UNION OF INDIAversusCOL. L.S.N. MURTHY & ANR.

              [2011] 13 (ADDL.) S.C.R. 295


                      UNION OF INDIA                           A
                              v.
               COL. L.S.N. MURTHY & ANR.
              (Civil Appeal No. 2755 of 2007)
                   NOVEMBER 23, 2011
                                                                B
        [P. SATHASIVAM AND A.K. PATNAIK, JJ.]

      Constitution of India, 1950: Arlie/es 13(2), 13(3)(a) -
Agreement between Union of India and respondent no.2 for
supply of fruit - Dispute arose between them and matter C
referred to arbitrator - Arbitrator held that the said agreement
was void and not enforceable as the consideration of the
agreement was hit by letter dated 31.08.1990 of the
Government of India, Ministry of Defence (GO/) - As per the
letter issued by GO/, if the rate quoted by a tenderor was lower o
than 20% of the reasonable rates, the rate would be treated
as fictitious and the tender would be rejected by a panel of
officers - Whether the agreement is hit by the said letter -
Held: Article 13(2) prohibits the State from making any law
which takes away or abridges the fundamental rights conferred E
by Parl-111 bf the Constitution - The word "law" is defined in
clause (3)(a) of Article 13 to include any Ordinance order, bye-
/aw, rule, regulation, notification, custom or usage having in
the territory of India the force of law - The said clause,
therefore, makes it clear that not only law made by the F
legislature but also an order or notification which takes away
or abridges the fundamental rights conferred by Parl-111 of the
Constitution would be void - Thus, clause (3)(a) of Article 13
is relevant, where an order or notification of the Government
attempts to take away or abridge the fundamental rights
conferred by Parl-111 of the Constitution and this provision of G
the Constitution has no relevance in deciding a question
whether an agreement is void and is not enforceable in law -
s.23 of the Contract Act states that the consideration or object

                             295                                H
    296   SUPREME COURT REPORTS [2011) 13 (ADDL.) S.C.R.


A 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
  - It is thus clear that the word "law" in the expression "defeat
B the provisions of any law" in s. 23 of the Contract Act is limited
  to the expressed terms of an Act of the legislature - 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
c 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 - The arbitrator was,
  therefore, not right in law in coming to the conclusion that the
0 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
E 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 was thus patently illegal
  and opposed to public policy- The Award of the arbitrator as
F upheld by the courts below is set aside and the matter remitted
  to arbitrator for deciding the claims of the appellant and the
  respondent No.2 - Contract Act, 1872 - s.23.
       The appellant invited tenders for supply of fresh fruits
G for its troops for the period 1.10.1999 to 30.9.2000. The
  tender of respondent no.2 was accepted. Respondent
  no.2 started the supply of fresh fruits on 1.10.1999.
  However, the supply was stopped on 6.6.2000. In reply
  to the show cause notice issued by the appellant,
H respondent no.2 stated that the price of all variety of
  UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.         297


fruits had increased and, therefore, it was not possible     A
for him to perform his part of the contract. The appellant
then rescinded the contract and informed respondent
no.2 about forfeiture of its security deposit and that the
appellant would recover from him the expenditures made
by it for purchase of fruits from elsewhere during the       B
contract period.

     The dispute was referred to arbitration. Before the
arbitrator, respondent No.2 made a claim of Rs.12,23,732/
- and the appellant made a claim of Rs.5,89, 130.72 for C
purchase of fruits during the period 07.06.2000 to
30.09.2000. The arbitrator (respondent no.1) framed 4
issues and answered the 4 issues in his award 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 18% per annum till payment and D
also directed the appellant to release the security deposit
to respondent No.2. The appellant filed application under
Section 34 of the Arbitration and Conciliation Act, 1996
for setting aside the award. The trial court dismissed the
application. The High Court dismissed the appeal.           E

    In the instant appeal, it was contended for the
appellant that finding of the arbitrator that the contract
was void ab initio and was not enforceable was not
correct.                                                     F
    Allowing the appeal, the Court
     HELD: 1.1. The reasons given by the arbitrator in his
Award for recording the finding that the contract was void
ab initio were not tenable in law. The basis of such finding G
of the arbitrator was the letter dated 31.08.1990 issued by
the Government of India, Ministry of Defence in which it
was stated that if the rate quoted by a tenderor was lower
than 20% of the reasonable rates, the rate would be
treated as fictitious and the tender would be rejected by H
    298   SUPREME COURT REPORTS [2011] 13 (ADDL.) S.C.R.


A   a panel of officers. The arbitrator had 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 said letter dated 31.08.1990. The arbitrator
B   had 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
C   the appellant and the respondent No.2 defeated             a
    provision of law, the agreement was void under Section
    23 of the Indian Contract Act. A reading of clause (2) of
    Article 13 of the Constitution would show that by the said
    clause the State is prohibited from making any law which
    takes away or abridges the fundamental rights conferred
D   by Part-Ill of the Constitution. Clause (2) of Article 13 of
    the Constitution 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
E   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
F   or notification which takes away or abridges the
    fundamental rights conferred by Part-Ill 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
G                         •
    abridge the fundamental    rights conferred by Part-Ill 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. Section
    23 of the Indian Contract Act inter a/ia states that the
H   consideration or object of an agreement is lawful, unless
  UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.            299

the consideration or object of an agreement is of such a 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. 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 B
limited to the expressed terms of an Act of the legislature.
[Paras 7-9] [304-A-E; 305-D-H; 306-E-F; 307-A-B]

    Shri Lachoo Mal vs. Shri Radhey Shyam (1971) 1 SCC
619 - relied on.
                                                                 c
     Pollock & Mui/a in Mui/a Indian Contract; Specific Relief
Acts, 13th Edition, Volume-I published by Lexis Nexis
Butterworths - referred to.

     1.2. Unless the effect of an agreement results in · 0
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 E
bargain entered into by the parties and the solemn
promises made thereunder. 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 F
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 G
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 was thus patently illegal and
opposed to public policy. The Award of the arbitrator and
the judgments of the City Civil Court and the High Court H
    300     SUPREME COURT REPORTS [2011) 13 (ADDL.) S.C.R.


A is set aside and the matter is remitted to the arbitrator for
  deciding the claims of the appellant and the respondent
  No.2. [Paras 10-12] [307 -D-F-H; 308-A-C-F]

        Oil and Natural Gas Corporation Ltd. vs. Saw Pipes Ltd.
    (2003) 5 sec 705: 2003 (3) SCR 691 - relied on.
6
         National Insurance Company Limited v. Boghara Polyfab
    Private Limited (2009) 1 SCC 267: 2008 (13) SCR 638 -
    referred to.

c       Vita Food Products Incorporated v. Unus Company
    Ltd. (in liquidation) (1939) AC 277 - referred to.
                          Case Law Reference:
          2008 (13) SCR 638        cited                 Para 4
D
          (1971) 1 sec 619         relied on             Para 10
          (1939) AC 277            referred to           Para 10
          2003 (3) SCR 691         relied on             Para 11

E       CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    2755 of 2007.

      From the Judgment & Order dated 27.04.2006 of the High
  Court of Judicature, Andhra Pradesh at Hyderabad in Civil
F Appeal No. 322 of 2005.

         S. Wasim A Qadri, Rekha Pandey, Ashwani Garg, Anil
    Katiyar for the Appellant.

      V. Shekhar, R. Santhanakrishnan, Vinamr, D. Mahesh
G Babu for the Respondents.

          The Judgment of the Court was delivered by

        A. K. PATNAIK, J. 1. This is an appeal by way of special
    leave under Article 136 of the Constitution against the judgment
H
  UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.                 301
               [A.K. PATNAIK, J.]

dated 27 .04.2006 of the Division Bench of the Andhra Pradesh         A
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     B
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 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                C
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       D
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.                        E

     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
                                                                      F
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 18% per annum till payment     G
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')
                                                                      H
    302   SUPREME COURT REPORTS [2011] 13 (ADDL.) S.C.R.


A 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
B 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.
c       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
D 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 counsel for the appellant alternatively submitted that
  if it is held that the contract was void ab initio, then the
E 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
F 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
G 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
H
   UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.             303
                [A.K. PATNAIK, J.]
No.2 to the appellant and to the security deposit with interest   A
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         B
    discharged?

    Issue No.2 - Whether the disputed contract was
    discharged in the following ways:

            (a) By performance of the contract
                                                                  c
            (b) By breach of the contract

            (c) By impossibility of performance
                                                                  D
    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 E
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 F
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 G
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 not enforceable and
therefore no right accrued to any of the parties for breach of H
contract.
    304 SUPREME COURT REPORTS (2011] 13 (ADDL.) S.C.R.

A       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
s that if the rate quoted by a tenderer 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
C 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
0
  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 appreciate not
E 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:

F       "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.
G
        (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.
H
  UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.                 305
               [A.K. PATNAIK, J.]
     (3) in this article, unless the context otherwise requires -    A

            (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        B
            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         C
            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 D
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-Ill of the Constitution.
Clause (2) of Article 13 of the Constitution further provides that
any !aw made in contravention of clause (2) shall to the extent E
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 F
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-Ill 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 G
Government attempts to take away or abridge the fundamental
rights conferred by Part-Ill 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.
                                                                     H
    306     SUPREME COURT REPORTS [2011] 13 (ADDL.) S.C.R.


A       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
8         is lawful, unless -

                 it is forbidden by law; or

                 is of such a nature that, if permitted, it would defeat
c                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.

D         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
E 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
F 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
G         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
H
  UNION OF INDIA v. COL. L.S.N. MURTHY & ANR.                 307
               [A.K. PATNAIK, J.]
    legislative debates or preliminary memoranda, not forming        A
    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 legislature.
                                                                     B
    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: .
                                                                     c
     "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."                        D
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   E
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]:                              F

    "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    G
    in a wider sense may at times be better served by refusing
    to nullify a bargain save on serious and sufficient grounds."

     11. The arbitrator was, therefore, not right in law in coming
to the conclusion that the agreement between the appellant and
                                                                     H
    308    SUPREME COURT REPORTS (2011] 13 (ADDL.) S.C.R.

A 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
B 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
C 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,
D         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
E         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
F 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.
G D.G.                                                Appeal allowed.