We recently advised a UK seller in a supply contract involving buyer insolvency, where the buyer entered administration before completing payment.
Background
The contract provided for:
- 50% payment before dispatch;
- 50% payable upon presentation of a copy bill of lading (to release shipping documents).
After shipment, the buyer began selling its business and failed to pay the outstanding balance. Freight charges also remained unpaid, leading the carrier to detain the goods and charge daily storage fees.
The buyer subsequently entered administration.
Key Legal Issues
- Buyer’s Breach Following Insolvency
Payment against the bill of lading was a contractual condition. The buyer’s failure to pay constituted repudiatory breach, preventing completion of the contract.
- Seller’s Right of Resale
Under the Sale of Goods Act 1979, an unpaid seller may resell goods where the buyer wrongfully neglects or refuses to pay.
The seller identified a new buyer and arranged for the consignee under the bill of lading to be changed. This was both commercially pragmatic and legally justified.
- Retention of Deposit
The administrators argued that the 50% deposit should be returned.
However, under Howe v Smith, a true deposit is generally non-refundable where the contract fails due to the payer’s breach. As the buyer’s non-payment caused the contract to fail, the seller was entitled to retain the deposit.
Practical Takeaways
This matter highlights that when a buyer becomes insolvent:
- Payment terms tied to shipping documents provide critical protection;
- An unpaid seller may exercise statutory resale rights;
- A deposit is typically forfeited where the buyer is in breach;
- Prompt action is essential to mitigate storage and freight exposure.
The lesson which can be learned from this case is that early legal intervention in cases of buyer insolvency can significantly improve recovery and reduce commercial loss.
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