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.
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.
Rights of Unpaid Seller
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.