Unpaid Seller – Chapter Notes
CA Foundation Business Laws Chapter 3 Unit 4 notes on Unpaid Seller under the Sale of Goods Act, 1930. Covers Sections 45 to 64A, lien, stoppage in transit, resale, buyer remedies, auction sale and tax adjustment.
Contents
This unit deals with the seller’s protection when the buyer does not pay. In a contract of sale, seller has to deliver goods and buyer has to pay price. If buyer fails to pay, the law does not leave the seller helpless. It gives the seller rights against the goods and rights against the buyer personally.
- Concept of unpaid seller.
- Rights of unpaid seller.
- Effect of sub-sale or pledge by buyer.
- Difference between lien and stoppage in transit.
- Rights of parties in case of breach.
- Concept of sale by auction.
- Confusing lien with stoppage in transit.
- Forgetting insolvency is essential for stoppage.
- Assuming sub-sale always defeats unpaid seller.
- Forgetting notice requirement in resale.
- Confusing seller’s remedies with buyer’s remedies.
- Missing auction rule: sale completes on fall of hammer.
The seller of goods is deemed to be an unpaid seller when the whole of the price has not been paid or tendered, or when a bill of exchange or other negotiable instrument received as conditional payment is dishonoured or the condition is otherwise not fulfilled.
When Seller Becomes Unpaid
Who is Included in “Seller”
The term seller includes any person in the position of seller, such as an agent of the seller to whom bill of lading is endorsed, or a consignor/agent who has himself paid or is directly responsible for the price.
X sells goods to Y for ₹50,000. Y pays ₹40,000 but fails to pay the balance. X is an unpaid seller. Similarly, if P receives a cheque for full price from R and the cheque is dishonoured, P is an unpaid seller.
Section 46 creates the master framework. An unpaid seller has rights against the goods and rights against the buyer personally.
| Rights Against Goods | Rights Against Buyer Personally |
|---|---|
| Right of lien. | Suit for price. |
| Right of stoppage in transit. | Suit for damages for non-acceptance. |
| Right of resale. | Repudiation of contract before due date. |
| Right of withholding delivery where property has not passed. | Suit for interest. |
Lien is the unpaid seller’s right to retain possession of goods and refuse delivery until price is paid or tendered.
The lien of unpaid seller is a possessory lien. It exists only while the seller has possession of the goods. It can be exercised even if property in goods has passed to the buyer.
When Lien Can Be Exercised
A sold goods to B for ₹50,000 and allowed one month credit. B becomes insolvent during the credit period. A can exercise right of lien.
Part Delivery — Section 48
If unpaid seller has made part delivery, he may exercise lien on the remainder unless the part delivery was made in circumstances showing waiver of lien.
Termination of Lien — Section 49
- Seller delivers goods to carrier or bailee for transmission to buyer without reserving right of disposal.
- Buyer or buyer’s agent lawfully obtains possession.
- Seller waives lien.
- Seller is estopped by his conduct from claiming lien.
Facts A sold a car to B and delivered it to railways for transmission. Railway receipt was taken in B’s name and sent to B.
Issue Can A still exercise lien after handing over goods to carrier without reserving disposal?
Held No. A lost lien because goods were delivered to carrier for transmission to buyer and right of disposal was not reserved.
Stoppage in transit is the unpaid seller’s right to stop goods while they are in transit, regain possession and retain them until full price is paid.
This right is an extension of lien. It arises after seller has parted with possession but goods have not yet reached buyer.
Conditions for Stoppage in Transit
A of Mumbai sells goods to B of Delhi and delivers them to carrier C. Before goods reach B, B becomes insolvent. A can stop the goods in transit by giving notice to C.
Duration of Transit — Section 51
Transit starts when goods are delivered to carrier or bailee for transmission to buyer. Transit ends when buyer or buyer’s agent takes delivery.
When Transit Comes to an End
- Buyer or his agent obtains delivery.
- Buyer intercepts goods before destination.
- Carrier acknowledges to buyer that he holds goods on buyer’s behalf.
- Carrier wrongfully refuses to deliver goods to buyer.
- Goods are delivered to carrier hired by buyer.
- Goods are delivered to ship chartered by buyer.
How Stoppage is Effected — Section 52
| Basis | Right of Lien | Right of Stoppage in Transit |
|---|---|---|
| Essence | Retain possession. | Regain possession. |
| Where are the goods? | Goods are with seller. | Goods are with carrier/bailee in transit. |
| Possession | Seller has not parted with possession. | Seller has parted with possession. |
| Buyer’s insolvency | Not always necessary. | Essential. |
| Starting point | Starts while seller has possession. | Begins when lien ends and goods enter transit. |
| Ending point | Ends when seller loses possession. | Ends when buyer or agent obtains delivery. |
| Nature | Primary right. | Extension of lien. |
General rule: unpaid seller’s right of lien or stoppage in transit is not affected merely because buyer has sold or pledged the goods. A second buyer cannot get a better position than the first buyer.
A sells goods to B and sends them by rail. B sells goods to C. B becomes insolvent before goods reach him. If A has not assented to sub-sale, A can still exercise stoppage in transit.
When Unpaid Seller’s Rights Are Defeated
Facts A agreed to sell cartons in possession of a wharfinger to B. A also agreed that price would be paid from sale proceeds recovered by B from his customers. B sold goods to C and C paid B. B failed to pay A. A then tried to stop delivery to C by exercising lien.
Issue Can seller exercise lien after having agreed that buyer would resell and pay from resale proceeds?
Held No. Seller had assented to resale by buyer to sub-buyers. Therefore unpaid seller’s lien was defeated.
The right of resale is important because lien and stoppage only allow the seller to retain or regain goods. Resale allows the seller to realise value from goods.
When Unpaid Seller Can Resell
Notice of Resale — Consequences
| Situation | Seller’s right to recover loss | Seller’s right to keep profit |
|---|---|---|
| Notice of resale given and buyer still defaults | Seller can recover loss from original buyer. | Seller can keep profit. |
| No notice of resale | Seller cannot recover loss on resale. | Seller must return profit to original buyer. |
| Perishable goods | Notice not required. | Seller protected. |
| Express resale right reserved | Notice not required. | Seller can recover damages. |
Rights against buyer personally are also called seller’s remedies for breach of contract of sale. They are in addition to rights against goods.
Suit for Price — Section 55
| Situation | Seller’s right |
|---|---|
| Property has passed and buyer wrongfully refuses to pay. | Seller may sue for price. |
| Price is payable on a certain day irrespective of delivery. | Seller may sue for price even if property has not passed and goods are not appropriated. |
Damages for Non-Acceptance — Section 56
If buyer wrongfully neglects or refuses to accept and pay for goods, seller may sue for damages for non-acceptance. Measure of damages follows Section 73 of the Indian Contract Act, 1872.
Repudiation Before Due Date — Section 60
If buyer repudiates before delivery date, seller may either treat contract as subsisting and wait, or treat it as rescinded and sue for damages. This is anticipatory breach.
Suit for Interest — Section 61
If there is agreement for interest, seller may recover interest as agreed. If there is no agreement, court may award interest from date of tender of goods or from date price was payable.
Facts D sold goods to E for ₹5,00,000 on 15 days credit and delivered the goods. On due date, E refused to pay.
Issue What are D’s rights as unpaid seller?
Held Since goods were delivered and price became due, D can sue for price. Depending on facts, he may also claim damages for non-acceptance and interest.
If seller breaches the contract, buyer also gets remedies. These apply where seller fails to deliver, repudiates, or supplies non-conforming goods which buyer rejects.
| Buyer’s Remedy | Section | When available |
|---|---|---|
| Damages for non-delivery | 57 | Seller wrongfully neglects/refuses to deliver goods. |
| Specific performance | 58 | Goods are specific/ascertained and damages are inadequate. |
| Breach of warranty | 59 | Seller breaches warranty or buyer treats breach of condition as warranty. |
| Anticipatory breach | 60 | Seller repudiates contract before due date. |
| Interest | 61 | Buyer may recover interest/special damages or refund where consideration fails. |
Facts A, a shoe manufacturer, agreed to sell 100 pairs of shoes to B at ₹10,500 per pair. A knew B wanted to resell them to C at ₹11,000 per pair. A failed to deliver.
Issue Can B recover lost resale profit?
Held Yes. Since A knew the resale purpose and profit margin, B can recover ₹500 per pair as damages.
Facts A agreed to sell a rare Mughal period painting to B but refused to deliver it on due date.
Issue Are damages enough, or can court compel delivery?
Held B may sue for specific performance because the goods are rare and unique. Money damages may not be adequate.
Facts Cigarettes sold turned out to be mildewed and unfit for consumption.
Issue How should damages be calculated?
Held Damages were based on the difference between contract price and the price actually realised/value in defective condition.
Auction sale is a public sale where intending buyers bid against each other and goods are sold to the highest bidder.
An auctioneer is generally an agent of the seller. He may also sell his own property as principal, without disclosing that fact.
Legal Rules of Auction Sale
| Rule | Meaning |
|---|---|
| Goods sold in lots | Each lot is prima facie a separate contract. |
| Completion | Sale completes on fall of hammer or customary announcement. |
| Bid withdrawal | Bidder may retract before completion/fall of hammer. |
| Right to bid | Seller or one person on his behalf may bid only if right is expressly reserved. |
| No secret seller bidding | If right to bid not notified, seller cannot bid or employ another to bid. |
| Reserve price | Sale may be subject to reserve or upset price. |
| Pretended bidding | If seller uses pretended bidding to raise price, sale is voidable at buyer’s option. |
Facts P sold a car by auction. It was knocked down to Q. Q could take it away only after giving cheque and signing an agreement that ownership would not pass until cheque cleared. Before cheque cleared, Q sold the car to R.
Issue Did ownership pass at fall of hammer or only after cheque clearance?
Held Property passed at fall of hammer. Therefore Q had title and R also got good title.
Where tax changes after contract but before performance, price may be adjusted unless parties have agreed otherwise.
| Tax event before performance | Effect |
|---|---|
| Customs/excise/sale or purchase tax is imposed or increased | Seller may add increase to price; buyer pays increased price. |
| Tax is decreased or remitted | Buyer gets benefit of reduction. |
| Contrary agreement exists | Parties’ agreement prevails. |
| Case / Illustration | Topic | Principle |
|---|---|---|
| Dishonoured cheque example | Unpaid seller | Conditional payment fails; seller becomes unpaid. |
| Credit-period insolvency | Lien | Seller may exercise lien if buyer becomes insolvent. |
| Railway receipt in buyer’s name | Loss of lien | Lien ends when goods delivered to carrier without reservation. |
| Mumbai to Delhi carrier example | Stoppage in transit | Unpaid seller can stop goods if buyer becomes insolvent while goods are in transit. |
| Mount D. F. Ltd. v. Jay & Jay (Provisions) Co. Ltd. | Sub-sale | Seller’s assent to resale defeats lien/stoppage. |
| Credit sale and refusal to pay | Suit for price | Goods delivered and price due gives seller action for price. |
| Shoe resale loss | Damages for non-delivery | Known resale loss is recoverable. |
| Rare Mughal painting | Specific performance | Unique goods may justify court order for delivery. |
| Mildewed cigarettes | Breach of warranty / damages | Damages based on difference between contracted value and actual value. |
| P–Q–R car auction | Auction sale | Property passes on fall of hammer. |
One-Line Revision
- Section 45: Seller is unpaid if whole price is not paid or conditional payment instrument is dishonoured.
- Section 46: Unpaid seller has rights against goods and against buyer.
- Lien: Right to retain possession until payment.
- Stoppage: Right to regain possession while goods are in transit if buyer becomes insolvent.
- Resale: Seller may resell in specified cases under Section 54.
- Withholding delivery: Used when property has not passed.
- Sub-sale: Does not defeat unpaid seller unless seller assents or document of title is transferred to bona fide purchaser.
- Suit for price: Available when property has passed or price payable on fixed date.
- Buyer’s remedies: Non-delivery, specific performance, breach of warranty, anticipatory breach and interest.
- Auction: Sale completes on fall of hammer.
- Section 64A: Tax increase/decrease adjusts price unless agreed otherwise.
High-Frequency ICAI Traps
- Unpaid seller includes seller who received dishonoured cheque.
- Part payment does not prevent seller from being unpaid.
- Lien requires seller’s possession; stoppage requires goods in transit.
- Buyer insolvency is essential for stoppage in transit.
- Stoppage does not cancel the contract.
- Seller’s notice of resale affects right to recover loss and retain profit.
- Bid can be withdrawn before fall of hammer.
- Pretended bidding makes auction sale voidable, not void.
- Reserve price must be respected; sale below reserve does not bind seller.
Unpaid Seller — One Page Recall
- Whole price not paid or tendered.
- Cheque / BOE / negotiable instrument dishonoured.
- Part payment still leaves seller unpaid.
- Includes person in position of seller.
- Lien — retain possession.
- Stoppage in transit — regain possession.
- Resale — sell again in allowed cases.
- Withholding delivery where property has not passed.
- No credit sale.
- Credit period expired.
- Buyer insolvent.
- Ends when possession is lost, waived or estopped.
- Court decree does not destroy lien.
- Seller unpaid.
- Seller parted with possession.
- Goods in transit.
- Buyer insolvent.
- Effected by possession or notice to carrier.
- Generally does not affect seller’s lien/stoppage.
- Exception: seller assented to resale.
- Exception: document of title transferred to good-faith buyer.
- Pledgee rights may prevail to that extent.
- Perishable goods.
- Notice given and buyer defaults.
- Right expressly reserved.
- After lien or stoppage.
- Notice decides loss recovery and profit retention.
- Suit for price.
- Damages for non-acceptance.
- Anticipatory breach.
- Suit for interest.
- Damages for non-delivery.
- Specific performance.
- Breach of warranty.
- Anticipatory breach.
- Interest / refund where consideration fails.
- Public sale to highest bidder.
- Each lot is separate contract.
- Sale complete on fall of hammer.
- Bid can be withdrawn before completion.
- Reserve price permitted.
- Pretended bidding makes sale voidable.
- Tax imposed or increased → buyer pays increased price.
- Tax decreased or remitted → buyer gets benefit.
- Contrary agreement overrides default rule.