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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   The  appellant  then rescinded  the  contract  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.