Buyer Cannot Reject Goods After Putting Them To Use: Bombay High Court Upholds Arbitral Award Against Godrej & Boyce Manufacturing

The Bombay High Court dismissed a petition under section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), holding that once goods are put to use by the buyer, such conduct amounts to deemed acceptance under section 42 of the Sale of Goods Act, 1930 ("SOGA"), the buyer cannot later reject the goods on the ground of alleged defects. A claim for damages can be filed for breach of warranty but goods cannot be rejected, the court ruled. Justice Sandeep V. Marne refused to interfere with an arbitral award that directed Godrej and Boyce Manufacturing Company Limited (“Petitioner”) to pay over ₹4.25 crore to Remi Sales and Engineering Limited (“Respondent”) for stainless steel tubes supplied under a purchase order. Background: Godrej issued a purchase order in August 2016 to Remi for the supply of 8,339 stainless steel seamless tubes, conforming to ASTM A213 TP 316/316L specifications, to be used in heat exchangers for an oil refinery project in Oman. The total cost of the contract exceeded Rs. 5 crore. The tubes were supplied in 2017 which were accepted by Godrej and later installed in heat exchangers. Godrej alleged that rusting, pitting and discoloring was observed in some tubes after installation. After discussions, around 965 tubes were sent back for cleaning under a procedure approved by Godrej. Despite this, Godrej later rejected the goods and withheld payments which prompted Remi to invoke arbitration. The arbitral tribunal allowed the claims of Remi and awarded ₹4,25,44,680 with 10% interest, holding that the supply of goods conformed to contractual specifications and that Godrej had used the supplied goods which amounted to deemed acceptance. Aggrieved, Godrej had challenged the award under section 34 before the High Court. It argued that the arbitral tribunal erred in appreciating contractual clauses which permitted rejection of goods even after acceptance. Findings: The court upheld the arbitral tribunal's finding that Remi had proved conformity with contractual specifications through certificates of raw materials, mill test certificates, intergranular corrosion tests, third party inspection reports and PMI tests conducted by Godrej itself after supply. Based on the above, the court refused to interfere with the arbitrator's findings, holding that there was ample evidence before the arbitrator based on which it recorded its findings, which cannot be re-appreciated under section 34 of the Arbitration Act. The court heavily relied on section 42 of the SOGA which provides that the goods are deemed to be accepted if the buyer does any act inconsistent with the ownership of the seller. Applying the above provision, the court held that “in the present case, since the Petitioner has used the tubes in the heat exchangers, such act is construed as an act which is inconsistent with the ownership of the seller. Thus, the Petitioner's act of using the tubes in heat exchangers is treated as an acceptance of the tubes.” Rejecting the plea that clause 6 of the agreement allowed post acceptance rejection, the court held that clause 6(b) only permitted rejection before use subject to inspection. Furthermore, the second part of the clause only permitted withholding of payment and not rejection of goods which was only limited to non-conformity with specifications. The Court observed: “Thus clause 6(b) does not constitute contractual variation with deeming fiction of 'acceptance' under Section 42 of the Sale of Goods Act and even if it is held to be contractual variation, Petitioner has failed to prove that the tubes were not in accordance with specifications. In my view, therefore the provisions of Section 42 of the Sale of Goods Act have rightly been invoked by the Arbitral Tribunal. The act of the Petitioner of inserting the tubes in the heat exchangers constitutes the act of doing something which is inconsistent with the ownership of the seller.” The court further observed that alleged rusting did not amount to material defect as no evidence was produced to show that the tubes sent for cleaning showed any dysfunction after being re-installed. It further held that boroscopy reports allegedly relied upon by Godrej were never produced. It observed that “There is no material to hold that the clean tubes again developed rusting or pitting. The Arbitral Tribunal rightly concluded that the rusting/pitting/discoloration observed prior to cleaning was not a material defect since the same was cured by cleaning process with due approval of the Petitioner.” Relying on the Supreme Court's judgment in Bhagwat Sharan Justice Marne noted: “A party cannot blow hot and cold at the same time. Once a party elects to take a stand, it cannot turn around and take the opposite stand.” Coming to the facts of the present case, the court observed that “In the present case, Petitioner-Godrej is ...

Buyer Cannot Reject Goods After Putting Them To Use: Bombay High Court Upholds Arbitral Award Against Godrej & Boyce Manufacturing

Mohd Malik Chauhan

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