Rights of Unpaid Seller against the Goods | Law of Contracts - CLAT PG PDF Download

Who is an Unpaid Seller? 

An unpaid seller, as defined by Section 45 of the Sale of Goods Act, 1930, is a person who has sold goods but has not received the full price. This situation often arises when the transaction involves negotiable instruments such as cheques, bills of exchange, or promissory notes.

 Key Aspects of an Unpaid Seller 

•  Definition:  An unpaid seller is deemed as such when the entire price has not been paid or tendered, or when a negotiable instrument has been accepted as conditional payment but the conditions have not been met due to dishonor or other reasons.
•  Seller:  In this context, the term "seller" includes anyone in the position of a seller, such as an agent of the seller or a consignor who has paid or is responsible for the price.
•  Illustration:  For example, if A sells goods to B, transfers possession, but B fails to pay the agreed sum, A becomes an unpaid seller.

Rights of an Unpaid Seller 

 1. Right Against the Goods (jus in rem) 

•  Right to Lien:  The seller has the right to retain possession of the goods until payment is made.
•  Right to Stoppage in Transit:  The seller can instruct the carrier or transporter to stop the delivery of goods in transit.
•  Right to Resale:  The seller has the right to sell the goods again since they retain possession.

 2. Rights Against the Buyer (jus in personam) 

•  Right to Sue for Price:  If the seller has sold the goods and the buyer has not paid, the seller can sue the buyer for the price.
•  Right to Sue for Damages:  If the seller incurs damages due to the buyer's actions, such as returning goods undelivered, the seller can sue for damages like packing and transportation costs.
•  Right to Sue for Interest:  If the buyer fails to pay the price within the stipulated time after delivery, the seller can claim interest on the amount due.

Rights of Unpaid Seller Against Goods 

Rights of Lien 

Seller's Lien (Section 47) 

• According to  Section 47 (1)  of the Sale of Goods Act, 1930, an unpaid seller in possession of the goods has the right to retain them until payment is made. This applies in the following situations:
• The goods are sold without any credit terms.
• The goods are sold on credit, but the credit period has expired.
• The buyer becomes insolvent.
•  Section 47 (2)  states that the unpaid seller can exercise the right of lien even if they are in possession of the goods as an agent or bailee for the buyer.

Part-delivery (Section 48) 

•  Section 48  of the Sale of Goods Act allows an unpaid seller who makes part-delivery of goods to exercise the right of lien on the remaining goods.
• This is valid unless there is an agreement between the buyer and seller waiving the lien in case of part-delivery.

Termination of Lien (Section 49) 

•  Section 49 (1)  of the Sale of Goods Act states that an unpaid seller loses the right of lien in the following cases:
• If the seller delivers the goods to a carrier or bailee for transmission to the buyer without reserving the right of disposal.
• If the buyer or their agent lawfully obtains possession of the goods.
• By waiver.
•  Section 49 (2)  clarifies that an unpaid seller with a lien does not lose it simply because they have obtained a decree for the price of the goods.

When is lien lost? 

• Lien is lost when physical ownership of the goods is lost. The unpaid seller loses lien in the following cases:
• When the seller delivers the goods to a carrier or bailee for transmission to the buyer without reserving the right of disposal.
• When the buyer lawfully obtains possession of the goods.
• When the seller expressly or impliedly waives the right of lien.

Rights of Stoppage of Goods in Transit 

• The right of stoppage in transit allows the seller to stop the transit of goods, regain possession, and retain them until payment is made.
• This right extends the seller's control over goods even after parting with possession.

When can this right be exercised? (Section 50) 

• An unpaid seller can exercise the right of stoppage in transit when:
• The buyer becomes insolvent.
• The buyer is considered bankrupt when they are unable to pay their debts in the normal course of business.
• The goods are within the course of transit.
• The goods should not be in the possession of the seller, buyer, or their agents but with a carrier as an intermediary.

Right of Stoppage in Transit 

• The right of stoppage in transit is an extension of the right of lien. It allows an unpaid seller to stop goods in transit, regain possession, and retain them until full payment is received.
• If an unpaid seller has parted with possession of goods and the buyer becomes insolvent, the seller can request the carrier to return the goods, subject to the provisions of the Act.

Duration of Transit (Section 51) 

• Goods are considered in transit from the time the seller delivers them to a carrier or bailee for transmission to the buyer until the buyer or their agent takes delivery.
• Transit ends in several scenarios:
• When the buyer or their agent obtains delivery before the goods reach the destination.
• When the carrier or bailee informs the buyer or their agent that they hold the goods after reaching the destination.
• If the buyer refuses the goods and the seller also refuses to take them back, transit is not at an end.
• If goods are delivered to a ship chartered by the buyer, it is determined whether 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 their agent, transit ends.
• If part-delivery of goods is made and the unpaid seller stops the remaining goods in transit, transit ends for those goods, provided there is no agreement to give up possession of all the goods.

How Stoppage is Affected (Section 52) 

• Stoppage of goods in transit can be done in two ways:
• 1. The seller takes actual possession of the goods.
• 2. If the goods are in the possession of a carrier or other bailee, the seller gives a notice of stoppage to the carrier or bailee. Upon receiving the notice, the carrier or bailee must re-deliver the goods to the seller, who bears the expenses of re-delivery.

Effect of Stoppage 

• Even if the unpaid seller exercises the right of stoppage in transit, the contract remains valid.
• The buyer can still demand delivery of the goods after making the payment.

Right of Lien vs. Rights of Stoppage in Transit 

•  Seller's Lien 
•  Right of Stoppage in Transit 

1. Seller's Lien 

• Attaches when the purchaser is in default, regardless of their solvency or bankruptcy.
• Can only be exercised when the goods are in the actual possession of the seller.
• Comes into effect as soon as the seller takes possession of the goods.

2. Right of Stoppage in Transit 

• Arises primarily when the buyer is bankrupt.
• Can be invoked even when the seller has parted with possession, as long as the goods are in transit.
• Begins once the seller hands over the goods to a carrier for delivery to the buyer.

Differences Between Right of Lien and Right of Stoppage in Transit 

•  1. Basis of Attachment:  Seller's lien attaches when the purchaser is in default, regardless of their financial status. In contrast, the right of stoppage in transit is most relevant when the buyer is bankrupt.
•  2. Conditions of Exercise:  Lien can only be exercised when the goods are in the actual possession of the seller. The right of stoppage in transit applies even when the seller has parted with possession, as long as the goods are in transit.
•  3. Timing of Rights:  The right of lien comes into play as soon as the seller takes possession of the goods. On the other hand, the right of stoppage in transit begins once the seller has handed over the goods to a carrier for delivery to the buyer.

 Pledge by the Buyer (Section 53) 

•  Seller's Rights Unaffected by Buyer's Actions:  The seller's right of lien or stoppage is not impacted by the buyer's decision to sell or pledge the goods, unless the seller explicitly agrees to such actions.
•  Second Buyer’s Position:  The principle ensures that the second buyer cannot have a better position than the seller (first buyer).
•  Defeating Right of Stoppage:  If the buyer transfers the document of title or pledges the goods to a sub-buyer in good faith and for consideration, the right of stoppage is defeated.

Exceptions: 

•  a. Seller's Agreement:  If the seller consents to the buyer selling, pledging, or disposing of the goods in any manner, the seller loses his right to lien.
•  b. Transfer of Document of Title:  If the seller transfers the document of title of goods to the buyer, and the buyer subsequently transfers it to another buyer in good faith and for a price:
•  i.  If the transfer is a sale, the original seller's right of lien and stoppage is defeated.
•  ii.  If the transfer is a pledge, the original seller's right of lien or stoppage can be enforced subject to the rights of the pledgee.

Right of Resale (Section 54) 

•  Importance of Right of Resale:  The right of resale is crucial for an unpaid seller. Without this right, the concepts of lien and stoppage would lose their significance.

Conditions for Exercising Right of Resale: 

1. Perishable Goods:  If the goods are perishable, the seller does not need to notify the buyer of the intention to resell.
2. Notice to Buyer:  If the goods are not perishable, the seller must give notice to the buyer of the intention to resell. The buyer is required to pay the price of the goods and request delivery within the timeframe specified in the notice. If the buyer fails to do so, the seller has the right to resell the goods.
3. Price Difference:  If the resale price is lower than the contract price, the seller can recover the difference. Conversely, if the resale price is higher, the seller keeps the profit.
4. Resale Post Lien or Stoppage:  If the unpaid seller resells the goods after exercising the right of lien or stoppage, the subsequent buyer acquires a good title to the goods, even if the seller did not notify the original buyer of the resale.
5. Reserved Right of Resale:  If the contract of sale stipulates that the seller can resell the goods in case of buyer default, the seller reserves the right of sale. The seller can claim damages from the original buyer even without notifying them of the resale.
6. Quasi-Lien:  If the property in the goods has not passed to the buyer, the unpaid seller can exercise the right of withholding delivery of goods, similar to the right of lien. This is known as quasi-lien.