What Are The Rights Of Unpaid Sellers?

Law
27-Nov-2023
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When a seller delivers goods to a customer, the buyer typically pays the seller the exact amount he agreed to pay. If this procedure took place in the usual way, legal action would not be necessary. If malpractices or errors occur, the legislation gives the unpaid seller specific rights against the buyer.

The Sales of Goods Act was enacted on July 1st, 1930, to promote ethical and equitable procedures in selling goods. All contracts and agreements between the sellers feature in the Sales of Goods Act. Furthermore, it describes the phenomena known as reciprocal promises. However, the Indian Contract Act of 1872 was the first to introduce reciprocal agreements.

Today we will understand the concept of an unpaid seller and their rights according to the 1930 Sale of Goods Act.

Who is an Unpaid seller in business law?

According to business law, a person who has sold goods to a third party without receiving full payment or paid partially is called an unpaid seller. Section 45 of the Sale of Goods Act states that a seller who has received a negotiable instrument, such as a bill of exchange that gets declined due to certain conditions is also considered an unpaid seller.

If the seller sells the goods on credit, he will not be considered an unpaid seller throughout the credit period until the buyer experiences insolvency. If the price is still outstanding at the end of the credit term, only the seller will be deemed an unpaid seller.

The Sales of Goods Act created two distinct rights to compensate the unpaid seller. These are

  • Right of Unpaid Seller Against Goods

  • Right of Unpaid Seller Against Buyer

Right of Unpaid Seller Against Goods

A collection of legal rights that arise when a buyer neglects to pay for things they have acquired is known as the right of an unpaid seller against goods. The Sale of Goods Act, of 1930, established these rights, enabling the unpaid seller to protect their interests and pursue suitable remedies.

Below is a thorough summary of an unpaid seller's rights regarding goods:

Right of Lien

Right of Lien permits an unpaid seller to hold onto the goods until the buyer has made the final payment for them. It essentially grants the seller the right to keep the products in storage as collateral until the buyer fulfills their financial commitments.

The seller can only use the right of lien under certain circumstances. The seller may exercise the right of lien under Section 47 of the Sales of Goods Act, 1930, if:

  1. The goods were sold for cash as there was no credit agreement in place.
  2. If the purchaser is bankrupt.
  3. When the goods sold on credit have reached the end of their contract.

Section 48 of the Sale of Items Act further stipulates that the unpaid seller may use his lien right on the remaining items even if he has only delivered a portion of them.

The following circumstances result in the unpaid seller of the goods losing his lien rights:

  • When he gives the goods to a carrier or other bailee so that the buyer may get them, not holding onto the right to dispose of the items, or
  • When the commodities are properly possessed by the buyer or his agent, or
  • When the seller releases himself from any lien, or
  • When the buyer sells the goods or disposes of them in any other way with the seller's permission, or
  • When a buyer sells a document of title to someone who accepts it in good faith and for consideration after it has been issued or legally transferred to any individual.

Right of Stoppage in Transit

The right to stop goods in transit is a crucial recourse for sellers who find out they sold goods to a bankrupt buyer, regardless of whether the credit terms have run out. Under Section 50 of the Sale of Goods Act, 1930, the unpaid seller who took custody of the goods may halt their transportation if the buyer becomes insolvent. In other words, he has the right to repossess the goods while they're being transported and keep them until the agreed-upon amount is offered or paid.

The unpaid seller may use their right to stop goods in transit under the following situations:

  1. The seller has given up ownership of the goods; they cannot be in the seller's hands.
  2. The goods must be in travel.
  3. A buyer needs to become bankrupt.

In two situations, a seller has the right to halt delivery of goods: when the buyer repudiates or fails to make payment before delivery, or when the debtor becomes bankrupt.

  • The insolvency of the buyer: When a seller finds out that a buyer is insolvent, they have the right to halt delivery of the goods. When a buyer defaults on a debt, their balance sheet indicates insolvency since their obligations outweigh their assets.
  • Preliminary Vulnerability: If the buyer violates the terms of the agreement or doesn't pay when it's supposed to, the seller has the right to halt the products. Large shipments of products are the only ones eligible for this suspension privilege. When a carrier acknowledges that the items are being held in favor of the buyer, the seller forfeits its ability to halt the commodities while they are in transit. In the buyer's favor, the carrier has constructive custody of the merchandise.

Right to Resale Goods

The seller's ability to resell the items that were first sold to a customer is known as the "right of resale". This is permissible under the following situations, which are covered in more detail below:

Perishable Goods

The seller may resell items without giving the customer any warning if they are perishable. This is due to the short shelf life of perishable items, such as fruits and vegetables, which renders them useless if not consumed within that period.

Reserved Rights

Under the terms of the sale agreement, the seller may occasionally reserve the right to resell the products. This indicates that, under some circumstances, the buyer consents to the seller's right to resell the items.

The seller is under no obligation to provide the buyer any surplus from the resale as the buyer cannot profit from his own mistake. If notification is not received, the unpaid seller will:

  • He is not eligible to get any money back if the products are sold again.
  • He is free to keep any extra money that comes from selling the things for more money. If there is any excess that results from reselling, the buyer is entitled to claim it.

Right of Unpaid Seller Against Buyer

The seller of the products becomes an unpaid seller when the consumer fails to pay the seller. Also, the seller is now able to use certain rights against the buyer. These rights serve as the seller's legal defense against the buyer's violation of the agreement. These rights belong to the unpaid seller in addition to his rights over the goods he sold.

Suite for Price

The seller has the right to sue the buyer for the entire price of the products in cases where the buyer willfully fails to pay for the items even after ownership of the goods has been transferred to him. In this situation, the seller may file a lawsuit against the buyer for unjustly withholding payment from him.

But let's imagine the sales agreement specifies that payment for the price is due at a later time, regardless of when the products are delivered. On that day, the unpaid seller may file a lawsuit for the cost of these products if the buyer declines to pay. The law does not place any value on the products' actual delivery.

Suite for damages

If the buyer wrongfully refuses to accept the products and pay the money, the seller may file a lawsuit against him for damages for non-acceptance under Section 56. Sections 73 and 74 of the Indian Contract Act are applicable for determining the amount of damages.

The seller must resell the items if there is an open marketplace for them, and the buyer is responsible for any losses that may arise. The difference between the contract and market price on the breach day is deducted as damages if the seller does not resell the goods.

The seller receives a nominal value if there is no difference between them. The seller has a duty of mitigation, which requires the victim to take reasonable steps to lessen the loss resulting from the breach.

Suite for interest

According to Section 61, a seller may recoup interest from a buyer provided there is a written agreement between the parties about interest on the price of the products as of the due date for payment. However, if there was no such arrangement, the seller might start charging interest the moment he gives the buyer notice.

Repudiation of the contract before the due date

The seller may still file a lawsuit for damages even if the customer renounces the agreement before the products are delivered. The seller may file a lawsuit for breach of contract in such a case if it is deemed to have been retracted. The Indian Contract Act protects against this kind of behavior, which is known as an anticipatory breach of contract.

If the seller cancels the agreement before the delivery date, the buyer may pursue any of the two options listed below:

  1. He can sue the seller for damages and treat the agreement as revoked. Another name for this is "damages for anticipatory breach." The pricing in effect on the breach day can determine the damages.
  2. He can wait till the delivery date and regard the contract as if it already exists. For the mutual interest of both parties, the contract is still open. There won't be any damages if the seller decides to perform later; if not, he will be responsible for damages calculated based on the pricing in effect on the delivery day.