Rights of Unpaid Seller against Goods

Introduction:

A seller or supplier is obliged to supply the products sold under a sales contract, and the purchaser is obliged to pay them the required sum amount or quid pro quo, i.e. anything in return under the sales contract. This is referred to as the reciprocal promise,^[1] according to section 2(f) of the Contract Act. Every sales contract consists of reciprocal promises.^[2]

If the purchaser denied paying or could not pay, the supplier could exercise specific rules against the purchaser, under the rights of an unpaid supplier. The remedies are available for an unpaid supplier when there is a contract breach by the purchaser. Remedies could be against the purchaser or the products.^[3]

Under Section 45(1) of Sale of Goods Act, 1930(The Act), if the entire amount has not been paid, then the supplier is called as an unpaid supplier, and supplier has an effective right of action for the amount.^[4] Also, when bills of exchange or other negotiable instruments have been obtained as conditional payments, and the precondition was not met due to the dishonour or otherwise of the instrument.^[5] The supplier also includes a person who is in the position to supply, i.e. agent of the supplier or a consignor.^[6]

Rights of an Unpaid Seller

 Unpaid supplier has the subsequent rights:^[7]

1. Rights against the buyer
2. Rights against the goods/products

Rights against the goods may be classified as:^[8]

1. When the property in goods has passed
2. When the property in goods has not passed

When the property in goods has passed to the purchaser, the subsequent three rights are available to the unpaid supplier:^[9]

1. Right of Lien
2. Right of Stoppage in Transit
3. Right of Resale

Right of Lien

Lien could be a right that suppliers can assert if a purchaser has not paid the value of the products, and also the supplier may keep the possession of the products as an agent or bailee under this right.^[10]

Lien, as described by the Black’s Law Dictionary, is “a legitimate right or privilege that a borrower has in another’s property, remaining usually until a loan or obligation that it secures is settled”.^[11] Under Section 47, the supplier can keep the possession when:^[12]

1. Expired credit, when products sold on credit.
2. Products sold with none stipulation on credit.
3. Insolvent purchaser.

As mentioned above, the right to lien is suspended during the term of credit, when the products are sold on credit and lien doesn’t deal with extra charges apart from the price of the products.

Under Article 48, if the supplier has delivered a part of unpaid products to the purchaser, then the supplier can exercise his right of lien. He has a lien on the products as long as it is in his possession. If the supplier does not have the products, he cannot have a right of lien on such products. This was affirmed by the Delhi high court within the case of Pawan Hans Helicopters Ltd. vs Aes Aerospace Ltd.^[13]

Termination of Lien

Lien may be used while a purchaser has issued a “decree” for the price of the products.^[14] As stated above, lien relies on the physical possession of things. The lien is therefore lost after the possession has been lost. Section 49 thus stipulates that the unpaid supplier loses his right of lien under the subsequent situations:^[15]

1. When, without having the right of disposal to the products, the supplier delivers products to a carrier or other bailee for the transmission of products.^[16]

When a supplier has supplied the products to the carrier, his right of lien is terminated, but he still has the right to stoppage in transit. Within the event, if the supplier regains possession of the products in transit by stoppage, his right to lien is renewed.

2. When purchaser or agent lawfully obtains possession of products^[17]

When the purchaser receives the products, all the rights of the supplier concerning the products are terminated whether or not the price isn’t paid. The supplier can recover the price as common debt because acceptance of possession gives the purchaser, absolute, unqualified and unfailing right of products. If the products are returned to the supplier for restoration, he cannot claim the right of lien again.

3. Waiver of Lien

The right of lien under any sales contract is implicit, and therefore the supplier includes a right to waive this right, it can be implied or expressed by the supplier’s conduct.

The right to lien if lost, it’d not revert if the purchaser returns the product for any specific reason to the supplier. In Eduljee vs John Bros^[19], when the refrigerator was shipped to the purchaser, after delivery, it had been not working correctly, and the purchaser returned the item to the supplier. It was held that the supplier couldn’t exercise the right of lien on the refrigerator.[20]

Right of Stoppage of Goods in Transit

The right of stoppage means an unpaid supplier can stop the products which are in transit, regain possession and may keep them until the whole amount is paid. When an unpaid supplier has distributed the products, and the purchaser becomes insolvent, the supplier may request the carrier to return the products.^[21]

In compliance with Section 50, there are four specific criteria for the stoppage of products:^[22]

1. Unpaid supplier.
2. Insolvent purchaser.
3. Products have passed to the purchaser.
4. Products are in the course of transit.

The course of transit relies on the middleman’s ability to carry the products. As in the case of Schotsmans v Lancashire & Yorkshire Rly Co.,^[23] the middleman should be between the supplier who has distributed the products and the purchaser who hasn’t yet received the products. Section 51 contains the rules on the starting and ending of transit:^[24]

1. Delivery to purchaser

The Products shall be regarded as in transit from the instant the products are shipped for the delivery to the carrier or other bailee until they’re received by the purchaser himself or his agent. ^[25]However, the transit wouldn’t terminate if the purchaser declines to simply accept the transfer although it’s been delivered.^[26]

2. Interception by the purchaser

The transit terminates after the purchaser, or his agent takes the delivery of the product from the carrier before they arrive at the appointed destination. Although it’s wrong and also the carriers could also be liable for penalties, transit ends when the carrier delivers the products before the purchaser’s arrival.^[27]

3. Supplier’s acknowledgement

Transit is regarded as stopped when products reach the destination and are acknowledged to the purchaser or agent that he retains the products on behalf of them. If the products are either in the carrier or if the purchaser suggested another destination, it is not considered. A particular acknowledgement is needed to bring an end to the original carriage contract.^[28]

4. Rejection by the purchaser

If the purchaser rejects the products and his agent or the carrier still possess them, then the products are considered to be always in transit. It also applies if the supplier does not accept to take back the products himself.^[29]

5. Delivery to ship charted by the purchaser

The transit ends because the products are placed on the ship, and the carrier is acting as an agent of the purchaser.^[30]

6. Wrongful refusal to delivery

The carrier has the right to refuse the delivery. If the carrier refuses to deliver, the products to the purchaser or his agent, the transit stops.^[31]

7. Part delivery

If the products are partly shipped, the supplier is entitled to prevent the delivery of the rest of the products until the said delivery shows an agreement to the possession of the whole.^[32]

Two ways of stoppage of products in transit:

The supplier directly takes possession of the products, and therefore the supplier can provide a notice to the carrier or the bailee when the products are in their possession. The carrier or bailee shall re-send the products to the supplier upon receiving the notice. The supplier pays the redelivery costs. The contract remains valid whether or not the unpaid supplier exercises his right of stoppage of products in transit. ^[33]

Right of Resale

The right to resale for an unpaid supplier is a fundamental right. If there has been no such right, the supplier wouldn’t have been of many benefits for the other rights of products including ‘lien’ and ‘stoppage in transit,’ because such rights permit the unpaid supplier to have them only until the purchaser receives payment. Accordingly, article 54 grants the unpaid supplier a limited right to resell the products when:^[34]

1. Where the products are perishable.
2. Where a contract expressly guarantees the right in the event of a default by the purchaser.

The unpaid supplier may exercise his right to resale when:

1. He, before reselling the products, give the purchaser a notice, to pay the price and to return the products in an appropriate time, except when the products are perishable. The supplier has the right to resell all the items if the purchaser does not pay back the money. If the supplier has not expressed his intent to resell, he shall not be entitled to demand damages from the purchaser and shall offer the advantages.^[35]
2. The supplier can claim losses from resale from the purchaser, but the purchaser cannot claim any benefits. ^[36]
3. Whether the notice is given or not, the purchaser has rightful ownership after the resale.^[37]
4. Often the supplier retains the exclusive resale right if the purchaser makes default payments. In such cases, purchasers can’t ask for profit on resale, and supplier has an exclusive right to resale.^[38]

Rights of Withholding Delivery

The unpaid supplier has a right of withholding delivery when a property in goods has not passed to the purchaser. ^[39]

Conclusion

When either the purchaser has not been paid entirely or if the maturity of the exchange bill or any other legal document agreed the purchaser doesn’t meet a precedent requirement, the supplier shall be considered as an unpaid supplier. This ensures that, after the notice is given to the purchaser, a supplier can resell the products after he has exercised the right to the lien, and therefore the new purchaser has fair rights over the products. The supplier is entitled to sue the purchaser if the requisite amount and a lien are not paid. If therefore, the supplier cannot deliver the product to the purchaser, he may sue the supplier for failure to comply and may seek damages or such outcomes.

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References:

^[1] The Indian Contract Act, 1872, No. 9, §2(f).

^[2] Diva Rai, Rights of an Unpaid Seller, iPleaders (June 16, 2019,), https://blog.ipleaders.in/rights-of-an-unpaid-seller/.

^[3] Ibid.

^[4] The Sale of Goods Act, 1930, No. 3, §45(1).

^[5] Ibid.

^[6] Ibid.

^[7] Ibid.

^[8] http://aditi.du.ac.in/uploads/econtent/Document_(4)(1).pdf

^[9] The Sale of Goods Act, 1930, No. 3, §46.

^[10] The Sale of Goods Act, 1930, No. 3, §47.

^[11] Gunita Pahwa, Priya Dhankhar, India: Unpaid Seller’s Lien, Mondaq (Aug. 16, 2016, ), https://www.mondaq.com/india/contracts-and-commercial-law/519392/unpaid-seller39s-lien

^[12] The Sale of Goods Act, 1930, No. 3, §47.

^[13] Pawan Hans Helicopters Ltd. vs. Aes Aerospace Ltd., 2008 (2) ARBLR 63 Delhi

^[14] The Sale of Goods Act, 1930, No. 3, §49(2).

^[15] Ibid.

^[16] The Sale of Goods Act, 1930, No. 3, §49(a).

^[17] The Sale of Goods Act, 1930, No. 3, §49(b).

^[18] The Sale of Goods Act, 1930, No. 3, §49(c).

^[19] Eduljee vs John Bros, AIR 1943 Nag. 249.

[20] Ibid.

^[21] The Sale of Goods Act, 1930, No. 3, §50.

^[22] Ibid.

^[23] Schotsmans v Lancashire & Yorkshire Rly Co.

^[24] The Sale of Goods Act, 1930, No. 3, §51.

^[25] The Sale of Goods Act, 1930, No. 3, §51(1).

^[26] James v Griffin, 192 N.C. 285 (286).

^[27] The Sale of Goods Act, 1930, No. 3, §51(2).

^[28] The Sale of Goods Act, 1930, No. 3, §51(3).

^[29] The Sale of Goods Act, 1930, No. 3, §51(4).

^[30] The Sale of Goods Act, 1930, No. 3, §51(5).

^[31] The Sale of Goods Act, 1930, No. 3, §51(6).

^[32] The Sale of Goods Act, 1930, No. 3, §51(7).

^[33] The Sale of Goods Act, 1930, No. 3, §52.

^[34] The Sale of Goods Act, 1930, No. 3, §54.

^[35] Diva Rai, Rights of an Unpaid Seller, iPleaders (June 16, 2019,), https://blog.ipleaders.in/rights-of-an-unpaid-seller/.

^[36] The Sale of Goods Act, 1930, No. 3, §54(2).

^[37] The Sale of Goods Act, 1930, No. 3, §54(3).

^[38] The Sale of Goods Act, 1930, No. 3, §54(4).

^[39] http://www.cvs.edu.in/upload/BUSINESS%20LAW3.pdf