Supply Contract and Sale of Goods Disputes: Rejected Goods, Short Payment and Quality Claims

What counts as a supply dispute

Any disagreement between businesses over goods sold. Did the right goods arrive? Were they good enough, and on time? And how much is still owed? The contract itself might be a signed supply agreement, a purchase order accepted by email, a rate contract, or nothing more than years of invoices and payments. Each of these is a contract for the sale of goods. Whatever the parties forgot to write down, the Sale of Goods Act, 1930 fills in.

Hardly any of these start as a legal argument. They start with a phone call from the buyer's stores saying the material failed inspection. Or a payment lands lighter than expected, with a debit note stapled to it. By the time the file reaches us, there are usually six months of emails, two versions of the ledger, and a heap of goods sitting in somebody's godown. The question underneath barely changes. Who carries the loss for these goods, and what paper proves it?

We act for both sides, so this page does too. Suppliers will find how to recover the price and handle quality objections that surface late. Buyers will find how to reject goods properly and claim damages. If it's just an unpaid bill and nobody's arguing about quality, go to our page on unpaid invoice recovery. It's the shorter road.

The Sale of Goods Act sections that decide most of these cases

Suppliers: the buyer won't pay and says the goods were bad

Acceptance is usually your best card. Maybe the buyer took delivery, signed the challan or goods receipt note, held the goods for weeks, used them in production or sold them on. Section 42 then treats the goods as accepted. A quality complaint that first appears after your legal notice, or months after delivery, counts for far less than one sent in writing a few days after the goods arrived.

Watch what the buyer did, not what he's saying now. Repeat orders after the supposed defect. Later invoices paid without a murmur. His own ledger, or a year-end balance confirmation, showing the whole amount as payable. Every one of these tells the court the goods were fine. Every one can go into the plaint, with the document attached.

A real defect is another matter. If the buyer complained in writing within the inspection period, set the goods aside and offered them back, he may well have rejected them properly. Then your claim depends on whether the goods actually met the specification. A joint inspection or an independent lab report, done early, is worth more than a year of arguing. When Advocate B.K. Singh picks up a supplier's file, he reads the buyer's first complaint before he looks at a single invoice. The date and wording of that complaint usually tell you which way the case will lean.

Buyers: how to reject goods and keep your rights

Reject clearly, quickly, and in writing. Write to the supplier the moment inspection turns up the problem. Name the consignment, the invoice and the fault. Say in so many words that you reject the goods and are holding them at the supplier's risk. Then leave them alone. Don't use them, process them or mix them with good stock. A buyer who complains about material while feeding it into the plant is often treated as having accepted it.

Lock down the evidence before anything changes. Dated photographs. Samples drawn in front of the transporter or the supplier's man. Your incoming inspection report. And, where the money justifies it, a report from an independent testing lab. If the contract names a test method or standard (a BIS standard, a drawing number, an approved sample), test against exactly that. Your own idea of quality doesn't come into it.

Found a hidden defect only after accepting the goods? You haven't lost everything. Section 59 lets you set the loss off against the unpaid price, or sue for damages. What you can't comfortably do is return goods you've been using for months. Claims for lost orders, or penalties you paid your own customer, are possible too. But you'll have to show the supplier knew, when the contract was made, that this kind of loss was likely. That's the Section 73 test under the Indian Contract Act, which our breach of contract page explains.

Patterns that keep turning up

• Debit notes nobody agreed to. The buyer pays the invoice less a cut for rate difference, late delivery or rejection, and raises a debit note the supplier never accepted. The supplier sues for the balance. It's for the buyer to prove the contract let him deduct.
• Rejection after use. The goods have been processed or sold, and the complaint shows up only when payment falls due. Section 42 tends to help the supplier here.
• Short supply and transit loss. Less material reached the buyer's gate than the invoice shows. The lorry receipt, the weighment slips and the e-way bill decide who takes the loss, and whether the transporter can be claimed against.
• Penalties for late delivery. There's a penalty clause in the PO and the buyer has deducted it. Under Section 74 of the Contract Act, courts allow only reasonable compensation up to the stated figure. And delay caused by the buyer sitting on approvals doesn't count against you.
• Cancelled orders. The buyer cancels after the goods have been made to its specification. The supplier can claim damages for non-acceptance under Section 56, less whatever it gets by selling the goods elsewhere.
• Running account fights. Years of supplies and part payments, two ledgers that refuse to agree, and a balance nobody accepts. Reconcile properly before anyone files.

MSME suppliers: extra protection you may already have

If you're registered as a micro or small enterprise under the MSMED Act, 2006, you're better placed than an ordinary supplier. Section 15 makes the buyer pay within the agreed period, which can't exceed 45 days from acceptance or deemed acceptance, or within 15 days if nothing was agreed. Pay late, and Section 16 adds compound interest with monthly rests at three times the bank rate notified by the RBI. Section 17 makes the buyer liable for the price and that interest both.

Section 18 lets you take the dispute to your state's Micro and Small Enterprises Facilitation Council. The council tries conciliation first, then arbitrates or sends the matter to arbitration. Delhi, Uttar Pradesh and Haryana each have their own, and claims are filed online on the MSME Samadhaan portal. Buyers dislike one part in particular. To challenge the council's award, they must first deposit 75 percent of it (Section 19). That cools a buyer's enthusiasm for delay.

Two cautions. One, the protection generally covers supplies made after you registered, not before. Check the date on your Udyam certificate against your invoice dates. Two, a large buyer that took GST input tax credit on your invoice has to reverse it if it doesn't pay you within 180 days, and income tax rules also tie the buyer's deduction to paying micro and small suppliers on time (check the current provision). Get these points right in a notice and a buyer's accounts team often moves faster than it would for a threat of litigation. Whether you go to the Facilitation Council or file a money recovery suit in the Commercial Court depends on the amount, your evidence, and how fast you need security over the buyer's assets.

From the first complaint to a decree

This is the usual path. Plenty of cases stop at step 3 or step 4.

1. Gather every paper now

   Pull together the purchase order and every invoice, delivery challan, lorry receipt, goods receipt note, inspection report, debit note and payment advice. Export the email threads and WhatsApp chats with the dates intact. Match your ledger against the buyer's last balance confirmation. Do it before you write a word.

2. Put it in writing, properly

   Each side has its own letter to send. A seller sends a demand for the price with the statement of account, a buyer a rejection or claim notice with the defect evidence. A well-drafted legal notice sets out the contract, the breach and the amount with interest. Keep it honest. Don't overstate anything you'll have to prove later.

3. Try to agree the numbers

   Most of these fights are about a percentage, not all or nothing. A joint inspection, a fresh test at a neutral lab, or the two accounts teams sitting down together settles a lot of them. Write down any settlement, with a payment schedule.

4. Pre-institution mediation

   Unless you need urgent interim relief, Section 12A of the Commercial Courts Act makes you apply for pre-institution mediation through the District or State Legal Services Authority. Three months is the limit, extendable by two months if both agree. If the buyer doesn't turn up, you get a non-starter report. Then you file.

5. File the commercial suit

   Your plaint carries a statement of truth, every document in your power and a list of documents, as the amended Order XI requires. A seller with a written contract or invoices for a fixed sum can file a summary suit under Order XXXVII. A damages claim goes as a regular commercial suit.

6. Defence and documents

   The defendant gets 30 days for its written statement, stretchable to an outside limit of 120 days from service of summons. In a summary suit it must appear within 10 days, and then seek leave to defend within 10 days of the summons for judgment. Admission and denial of documents comes next.

7. Case management, evidence, judgment

   At the case management hearing the court frames issues and sets a timetable for evidence affidavits and cross-examination. If one side has no real case, the other can ask for summary judgment under Order XIIIA. Final arguments follow the evidence.

8. Execution

   An unpaid decree is enforced under Order XXI by attaching bank accounts, receivables, stock or property. The Supreme Court's directions in Rahul S. Shah v. Jinendra Kumar Gandhi (2021) say execution should ordinarily be decided within six months.

Sometimes an insolvency petition comes up instead, where the buyer is a company owing Rs 1 crore or more and the debt isn't disputed. That's NCLT work. A genuine quality dispute that existed beforehand will usually sink it. So don't treat it as a replacement for a suit when quality is in issue.

What each stage costs and how long it takes (general guidance)

Which court hears it: value and place

Sale of goods is named outright. Section 2(1)(c)(xviii) of the Commercial Courts Act covers agreements for the sale of goods, and ordinary dealings between merchants and traders fall under Section 2(1)(c)(i), so at a specified value of Rs 3 lakh or more the suit goes to a Commercial Court. Watch the interest. For a money claim, Section 12 counts the principal plus interest up to the filing date, which means an invoice for Rs 2.6 lakh that's two years overdue can tip over the line.

In Delhi, commercial suits up to Rs 2 crore go to the District Judge (Commercial Court) at the district complexes: Saket, Tis Hazari, Karkardooma, Rohini, Dwarka or Patiala House, depending on the district. Bigger suits go to the Commercial Division of the Delhi High Court. A proposal to raise the district limit is under consideration. Check the current figure before you file. In Ghaziabad, Gautam Buddh Nagar, Gurugram and Faridabad, you file in the court designated as Commercial Court for the district, and appeals go to the Allahabad High Court or the Punjab and Haryana High Court. Our page on which commercial court hears your case has more.

Place depends on Section 20 of the Code of Civil Procedure. You can sue where the defendant carries on business, or wherever part of the cause of action arose, which might be where the order was accepted, where delivery was due or where payment was due. Lots of purchase orders carry an exclusive jurisdiction clause. Courts generally respect it if it picks one of the courts that already had jurisdiction and both sides agreed. A line printed at the foot of your own invoice is shakier ground than a clause in a PO the buyer signed.

Summary suit or regular suit for the price?

If you're suing for the price on signed invoices, an accepted purchase order or a written contract, Order XXXVII is often available. The buyer can't defend as of right. It has to apply for leave and show a real, triable defence. Under the Supreme Court's tests in IDBI Trusteeship Services v. Hubtown (2016), a defence that's plausible but doubtful may get leave only on terms, for example a deposit of part of the amount.

Quality defences are the commonest reason leave gets granted, and a buyer holding a dated rejection letter and a lab report will probably get it. If all the buyer holds is a debit note raised after your notice, leave may be refused. Or a deposit ordered. So the buyer's papers matter as much as yours when you choose the suit. Our guide on summary suit versus regular suit lays out the trade-off.

A buyer's claim for defective goods, lost profit or a penalty paid downstream isn't a liquidated sum. It goes as a regular commercial suit. So does a seller's damages claim over a cancelled order. Even inside a regular suit, Order XIIIA summary judgment is available where the other side's case has no real prospect. That's handy when the defence is thin but the claim isn't a fixed debt.

Papers to collect before you do anything

How long you have to file

Most claims for the price of goods have a three-year limit under the Limitation Act, 1963. When the three years start depends on how you dealt. Goods sold and delivered with no fixed credit period fall under Article 14, and time runs from delivery. With a fixed credit period, Article 15 starts the clock when that period ends. And where both sides kept a mutual, open and current account with reciprocal demands, Article 1 gives three years from the close of the year in which the last item was admitted or entered.

Two rules rescue a lot of older claims. The first is Section 18: a written acknowledgment of the debt, signed by the buyer before time runs out, starts a fresh three years, and a balance confirmation, a signed ledger or an email admitting the amount can all count. The second is Section 19. A part payment made before expiry, shown in writing, restarts time too. Timing matters. An acknowledgment that comes after limitation has expired won't revive the claim under Section 18, though it may support a fresh promise to pay under Section 25(3) of the Contract Act.

Buyers get three years too. A damages claim for defective goods usually runs from the breach, and whichever side you're on, the time spent in Section 12A mediation is left out of the count. Our guide on the time limit to recover unpaid dues has worked examples.

Interest on unpaid goods

Begin with the contract. If the PO or supply agreement fixes a rate for late payment, courts usually apply it, unless it's really a penalty. A rate printed only on the seller's invoice is less certain. It helps if the buyer took a long run of invoices on those terms and paid without protest. Don't bank on the full printed rate, though.

Where there's no agreed rate, Section 61 of the Sale of Goods Act keeps your right to interest alive, and Section 34 of the Code of Civil Procedure lets the court award interest from the date of the suit. In commercial matters the court can go above 6 percent a year, though ordinarily not beyond the contract rate or what nationalised banks charge on loans. Registered micro and small suppliers have the MSMED Act rate, three times the bank rate compounded monthly. That's usually far higher than anything else on offer.

Spell out the interest claim in the plaint. Rate, basis, period, and a calculation sheet attached. Ask vaguely for 'interest at a reasonable rate' and you'll tend to get a modest award, which is a poor return on a claim you've otherwise proved well. Our guide on interest on unpaid dues runs through the options.

Keeping the money, or the goods, safe while the case runs

A seller who's worried the buyer will empty its accounts or sell off stock before judgment can apply for attachment before judgment under Order XXXVIII Rule 5. The court will want evidence that the defendant is about to dispose of or remove property to defeat a decree. That it owes you money isn't enough. Recent transfers, a factory shutting down, a sudden change of business address. Facts like these help.

When the fight is about the goods themselves, Order XXXIX Rule 7 lets the court order them preserved or inspected, or samples taken. That's useful when rejected material is lying in the buyer's warehouse and might deteriorate. In bigger stock disputes, the court can appoint a receiver under Order XL to hold or sell the goods and keep the money in court. Urgent relief of this kind also lets you file without waiting for mediation. The urgency has to be real, and it has to show on the face of the plaint.

An unpaid seller still holding the goods can keep them under the Section 47 lien and needn't deliver until paid, unless credit was agreed. A buyer who paid an advance and fears the supplier won't deliver can ask the court to stop a sale of identified goods to third parties. Courts are wary, though, where damages would do the job.

Where things usually go wrong

Sellers most often go wrong by leaving debit notes unanswered. Two years on, every unchallenged debit note looks like a deduction you accepted. Answer each one in writing. One line is fine. The second mistake is suing for the gross invoice value when your own ledger shows part payments and credit notes. An overstated plaint hurts your credibility. It also makes leave to defend easier for the buyer.

Buyers usually go wrong with a vague complaint. 'Material not up to the mark', without the invoice number, the defect and a test result, isn't a rejection. The other trap is carrying on using the goods while disputing them. And buyers forget that a claim for lost orders needs proof they told the supplier about the end use when the order was placed.

By the time a supply case reaches Advocate B.K. Singh after talks have broken down, the documents that decide it are often tiny ones. A goods receipt note stamped with no remarks. An inspection report signed by the buyer's own staff. A WhatsApp message saying 'material received, ok'. Both sides should hunt for these before deciding how hard to fight.

Traders, manufacturers, MSMEs and large buyers: how it differs

Traders and distributors mostly work on running accounts with lots of small invoices. For them, the real work is reconciliation and limitation. Manufacturers who supply to specification get drawn into quality and drawing disputes, where technical evidence counts as much as the accounts. Registered micro and small enterprises have the MSMED Act route and its interest, which large suppliers don't. Startups and online brands buying from contract manufacturers are usually the buyer, with claims for defective batches, delayed launches and customer returns.

Big companies tend to run on vendor codes, portal-generated purchase orders and standard terms that lean their way. Long inspection windows. Their own jurisdiction clause. Caps on what a supplier can claim. Read those terms before you assume the Sale of Goods Act defaults apply. Many also include an arbitration clause, in which case the dispute may have to go to arbitration and not to a suit.

Geography counts too. A Ghaziabad manufacturer supplying a buyer in Gurugram may get to choose the forum, depending on where the order was accepted and where payment was due. UP and Haryana have separate court fee schedules and separate MSME Facilitation Councils, and the place you file can change both cost and time. Pick the forum on purpose. Not out of habit.

What to do this week

If you're owed money, reconcile your ledger, find the buyer's last written acknowledgment and work out how much limitation you have left. Dispute any debit note in writing. If you're a registered micro or small supplier, put your Udyam date next to your invoice dates. If you're the one who rejected goods, send a clear written rejection today, stop using the material, and have it tested against the contract specification.

Whichever side you're on, don't rush to file. Check whether mediation is required, whether there's an arbitration clause, and which court has jurisdiction. Those checks head off most procedural trouble. If a suit or notice has landed on you instead, our page on defending a commercial suit sets out your deadlines.

You can send your purchase orders, ledger and quality correspondence to Advocate B.K. Singh's team through the contact page, and have them looked at before you decide anything.