2025 (6) TMI 1101 - HC - Companies Law

Rejection of request of refund of the amounts deposited by the applicant towards sale consideration - Validity of sale conducted under Annexure A tender notification - principle of Caveat Emptor - As is where is and whatever there is - HELD THAT - Caveat Emptor is the general rule applicable to the sale of goods. Unless there is an express or implied condition or warranty regarding the quality of the goods or there is fraud the buyer must exercise proper caution. Let us examine the extent to which the buyer should exercise caution in an auction sale where goods are sold by description and the auction notification contains an as is where is and whatever there is clause. In the case at hand the description of the goods in the Annexure A auction notification is Copper ingots . Admittedly the goods turned out to be copper alloy ingots . Pure copper and copper alloys are different commercial metals that have different qualities and uses. Hence the articles available at the site did not answer the description in Annexure A - Even if it is to be assumed that the copper ingots and copper alloy ingots are not materially different and the description cannot be faulted before mulcting the purchaser with the liability to take a defective article by applying the condition as is where is and whatever there is it has to be examined whether the issue comes within the purview of Sections 15 and 16 of the Sale of Goods Act. Section 16 of the Sale of Goods Act deals with the implied condition or warranty as to quality or fitness. The proviso to Section 16(2) says that if the buyer has examined the goods there shall be no implied condition as regards defects which such examination ought to have revealed. The Courts have considered the scope and extent of the above provision and held that the defects can be either patent or latent and in cases where there is a latent defect that could not be detected on examination the purchaser will have to be given the benefit of the implied condition as regards the quality of the goods - The suit was filed for damages against the seller and their agent without impleading the manufacturer. The trial court decreed the suit in part against the seller and exonerated the agent. The appeal filed by the seller was dismissed by the First Appellate Court and the second appeal filed against the judgment was dismissed by the above-referred judgment. The Court considered the issue in the context of Sections 15 and 16 of the Sale of Goods Act. It can thus be seen that in the case at hand the available property did not meet the description which was given in the auction notice. It is also evident that even if the description is treated to be sufficient the goods had latent defects which could not have been identified by the buyer at the time of its inspection. The law is settled as can be seen from the above-referred judgments that on the admitted facts the buyer cannot be nonsuited on the ground that the sale is on as is where is and whatever there is basis . This is not a case where the Official Liquidator can claim shelter under the said clause and thus the applicant is entitled to succeed. Conclusion - The sale was vitiated by material misdescription and latent defects which the buyer could not have discovered by reasonable inspection. The as is where is and whatever there is clause and the principle of caveat emptor do not absolve the Official Liquidator from liability in such circumstances. The sale conducted under Annexure A tender notification is set aside - Application allowed.

Summary

The core legal questions considered in this judgment include:

1. Whether the sale of movable assets of a company in liquidation conducted on an "as is where is and whatever there is" basis can be set aside where the goods delivered differ materially from the description in the sale notification.

2. The applicability and scope of the principle of caveat emptor in sales conducted by the Official Liquidator, particularly in the context of latent defects or misdescription of goods.

3. The interpretation and effect of "as is where is" clauses in auction sales, including the obligations of the seller and the rights of the buyer under the Sale of Goods Act, specifically Sections 15 and 16.

4. Whether the Official Liquidator can rely on the "as is where is" clause to avoid liability for defects or misdescription in the assets sold.

5. The distinction between patent defects and latent defects in the context of sales by description and the consequent legal implications.

6. The extent to which the buyer is entitled to rely on the description of goods in the tender notification and the remedies available if the goods do not correspond to that description.

Issue-wise Detailed Analysis

1. Validity of Sale on "As Is Where Is and Whatever There Is" Basis Where Goods Differ from Description

The legal framework includes the principle of caveat emptor, the Sale of Goods Act (Sections 15 and 16), and precedents such as United Bank of India v. Official Liquidator and TCI Distribution Centres Ltd. v. Official Liquidator.

The Court examined whether the goods sold-advertised as "Copper Ingots"-corresponded with the actual goods delivered, which were found to be obsolete lead scrap or copper alloy ingots rather than pure copper ingots. The applicant argued that the description was materially inaccurate and that the goods had latent defects not discoverable on inspection.

The Official Liquidator contended that the sale was on an "as is where is" basis and that the principle of caveat emptor applied, absolving them from liability for defects or misdescription.

The Court referred to a recent Supreme Court decision interpreting "as is where is" clauses, emphasizing that such clauses put the buyer on notice to conduct due diligence regarding the physical condition, title, encumbrances, and liabilities attached to the property. However, the Court also noted that the seller must disclose latent defects which are not discoverable by ordinary care, and that the buyer is entitled to goods corresponding to their description under Sections 15 and 16 of the Sale of Goods Act.

Applying these principles, the Court found that the goods did not correspond to the description in the tender notification and that the defects were latent, not patent, as the buyer could not have discovered them by reasonable inspection. Thus, the sale could not be upheld merely on the "as is where is" clause.

2. Applicability and Scope of Caveat Emptor in Auction Sales by Official Liquidator

The Court analyzed the doctrine of caveat emptor as the general rule in sales of goods, subject to exceptions under the Sale of Goods Act. It cited authoritative texts and precedents, including the distinction between patent and latent defects, and the implied condition of merchantability.

The Court noted that caveat emptor applies unless there is an express or implied warranty or fraud. Here, the applicant was not alleging fraud but relied on the implied condition that goods sold by description must correspond to that description and be free from latent defects.

It was held that the Official Liquidator cannot shelter behind caveat emptor when the goods sold are fundamentally different from those described, especially where the defects are latent and not discoverable by reasonable examination.

3. Interpretation of "As Is Where Is" Clauses in Auction Sales

The Court extensively relied on the Supreme Court ruling in K.C. Ninan v. Kerala SEB, which clarified that "as is where is" clauses encompass not only the physical condition of the property but also the condition of title, encumbrances, and liabilities, unless otherwise stated.

The Court extracted key paragraphs emphasizing that buyers are put on notice to make reasonable inquiries and inspections, but the seller must disclose latent defects unknown to the buyer. The Court emphasized that the terminology of the sale notification must be considered in context to reach an equitable decision.

In the present case, the Court found that the description "Copper Ingots" was inaccurate and that the goods delivered did not meet the description, which goes beyond mere quality issues covered by caveat emptor.

4. Seller's Duty to Disclose Latent Defects and Implied Conditions Under Sale of Goods Act

The Court examined Sections 15 and 16 of the Sale of Goods Act, which impose an implied condition that goods sold by description correspond to that description and are of merchantable quality, subject to the buyer's examination.

The Court distinguished between patent defects (discoverable by reasonable inspection) and latent defects (not discoverable by such inspection). It relied on precedents such as Sorabji Hormusha Joshi and Co. and G. McKenzie and Co., which held that latent defects breach the implied condition of merchantability and allow the buyer to claim damages or rescind the contract.

The Court found that the defects in the goods sold were latent and that the buyer could not have discovered them despite inspection. Therefore, the Official Liquidator was under an implied obligation to ensure the goods conformed to the description.

5. Effect of Misdescription and Absence of Title in Sales by Official Liquidator

The Court referred to the Madras High Court decision in TCI Distribution Centres, which held that misdescription or absence of title in sales by Official Liquidators cannot be excused by "as is where is" clauses or caveat emptor. Material irregularities that go to the root of the sale warrant setting aside the sale.

Applying this principle, the Court found that the misdescription of the goods and the latent defects were material irregularities that justified setting aside the sale.

6. Application of Law to Facts and Treatment of Competing Arguments

The applicant's argument was that the goods sold did not match the description and had latent defects, supported by the valuation report and inspection findings. The Official Liquidator argued that the sale was on an "as is where is" basis and that the buyer had inspected the goods, invoking caveat emptor.

The Court analyzed the evidence, including the valuation report admitting limitations in testing and weight discrepancies, and the fact that bidders were not allowed to test purity. It found the defects latent and the description inaccurate.

The Court rejected the Official Liquidator's reliance on caveat emptor and "as is where is" clauses as absolute defenses, holding that these do not apply where goods do not correspond to description or have latent defects unknown to the buyer.

Conclusions

The Court concluded that the sale was vitiated by material misdescription and latent defects, which the buyer could not have discovered by reasonable inspection. The "as is where is and whatever there is" clause and the principle of caveat emptor do not absolve the Official Liquidator from liability in such circumstances.

The sale was set aside, and the Official Liquidator was directed to refund the amounts deposited by the applicant.

Significant Holdings

"The implication of the expression 'as-is-where is' or 'as-is-what-is basis' or 'as-is-where-is, whatever there-is and without recourse basis' is not limited to the physical condition of the property, but extends to the condition of the title of the property and the extent and state of whatever claims, rights and dues affect the property, unless stated otherwise in the contract."

"In terms of the legal doctrine of caveat emptor, it becomes the duty of the buyer to exercise due diligence. A seller is not under an obligation to disclose patent defects of which a buyer has actual or constructive notice in terms of Section 3 of the Transfer of Property Act, 1882. However, in terms of Section 55(1)(a), in the absence of a contract to the contrary, the seller is under an obligation to disclose material defects in the property or in the seller's title thereto of which he is aware and which a buyer could not with ordinary care discover for himself."

"When an article is sold by description, it may be regarded as a sale of an article of that description, which is free from any latent defect which, if known at the time, will make it unmerchantable. When, in such a case, a latent defect of that kind is discovered, it may be said that such an article with such a defect was not the article contracted for, and that the case falls within sec. 15."

"No doubt, the sale notice contained the clause 'as is where is and whatever there is basis'. But, the Official Liquidator should not be permitted to take shelter under the clause in a case where the company under liquidation had no title to sell in respect of the part of the property and there were lot of mis-descriptions in respect of the property... The court is afraid to allow the Official Liquidator to get shelter under the clause that the property was sold 'as is where is and whatever there is basis' or under the doctrine of Caveat Emptor."

These holdings establish that while "as is where is" clauses and caveat emptor impose duties on buyers to inspect and inquire, they do not protect sellers or Official Liquidators from liability for latent defects or fundamental misdescription of goods sold by description. The buyer is entitled to goods corresponding to the description, free from latent defects that render them unmerchantable, and may seek rescission and refund if this condition is breached.