1. Facts of the Case
- A, the seller, enters into a contract to sell goods to B, the buyer.
- B pays A through a cheque, intending it as payment for the goods.
- Before B can obtain delivery of the goods, the cheque is dishonoured by the bank due to insufficient funds.
- In response, A refuses to deliver the goods until he receives actual payment.
- The key issue is whether A’s refusal to deliver is legally justified under the Indian Contract Act, 1872, given that payment has not been realised.
2. Issues in the Case
- Whether a seller can refuse to deliver goods when the buyer’s cheque is dishonoured.
- Whether a cheque constitutes valid payment in the eyes of the law before being cleared by the bank.
- Whether the seller is entitled to exercise his right of lien or suspension of delivery until payment is received.
- What legal remedies are available to the seller if the buyer’s cheque fails.
3. Legal Principles Covered
a) Sale of Goods and Payment by Cheque
- Section 31, Sale of Goods Act, 1930:
Payment of price must be made in cash, by cheque, or as otherwise agreed. However, the seller is entitled to receive payment in accordance with the terms of contract. - A cheque is not deemed valid payment until it is honoured by the bank. Until then, the seller has not received the consideration for the goods.
b) Right of Lien (Section 47, Sale of Goods Act, 1930)
“Where the price is payable on delivery, the seller of goods is entitled to retain possession of the goods until the price is paid, even if the buyer has made part payment or issued a cheque which is dishonoured.”
Explanation:
- Since the cheque is dishonoured, A has not received payment, and under Section 47, he can refuse delivery until actual payment is made.
c) Dishonour of Cheque under Negotiable Instruments Act, 1881
- Section 138 N.I. Act: Dishonour of a cheque for insufficiency of funds constitutes a criminal offence and gives the payee (seller) the right to refuse performance until actual payment is received.
- The dishonour does not automatically transfer risk or title to the buyer, so the seller’s lien and right to withhold delivery remain intact.
d) Judicial Precedents
- Kundan Lal v. Ramnath, AIR 1963 SC 589
- Held: A seller can withhold delivery if payment promised has not been realised.
- Union Bank of India v. D.B. Gupta (2001)
- Held: A cheque constitutes conditional payment; delivery of goods may be withheld if the cheque is dishonoured.
- M.P. Sugar Mills Ltd. v. Union of India, AIR 1975 SC 1817
- Held: Until consideration is complete, the seller has the right to retain goods and enforce payment.
4. Possible Judgement
- A’s refusal to deliver the goods is justified.
- Since B’s cheque was dishonoured, there is no valid payment made for the goods.
- Under Section 47 of the Sale of Goods Act, 1930, the seller has the right of lien to retain possession of goods until full payment is received.
- The seller is entitled to insist on cash payment or valid cleared funds before delivering the goods.
- If B fails to make payment, A can also rescind the contract and sue for damages for non-payment under Section 55 of the Sale of Goods Act.
About lawgnan:
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