When Use Becomes Acceptance: Bombay HC Settles Dispute Over Defective Industrial Tubes

In a significant ruling for commercial contract law, the Bombay High Court has clarified the boundaries of the "right to reject" under the Sale of Goods Act, 1930. Justice Sandeep V. Marne, presiding over a challenge under Section 34 of the Arbitration and Conciliation Act, 1996, affirmed that once a buyer integrates supplied goods into their own manufacturing processes, the goods are deemed accepted under Section 42 of the Act, effectively extinguishing the right to reject them.

The Genesis of the Dispute

The conflict arose between engineering giant Godrej and Boyce Manufacturing Company Limited (Petitioner) and Remi Sales and Engineering Limited (Respondent). In 2016, Godrej placed a purchase order for over 8,000 stainless steel seamless tubes to be used in heat exchangers for an oil and gas refinery.

Post-delivery, Godrej integrated these tubes into the heat exchangers. Shortly thereafter, the company reported observing pitting and rusting within the pipes. While some tubes were sent back for a cleaning process, Godrej eventually sought to reject the entire consignment, withholding payment for the invoiced amount. The matter progressed to arbitration, where the sole Arbitrator ruled in favor of the supplier, leading to the current petition.

Arguments on Legal Interpretation

Godrej argued that the arbitral award was "riddled with perverse findings." They contended that the contract, specifically Clause 6(b), allowed for the rejection of goods even after use, thereby overriding the default provisions of Section 42 of the Sale of Goods Act. They maintained that the presence of rusting was an inherent defect that made the goods unusable for high-pressure petrochemical environments.

Conversely, Remi Sales and Engineering argued that the Tribunal’s factual determination—that the goods met specifications and that the defect was not material—was sound. They asserted that the Petitioner’s attempt to reject the goods after installation was merely an afterthought intended to avoid payment, and that the "deeming fiction" of acceptance under Section 42 strictly applied.

The Court’s Reasoning

The Court’s analysis centered on the distinction between passing of title and acceptance of goods .

Justice Marne emphasized that under Section 42 of the Sale of Goods Act, an act "inconsistent with the ownership of the seller"—such as the act of inserting tubes into a larger manufacturing project—constitutes legal acceptance. The Court noted that even if Clause 6(b) allowed for withholding payment or claiming a warranty, it did not grant a blanket right to reject the goods after they had already been consumed or put into operation.

Furthermore, the Court found no evidence of perversity in the Tribunal’s conclusion that the tubes met contract specifications. The Court observed that internal inspections and Third-Party Inspection Agency (TPIA) reports supported the supplier’s position, and that Godrej’s later claims of "defects" were not adequately substantiated by the technical reports they failed to produce during arbitration.

Key Observations

Highlighting the finality of the Arbitral Tribunal’s findings, the Court noted:

• "The statutory concept is that once the goods are dealt with by making use of the same or selling the same to third party, the buyer cannot then turn around and proceed to reject the goods."
• "The Arbitral Tribunal is the master of evidence and is the best judge of adequacy of quantity and quality of evidence."
• "If the Respondent was of the view that the SS Seamless Tubes supplied by the Claimant suffered from rusting, pitting, corrosion etc., the Respondent ought to have rejected the goods and not permitted the Claimant to carry out the cleaning process."

Implications for Future Commercial Contracts

The dismissal of the petition underscores a cautionary lesson for commercial entities: the conduct of the buyer post-delivery is often more legally significant than later claims of dissatisfaction. By electing to proceed with cleaning and installation rather than holding the goods for inspection and formal rejection, the Petitioner unwittingly triggered the "deeming fiction" of acceptance.

This judgment reinforces the principle that once an item is incorporated into a project, the path to recourse should be sought through a breach of warranty claim rather than a total rejection of the contract, especially when the breach of technical specifications is not clearly proven. For now, the arbitral award stands, and the dispute highlights the vital necessity for rigorous, contemporaneous documentation in high-stakes industrial procurement.