NEW DELHI: In agreements of sale entered into on ‘as is where is' basis, the buyer can not repudiate the contract on the grounds of defects in quality of goods sold, the Supreme Court has ruled.

The Apex Court vide its recent order in Industrial Promotion and Investment Corporation of Orissa Limited (IPICOL) vs. Tuobro Furguson Steels Private Limited and Others, held that when a unit is sold on ‘as-is-where-is' basis, the buyer must exercise due diligence about the condition of the machinery and other assertions made by the seller.

The respondent, having bought an undertaking for Rs 40 lakh from IPICOL, which had made such sale in exercise of power to that effect conferred by Section 29 of the State Finance Corporation Act when a third party borrower was remiss in payment of his dues to the petitioner; it does not lie in his mouth to renege from his obligation to pay the full sale consideration on grounds like machinery later on turning out to be not in working order, electricity dues being in arrears etc. even if these grounds are genuine.

Any latent or patent defects in the quality of the items being sold must be pointed out upfront before entering into the sale agreement. It is possible to drive down the selling price in the face of such latent defects. Any laxity in this regard could prove to be costly because the seller has in any case saved his skin by inserting the as-is-where-is clause.

(The author is a New Delhi-based chartered accountant.)

(This article was published on December 27, 2011)
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