2011 (11) TMI 851 - SC - Indian Laws

Supreme Court enforces contract, rejects arbitrator decision based on public policy, allows breach claim.

The Supreme Court held that the contract was not void ab initio and enforceable despite the arbitrator's decision. The Court disagreed with the ... Void ab initio - arbitrability where the main contract is void ab initio - public policy (narrower meaning - patent illegality) - unlawful consideration defeating the provisions of any law under Section 23 of the Indian Contract Act - constitutional scope of Article 13(3)(a) - definition of 'law' for fundamental rights - setting aside arbitral award for patent illegality under Section 34 - remand to arbitrator for determination in accordance with court's findingsVoid ab initio - unlawful consideration defeating the provisions of any law under Section 23 of the Indian Contract Act - constitutional scope of Article 13(3)(a) - definition of 'law' for fundamental rights - Whether the arbitrator was correct in holding the contract to be void ab initio on the basis that a Ministry of Defence letter rendered the contract unlawful and unenforceable. - HELD THAT: - The arbitrator concluded the contract was void ab initio because rates quoted were more than 20% below 'reasonable rates' and therefore hit by the Ministry of Defence letter dated 31.08.1990, treating that letter as 'law' within Article 13(3)(a), and held the agreement void under Section 23 of the Indian Contract Act. The Court held this reasoning unsustainable. Article 13(3)(a) is concerned with the meaning of 'law' for purposes of fundamental rights (i.e., identifying ordinances, notifications, rules which could abridge fundamental rights) and is not a provision for determining whether a private agreement is void. Section 23 renders an agreement void only where its object or consideration is forbidden by law or would necessarily defeat the express provisions of a legislative enactment. A departmental instruction or internal letter to administrative officers does not convert into a legislative prohibition rendering performance of the contract illegal. Absent a legislative enactment whose express terms make the contract's performance unlawful, the contract cannot be declared void under Section 23 merely because it tends to defeat an administrative instruction or policy. Accordingly, the arbitrator's conclusion that the agreement was void ab initio was legally erroneous and amounted to patent illegality warranting interference under the public policy head applicable to setting aside awards. [Paras 7, 8, 9, 10, 11]The finding that the contract was void ab initio is set aside as legally untenable; the Ministry letter did not make performance unlawful within Section 23 and Article 13(3)(a) was misapplied.Setting aside arbitral award for patent illegality under Section 34 - public policy (narrower meaning - patent illegality) - arbitrability where the main contract is void ab initio - Whether the arbitral award should be set aside on the basis that the arbitrator's conclusion on Issue No. 4 was patently illegal and opposed to public policy. - HELD THAT: - Having found that the arbitrator's legal basis for declaring the contract void was erroneous, the Court held that the Award was, on its face, patently illegal and in violation of law. An award that is patently in violation of statutory provisions or is manifestly contrary to applicable legal principles falls within the limited public policy ground permitting interference under Section 34. In consequence, the award (and the consequent orders of the courts below upholding it) must be set aside to the extent the award rests on the patently illegal conclusion that the contract was void ab initio. [Paras 11, 12]The arbitral award is set aside insofar as it rests on the finding that the contract was void ab initio; the award is quashed on the ground of patent illegality/public policy.Remand to arbitrator for determination in accordance with court's findings - decide claims in accordance with findings on Issues 1, 2 and 3 - What is the appropriate remedial course after setting aside the Award? - HELD THAT: - The Court directed that the matter be remitted to the arbitrator for fresh adjudication of the parties' claims. The arbitrator is to decide the claims of the parties in accordance with the findings already recorded by him on Issue Nos. 1, 2 and 3, and in accordance with the legal conclusions reached by this Court in relation to Issue No. 4 (i.e., that the contract is not void by reason of the Ministry letter and that the arbitrator must proceed consistently with the Court's legal analysis). The remand is for adjudication of the substantive claims within the corrected legal framework and not for re-examination of the Court's legal conclusions. [Paras 12]Proceedings remitted to the arbitrator to decide the parties' claims in accordance with the Award's findings on Issues 1-3 and this judgment; appeal allowed with no order as to costs.Final Conclusion: The appeal is allowed. The arbitral award is set aside to the extent it held the contract void ab initio on the basis of the Ministry letter; that conclusion was a patent illegality and a misapplication of Article 13(3)(a) and Section 23. The matter is remitted to the arbitrator to determine the parties' claims in accordance with the arbitrator's findings on Issues 1, 2 and 3 and the legal principles stated in this judgment. No order as to costs. Issues Involved:1. Legality and enforceability of the contract.2. Discharge of obligations under the contract.3. Impossibility of performance.4. Interpretation of ASE Specification No. 68.Summary:Legality and Enforceability of the Contract:The arbitrator held that the contract was void ab initio and not enforceable, citing a letter dated 31.08.1990 from the Government of India, Ministry of Defence, which instructed that rates quoted below 20% of reasonable rates should be treated as fictitious and rejected. The Supreme Court found this reasoning untenable, stating that the letter was not an Act of the legislature and did not render the contract unlawful u/s 23 of the Indian Contract Act. The arbitrator's conclusion that the contract was void was deemed patently illegal and opposed to public policy.Discharge of Obligations under the Contract:The arbitrator concluded that Respondent No. 2 discharged the Appellant from its obligations by not supplying fruits, allowing the Appellant to sue for breach of contract and damages under the Indian Contract Act.Impossibility of Performance:The arbitrator rejected Respondent No. 2's claim of impossibility of performance due to short supply of fruits, holding that this did not excuse non-performance of the contract.Interpretation of ASE Specification No. 68:The arbitrator dismissed Respondent No. 2's contention regarding ASE Specification No. 68, noting that Respondent No. 2 had accepted and signed the chart and performed the contract until June 2000.Conclusion:The Supreme Court set aside the Award of the arbitrator and the judgments of the City Civil Court, Hyderabad, and the High Court. The matter was remitted to the arbitrator for deciding the claims of the parties in accordance with the findings on Issue Nos. 1, 2, and 3 and the Supreme Court's judgment. The appeal was allowed with no order as to costs.