Section 34(1) of the Indian Arbitration and Conciliation Act 1996 (1996 Act) provides for recourse to a court against an arbitral award by way of an application to set aside the award.

Article 13(3) of the Constitution of India (Constitution) which deals with laws inconsistent with or in derogation of the fundamental rights provides that, unless otherwise required:

Section 23 of the Contract Act 1872 (Contract Act) provides that the consideration or object of an agreement is lawful, unless:

The Government of India, Ministry of Defence (Appellant) and the tenderor (Respondent 2) entered into a contract in 1999 under which Respondent 2 was to supply fresh fruits to the Appellant for a certain time period. Respondent 2 stopped supplying the fruits two months before the end of the contract, citing an increase in the price of fruit as a reason for non-performance of the contract. The Appellant therefore rescinded the contract and forfeited the security deposit of Respondent 2. Given that the contract contained an arbitration clause, the dispute was referred to an arbitrator.

The arbitrator issued an award, directing Respondent 2 to pay an amount to the Appellant whilst also directing the Appellant to hand over the security deposit of Respondent 2 (that had been forfeited by the Appellant). Furthermore, the arbitrator reasoned that the consideration or object of the agreement was hit by a letter sent by the Appellant before the contract was entered into. The arbitrator treated the letter as an Act of legislature declaring the consideration to be unlawful and, therefore, held the contract to be void ab initio.

The Appellant filed an application to set aside the award in the City Civil Court of Hyderabad (City Civil Court), under section 34 of the 1996 Act. That application was dismissed by the City Civil Court. On appeal, the application was dismissed by the Division Bench of the High Court of Hyderabad as well. The decision was, therefore, appealed before the Supreme Court via a special leave petition.

The Supreme Court allowed the appeal. It reasoned that the word "law" in the expression "defeat the provisions of any law" in section 23 of the Contract Act is limited to the expressed terms of an Act of legislature. Furthermore, it considered that the letter sent by the Appellant was an instruction to the officers of the defence department to reject a tender where the rate quoted by any tenderor was more than 20% below the reasonable rates. It could not be treated as an Act of the legislature under article 13(3) of the Constitution, declaring any supply made at a rate below 20% of the reasonable rates to be unlawful.

The Supreme Court, therefore, held that unless the effect of an agreement resulted in the performance of an unlawful act, an agreement that was otherwise legal, should not be held to be void. The Supreme Court, relying on its own judgment in Oil and Natural Gas Corporation Ltd v Saw Pipes Ltd (2003) 5 SCC 705 (Saw Pipes), held that if such a valid agreement was held to be void ab initio then such an act would be patently illegal and opposed to public policy.

This judgment, in our view, is a positive one, in that, by stating that a letter sent by the government to its department is not an Act of legislature, the Supreme Court has narrowed the interpretations of the terms "law" and "law in force" as stated in article 13 of the Constitution, which in turn should potentially reduce the filing of frivolous or vexatious applications.