When Use Becomes Acceptance: Bombay HC Upholds Arbitrator’s Ruling in Stainless Steel Tube Dispute

The Bombay High Court has issued a significant clarification regarding the interpretation of "acceptance" under the Sale of Goods Act (SOGA), 1930. In a commercial arbitration petition brought by Godrej and Boyce Manufacturing Company Limited, Justice Sandeep V. Marne affirmed a sole arbitrator’s decision that once a buyer incorporates delivered goods into a manufacturing process, they are deemed to have accepted those goods under Section 42 of the Act, regardless of subsequent claims of defects.

The Backdrop: A Manufacturing Dispute

The dispute centered on the supply of 8,339 stainless steel seamless tubes valued at over ₹5 crores, intended for use in petrochemical heat exchangers for a refinery in Oman. Following delivery in early 2017, Godrej and Boyce inserted the tubes into their heat exchangers. Shortly thereafter, the company reported observing "pitting and rusting" on the inner surfaces of the tubes.

What followed was a complex back-and-forth involving third-party inspections and remedial cleaning attempts. When Godrej ultimately refused to pay the outstanding invoice, claiming the tubes were fundamentally defective, Remi Sales and Engineering Limited invoked the arbitration clause. The sole arbitrator found in favor of the Respondent, determining that the tubes met contractual specifications and that the Petitioner’s act of using them triggered the "deemed acceptance" rule under Section 42.

Arguments on the Table

The Petitioner, Godrej and Boyce, argued that the arbitration award was riddled with patent illegalities. Their counsel contended that Clause 6(b) of the purchase order created a contractual variance from Section 42 of the SOGA, effectively allowing them to reject goods even after insertion into the heat exchangers. They further asserted that the tribunal ignored critical evidence, such as admissions by Remi Sales regarding the existence of rust and pitting.

Conversely, the Respondent, Remi Sales, maintained that the Arbitral Tribunal correctly applied the law. They contended that because the Petitioner had conducted successful pre-delivery inspections along with a third-party inspection agency (TPIA), the burden of proof rested on the Petitioner to demonstrate defects—which they failed to do. They argued that the Petitioner's subsequent conduct of allowing the tubes to be cleaned and re-inserted in the manufacturing process constituted a clear election to accept the goods.

The Court’s Legal Analysis

Justice Marne’s analysis focused on the distinction between the "passing of title" and the "acceptance of goods." Under Section 42, the law deems goods accepted if the buyer does an act "inconsistent with the ownership of the seller." The Court observed that inserting the tubes into the heat exchangers was unequivocally such an act.

The Court thoroughly rejected the Petitioner’s reliance on Clause 6(b), noting that while the clause granted a right to withhold payment for goods not conforming to specifications, it did not override the statutory deeming fiction of acceptance once the buyer has consumed or used the products.

Key Observations

• On the Nature of Acceptance: "The act of buyer using or consuming the goods would certainly constitute acceptance of the goods by the buyer."
• On Contractual Variance: "There is nothing in Clause-6(b) which made the Petitioner entitled to reject the goods even after using them."
• On the Role of the Arbitrator: "I am not an appellate court over the award of the Tribunal. The Tribunal has taken into consideration overwhelming evidence on record for holding that the supplied tubes met the specifications."
• On Admissions: "Admission made by a party is only piece of evidence and not conclusive proof of what is stated therein... the weight to be attached with it must depend on the circumstances in which it is made."

Final Decision: The Verdict

The High Court dismissed the petition, ruling that the Arbitral Tribunal’s decision was well-reasoned and supported by evidence. The Court affirmed that the Petitioner’s refusal to pay was not justified once the goods were put to use. The ruling emphasizes the sanctity of arbitral awards in commercial disputes, reinforcing that Section 42 of the SOGA serves as a protective mechanism for sellers where buyers have already extracted value from the supplied goods.

Practically, this judgment serves as a cautionary tale for manufacturers and industrial purchasers: performing invasive tests after integrating components into critical machinery carries the risk of being legally barred from rejecting those components, regardless of later-discovered imperfections. Under these circumstances, claims regarding product quality must be framed as a breach of warranty rather than a fundamental breach for rejection.