distinction between the right of lien and right of stoppage in transit 
? Rights of parties in case of breach of contract 
? Concept of sale by auction. 
 
 
 
Rights of an unpaid seller
Against Goods
Property in Goods has 
passed to the buyer
Lien
stoppage in transit
Resale
Property in Goods has 
not passed to the buyer
With holding Delivery
Lien
stoppage in transit
Resale
Against the Buyer
Suit for Price
Suit for Damages
Suit for interest
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
Page 2


 
 
a
    
 
3.73 
THE SALE OF GOODS ACT, 1930 
 
LEARNING OUTCOMES 
UNIT – 4: UNPAID SELLER 
 
 
After studying this unit, you would be able to understand- 
? The concept of Unpaid Seller 
? The rights of Unpaid Seller 
? Effect of sub-sale or pledge by the buyer 
? Distinction between the right of lien and right of stoppage in transit 
? Rights of parties in case of breach of contract 
? Concept of sale by auction. 
 
 
 
Rights of an unpaid seller
Against Goods
Property in Goods has 
passed to the buyer
Lien
stoppage in transit
Resale
Property in Goods has 
not passed to the buyer
With holding Delivery
Lien
stoppage in transit
Resale
Against the Buyer
Suit for Price
Suit for Damages
Suit for interest
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.74 
4.1  UNPAID SELLER 
A contract comprises of reciprocal promises.  In a contract of sale, if seller is under an 
obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the 
seller, as an unpaid seller, shall have certain rights. 
According to Section 45(1) of the Sale of Goods Act, 1930, the seller of goods is deemed to 
be an ‘Unpaid Seller’ when- 
(a) The whole of the price has not been paid or tendered and the seller had an immediate 
right of action for the price. 
(b) When a bill of exchange or other negotiable instrument has been received as 
conditional payment, and the condition on which it was received has not been fulfilled 
by reason of the dishonour of the instrument or otherwise.  
 The term ‘seller‘ here includes any person who is in the position of a seller, as, for 
instance, an agent of the seller to whom the bill of lading has been endorsed, or a 
consignor or agent who has himself paid, or is directly responsible for, the price 
[Section 45(2)]. 
Example 1: X sold certain goods to Y for 
`
 50,000. Y paid 
`
 40,000 but fails to pay the balance. 
X is an unpaid seller. 
Example 2: P sold some goods to R for 
`
 60,000 and received a cheque for a full price. On 
presentment, the cheque was dishonoured by the bank. P is an unpaid seller. 
4.2 RIGHTS OF AN UNPAID SELLER  
Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for 
the time being in force, notwithstanding that the property in the goods may have passed to 
the buyer, the unpaid seller of goods, as such, has by implication of law-  
(a)  a lien on the goods for the price while he is in possession of them;  
(b)  in case of the insolvency of the buyer a right of stopping the goods in transit after he 
has parted with the possession of them;  
(c)  a right of re-sale as limited by this Act. [Sub-section (1)] 
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition 
to his other remedies, a right of withholding delivery similar to and co-extensive with his rights 
of lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)] 
© The Institute of Chartered Accountants of India
Page 3


 
 
a
    
 
3.73 
THE SALE OF GOODS ACT, 1930 
 
LEARNING OUTCOMES 
UNIT – 4: UNPAID SELLER 
 
 
After studying this unit, you would be able to understand- 
? The concept of Unpaid Seller 
? The rights of Unpaid Seller 
? Effect of sub-sale or pledge by the buyer 
? Distinction between the right of lien and right of stoppage in transit 
? Rights of parties in case of breach of contract 
? Concept of sale by auction. 
 
 
 
Rights of an unpaid seller
Against Goods
Property in Goods has 
passed to the buyer
Lien
stoppage in transit
Resale
Property in Goods has 
not passed to the buyer
With holding Delivery
Lien
stoppage in transit
Resale
Against the Buyer
Suit for Price
Suit for Damages
Suit for interest
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.74 
4.1  UNPAID SELLER 
A contract comprises of reciprocal promises.  In a contract of sale, if seller is under an 
obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the 
seller, as an unpaid seller, shall have certain rights. 
According to Section 45(1) of the Sale of Goods Act, 1930, the seller of goods is deemed to 
be an ‘Unpaid Seller’ when- 
(a) The whole of the price has not been paid or tendered and the seller had an immediate 
right of action for the price. 
(b) When a bill of exchange or other negotiable instrument has been received as 
conditional payment, and the condition on which it was received has not been fulfilled 
by reason of the dishonour of the instrument or otherwise.  
 The term ‘seller‘ here includes any person who is in the position of a seller, as, for 
instance, an agent of the seller to whom the bill of lading has been endorsed, or a 
consignor or agent who has himself paid, or is directly responsible for, the price 
[Section 45(2)]. 
Example 1: X sold certain goods to Y for 
`
 50,000. Y paid 
`
 40,000 but fails to pay the balance. 
X is an unpaid seller. 
Example 2: P sold some goods to R for 
`
 60,000 and received a cheque for a full price. On 
presentment, the cheque was dishonoured by the bank. P is an unpaid seller. 
4.2 RIGHTS OF AN UNPAID SELLER  
Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for 
the time being in force, notwithstanding that the property in the goods may have passed to 
the buyer, the unpaid seller of goods, as such, has by implication of law-  
(a)  a lien on the goods for the price while he is in possession of them;  
(b)  in case of the insolvency of the buyer a right of stopping the goods in transit after he 
has parted with the possession of them;  
(c)  a right of re-sale as limited by this Act. [Sub-section (1)] 
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition 
to his other remedies, a right of withholding delivery similar to and co-extensive with his rights 
of lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)] 
© The Institute of Chartered Accountants of India
 
 
a
    
 
3.75 
THE SALE OF GOODS ACT, 1930 
An unpaid seller has been expressly given the rights against the goods as well as the buyer 
personally which are discussed as under:  
(a) Rights of an unpaid seller against the goods: The right of unpaid seller against 
goods can be categorized under two headings.  
 
4.3  RIGHT OF UNPAID SELLER AGAINST THE GOODS 
The unpaid seller has the following rights against the goods:  
(1) Seller’s lien (Section 47) 
Rights of lien: An unpaid seller has a right of lien on the goods for the price while he 
is in possession, until the payment or tender of the price of such goods. It is the right 
to retain the possession of the goods and refusal to deliver them to the buyer until the 
price due in respect of them is paid or tendered.  
 The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as the 
seller remains in possession of the goods. 
 Exercise of right of lien: This right can be exercised by him in the following cases 
only: 
 (a) where goods have been sold without any stipulation of credit; (i.e., on cash sale) 
 (b) where goods have been sold on credit but the term of credit has expired; or 
 (c) where the buyer becomes insolvent. 
Example 3: A sold certain goods to B for a price 
`
 50,000 and allowed him to pay the 
price within one month. B becomes insolvent during this period of credit. A, the unpaid 
seller, can exercise his right of lien. 
 Seller may exercise his right of lien even where he is in possession of the goods as 
agent or bailee for the buyer. 
Against the goods
Where the property in goods 
has passed to the buyers
Where the property in goods 
has not passed to the buyers
© The Institute of Chartered Accountants of India
Page 4


 
 
a
    
 
3.73 
THE SALE OF GOODS ACT, 1930 
 
LEARNING OUTCOMES 
UNIT – 4: UNPAID SELLER 
 
 
After studying this unit, you would be able to understand- 
? The concept of Unpaid Seller 
? The rights of Unpaid Seller 
? Effect of sub-sale or pledge by the buyer 
? Distinction between the right of lien and right of stoppage in transit 
? Rights of parties in case of breach of contract 
? Concept of sale by auction. 
 
 
 
Rights of an unpaid seller
Against Goods
Property in Goods has 
passed to the buyer
Lien
stoppage in transit
Resale
Property in Goods has 
not passed to the buyer
With holding Delivery
Lien
stoppage in transit
Resale
Against the Buyer
Suit for Price
Suit for Damages
Suit for interest
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.74 
4.1  UNPAID SELLER 
A contract comprises of reciprocal promises.  In a contract of sale, if seller is under an 
obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the 
seller, as an unpaid seller, shall have certain rights. 
According to Section 45(1) of the Sale of Goods Act, 1930, the seller of goods is deemed to 
be an ‘Unpaid Seller’ when- 
(a) The whole of the price has not been paid or tendered and the seller had an immediate 
right of action for the price. 
(b) When a bill of exchange or other negotiable instrument has been received as 
conditional payment, and the condition on which it was received has not been fulfilled 
by reason of the dishonour of the instrument or otherwise.  
 The term ‘seller‘ here includes any person who is in the position of a seller, as, for 
instance, an agent of the seller to whom the bill of lading has been endorsed, or a 
consignor or agent who has himself paid, or is directly responsible for, the price 
[Section 45(2)]. 
Example 1: X sold certain goods to Y for 
`
 50,000. Y paid 
`
 40,000 but fails to pay the balance. 
X is an unpaid seller. 
Example 2: P sold some goods to R for 
`
 60,000 and received a cheque for a full price. On 
presentment, the cheque was dishonoured by the bank. P is an unpaid seller. 
4.2 RIGHTS OF AN UNPAID SELLER  
Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for 
the time being in force, notwithstanding that the property in the goods may have passed to 
the buyer, the unpaid seller of goods, as such, has by implication of law-  
(a)  a lien on the goods for the price while he is in possession of them;  
(b)  in case of the insolvency of the buyer a right of stopping the goods in transit after he 
has parted with the possession of them;  
(c)  a right of re-sale as limited by this Act. [Sub-section (1)] 
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition 
to his other remedies, a right of withholding delivery similar to and co-extensive with his rights 
of lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)] 
© The Institute of Chartered Accountants of India
 
 
a
    
 
3.75 
THE SALE OF GOODS ACT, 1930 
An unpaid seller has been expressly given the rights against the goods as well as the buyer 
personally which are discussed as under:  
(a) Rights of an unpaid seller against the goods: The right of unpaid seller against 
goods can be categorized under two headings.  
 
4.3  RIGHT OF UNPAID SELLER AGAINST THE GOODS 
The unpaid seller has the following rights against the goods:  
(1) Seller’s lien (Section 47) 
Rights of lien: An unpaid seller has a right of lien on the goods for the price while he 
is in possession, until the payment or tender of the price of such goods. It is the right 
to retain the possession of the goods and refusal to deliver them to the buyer until the 
price due in respect of them is paid or tendered.  
 The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as the 
seller remains in possession of the goods. 
 Exercise of right of lien: This right can be exercised by him in the following cases 
only: 
 (a) where goods have been sold without any stipulation of credit; (i.e., on cash sale) 
 (b) where goods have been sold on credit but the term of credit has expired; or 
 (c) where the buyer becomes insolvent. 
Example 3: A sold certain goods to B for a price 
`
 50,000 and allowed him to pay the 
price within one month. B becomes insolvent during this period of credit. A, the unpaid 
seller, can exercise his right of lien. 
 Seller may exercise his right of lien even where he is in possession of the goods as 
agent or bailee for the buyer. 
Against the goods
Where the property in goods 
has passed to the buyers
Where the property in goods 
has not passed to the buyers
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.76 
 The term insolvent refers to “a person is said to be insolvent who has ceased to pay 
his debts in the ordinary course of business, or cannot pay his debts as they become 
due, whether he has committed an act of insolvency or not”. 
 Part delivery (Section 48): Where an unpaid seller has made part delivery of the 
goods, he may exercise his right of lien on the remainder, unless such part delivery has 
been made under such circumstances as to show an agreement to waive the lien. 
 Termination of lien (Section 49): The unpaid seller loses his right of lien under the 
following circumstances: 
 (i) When he delivers the goods to a carrier or other bailee for the purpose of 
transmission to the buyer without reserving the right of disposal of the goods. 
 (ii) Where the buyer or his agent lawfully obtains possession of the goods. 
 (iii) Where seller has waived the right of lien. 
 (iv) By Estoppel i.e., where the seller so conducts himself that he leads third parties 
to believe that the lien does not exist. 
 Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien 
by reason only that he has obtained a decree for the price of the goods. (This means 
even if the seller has taken a price for the goods under a court case, he can still exercise 
his right to lien on those goods.) 
Example 4: A, sold a car to B for 
`
 1,00,000 and delivered the same to the railways for 
the purpose of transmission to the buyer. The railway receipt was taken in the name of 
B and sent to B. Now A cannot exercise the right of lien. 
(2) Right of stoppage in transit (Section 50 to 52):  
 Meaning of right of stoppage in transit (Section 50): The right of stoppage in transit 
means the right of stopping the goods while they are in transit, to regain the 
possession and to retain them till the full price is paid. 
When the unpaid seller has parted with the goods to a carrier and the buyer has 
become insolvent, he can exercise this right of asking the carrier to return the goods 
back, or not to deliver the goods to the buyer. 
This right is the extension of the right of lien because it entitles the seller to regain 
possession even when the seller has parted with the possession of the goods. 
However, the right of stoppage in transit is exercised only when the following 
conditions are fulfilled: 
(a) The seller must be unpaid. 
© The Institute of Chartered Accountants of India
Page 5


 
 
a
    
 
3.73 
THE SALE OF GOODS ACT, 1930 
 
LEARNING OUTCOMES 
UNIT – 4: UNPAID SELLER 
 
 
After studying this unit, you would be able to understand- 
? The concept of Unpaid Seller 
? The rights of Unpaid Seller 
? Effect of sub-sale or pledge by the buyer 
? Distinction between the right of lien and right of stoppage in transit 
? Rights of parties in case of breach of contract 
? Concept of sale by auction. 
 
 
 
Rights of an unpaid seller
Against Goods
Property in Goods has 
passed to the buyer
Lien
stoppage in transit
Resale
Property in Goods has 
not passed to the buyer
With holding Delivery
Lien
stoppage in transit
Resale
Against the Buyer
Suit for Price
Suit for Damages
Suit for interest
UNIT OVERVIEW 
 
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.74 
4.1  UNPAID SELLER 
A contract comprises of reciprocal promises.  In a contract of sale, if seller is under an 
obligation to deliver goods, buyer has to pay for it. In case buyer fails or refuses to pay, the 
seller, as an unpaid seller, shall have certain rights. 
According to Section 45(1) of the Sale of Goods Act, 1930, the seller of goods is deemed to 
be an ‘Unpaid Seller’ when- 
(a) The whole of the price has not been paid or tendered and the seller had an immediate 
right of action for the price. 
(b) When a bill of exchange or other negotiable instrument has been received as 
conditional payment, and the condition on which it was received has not been fulfilled 
by reason of the dishonour of the instrument or otherwise.  
 The term ‘seller‘ here includes any person who is in the position of a seller, as, for 
instance, an agent of the seller to whom the bill of lading has been endorsed, or a 
consignor or agent who has himself paid, or is directly responsible for, the price 
[Section 45(2)]. 
Example 1: X sold certain goods to Y for 
`
 50,000. Y paid 
`
 40,000 but fails to pay the balance. 
X is an unpaid seller. 
Example 2: P sold some goods to R for 
`
 60,000 and received a cheque for a full price. On 
presentment, the cheque was dishonoured by the bank. P is an unpaid seller. 
4.2 RIGHTS OF AN UNPAID SELLER  
Unpaid seller’s right (Section 46): Subject to the provisions of this Act and of any law for 
the time being in force, notwithstanding that the property in the goods may have passed to 
the buyer, the unpaid seller of goods, as such, has by implication of law-  
(a)  a lien on the goods for the price while he is in possession of them;  
(b)  in case of the insolvency of the buyer a right of stopping the goods in transit after he 
has parted with the possession of them;  
(c)  a right of re-sale as limited by this Act. [Sub-section (1)] 
Where the property in goods has not passed to the buyer, the unpaid seller has, in addition 
to his other remedies, a right of withholding delivery similar to and co-extensive with his rights 
of lien and stoppage in transit where the property has passed to the buyer. [Sub-section (2)] 
© The Institute of Chartered Accountants of India
 
 
a
    
 
3.75 
THE SALE OF GOODS ACT, 1930 
An unpaid seller has been expressly given the rights against the goods as well as the buyer 
personally which are discussed as under:  
(a) Rights of an unpaid seller against the goods: The right of unpaid seller against 
goods can be categorized under two headings.  
 
4.3  RIGHT OF UNPAID SELLER AGAINST THE GOODS 
The unpaid seller has the following rights against the goods:  
(1) Seller’s lien (Section 47) 
Rights of lien: An unpaid seller has a right of lien on the goods for the price while he 
is in possession, until the payment or tender of the price of such goods. It is the right 
to retain the possession of the goods and refusal to deliver them to the buyer until the 
price due in respect of them is paid or tendered.  
 The unpaid seller’s lien is a possessory lien i.e. the lien can be exercised as long as the 
seller remains in possession of the goods. 
 Exercise of right of lien: This right can be exercised by him in the following cases 
only: 
 (a) where goods have been sold without any stipulation of credit; (i.e., on cash sale) 
 (b) where goods have been sold on credit but the term of credit has expired; or 
 (c) where the buyer becomes insolvent. 
Example 3: A sold certain goods to B for a price 
`
 50,000 and allowed him to pay the 
price within one month. B becomes insolvent during this period of credit. A, the unpaid 
seller, can exercise his right of lien. 
 Seller may exercise his right of lien even where he is in possession of the goods as 
agent or bailee for the buyer. 
Against the goods
Where the property in goods 
has passed to the buyers
Where the property in goods 
has not passed to the buyers
© The Institute of Chartered Accountants of India
  
 
 
BUSINESS LAWS 
a
 
 3.76 
 The term insolvent refers to “a person is said to be insolvent who has ceased to pay 
his debts in the ordinary course of business, or cannot pay his debts as they become 
due, whether he has committed an act of insolvency or not”. 
 Part delivery (Section 48): Where an unpaid seller has made part delivery of the 
goods, he may exercise his right of lien on the remainder, unless such part delivery has 
been made under such circumstances as to show an agreement to waive the lien. 
 Termination of lien (Section 49): The unpaid seller loses his right of lien under the 
following circumstances: 
 (i) When he delivers the goods to a carrier or other bailee for the purpose of 
transmission to the buyer without reserving the right of disposal of the goods. 
 (ii) Where the buyer or his agent lawfully obtains possession of the goods. 
 (iii) Where seller has waived the right of lien. 
 (iv) By Estoppel i.e., where the seller so conducts himself that he leads third parties 
to believe that the lien does not exist. 
 Exception: The unpaid seller of the goods, having a lien thereon, does not lose his lien 
by reason only that he has obtained a decree for the price of the goods. (This means 
even if the seller has taken a price for the goods under a court case, he can still exercise 
his right to lien on those goods.) 
Example 4: A, sold a car to B for 
`
 1,00,000 and delivered the same to the railways for 
the purpose of transmission to the buyer. The railway receipt was taken in the name of 
B and sent to B. Now A cannot exercise the right of lien. 
(2) Right of stoppage in transit (Section 50 to 52):  
 Meaning of right of stoppage in transit (Section 50): The right of stoppage in transit 
means the right of stopping the goods while they are in transit, to regain the 
possession and to retain them till the full price is paid. 
When the unpaid seller has parted with the goods to a carrier and the buyer has 
become insolvent, he can exercise this right of asking the carrier to return the goods 
back, or not to deliver the goods to the buyer. 
This right is the extension of the right of lien because it entitles the seller to regain 
possession even when the seller has parted with the possession of the goods. 
However, the right of stoppage in transit is exercised only when the following 
conditions are fulfilled: 
(a) The seller must be unpaid. 
© The Institute of Chartered Accountants of India
 
 
a
    
 
3.77 
THE SALE OF GOODS ACT, 1930 
(b) He must have parted with the possession of goods.  
(c) The goods are in transit. 
(d) The buyer has become insolvent. 
(e) The right is subject to provisions of the Act. [Section 50] 
Example 5: A of Mumbai sold certain goods to B of Delhi. He delivered the goods to 
C, a common carrier for the purpose of transmission of these goods to B. Before the 
goods could reach him, B became insolvent and A came to know about it. A can stop 
the goods in transit by giving a notice of it to C. 
Duration of transit (Section 51): The goods are deemed to be in course of transit 
from the time when they are delivered to a carrier or other bailee for the purpose of 
transmission to the buyer, until the buyer or his agent on that behalf takes delivery of 
them from such carrier or other bailee. 
When does the transit come to an end? 
The right of stoppage in transit is lost when transit comes to an end. Transit comes to 
an end in the following cases: 
? When the buyer or other bailee obtains delivery. 
? Buyer obtains delivery before the arrival of goods at destination. It is also called 
interception by the buyer which can be with or without the consent of the 
carrier.  
? Where the carrier or other bailee acknowledges to the buyer or his agent that 
he holds the goods as soon as the goods are loaded on the ship, unless the 
seller has reserved the right of disposal of the goods. 
? If the carrier wrongfully refuses to deliver the goods to the buyer. 
? Where goods are delivered to the carrier hired by the buyer, the transit comes 
to an end. 
? Where the part delivery of the goods has been made to the buyer, the transit 
will come to an end for the remaining goods which are yet in the course of 
transmission. 
? Where the goods are delivered to a ship chartered by the buyer, the transit comes 
to an end. [section 51]  
 How stoppage in transit is effected (Section 52):  
 (1)  The unpaid seller may exercise his right of stoppage in transit either by taking 
actual possession of the goods, or by giving notice of his claim to the carrier or 
© The Institute of Chartered Accountants of India