Use of Goods in Manufacturing Constitutes Acceptance under Section 42 of the Sale of Goods Act: Bombay High Court - 2025-12-24

Beyond the Purchase Order: High Court Clarifies "Acceptance" in Industrial Supply Disputes

In a significant ruling for commercial contract law, the Bombay High Court has affirmed that a buyer’s decision to integrate supplied goods into their production process acts as a definitive "acceptance" under the Sale of Goods Act, barring subsequent rejection of the entire lot. The decision, delivered by Justice Sandeep V. Marne, reinforces the narrow scope of judicial interference in arbitral awards and clarifies the interplay between contractual clauses and statutory deeming provisions.

The Genesis of the Dispute

The conflict arose from a 2016 purchase order between Godrej and Boyce Manufacturing Company Limited (Petitioner) and Remi Sales and Engineering Limited (Respondent) for the supply of 8,339 stainless steel seamless tubes. Intended for use in heat exchangers for an oil and gas refinery, these components were subject to stringent technical standards. Following the delivery and subsequent installation into the heat exchangers, Godrej reported issues of rusting and pitting. A protracted disagreement ensued, leading to arbitration.

The Arbitral Tribunal had originally awarded over Rs. 4.25 crore in favor of the Respondent, determining that the supplied tubes met contractual specifications and that Godrej’s act of incorporating those tubes into its machines constituted a legally binding acceptance.

Competing Arguments: Contract vs. Statute

The Petitioner, represented by Ms. Arti Raghavan, argued that Clause 6(b) of the purchase order created a specific contractual mechanism allowing for the rejection of goods even after they had been put to use. They contended that the Tribunal’s application of Section 42 of the Sale of Goods Act—which deems goods accepted when the buyer performs an act inconsistent with the seller’s ownership—was legally flawed given the parties’ specific agreement to the contrary.

Conversely, Mr. Rashmin Khandekar, representing the Respondent, maintained that the Tribunal acted well within its jurisdiction. He argued that the Petitioner failed to prove that the goods were defective and that, in any event, the Tribunal’s factual findings regarding technical compliance were final and not subject to re-appreciation by the High Court under Section 34 of the Arbitration and Conciliation Act.

Legal Analysis: The Mechanics of "Acceptance"

The Bombay High Court underscored that Section 42 of the Sale of Goods Act operates as a "deeming fiction." The Court dismissed the Petitioner’s attempt to override this via Clause 6(b), noting that while the clause allowed for withholding payment or rejecting defective items, it did not alter the statutory threshold for "acceptance" triggered by the physical use of the goods.

Crucially, the Court distinguished between a rejection of goods and a claim for warranty . Once a buyer incorporates components into active machinery, the legal "point of no return" is crossed. Any subsequent discovery of defects must be pursued as a warranty claim rather than a blanket repudiation of the contract.

Key Observations

The judgment clarifies that the sanctity of arbitral findings remains a priority for the judiciary. Key excerpts from the ruling include:

• "Under Section 42 of the Sale of Goods Act, the buyer is deemed to have accepted the goods when he intimates to the seller that he has accepted them or when the goods have been delivered to the buyer and the buyer does any act in relation to them which is inconsistent with the ownership of the seller."
• "The Arbitral Tribunal is the master of evidence and is the best judge of adequacy of quantity and quality of evidence. This Court cannot be called upon to enter into the realm of re-appreciation of evidence merely because another view is also possible."
• "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."
• "If any defect is noticed in the consumed tubes, it would be a claim for warranty and not a right to reject the goods."

Final Decision: A Cautionary Tale for Procurement

The Court ultimately dismissed the Petition, upholding the Arbitral Award. The ruling signals a clear warning to industrial players: contractual terms meant to preserve rights of rejection must be meticulously drafted to explicitly exclude statutory provisions like Section 42, and buyers must proceed with extreme caution before installing components suspected of non-conformity. By refusing to intervene in the fact-finding process of the arbitrator, the High Court has reaffirmed that commercial entities are bound by their election to use goods, rendering subsequent "volte-face" claims of defect insufficient to avoid payment obligations.