Bombay High Court Affirms Finality of Arbitral Award in Purchase Dispute

In a significant ruling concerning the interpretation of commercial contracts and the Sale of Goods Act, the Bombay High Court has upheld an arbitral award that denied a buyer the right to reject goods after they had already been put into production. The court emphasized that under Section 42 of the Sale of Goods Act, 1930 , once a buyer utilizes goods in their manufacturing process, such conduct is legally inconsistent with the seller’s ownership, creating a "deeming fiction" of acceptance.

A Refinery Project Gone Wrong

The dispute arose between Godrej and Boyce Manufacturing Company Limited (the Petitioner) and Remi Sales and Engineering Limited (the Respondent). In 2016, Godrej placed a purchase order exceeding ₹5 crore for stainless steel seamless tubes required for heat exchangers in an Oman-based oil and gas refinery.

After 14 consignments were delivered and incorporated into the refinery infrastructure, Godrej reported pitting and rusting. Despite an attempt to resolve the issue through a cleaning process performed by the Respondent, Godrej later sought to reject the entire inventory and recover costs. The matter proceeded to arbitration, ending in an award of approximately ₹4.25 crore in favor of the Respondent.

Conflicting Interpretations of the Contract

During the hearing before the High Court, Godrej argued that the arbitral award suffered from patent illegality and perversity. The core of their argument rested on Clause 6(b) of the purchase order, which they contended allowed them to withhold payment and reject materials based on defects even after the passing of title or physical acceptance. They maintained that the nature of the goods made it impossible to inspect every tube upon arrival, thus validating their subsequent rejection.

In response, Remi Sales and Engineering Limited argued that the Tribunal ’s factual findings were unimpeachable. They asserted that Godrej’s act of inserting the tubes into the heat exchangers constituted clear "acceptance" under Section 42 of the Sale of Goods Act, rendering subsequent rejection legally invalid.

The Court’s Reasoning: Acceptance vs. Warranty

Justice Sandeep V. Marne, presiding over the matter, clarified that the scope of intervention under Section 34 of the Arbitration and Conciliation Act, 1996 , is limited. The court noted that the petitioner could not simply switch between theories of breach of condition for rejection and breach of warranty. Once Godrej elected to use the goods, they could no longer legally treat the contract as repudiated.

Key Observations

• On the Deeming Fiction of Acceptance: "Section 42 creates a deeming fiction where the goods are deemed to have been accepted when the buyer intimates to the seller that he has accepted them or when the goods have been delivered to the buyer, who acts in relation to them which is inconsistent with the ownership of the seller."
• On the Limitations of Clause 6(b): "The second part of clause 6(b) does not deal with deeming fiction of acceptance but with right of withholding the payment and here, the parameter is not ‘defect in goods’ but ‘goods not in conformity with the specifications’."
• On Judicial Restraint in Fact-Finding: "It bears mention that Petitioner’s case is mainly about development of defect after the tubes were put to use... the Tribunal has taken into consideration overwhelming evidence on record for holding that the supplied tubes met the specifications."
• On the Principle of Election: "A party cannot be permitted to approbate and reprobate at the same time... Petitioner is attempting to blow hot and cold at the same time."

Implications for Future Commercial Disputes

The Court ultimately dismissed the petition, ruling that the petitioner’s attempt to characterize the defect as a basis for outright rejection—after having already processed and used the materials—amounted to an attempt to "blow hot and cold."

This decision reinforces the high threshold required to challenge arbitral awards under the "patent illegality" gateway. It serves as a stark reminder to manufacturing and engineering firms: once goods are integrated into production or assembly, the legal avenue to challenge the purchase shifts from rejection of the contract to claims for breach of warranty , provided the goods were initially in substantial conformity with specifications.

The court granted the Petitioner a short window to maintain their existing bank guarantee, while permitting the Respondent to access the deposited funds after six weeks, effectively concluding a long-standing commercial standoff.