Exercising the right of stoppage is a useful 'self-help' remedy for an unpaid seller of goods to secure payment, but the right must be exercised with due consideration.
For many contracts for the sale of goods, delivery and payment happen simultaneously – the buyer makes payment immediately upon receipt of the goods from the seller. However, international trade means that there may be a significant distance between parties to a contract making simultaneous performance difficult. Out of necessity, often the seller must perform its end of the bargain before it has secured payment.
Consider this scenario: an Australian producer secures an international sale of its goods via an Australian exporter. The producer packs the goods into containers, delivers the goods to the exporter who arranges for their shipment to the overseas purchaser.
The farmer issues an invoice for the cost of the goods and whilst the goods are in transit, the farmer discovers an external administrator has been appointed to the purchaser and the farmer is unlikely to receive payment of its invoice.
Fortunately, in such scenarios, the Sale of Goods Acts in each state and territory of Australia afford the unpaid seller of goods, in the case of the insolvency of the buyer, a right of stopping the goods in transit notwithstanding that the property in the goods may have already passed to the exporter (or in some cases to the overseas purchaser).
In this article, we discuss the elements required to enliven the right of stoppage provisions in Australia and outline some issues which can arise.
What is the right of stoppage?
Stoppage in transit is a right possessed solely by the seller and is effective only between the seller and the buyer. The right is a useful 'self-help' remedy to enforce payment where an unpaid seller has parted with possession of the goods, and the buyer of the goods has become insolvent.
The right of stoppage entitles the seller to resume possession of the goods, and retain them until payment of the purchase price, even if the documents of title or ownership have already been transferred to the buyer.
The right of stoppage isn't unique to Australia. International private law has long recognised the right of contracting parties to suspend performance upon an anticipatory breach. For example, pursuant to article 71 of the United National Convention on the International Sale of Goods, a party may suspend the performance of his or her obligations if, after the conclusion of the contract, it becomes apparent that the other party will not perform a substantial part of his or her obligations as a result of either:
- a serious deficiency in that party's ability to perform or in his or her creditworthiness; or
- his or her conduct in preparing to perform or in performing the contract.
What are the elements of the right of stoppage?
The right of stoppage requires a seller to be unpaid and no longer in possession of the goods while the buyer is insolvent (or there is a suspicion the buyer will become insolvent) and the goods are in the course of transit.
The "course of transit" means that from the time when the goods are delivered to a carrier or other bailee for the purpose of transmission to the buyer until the buyer or the buyer's agent takes delivery of the goods from the carrier or other bailee.
If the buyer or the buyer's agent obtains delivery of the goods before their arrival at its destination, the goods are no longer in transit and the buyer cannot claim to stop the goods.
The right of stoppage does not require an actual breach of the contract to have occurred in order for the innocent party to exercise the right. The right requires that it must be apparent that one party to the contract will not ultimately fulfil its obligation due to that party's insolvency.
Furthermore, the right of stoppage does not rescind the sale contract or restore property in the goods to the seller. It only gives the seller the right to retain possession until payment. The seller, having obtained possession of the goods by stopping them in transit to the buyer, is then in a position to exercise its vendor's lien for the unpaid price of the goods.
How is a stoppage effected?
The unpaid seller may exercise its right of stoppage either by taking actual possession of the goods or by giving notice of the seller's claim to the carrier or other bailee who has possession of the goods while in transit.
The notice may be given either to the person in actual possession of the goods or to the person's principal. In the latter case the notice to be effectual must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may communicate it to the principal's servant or agent in time to prevent a delivery to the buyer.
When a notice of stoppage is given by the seller to the carrier or other bailee in possession of the goods, the carrier or other bailee must redeliver the goods according to the directions of the seller. The expense of redelivery must be borne by the seller.
What issues can arise in exercising a right of stoppage?
Conflict with a carrier's lien
The effectiveness of the right of stoppage will largely depend on the attitude of the carrier of the goods.
Take the example used in the beginning of this article – the seller attempts to exercise his right of stoppage whilst the goods are in transit, however the carrier has not been paid for the freight costs and wants to exercise its carriers' lien over the goods to secure payment. Does the right of stoppage or the carrier's lien take priority?
The case of Gilgandra Marketing Co-Operative Limited v Australian Commodity & Merchandise Pty Ltd & Ors [administrator appointed] [No. 2]  NSWSC 16, illustrates this problem.
Gilgandra Marketing Co-Operative Limited (Gilgandra) made 10 contracts to sell wheat to Australian Commodity & Merchandise Pty Ltd (ACM) between 1 February 2010 and 12 March 2010. Each contract consisted of a sale note attaching standard terms (GM contracts). Gilgandra delivered the wheat under the GM contracts to a container terminal and ACM arranged shipment.
Gilgandra issued an invoice to ACM whom did not pay and a notice of stoppage was issued by Gilgandra whilst the goods were in transit.
The Court identified two issues relating to the right of stoppage.
The first is whether the transit of goods under the GM contracts had ceased when they arrived in Sydney or whether transit (and therefore the right to stoppage) continued to Bangladesh? The Court held that the wheat remained in transit after it departed from Sydney as the wheat containers were on various vessels by reason of the directions of ACM.
The second is whether Gilgandra's exercise of its rights of stoppage was subject to the operation of the carrier's liens to recover the freight charges.
The Court held that the exercise of a notice of stoppage by an unpaid seller is to facilitate the seller in asserting its vendor's lien for unpaid purchase money and that a carrier's lien for money due for the carriage of and other charges upon the goods in question would take precedence.
Accordingly, a seller looking to exercise its right of stoppage must anticipate that it will need to provide an undertaking of some sort to the carrier to pay any outstanding freight costs, including the costs of storing the goods and/or re-delivering the goods to the seller.
Carrier's compliance with the notice of stoppage
Again using the example from the beginning, the seller issues a notice of stoppage to the carrier, though the carrier ignores the notice and continues to deliver the goods to the end purchaser.
In the case of Toll Holdings Ltd v Stewart  FCA 256 an overseas supplier (Stewart) shipped televisions to a purchaser in Australia using a carrier, Toll Holdings Pty Ltd (Toll). Whilst the televisions were in transit with Toll, administrators were appointed to the local buyer, leaving the seller unpaid.
On the day after the appointment of the administrators, Stewart emailed Toll advising that goods being transported under 12 bills of lading were the property of the supplier and directed Toll to 'hold' the goods and help 'recall' those goods.
Toll didn't follow those instructions. Toll's concern was the storage costs it would incur if the goods remained at the container terminals and consequently lodged requests to warehouse the containers with Australian Customs for the underbond movement of the containers and issued delivery orders to the buyer's unpacking contractor to enable it to collect the containers. The goods were then placed into Australian Customs' warehouses.
The main issues before the Court were two-fold:
- whether the supplier or the administrator was entitled to the goods in the warehouses; and
- if the administrator was entitled to the goods, whether Toll was liable for damages in conversion to the supplier, because it released the goods despite receiving a notice under the stoppage in transit provisions.
The Court found that Stewart's email to Toll constituted a notice of stoppage in transit and because the goods were released to the buyer's contractor, they were no longer in transit and, as a result, Stewart lost the right of stoppage.
By Toll failing to comply with the notice and releasing the goods to the buyer's contractor, Toll had acted inconsistently with Stewart's right to possession of the goods and was liable to Stewart for conversion.
Exercising the right of stoppage is a useful remedy to secure payment for an unpaid seller of goods, but the right co-exists with other legal principles, such as a carrier's lien.
When exercising the right of stoppage, due consideration must be taken of the interests of all other affected parties to ensure the seller isn't bearing any unintended costs.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.