Have you ever wondered what rights do you have as an unpaid seller if your buyer defaults on payment? While we can not accurately estimate your pain if your buyer chooses not to pay, we do know that knowing your legal rights can certainly save you from going out of business.
Non-payment is an unfortunate reality that many sellers face at some point in their business life. Due to insufficient information, sellers often need professional help to protect their goods and money when buyers fail to make payments. Awareness of the rights of an unpaid seller needs to be raised in the trade community.
Let's explore the "rights of an unpaid seller" within the framework of the Indian legal system.
Meaning of an Unpaid Seller
An unpaid seller refers to a seller who hasn't received full payment for the goods he sold. The Indian Sale of Goods Act, 1930 (referred to as the "Act") provides a detailed legal definition for the term "unpaid seller" in Section 45. The term “seller” includes any person who is in the position of the seller, such as the consignor or an agent of the seller.
If a buyer fails to fulfill his obligation or becomes insolvent, the seller can exercise his legal rights to protect his commercial interests. Let's delve into these rights in detail.
Rights of an Unpaid Seller
The rights of an unpaid seller can be broadly divided into two major categories; namely
- Rights Against Goods
- Rights Against Buyer
Rights Against Goods
An unpaid seller has several legal remedies to protect his goods from the defaulting buyer who has not paid in full for the goods he purchased. These rights are further classified into 03 subheadings as follows -
(i) The Right of Lien Over the Goods
Lien refers to the seller's right to retain possession of the goods until full payment is received from the buyer. Section 47 of the Act addresses the Seller’s Lien, which allows the seller to keep possession of the goods if full payment is not received in the following cases:-
- where the goods have been sold on a cash basis (no credit);
- where the goods have been sold on credit, but the term of credit has expired;
- where the buyer becomes insolvent.
The seller can exercise this right even when acting as an agent or bailee for the buyer.
Physical possession of the goods is a crucial aspect of the right of lien. Technically, the lien could be exercised when the property or ownership of the goods has been transferred to the buyer, but the possession remains with the seller.
Section 49 of the Act addresses the termination of the right of lien. The unpaid seller loses his lien over the goods:-
- when he delivers the goods to a carrier without reserving the right of disposal of the goods;
- when the buyer or his agent lawfully obtains possession of the goods;
- when the seller waives this right.
In the case of Suchetan Exports Pvt. Ltd. v/s Gupta Coal (India) Ltd., the Supreme Court of India stated that if a contract specifies that ‘the seller retains the right of lien and the title passes only upon full payment’, the seller can still claim their lien over the goods even after losing physical possession.
From the above judgment, we can understand the importance of contract drafting and vetting in a business. Make it a habit to have your contracts checked by professionals who understand the legal implications of the crucial terms and can help you protect your interests.
(ii) The Right of Stoppage of Goods in Transit
The right to stop goods in transit is exercised when the seller has lost possession of the goods to a carrier for transmission to the buyer.
As per Section 50 of the Act, if the buyer becomes insolvent, the unpaid seller who has already parted with the goods has the right to stop them while they are in transit. This means that the seller can take back possession of the goods and keep them until the price is paid.
Goods are considered in transit from when they are handed over to a carrier or bailee for delivery to the buyer until the buyer or his agent receives them from the carrier or bailee. If the buyer or their agent takes delivery of the goods before they reach the designated destination, the transit is concluded.
Once the goods arrive at the appointed destination, if the carrier acknowledges to the buyer or his agent that they are holding the goods on behalf of the buyer and continues to possess them as a bailee for the buyer, the transit is considered finished.
If the buyer rejects the goods, and the carrier retains possession of them despite the rejection, the transit is not considered concluded. This holds true even if the seller refuses to take back the rejected goods.
The unpaid seller holds the right to exercise stoppage in transit either by physically taking possession of the goods or by notifying the carrier in possession of the seller's claim. Upon receiving such notice from the seller, the carrier is obligated to re-deliver the goods.
The right to stoppage in transit begins with the delivery of the goods to a carrier and ends when the goods are delivered to the buyer or his nominated consignee.
(iii) The Right to Resell the Goods
A contract of sale is not cancelled by the mere exercise of the right of lien or stoppage in transit. An unpaid seller can also exercise his right to resell the goods subject to the provisions of Section 54 of the Sale of Goods Act.
Where the goods are perishable, or where the unpaid seller gives notice to the buyer of his intention to re-sell the goods for default, the seller may resell the goods within a reasonable timeframe and recover damages from the original buyer for the breach of contract but the buyer shall not be entitled to any profit which may occur on the re-sale.
If such notice is not given, the seller shall not only lose his right to recover the damages but will also entitle the buyer to get the profit resulting from the resale.
Upon the re-sale of goods by an unpaid seller who has exercised the right of lien or stoppage in transit, the new buyer gains a valid title to the goods in question, even in the absence of notice to the original buyer regarding the re-sale.
Rights Against Buyer
Apart from the rights against the goods, an unpaid seller has rights against the buyer himself. The seller can sue the buyer for the price, damages and interest as dictated by the statutes. Under the suit for the price, the seller can sue the buyer regardless of whether the ownership in goods is passed to the buyer under the contract, especially when the buyer turns hostile by:–
- non-accepting the delivery of the goods; or
- not making the payment of the goods; or
- repudiating the contract by not fulfilling his part of the obligation.
Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance as provided in Section 56 of the Act.
Conclusion
Indian laws acknowledge the rights of unpaid sellers and offer effective remedies to secure both goods and payment. However, sellers must recognize that the legal landscape is intricate and may pose challenges beyond surface simplicity. Navigating through contractual and statutory intricacies requires a professional approach to safeguard one's legal rights.
In addition to the aforementioned statutory rights, it's imperative to be vigilant about the terms and conditions outlined in Bills of Lading (BLs) or other transport documents. These documents may contain overriding clauses, often in fine print, which could take precedence under the principle of contractual liberty.
Given the small font size, BL clauses are frequently overlooked by shippers, leading to potential legal ramifications. Accepting them without a thorough understanding of their legal implications may jeopardize your rights and expose you to significant risks.
Therefore, acquiring basic knowledge about your legal rights before engaging in trade is advisable. Our sincere recommendation is to approach business transactions with prudence, ensuring that you are well-informed and proactive in safeguarding your interests.
Note: The purpose of this article is to provide general guidance on the topic. Professional advice should be sought on case-specific issues.