Effect of Sub-Sale or Pledge by Buyer

You have earlier read the general rule of law is that the right of lien or stoppage in transit of the unpaid seller is not affected by a sub-sale, pledge or other disposition of the goods by the buyer unless the seller had agreed to such a sale, etc. [Section 53(1)]. For example, A sold certain goods to B of Mumbai and the goods are handed over to railways for transmission to B. In the meantime, B sold these goods to C for consideration. B becomes insolvent A can still exercise his right of stoppage in transit.




But there are two exceptions to this general rule when the right of lien and stoppage in transit are affected by a sub-sale, pledge or other disposition of the goods. These exceptions are:

i) Seller’s consent: In case, the sub-sale or other disposition by the buyer has been done with the consent of the seller, the unpaid seller cannot exercise lien or stoppage in transit. In a case of Knights v. Wiffen, A sold to B, 80 mounds of grain out of his granary. B then sold (out of these 80 mounds) 60 mounds to C. A told C that the grain would be delivered to him in due course. B then became insolvent. A’s right against 60 mounds is lost since A recognised the title of C, the sub-buyer.

 

ii) Transfer of documents of title: Where a document of title to goods (bill of lading or railway receipt) has been issued or lawfully transferred to any person as a buyer, and the buyer transfers the document to a purchaser who buys them in good faith and for valuable consideration, then the unpaid seller’s right of lien or stoppage in transit would come to an end, if the transfer by buyer to the purchaser is by way of sale. For example, A sold certain goods to B and set the railway receipt to B. B, before making the payment of the goods transferred the railway receipt to C for valuable consideration. C buys the goods in good faith. B becomes insolvent. A’s right to stop the goods in transit is defeated and C shall get a good title.

Section 53(2) further provides that if such transfer of documents of title is by way of pledge, then the unpaid seller’s rights are not completely defeated but he can exercise these rights subject to the rights of the pledge. For example, A sold certain goods to B and sent the railway receipt to B. Without paying for the goods, B pledged the railway receipt with C as a security for a loan of Rs 10,000. Thereafter, B became insolvent. Here, A can get back the railway receipt after paying Rs 10,000 to C.

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