Case: Union Of India Vs. L.S.N. Murthy

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 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 The appellant then rescinded the contract with respondent No.2 by letter dated 29.06.2000 and informed the respondent No.2 that its security deposit has been forfeited and that the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 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.

Court's reasoning:
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 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 appreciate not only the provisions of Article 13(3)(a) of the Constitution but also of Section 23 of the Indian Contractare, 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 madearbitrator 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.