CA Foundation Business Laws Study Material Chapter 14 Rights of Buyer & Rights of Unpaid Seller

RIGHTS OF BUYER

A. GENERAL RIGHTS

  1. Right to have delivery as per contracts (Secs. 31 & 32).
  2. Right to reject the goods if they are delivered in wrong quantities (Sec. 37).
  3. Right to refuse delivery of goods by instalments (Sec. 38)
  4. Right to notice of shipment in case the goods are sent by sea so that he may get the goods insured (Sec. 39).
  5. Right to examine goods for the purpose of ascertaining whether they are in conformity with the contract (Sec. 41)

B. RIGHTS OF A BUYER AGAINST THE SELLER FOR BREACH OF CONTRACT
A seller may breach the contract in any of the following ways:

  1. He fails to deliver the goods at the time or in the manner called for in the contract
  2. He repudiates the contract.
  3. He delivers non-conforming goods and the buyer rightfully rejects the goods or properly revokes acceptance.

A buyer has the following rights against the seller for breach of contract under the Sale of Goods Act.
1. Suit for non-delivery [Sec. 57]
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sure the seller for damages for non-delivery. This remedy would be available even if the property has passed to the buyer.

2. Specific performance [Sec. 58]
Where property has passed to the buyer, he also can exercise another right, viz., a right to sue for specific performance and its limits are regulated by the Specific Relief Act. In such cases the court may in its discretion grant a decree ordering the seller to deliver those specific or ascertained goods which formed the subject-matter of the contract. It should be noted that the remedy is discretionary and will only be granted if the damages are not an adequate remedy or the goods are unique, e.g., rare book, a picture or a rare piece of jewellery.

3. Breach of Warranty [Sec. 59]
Where there is a breach of warranty by the seller (Le. defects in the goods delivered) or where the buyer elects or is compelled to treat any breach of condition on the part of the seller as a breach of warranty, the buyer has the following remedies:

  1. He may claim a deduction from the price.
  2. He may refuse to pay the price altogether, if the loss equals the price.
  3. If the loss exceeds the price, he may not only refuse to pay the price, but also claim the excess, or
  4. He may sue the seller for damages for the breach of warranty in addition to the right to claim diminution or extinction of the price.

4. Suit for Anticipatory breach [Sec. 60]
The buyer has the right to sue the seller for damages for anticipatory breach of contract Section 60 lays down that where the seller repudiates the contracts before the date of delivery, the buyer may either treat the contract has subsisting and wait till the date of delivery or he may treat the contract as rescinded and sue for damages for the breach.

5. Suit for interest and recovery of the price [Sec. 61]
If the buyer has already paid the price and the seller fails to deliver the goods, the buyer is entitled to file a suit for the refund of the price. In such a suit, the buyer may also claim interest or special damages from the defaulting seller. In the absence of any other contract to the contrary, the court may award interest at such rate as it thinks fit on the amount of price from the date on which the payment was made.

RIGHTS OF THE UNPAID SELLER

  1. Unpaid seller defined [Sec. 45]
  2. Unpaid sellers’ rights [Sec. 46]
    1. Unpaid sellers ’ lien [Secs. 47 to 49]
    2. Stoppage in transit [Secs. 50 to 52]
    3. Transfer by buyer and seller [Secs. 53 & 54]
  3. Suit for breach of the contract [Secs. 55 to 61 ]

A. Who is an unpaid seller?
The seller is deemed to be an unpaid seller under any of the following circumstances:
(a) If the whole of the purchase price is not paid on the due date.
(b) If payment is made in the form of a negotiable instrument. (Bill of exchange or cheque) and the instrument is dishonoured.

B. Unpaid Sellers’ Rights [Sec. 46] 
Rights of an unpaid seller can be listed as follows:

  1. Against the goods
    1. Right of Lien,
    2. Right of Stoppage in Transit, and
    3. Right of Resale
  2. Against the buyer personally
    1. Suit for price,
    2. Suit for damages for non-acceptance of delivery,
    3. Suit for damages for repudiation of the contract, and
    4. Suit for interest or special damages

B(a). Right of Unpaid Seller against the Goods
(I) Right of Lien or Vendor’s Lien [Secs. 47-49]
The ‘unpaid seller’ has a lien on the goods for the price while he is in possession, until the payment or tender of the price. A lien is a right to retain possession of goods until payment of the price. He is entitled to lien in the following three cases, namely;

  1. where goods have been sold without any stipulation as to credit; Le. cash sale.
  2. where goods have been sold on credit but the term of credit has expired; or
  3. where the buyer becomes insolvent.

Rules:

  1. The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer.
  2. If the goods have been sold on credit, the seller cannot refuse to part with possession unless the term of credit has expired.
  3. Lien can be exercised for non-payment of the price, not for any other charges.
  4. Effect of part delivery (Sec. 48): When an unpaid seller has made a part delivery of the goods he can exercise lien on the balance of the goods not delivered unless the part delivery was made under such circumstances as to show an intention to waive the lien.
  5. The seller can abandon or waive the lien if he so desires.
  6. Termination of lien (Sec. 49): If possession is lost, lien is lost. The unpaid seller of goods loses his lien thereon in the following cases:
    1. When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods;
    2. when the buyer or his agent lawfully obtains possession of the goods; and
    3. where the seller has waived the right of lien. The unpaid seller does not lose his lien by reason only that he has obtained a decree for the price of the goods.
  7. Sale not rescinded by lien (Sec. 54): A contract of sale is not rescinded by the mere exercise of the right of lien. The contract still remains live and the buyer can claim delivery of the goods by tendering the price. However, if the buyer defaults, the sellers remedy is to resell the goods and claim damages.

(II) The Right of Stoppage in Transit [Secs. 50-52]
When the buyer of goods becomes insolvent, and the goods are in course of transit to the buyer, the seller can resume possession of the goods from the carrier. This is known as the right of stoppage in transit. The right is exercisable by the seller only if the following conditions are fulfilled:
The seller must be unpaid.

  1. He must have parted with the possession of goods.
  2. The goods must be in transit.
  3. The buyer must have become insolvent.
  4. The right is subject to provisions of the Act.

The right of stoppage means the right to stop further transit of the goods to resume possession and to retain the same till the price is paid.
Who is an insolvent?
The term insolvent is used here to denote a person who is financially embarrassed. It is not necessary that the buyer should be declared insolvent by a court of law before the right of stoppage in transit can be exercised. According to section 2(8). The buyer is said to be ‘insolvent’ when he has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due whether he has committed an act of insolvency or not.

Rules:
The following points are to be noted in connection with the right of stoppage in transit:
1. Duration of transit [Sec. 51]
The goods are deemed to be in course of transit from the time they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent takes delivery of them.

2. When does transit end?

  1. Delivery before destination:If the buyer or his agent obtains delivery of the goods before their arrival at the appointed destination, the transit is at an end. [Sec. 51(2)]
  2. Attornment by carrier to buyer: if after the arrival of the goods at the appointed destination, the carrier expressly or by implication enters into a new agreement to hold the goods for the buyer (for purpose of custody), the original transit comes to an end. [Sec. 51(3)]
  3. Goods rejected by biiyer.Af the goods are rejected by the buyer and they continue to be in possession of the carrier or other bailee, then the transit continues even if the seller has refused to receive them back. [Sec. 51(4)]
  4. Delivery on ship chartered by buyer: When the goods are delivered to a carrier who is acting as agent of the buyer, e.g. when goods are delivered to a ship chartered by the buyer, the transit comes to an end as soon as the goods are loaded on board the ship. [Sec. 51(5)]
  5. Wrongful refusal by carrier to deliver: If the carrier wrongfully refuses to deliver the goods to the buyer, the transit is at an end. [Sec. 51(6)]
  6. Part delivery. Where the part delivery of the goods has been made to the buyer the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods. [Sec. gi 51(7)]

3. How stoppage in transit is effected [Sec. 52]
There two modes of stoppage in transit are—

  1. By taking actual possession of the goods or
  2. By giving notice to the carrier not to deliver the goods to the buyer or his agent.

When notice of stoppage in transit is given by the seller to the carrier or other bailee in possession of the goods, he shall re-deliver the goods to, or according to the directions of, the seller. The expenses of such re-delivery shall be borne by the seller.
Effect of Stoppage: Contract not rescinded- The contract of sale is not rescinded when the seller exercises his right of stoppage in transit. The contract still remains in force and the buyer can ask for delivery of goods on payment of price. [Sec. 54]

Effect of sub-sale or pledge by the buyer [Section 53]
The unpaid seller’s right of lien or stoppage in transit is not affected by any sale or pledge of the goods made by the buyer.
Exceptions: In the following two cases the unpaid seller’s right of lien or stoppage in transit is affected by any sale or pledge of the goods made by the buyer: (i.e., Unpaid seller cannot exercise right of lien or stoppage in transit.)

  1. when the seller assents to such sale or pledge; or
  2. when the seller has transferred a document of title to the goods, who transfers it by way of a sale, pledge or other disposition for value, to a person who takes it in good faith and for consideration.

Where (i) the seller has issued or lawfully transferred a document of title to goods, e.g. a bill of lading or a railway receipt to a person as buyer and (ii) the buyer transfers the document by way of sale or pledge to a person who takes the document in good faith and for consideration. In such a case if the transfer is by way of sale the unpaid sellers right of lien or stoppage is defeated, and if it was by way of pledge, his right of lien or stoppage can only be exercised subject to the rights of the pledgee.
Thus the effect of the rule is that the seller may still exercise his rights by paying off the pledgee.

DISTINCTION BETWEEN LIEN AND STOPPAGE IN TRANSIT:

  1. The essence of lien is to retain possession while the essence of the stoppage in transit is to regain possession.
  2. The right of lien is applicable to goods, which are in the possession of the seller. The right of stoppage in transit is applicable to the goods, which are in possession of the carrier.
  3. The right of stoppage in transit is applicable to the insolvent buyer. But the right of lien is applicable to all persons, solvent or insolvent.
  4. The right of stoppage in transit is applied to the buyer through the carrier. Therefore stoppage means the seller’s right to ‘regain’ the goods. But lien means the right to ‘retain’ the goods. Of course both the rights are applicable to goods only.
  5. When the right of lien ends the right to stop in transit begins.

(Ill) The Right of Resale [Sec. 54]
The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods:

  1. If the goods are of a perishable nature, without any notice to the buyer, and
  2. In other cases after notice to the buyer, calling upon him to pay or tender the price within reasonable time, and upon failure of the buyer to do so.

If the money realised upon such resale is not sufficient to compensate the seller, he can sue the buyer for the balance. But if he receives more than what is due to him, he can retain the excess. A resale does not absolve the buyer from his liabilities to compensate the seller for damages he may 2 have suffered.

B(b). Right of Unpaid seller against the buyer personally
1. Suit for the Price [Sec. 55]
Where under a contract of sale the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods.
Where the property in goods has not passed to the buyer, the seller as a rule cannot file a suit for the price and his remedy is to claim damages.
According to section 55(2), where under a contract of sale the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not passed and the goods have not been appropriated to the contract.

2. Suit for damages for non-acceptance [Sec. 56]
Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance.

3. Suit for damages for repudiation of the contract [Sec. 60]
Where the buyer repudiates the contract before the date of delivery, the seller may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded i and sue for damages for the breach.

4. Claim for interest and special damages [Sec. 61]
The seller may recover interest or special damages in any case where by law interest or special damages may be recoverable. He may also recover the money paid where the consideration for the payment of it has failed.

MULTIPLE CHOICE QUESTIONS:

1. The Seller of Goods is deemed to be an Unpaid Seller —
(a) when the whole of the price has not been paid or tendered.
(b) when a bill of exchange or other negotiable instrument has been received as conditional payment and the condition has not been fulfilled by reason of the dishonour of the instrument or otherwise.
(c) both (a) and (b).
(d) either (a) or (b).

2. The term “Unpaid Seller” includes —
(a) Agent of the Buyer
(b) Agent of the Seller
(c) Agent of the Carrier/Transporter
(d) All of the above

3. The right of lien is available to the Unpaid Seller, only when —
(a) he is not in possession of the goods
(b) he is in possession of the goods
(c) he has delivered the goods to the Carrier/ Transporter
(d) he has delivered the goods to the Buyer

4. The right of lien is available to the Unpaid Seller, u/s 47 of the Sale of Goods Act, when he is in possession of goods —
(a) as an agent of the Buyer
(b) as a Bailee for the buyer
(c) in his own right.
(d) all of the above

5. In which of the following situations, the right of lien available to the Unpaid Seller is lost?
(a) Where the Goods have been sold without any stipulation as to credit;
( b) Where the Goods have been sold on credit, but the credit period has expired;
(c) Where the Buyer becomes insolvent;
(d) Where the Unpaid Seller has parted with the possession of the goods.

6. Where the goods have been delivered to Railways for carriage and the R/R is taken in the name of the seller or his agent :
(a) the seller is prima facie deemed to reserve the right of disposal
( b) the seller did not retain the right of disposal
(c) the seller cannot retain right of disposal
(d) none of the above.

7. When the goods have been sold on credit and the credit period lien can he exercised
(a) has not expired
(b) has expired
(c) has not been extended
(d) has been extended

8. The right of lien can be exercised by the Unpaid Seller in respect of—
(a) Price
(b) Any other expenses, e.g. Godown Charges, Interest, etc.
(c) Both (a) and (b)
(d) Either (a) or (b)

9. The Unpaid Seller to deliver a part of the Goods on payment of a proportionate part of the price by the Buyer.
(a) shall be bound
(b) may refuse
(c) must honour his commitment
(d) shall request the carrier

10. Generally, where an Unpaid Seller has made part delivery of the Goods, he —
(a) may exercise his right of lien on the remainder
(b) has to honour the entire contract
(c) loses his lien on the remainder of the goods
(d) can supply defective goods in respect of the remainder

11. Where the Unpaid Seller has parted with the goods by handing it over to a carrier for transmission, and the goods are in transit, he can reclaim possession thereof. This right is called —
(a) Right of Lien
(b) Right of Stoppage of goods in transit
(c) Right of withholding delivery of goods
(d) Right of Re-sale

12. Right of Stoppage in transit can be exercised by the Unpaid Seller, where he —
(a) has lost his right of lien
(b) still enjoys his right of lien
(c) either (a) or (b)
(d) neither (a) nor (b)

13. Right of Stoppage in transit can be exercised by the Unpaid Seller, where the Buyer—
(a) is solvent
(b) becomes insolvent
(c) acts fraudulently
(d) acts smartly

14. The right of stoppage in transit may be exercised by the Unpaid Seller till—
(a) payment or tender of the price
(b) Buyer becomes solvent
(c) such time as the Carrier may think fit
(d) such time as the Court may think fit

15. Goods are deemed to be in transit from the time they are delivered to the Carrier or other bailee for transmission to the buyer, until —
(a) Buyer becomes solvent
(b) Buyer or his agent takes delivery of the goods
(c) Seller becomes solvent
(d) Seller or his agent takes delivery of the goods

16. If, after the arrival of goods at their destination, Carrier or other Bailee acknowledges to Buyer or his agent that he holds goods on his behalf, and continues possession of the goods, the transit —
(a) is at an end
(b) is deemed to continue
(c) is not at an end
(d) is not affected at all

17. If goods are rejected by the buyer and the Carrier or other Bailee continues in possession of them, and the seller has refused to receive them back, then transit —
(a) is at an end
( b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision.

18. If the Carrier/Bailee wrongfully refuses to deliver the goods to the buyer or his agent, the transit —
(a) is at an end
(b) is deemed to be at an end
(c) is not deemed to be at an end
(d) is dependent on the Court’s decision

19. Right of Stoppage in Transit may be exercised by the Unpaid Seller, by —
(a) taking actual possession of Goods
(b) giving notice of his claim to the Carrier/ Bailee who holds the Goods.
(c) either (a) or (b)
(d) Both (a) and (b)

20. The Unpaid Seller’s right of lien is to —
(a) re-organize possession of goods
(b) re-sell the goods
(c) regain possession of goods
(d) retain possession of goods

21. The word “perishable” in respect of goods, u/s 54 of the Sale of Goods Act, means —
(a) physically perishable
(b) commercially perishable
(c) both (a) and (b)
(d) either (a) or (b)

22. Where under a contract of sale, the price is payable on a certain day irrespective of delivery and Buyer wrongfully neglects or refuses to pay the price, the Seller can sue the Buyer for the price of goods. For this purpose, goods —
(a) should be appropriated to the contract
(b) need not be appropriated to the contract
(c) should be delivered to the buyer
(d) need not be delivered to the buyer

23. The unpaid seller who has retained possession of the goods in exercise of his right of lien or who has resumed possession from the carrier upon insolvency of the buyer, can resell the goods :
(a) If the goods are of perishable nature, without any notice to the buyer
(b) If the goods are non-perishable, by giving notice to the buyer
(c) Either ‘a’ or ‘b’
(d) Neither ‘a’ nor ‘b’

24. In case of interest by way of damages and special damages in a suit by the seller u/s 61, the interest may be calculated from —
(a) date of tender of goods
(b) date on which the price was payable
(c) either (a) or (b)
(d) both (a) and (b)

25. When under a contract of sale, buyer has paid the price, but seller neglects to deliver goods, buyer has a right to claim interest on the amount of price. The buyer can claim interest —
(a) only when he can recover the price
(b) only when he is entitled to claim damages
(c) either (a) or (b)
(d) both (a) and (b)

Answers:
CA Foundation Business Laws Study Material Chapter 14 Rights of Buyer & Rights of Unpaid Seller 1

STATE WHETHER THE FOLLOWING ARE TRUE OR FALSE:

1. The term unpaid seller includes buyer’s agent to whom bill of lading is endorsed.
2. Unpaid seller can exercise his right of lien even when property in goods has been passed to the buyer.
3. Once possession is lost, right of lien of the unpaid seller is also lost.
4. Unpaid seller can exercise his right of resale of goods only when property in goods has not passed to the buyer.
5. Where the unpaid seller has obtained a decree for the price of the goods the right of lien cannot be exercised.
6. Nemo dat quad non habet means let the buyer beware.
7. Sub-sale by the buyer with seller’s consent leads to loss of right of stoppage in transit.
8. Unpaid seller’s right of stoppage in transit can be exercised only when the buyer is insolvent.

Answers:
CA Foundation Business Laws Study Material Chapter 14 Rights of Buyer & Rights of Unpaid Seller 2