In commercial transactions, sellers often extend credit to buyers. However, when payment defaults occur, the seller faces financial risk. To protect their interest, the law recognizes a category called unpaid seller and grants specific rights to such sellers. Understanding these rights is vital for businesses, financial institutions, and legal professionals, particularly in the banking and trade finance sectors.
Who is an Unpaid Seller?
According to the Sale of Goods Act, 1930 (India), a seller is deemed an unpaid seller when:
- The whole of the price has not been paid or tendered.
- A bill of exchange, promissory note, or other negotiable instrument received as conditional payment has been dishonored.
Thus, even if part payment is received, the seller may still be considered unpaid for the balance.
Rights of an Unpaid Seller
The rights of an unpaid seller are classified into two categories: rights against the goods and rights against the buyer personally.
Rights Against the Goods
These rights allow the unpaid seller to protect or recover value from the goods themselves.
- Right of Lien
The seller can retain possession of goods until full payment is made. This applies when goods are sold without credit terms, when the credit period has expired, or when the buyer becomes insolvent. - Right of Stoppage in Transit
If goods are in transit and the buyer turns insolvent, the seller can stop delivery and reclaim possession by informing the carrier or bailee. - Right of Resale
If the buyer defaults, the unpaid seller can resell the goods after giving due notice to the buyer. Any loss from the resale can be claimed as damages, while any profit belongs to the seller.
Rights Against the Buyer Personally
Apart from rights over goods, the unpaid seller can enforce claims against the buyer directly.
- Suit for Price
When ownership of goods has passed to the buyer but payment is not made, the seller can sue for the agreed price. - Suit for Damages
If the buyer wrongfully refuses to accept goods or repudiates the contract, the seller can claim damages for non-acceptance. - Suit for Interest
The seller can claim interest on the sale value for the period of delay, provided there is an agreement, usage of trade, or law allowing such interest.
Importance in Banking and Trade Finance
Banks frequently finance commercial sales through credit, bills of exchange, and letters of credit. In case of default or insolvency, the unpaid seller’s rights directly impact risk exposure for both sellers and financial institutions. For example:
- In invoice financing, banks rely on seller rights to ensure recoverability.
- In cases of dishonored bills, an unpaid seller’s recourse is vital for credit assessment.
Thus, awareness of these rights is critical for bankers assessing collateral and for businesses navigating secure trade transactions.
Conclusion
The concept of unpaid seller serves as a safeguard for merchants against the risks of default and insolvency. With remedies both against goods and the buyer, the law ensures that sellers retain a degree of security in commercial dealings. For banks and finance professionals, these rights underline the necessity of structured contracts, proper documentation, and prudent credit evaluation.
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