Bombay High Court: In an arbitration revolving around whether Godrej & Boyce Mfg. Co. Ltd. (‘buyer’) could reject stainless steel seamless tubes for being defective, after having accepted delivery and put them to use in heat exchangers, the Arbitral Tribunal (‘Tribunal’) had awarded Rs 4.25 crore in favour of Remi Sales & Engg. Ltd. (‘seller’). A Single Judge Bench of Sandeep V. Marne, J., upheld the arbitral award, emphasising that once the goods were found to be in accordance with the contractual specifications, the burden shifted to the buyer to prove defects and the buyer cannot reject goods after use. The Court concluded that no perversity or patent illegality was demonstrated in the award, and therefore interference under Section 34 of the Arbitration and Conciliation Act, 1996 (‘A&C Act’) was unwarranted.
Background:
The dispute arose from a purchase order issued by the buyer in 2016 for supply of 8,339 stainless steel seamless tubes, intended for use in heat exchangers of oil and gas refinery. The tubes were delivered in 14 consignments during February and March 2017 and were subsequently inserted into the heat exchangers. Shortly thereafter, the buyer reported pitting and rusting in some tubes, leading to meetings, correspondence, and attempts at cleaning and re-bending. Despite these remedial measures, discoloration persisted, and the buyer decided to reject and replace all tubes, refusing payment of invoices. The seller demanded an inspection of the tubes, but the buyer was unable to provide an inspection of all the 965 tubes which were cleaned.
The seller invoked arbitration in December 2017 and claimed over Rs 4.47 crore plus interest at 24% per annum as well as around Rs 7.5 lakhs towards re-bending and Rs 1 crore towards non-disclosure of advance license against invalidation, while the buyer raised counter-claims for testing costs, transportation, procurement, and losses due to delayed delivery amounting to Rs 3.10 crore approximately.
The Tribunal passed an award dated 08-02-2023, allowing the seller’s claim in the sum of Rs 4.25 crore along with 10% interest from 01-04-2017 till the date of the award and granted 10% interest from the date of the award until realisation. All the other claims of the seller were rejected. The Tribunal awarded two counterclaims in the aggregate sum of Rs 22.13 lakh in favour of the buyer. This award was challenged by the buyer. However, the seller began execution proceedings, leading to freezing of buyer’s bank account. On 13-12-2024, the Court recorded the buyer’s statement to deposit the entire decretal sum of Rs 7.53 crore which was done on 07-01-2025. Subsequently, through an interim application, the seller sought withdrawal, and on 10-07-2025 the Court allowed it subject to furnishing a bank guarantee.
The buyer’s counsel argued that the arbitral award suffered from patent illegalities and perverse findings, particularly in applying Section 42 of the Sale of Goods Act, 1930 (‘SOGA’), which deems acceptance once the goods are used. It was submitted that Section 13 of the SOGA permitted the parties to agree contrary to the provisions of Section 42, and it was lawful for the parties to contractually agree for rejection of goods even after putting them to use. It was contended that Clause 6(b) of the purchase order expressly varied statutory provisions, preserving the buyers’s right to reject goods even after acceptance as the acceptance was qualified and was made subject to subsequent inspection or rejection of the material found defective.
On the other hand, the seller’s counsel maintained that the tubes were manufactured and tested as per specifications, with multiple inspections and certifications, including by a third-party agency. It was argued that the buyer failed to discharge the burden of proving defects, and that the Tribunal’s findings were based on cogent evidence, and re-appreciation of the same under Section 34 of the A&C Act was not permitted.
Analysis and Decision:
The Court noted that the dispute between the parties arose on account of the buyer’s refusal to pay the price of tubes supplied to it by the seller. The controversy hinged on two principal issues: whether the tubes supplied were in accordance with specifications, and whether defects gave the buyer the right to reject them after use.
The Court noted that the Tribunal conducted a factual inquiry, relying on quality certificates, mill test reports, IGC test results, and inspection reports of the third-party agency, all of which confirmed that the tubes supplied by the seller was in accordance with the requisite specifications. Once this was established, the burden shifted to the buyer to prove defects. The Court observed that the buyer’s reliance on stray admissions such as non-examination of mother hollow used or limited sampling by the inspection agency, could not outweigh the documentary evidence supporting conformity.
The Court emphasised that ordinarily, once the delivery of goods is accepted, the buyer becomes liable to pay for the same. But in the present case, the buyer submitted that the defects were noticed only after the tubes were put to use. The Tribunal had concluded that there was no defect in the tubes and that even if there was any defect noticed, it was not so material that the tubes could be rejected by the buyer. However, in the present case, the Court observed that since the buyer had used the tubes in the heat exchangers, it was construed as an act which was inconsistent with the ownership of the seller, and thus, it was treated as an acceptance of the tubes.
The Court rejected the buyer’s contention that Clause 6(b) of the purchase order varied the statutory fiction of acceptance as contained in Section 42 of the SOGA, as the clause merely provided that the acceptance of goods by the buyer was subject to its subsequent inspection, verification or rejection and it preserved a right to withhold payment for non-conforming goods, not a right to reject the goods after use. The Court noted that ‘acceptance of goods’ and ‘passing of title’ were distinct concepts, and once the tubes were inserted into heat exchangers, the buyer’s act constituted acceptance. The Court observed that Clause 6(b) did not cover the situation of consumption or use of goods, and thus, it could not be treated as a variation from statutory concept of acceptance under Section 42 of the SOGA.
The Court opined that once the buyer’s right to reject the tubes after their use in the heat exchangers was negatived, even if defect was noticed in the tubes after such use, the buyer could not reject the tubes, and its claim would be towards warranty as rightly held by the Tribunal. However, the Court noted that no such claim towards warranty was raised by the buyer.
Regarding the defects in the tubes, the Court noted that the buyer had accepted the remedial measure of cleaning the tubes and around 965 tubes were sent for cleaning, and the seller cleaned the same which were again inserted in the heat exchangers. Though it was the buyer’s contention that the even after reinsertion of the cleaned tubes, rusting and pitting occurred, there was no evidence on record to prove the same. The Court observed that the Tribunal had rightly approached the controversy relating to defects by considering the buyer’s conduct as there was no material to hold that the clean tubes again developed rusting or pitting.
The Court referred to Bhagwat Sharan v. Purushottam, (2020) 6 SCC 387, and held that the buyer could not blow hot and cold at the same time. The Court opined that the buyer ought to have remained consistent on its position of defect in the tubes on account of rusting and pitting. However, it made a conscious election to accept the seller’s readiness to clean the tubes. Thereafter, it inserted the cleaned tubes into the heat exchangers. Having elected to do so, the buyer could not turn around and base its claim on its original stand of defect in the tubes.
The Court observed that the Tribunal had rightly awarded the seller’s claim for the invoice amount as the buyer’s act of rejection of tubes after having put them to use was clearly wrongful, and it was bound to pay the price for the same. If any defect was noticed in the consumed tubes, it would be a claim for warranty and not a right to reject the tubes.
The Court clarified that out of the buyer’s counterclaim of Rs 3.10 crore under six heads, the major claim for new procurement costs, i.e., Rs 1.59 crore and storage charges i.e. Rs 15 lakh, was rejected. The Tribunal allowed Rs 18.38 lakh for testing costs and Rs 3.75 lakh for rework and extra man-days, totaling Rs 22.13 lakh. This amount was deducted from the seller’s invoice claim of Rs 4.47 crore, leaving a balance of Rs 4.25 crore payable. The seller did not challenge the award of Rs 22.13 lakh in favour of the buyer.
Consequently, the Court, while dismissing the petition, upheld the Tribunal’s award holding that there was no reason to interfere with the award as it was supported by evidence and did not suffer from perversity.
[Godrej & Boyce Mfg. Co. Ltd. v. Remi Sales & Engg. Ltd., Commercial Arbitration Petition No. 232 of 2024, decided on 24-12-2025]
Advocates who appeared in this case:
For the Petitioner: Arti Raghavan i/b Bachubhai Munim & Co.
For the Respondent: Rashmin Khandekar with Pranav Nair, Akanksha Patil, Harshil Parekh, Praharshi Saxena & Rahul Agrawal i/b Purnanand & Co.
Buy Arbitration and Conciliation Act, 1996 HERE
