Union Of India vs L.S.N. Murthy & Anr

Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2755 OF 2007

Union of India ...

Appellant

Versus

Col. L.S.N. Murthy & Anr. ...

Respondents

J U D G M E N T

A. K. PATNAIK, J.

This is an appeal by way of special leave under Article 136 of

the Constitution against the judgment dated 27.04.2006 of the

Division Bench of the Andhra Pradesh High Court in Civil

Miscellaneous Appeal No.322 of 2005 (for short `the impugned

judgment').

2. The facts in brief are that in August, 1999, the appellant

invited tenders for supply of fresh fruits for its troops for the

period from 01.10.1999 to 30.09.2000 and respondent No.2

amongst others submitted tenders and the tender of

respondent No.2 was accepted. The respondent No.2 started

supply of fresh fruits on 01.10.1999 and stopped the supply

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on 06.06.2000. On 13.06.2000, the appellant issued a notice

to respondent No.2 to show-cause why action should not be

initiated for such non-supply of fresh fruits. The respondent

No.2 submitted its reply dated 20.06.2000 saying that the

prices of all variety of fruits had increased and that it was

impossible on its part to perform the contract and that the

appeals made by the respondent No.2 were not considered by

the authorities. The appellant then rescinded the contract

with respondent No.2 by letter dated 29.06.2000 and informed

the respondent No.2 that its security deposit has been

forfeited and that the appellant will recover the expenditures

made by the appellant for purchase of fruits during the

contract period.

3. As the contract provided for an arbitration clause, the

dispute between the parties was referred to the arbitrator.

The respondent No.2 made a claim of Rs.12,23,732/- before

the arbitrator and the appellant made a claim of

Rs.5,89,130.72 for purchase of fruits during the period

07.06.2000 to 30.09.2000 before the arbitrator. The

arbitrator (respondent No.1) framed 4 Issues and answered

the 4 Issues in his Award dated 06.06.2001 and awarded a

sum of Rs.38,173/- towards prices of fresh fruits supplied by

respondent No.2 to the appellant with interest at the rate of

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18% per annum till payment and also directed the appellant to

hand over the Fixed Deposit Certificates retained as security

deposit to respondent No.2. The appellant filed O.P. No.1457

of 2001 under Section 34 of the Arbitration and Conciliation

Act, 1996 (for short `the Act') for setting aside the Award dated

06.06.2001 in the City Civil Court, Hyderabad. The Third

Additional Chief Judge, City Civil Court, Hyderabad, by his

order dated 05.11.2004 did not find any patent illegality in the

Award and dismissed the application of the appellant under

Section 34 of the Act. Aggrieved, the appellant filed Civil Misc.

Appeal No.322 of 2005 under Section 37 of the Act against the

order dated 05.11.2004 of the Third Additional Chief Judge,

City Civil Court, Hyderabad, but by the impugned judgment,

the Division Bench of the High Court has dismissed the

appeal.

4. Learned counsel for the appellant challenged the findings of

the arbitrator on Issue No.4. He submitted that Issue No.4

framed by the arbitrator was whether the contract between the

appellant and the respondent No.2 was legally enforceable and

the arbitrator has held in the Award that the contract was void

ab initio and was not enforceable. He referred to the reasons

given by the arbitrator in the Award to show that this finding

of the arbitrator on issue No.4 was contrary to law. Learned

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counsel for the appellant alternatively submitted that if it is

held that the contract was void ab initio, then the arbitration

clause which is part of the contract cannot be invoked. He

cited the decision in National Insurance Company Limited v.

Boghara Polyfab Private Limited [(2009) 1 SCC 267] in which

this Court has held that where a contract is void ab initio and

has no legal existence, the arbitration clause also cannot

operate, for along with the original contract, it is also void. He

submitted that on these two grounds the Award of the

arbitrator should have been set aside and the application of

the appellant under Section 34 of the Act should have been

allowed.

5. Learned counsel for the respondent No.2, on the other

hand, sought to sustain the Award of the arbitrator. He

submitted that the arbitrator has held that even though the

contract was void under Section 70 of the Indian Contract Act,

1892, the appellant is liable to pay compensation to the

respondent No.2 for the supply of fruits made by respondent

No.2 to the appellant and to the security deposit with interest

at the rate of 18% per annum to the respondent No.2.

6. We have perused the Award of the arbitrator and we find

that the arbitrator has framed the following 4 Issues:

Issue No.1 - Whether the parties to the contract were

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discharged?

Issue No.2 - Whether the disputed contract was

discharged in the following ways:

(a) By performance of the contract

(b) By breach of the contract

(c) By impossibility of performance

Issue No.3 - Construction of ASE Specification No.68;

Issue No.4 - Whether the contract was legally

enforceable?

On Issue No. 1, the arbitrator has held that the respondent

No.2 by not supplying fruits to the appellant had discharged

the appellant from its obligations under the contract and the

appellant had the right to sue for breach of contract for

damages for loss caused to it in accordance with the provisions

of the Indian Contract Act. On Issue No. 2, the arbitrator has

held that the contention of respondent No.2 that he was

disabled to perform from his part of the contract due to

impossibility of performance caused by short supply of fruits is

not correct. On Issue No.3, the arbitrator has held that the

contention of respondent No.2 regarding ASE Specification

No.68 and the note thereto failed because respondent No.2 has

accepted and signed the chart and performed his part of the

contract upto June, 2000. On Issue No.4, however, the

arbitrator has held that the contract was void ab initio and was

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not enforceable and therefore no right accrued to any of the

parties for breach of contract.

7. We, however, find that the reasons given by the arbitrator in

his Award for recording this finding on issue No.4 that the

contract was void ab initio are not tenable in law. The

arbitrator has found that the Government of India, Ministry of

Defence in its letter dated 31.08.1990 has issued an

instruction that if the rate quoted by a tenderor was lower

than 20% of the reasonable rates, the rate should be treated as

fictitious and the tender should be rejected by a panel of

officers. The arbitrator has held that as the rates quoted by

respondent No.2 were below 20% of the reasonable rates the

agreement entered into with respondent No.2 for supply of

fruits at the tendered rates was hit by the letter dated

31.08.1990 of the Government of India, Ministry of Defence.

The arbitrator has further held that under Article 13(3)(a) of

the Constitution of India, law includes a notification of the

Government and therefore the letter dated 31.08.1990 of the

Government of India, Ministry of Defence was law and as the

consideration or object of the agreement between the appellant

and the respondent No.2 defeated a provision of law, the

agreement was void under Section 23 of the Indian Contract

Act. In our considered opinion, the arbitrator has failed to

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appreciate not only the provisions of Article 13(3)(a) of the

Constitution but also of Section 23 of the Indian Contract Act.

8. Article 13 of the Constitution is quoted hereinbelow:

"13. Laws inconsistent with or in derogation of the

fundamental rights - (1) All laws in force in the territory

of India immediately before the commencement of this

Constitution, in so far as they are inconsistent with the

provisions of this Part, shall to the extent of such

inconsistency, be void.

(2) The State shall not make any law which takes away or

abridges the rights conferred by this Part and any law

made in contravention of this clause shall, to the extent

of the contravention, be void.

(3) in this article, unless the context otherwise requires -

(a) "law" includes any Ordinance, order, bye-law,

rule, regulation, notification, custom or usage

having in the territory of India the force of law;

(b) "laws in force" includes laws passed or made by

a Legislature or other competent authority in the

territory of India before the commencement of this

Constitution and not previously repealed,

notwithstanding that any such law or any part

thereof may not be then in operation either at all or

in particular areas.

(4) Nothing in this article shall apply to any amendment

of this Constitution made under article 368."

A reading of clause (2) of Article 13 of the Constitution quoted

above would show that by the said clause the State is

prohibited from making any law which takes away or abridges

the fundamental rights conferred by Part-III of the

Constitution. Clause (2) of Article 13 of the Constitution

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further provides that any law made in contravention of clause

(2) shall to the extent of the contravention be void. In clause

(3)(a) of Article 13 of the Constitution, the word "law" has been

defined for the purpose of Article 13 to include any Ordinance

order, bye-law, rule, regulation, notification, custom or usage

having in the territory of India the force of law. Clause (3)(a) of

Article 13 of the Constitution therefore makes it clear that not

only law made by the legislature but also an order or

notification which takes away or abridges the fundamental

rights conferred by Part-III of the Constitution would be void.

Thus, clause (3)(a) of Article 13 of the Constitution is relevant,

where an order or notification of the Government attempts to

take away or abridge the fundamental rights conferred by Part-

III of the Constitution and this provision of the Constitution

has no relevance in deciding a question whether an agreement

is void and is not enforceable in law.

9. For deciding whether an agreement is void and is not

enforceable, we have to refer to Section 23 of the Indian

Contract Act, which is quoted hereinbelow:

"23. What consideration and objects are lawful,

and what not - The consideration of object of an

agreement is lawful, unless -

it is forbidden by law; or

is of such a nature that, if permitted, it would

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defeat the provisions of any law; or is

fraudulent; or

Involves or implies, injury to the person or

property of another; or the Court regards it as

immoral, or opposed to public policy.

In each of these cases, the consideration or object of

an agreement is said to be unlawful. Every

agreement of which the object or consideration is

unlawful is void."

Section 23 of the Indian Contract Act inter alia states that the

consideration or object of an agreement is lawful, unless the

consideration or object of an agreement is of such a nature

that, if permitted, it would defeat the provision of law and in

such a case the consideration or object is unlawful and the

agreement is void. In Pollock & Mulla in Mulla Indian

Contract and Specific Relief Acts, 13th Edition, Volume-I

published by LexisNexis Butterworths, it is stated at page 668:

"The words `defeat the provisions of any law' must

be taken as limited to defeating the intention which

the legislature has expressed, or which is

necessarily implied from the express terms of an

Act. It is unlawful to contract to do that which it is

unlawful to do; but an agreement will not be void,

merely because it tends to defeat some purpose

ascribed to the legislature by conjecture, or even

appearing, as a matter of history, from extraneous

evidence, such as legislative debates or preliminary

memoranda, not forming part of the enactment."

It is thus clear that the word "law" in the expression "defeat

the provisions of any law" in Section 23 of the Indian Contract

Act is limited to the expressed terms of an Act of the

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legislature.

10. In Shri Lachoo Mal vs. Shri Radhey Shyam [(1971)

1 SCC 619] this Court while deciding whether an agreement

was void and not enforceable under Section 23 of the Indian

Contact Act held:

"What makes an agreement, which is otherwise

legal, void is that its performance is impossible

except by disobedience of law. Clearly no question

of illegality can arise unless the performance of the

unlawful act was necessarily the effect of an

agreement."

We are, therefore, of the opinion that unless the effect of an

agreement results in performance of an unlawful act, an

agreement which is otherwise legal cannot be held to be void

and if the effect of an agreement did not result in performance

of an unlawful act, as a matter of public policy, the court

should refuse to declare the contract void with a view to save

the bargain entered into by the parties and the solemn

promises made thereunder. As has been observed by Lord

Wright in Vita Food Products Incorporated vs. Unus Company

Ltd. (in liquidation) [(1939) AC 277 at p. 293]:

"Nor must it be forgotten that the rule by which

contracts not expressly forbidden by statute or

declared to be void are in proper cases nullified for

disobedience to a statute is a rule of public policy

only, and public policy understood in a wider sense

may at times be better served by refusing to nullify a

bargain save on serious and sufficient grounds."

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11. The arbitrator was, therefore, not right in law in

coming to the conclusion that the agreement between the

appellant and the respondent No.2 was void and not

enforceable as the consideration or object of the agreement

was hit by the letter dated 31.08.1990 of the Government of

India, Ministry of Defence. This letter may be an instruction

to the officers of the Defence Department to reject a tender

where the rate quoted by the tenderor is more than 20% below

the reasonable rates but the letter was not an Act of the

legislature declaring that any supply made at a rate below

20% of the reasonable rates was unlawful. The finding of the

arbitrator on Issue No.4 is thus patently illegal and opposed to

public policy. In Oil and Natural Gas Corporation Ltd. vs. Saw

Pipes Ltd. (2003) 5 SCC 705 at page 727], this Court after

examining the grounds on which an award of the arbitrator

can be set aside under Section 34 of the Act has said:

"31......However, the award which is, on the face of

it, patently in violation of statutory provisions

cannot be said to be in public interest. Such

award/judgment/decision is likely to adversely

affect the administration of justice. Hence, in our

view in addition to narrower meaning given to the

term "public policy" in Renusagar case it is required

to be held that the award could be set aside if it is

patently illegal."

12. We accordingly set aside the Award of the arbitrator

and the judgments of the City Civil Court, Hyderabad and the

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High Court and remit the matter to the arbitrator for deciding

the claims of the appellant and the respondent No.2 in

accordance with the findings in the Award on Issue Nos. 1, 2

and 3 and in accordance with this

judgment. The appeal is allowed with no order as to costs.

.............................J.

(P. Sathasivam)

.............................J.

(A. K. Patnaik)

New Delhi,

November 23, 2011.