Best Unpaid Supplies, Rejected Goods and Short Deliveries: Supply Contract Arbitration Lawyer

Supply disputes are among the most common commercial disputes in India. A manufacturer delivers goods and the buyer does not pay, or pays only part, citing quality problems raised months later. A buyer receives goods late and deducts liquidated damages. A government department rejects a consignment after inspection, or refuses to pay price variation. Because purchase orders and supply agreements usually carry arbitration clauses, often in standard terms printed on the back of the order or in a tender's general conditions, many of these disputes go to arbitration.

This page is for suppliers, manufacturers, traders and buyers, including vendors to government departments and public sector undertakings. In short: find the arbitration clause, which may be in the PO terms or the tender documents; gather the delivery, inspection and acceptance records; check whether you are an MSME supplier who can use the Facilitation Council instead; and remember that liquidated damages can be recovered only as reasonable compensation, and that acceptance of goods limits a buyer's later right to reject.

Suppliers who keep clean delivery and acceptance records win most payment disputes. Buyers who document defects promptly win most quality disputes.

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Common supply contract disputes

Where to find the arbitration clause

In supply relationships, there is often no single signed agreement. The terms are spread across a request for quotation, the supplier's quotation, the buyer's purchase order with its printed terms, delivery challans and invoices, sometimes with conflicting terms on the back. For government and PSU supplies, the terms are in the tender's general and special conditions of contract, and in the supply order.

An arbitration clause in any of these documents may bind the parties if it was incorporated into the contract. Section 7(5) of the Arbitration Act says a reference in a contract to a document containing an arbitration clause makes it part of the contract if the reference is such as to make the clause part of the contract. Courts look at whether the parties intended to incorporate the clause, not just whether a document mentioning arbitration exists. A clear reference such as "subject to the general conditions of contract, including the arbitration clause" is usually enough.

How we handle supply disputes

Time and typical cost range

Our fees are agreed in writing at the start, stage by stage, and are not linked to the outcome.

Documents needed

Rejection and acceptance under the Sale of Goods Act

Liquidated damages for delay

Supply contracts, especially government ones, usually provide for liquidated damages for delay, often a percentage of the order value per week of delay, capped at 5% or 10%. Buyers often deduct the full amount automatically from the supplier's bills. Under Section 74 of the Contract Act, as explained in Kailash Nath Associates v DDA (2015), a stated amount for breach is recoverable only as reasonable compensation, not exceeding the amount named. Where it is possible to prove the actual loss, it must be proved; where loss is difficult to prove, the stated amount may be a genuine pre-estimate and can be awarded. If the buyer suffered no loss at all, the LD may not be recoverable.

Suppliers should also check whether the delay was caused by the buyer: late approval of drawings, delayed inspection, delayed payment of advances, or changes in specifications. Delay caused by the buyer cannot be the basis of LD, and many supply contracts require extensions of time to be granted for such delays. Keep a record of every buyer-caused delay as it happens.

Government and PSU supplies

Supplies to government departments and PSUs, including through the Government e-Marketplace (GeM), have particular features. Arbitration clauses in older government contracts often named an official of the department as the arbitrator, or gave the department's head the power to appoint. After Perkins Eastman (2019) and CORE (2024), such unilateral appointment provisions are open to challenge, and suppliers can ask for an independent arbitrator.

GeM's general terms and conditions provide their own dispute mechanism; check the version that applied to your order. Government buyers may also take action such as withholding payments against other contracts or banning a supplier. A ban or blacklisting may be challenged in a writ petition if it was imposed without a fair hearing, separately from any arbitration on the money claim.

Laws that apply

How we work

We are a litigation and advisory practice led by Advocate BK Singh, with offices in Dwarka (New Delhi) and Vaishali (Ghaziabad). This is what you can expect:

• Paper trail first: delivery, inspection and acceptance records assembled early.
• Reconciled numbers: a clean account statement before any claim is filed.
• Forum choice: arbitration, MSME council or commercial court, whichever is best.
• LD challenges: built on proof of no loss and buyer-caused delay.
• Written fee terms: agreed stage by stage, never linked to the outcome.

Mistakes in supply disputes

Price variation and escalation clauses

Long-running supply contracts often include a price variation clause, which adjusts the price for changes in raw material costs, currency rates or statutory levies, usually by reference to a published index such as the wholesale price index or a metal price. Disputes arise over the base date, the index used, whether variation applies to delayed deliveries, and whether a ceiling applies.

A common issue is whether a supplier who delivered late is entitled to the higher prices of the extended period. Many clauses limit price variation to the original delivery period, or to the lower of the prices in the original and actual periods, unless the delay was caused by the buyer. Reconstruct the calculation for each delivery, and show which deliveries were delayed by the buyer.

Changes in law and taxes

Contracts often say who bears changes in taxes and duties. Since GST was introduced in 2017, many disputes have arisen over whether contract prices were inclusive or exclusive of tax, who bears changes in GST rates, and whether a buyer is entitled to the benefit of input tax credit under the anti-profiteering provisions. A clause that makes the price inclusive of "all taxes as applicable on the date of bid" usually puts the risk of later changes on the supplier, while a clause that adjusts for "statutory variations" shifts it.

Read the tax clause with the price schedule. Collect the GST invoices and returns, and any correspondence on rate changes. Where the buyer refused to reimburse a rate increase, the claim should show the rate change, the dates, and the quantities affected.

Defects and warranty claims

If you are the buyer and the goods turn out defective, act quickly. Notify the supplier in writing, describing the defect, the quantities affected and when you discovered it. Preserve samples and arrange independent testing at an accredited laboratory, preferably with notice to the supplier so that it can attend. Stop using the defective goods where safety or further damage is involved.

Your remedies depend on the contract: replacement, repair, refund or damages, with any warranty period and limitation of liability. Under the Sale of Goods Act, where goods do not match their description or are not of merchantable quality, the buyer can reject them, or accept them and claim damages for breach of warranty under Section 59. A buyer who rejects goods must make them available for collection; it need not return them to the supplier unless the contract says so (Section 43).

Transit loss and short delivery

Disputes about goods lost or damaged in transit depend on when property and risk passed to the buyer. Under the Sale of Goods Act, risk generally passes with property, and property passes according to the parties' intention, often shown by the delivery terms. In a contract "ex works", the buyer usually bears transit risk; in a contract for delivery "at site", the supplier usually does.

Where the buyer claims short delivery, the delivery challan signed by the buyer's representative, the weighbridge slip, and the e-way bill are the key evidence. A challan signed "received in good condition" without remarks puts a heavy burden on the buyer to prove later shortages. Suppliers should insist on signed and stamped receipts with quantities at every delivery.

Using the MSME route instead

Micro and small enterprises registered under the Udyam portal, supplying goods to buyers, can refer delayed payment disputes to the Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act, regardless of an arbitration clause in the contract (Gujarat State Civil Supplies Corporation v Mahakali Foods, 2022). The council first conciliates and, if that fails, arbitrates or refers the dispute to an institution. Interest at three times the bank rate, compounded monthly, applies to delayed payments under Section 16.

The registration must generally exist when the supply was made (Silpi Industries, 2021), and the council route covers delayed payment claims, so claims on other issues may need separate handling. See MSME delayed payment.

Limitation and running accounts

For unpaid supply invoices, limitation is generally three years from the date payment fell due. Where the account between the parties is a mutual, open and current account with reciprocal demands, Article 1 of the Limitation Act may apply, with time running from the close of the year in which the last item was entered in the account. A written acknowledgment of liability signed by the buyer before limitation expires, such as a balance confirmation, starts a fresh period under Section 18 of the Limitation Act.

Collect balance confirmations, ledger reconciliations signed by the buyer, and emails admitting dues. These can save claims that would otherwise be time-barred.

Interim relief in supply disputes

In supply disputes, urgent relief under Section 9 or Section 17 is most often sought for three things: to stop the encashment of a performance bank guarantee, to preserve goods that are the subject of a quality dispute so that they can be inspected, and to secure the amount claimed where the buyer is disposing of assets. Courts are cautious with bank guarantee injunctions, but readily make orders for preservation and joint inspection of goods, which protect both sides' evidence.

Where a buyer has withheld a large sum and the supplier is an MSME, the supplier may also ask the council or tribunal for interim measures. And where an award is later made against a buyer that challenges it, Section 19 of the MSMED Act requires the buyer to deposit 75% of the awarded amount before the challenge is entertained, which gives MSME suppliers an important advantage.

Settlement through reconciliation

A surprising number of supply disputes are really accounting disagreements: invoices not booked by the buyer, payments not matched, debit notes raised without notice, or deductions for tax deducted at source not reflected. A joint reconciliation meeting, with both sides' accounts teams and ledgers, often reduces the disputed amount sharply and leaves a small number of genuine issues. We often suggest one before arbitration, with a written note of the agreed and disputed items, which then frames the claim if no settlement follows.