In commercial transactions, the sale of goods is a fundamental activity where a seller transfers ownership of goods to a buyer in exchange for a monetary consideration. The Sale of Goods Act, 1930, governs such transactions in India and defines the rights and obligations of both sellers and buyers. One critical aspect covered by this legislation is the concept of an “unpaid seller,” a term that holds significant importance in protecting the interests of sellers.

An unpaid seller is defined under Section 45 of the Sale of Goods Act, 1930. This definition encompasses a seller who has not received full payment for the goods sold. The seller is considered unpaid when the whole price has not been paid or tendered, or when a negotiable instrument such as a bill of exchange or a cheque has been received as conditional payment and the condition has not been fulfilled due to dishonor of the instrument. For instance, if a seller receives a cheque from the buyer, and the cheque is later dishonored due to insufficient funds, the seller is categorized as an unpaid seller.

Definition of an Unpaid Seller

An unpaid seller is defined under Section 45 of the Sale of Goods Act, 1930. According to the Act, a seller is considered unpaid when:

1. The whole price has not been paid or tendered.
2. A negotiable instrument (e.g., a bill of exchange or a cheque) has been received as conditional payment, and the condition has not been fulfilled due to dishonor of the instrument.

Example:
“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, it was dishonored due to lack of funds. In this condition, A is an unpaid seller.

Characteristics of an Unpaid Seller

1. Outstanding Payment:

• The seller must be unpaid either fully or partially. Full payment has not been made, or partial payment is still due.

2. Provision of Goods or Services:

• The seller must have provided goods or services to the buyer and possess a legal right to receive payment for them.

3. Expiration of Payment Term:

• The duration agreed upon for making the payment has expired, and the seller is yet to be paid.

4. No Refusal of Payment:

• The seller must not have refused to accept the payment when it was tendered.

5. Dishonored Negotiable Instruments:

• When the payment is made through a cheque, promissory note, or another similar negotiable instrument, the dishonor or failure of such an instrument to meet its obligation will also make the seller unpaid.

Rights of an Unpaid Seller

The rights of an unpaid seller can be divided into two categories: rights against the goods and rights against the buyer personally.

Rights Against the Goods

1. Right of Lien (Section 47-49):

• The right of lien allows the unpaid seller to retain possession of the goods until payment is made. This right can be exercised if:
  • The seller is in possession of the goods.
  • The goods have not been delivered to a carrier for transmission to the buyer.
  • The term of credit has expired.
• Loss of Lien:
  • The lien is lost if the goods are delivered to a carrier without reserving the right of disposal, or if the buyer or their agent lawfully obtains possession of the goods.

2. Right to Stoppage in Transit (Section 50-52):

• This right can be exercised if the buyer becomes insolvent after the seller has parted with the possession of the goods but before the buyer takes delivery.
• The seller can stop the goods in transit and regain possession, effectively halting the delivery process.

3. Right of Resale (Section 54):

• The unpaid seller has the right to resell the goods if the buyer defaults on payment.
• Conditions for Resale:
  • Notice must be given to the buyer of the intention to resell.
  • If the goods are perishable, they can be resold without notice.
  • The seller can claim damages from the buyer if the resale results in a loss.
  • If the seller resells the goods at a profit, the original buyer cannot claim the profit.

4. Right to Sue for the Price (Section 55):

• If the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods, the seller can sue for the price.

5. Right to Claim Damages (Section 56):

• If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue for damages.

6. Right to Retain the Goods:

• This right allows the seller to retain possession of the goods until payment is made or tendered. It is similar to the right of lien but emphasizes the retention aspect.

7. Right to Rescind the Contract:

• If the buyer breaches the contract or if the payment terms are not met, the seller has the right to rescind the contract, effectively canceling the sale.

Rights Against the Buyer Personally

1. Suit for Price (Section 55):

• The unpaid seller can sue the buyer for the price of the goods if the property in the goods has passed to the buyer, and the buyer wrongfully neglects or refuses to pay.

2. Suit for Damages for Non-Acceptance (Section 56):

• If the buyer wrongfully refuses to accept and pay for the goods, the seller can sue for damages resulting from the non-acceptance.

3. Suit for Interest and Special Damages (Section 61):

• The seller can claim interest on the unpaid amount and any special damages incurred due to the buyer’s breach.

Case Laws

1. Lickbarrow v. Mason (1787):

• This case established the seller’s right of stoppage in transit. The court held that the seller could stop the goods in transit upon the buyer’s insolvency.

2. Nanka Bruce v. Commonwealth Trust (1926):

• The court reiterated the right of stoppage in transit and the conditions under which it could be exercised.

3. Bishundeo Narain & Anr. v. Seogeni Rai & Jagernath (1951):

• The Supreme Court of India highlighted the unpaid seller’s right to lien and the circumstances in which it can be exercised.

4. Hindustan Steel Works Construction Ltd. v. Tarapore & Co. (1996):

• The court emphasized the seller’s right to sue for the price and for damages in case of non-acceptance of goods by the buyer.

5. Trenython v. Hart (1876):

• This case dealt with the unpaid seller’s right to resell the goods and the requirement of giving notice to the buyer before resale.

Conclusion

An unpaid seller holds significant rights both against the goods and the buyer personally. These rights ensure that the seller is protected and can take appropriate legal action to recover the price of the goods or mitigate losses. Understanding the legal provisions and case laws pertaining to an unpaid seller is crucial for ensuring fair trade practices and protecting the interests of sellers in commercial transactions.