NAFED v. Alimenta: The Supreme Court Takes Several Steps Back

Anirudh Agarwal*

Abstract

The Supreme Court, in the recent case of NAFED v. Alimenta (2020 SCC OnLine SC 381) refused to enforce an arbitral award on the ground of it being violative of “public policy” exception. The judgment dealt with the enforcement of an award that was passed even before the enactment of the Arbitration and Conciliation Act, 1996 (hereinafter, “A&C Act”). The main issue before the court in the present case was the interpretation of the term “public policy” under the Foreign Awards (Recognition and Enforcement) Act, 1961 (hereinafter, “Foreign Awards Act”).

The objective of this article is to elucidate the reasoning adopted by the Supreme court in the present case and to establish how the judgment is incongruent to the fundamental legal principles which earlier courts have adopted during the enforcement of an award. Pertinently, the decision in the present case is contrary to two previous decisions of the Court namely Vijay Karia and Cruz City. This article will first briefly examine the decision of the court and then analyze how the present decision is contrary to established precedents and why it waters down the assiduous attempts to make India an arbitration hub.

Facts of the case:

On January 12, 1980, NAFED and Alimenta entered into a contract where the former agreed to supply 5000 metric tonnes (MT) of Hand Picked and Selected groundnuts (hereinafter, “HPS groundnuts”) during the season of 1979-80. However, due to severe damage to the crop, NAFED could supply only 1900 MT of the crop that season. Later, NAFED agreed to supply the rest of the commodity through execution of an addendum but oblivious to the fact that they were not allowed to carry forward the exports because of the Export Control Order of the government. Clause 14 of the agreement stated that-whereby in case of prohibition of export by executive order or by law, the agreement would be treated as cancelled”. NAFED being a canalizing agency for the government of India, required express consent of the government to carry forward the exports of the commodity of the previous year to next year. NAFED was allowed to enter into exports only for the period of 1977-1980 and had no permission to carry forward the exports of the previous season. NAFED approached the government for permitting it to carry forward the exports to next year but the government denied it and consequently NAFED informed Alimenta about its inability to fulfil the contract. Alimenta treated this as a default of supply and subsequently filed arbitration proceedings before the tribunal in London.

The tribunal directed NAFED to pay a sum of USD 4,681,000 along with interest at the rate of 10.5% per annum. Aggrieved by the award, NAFED decided to file an appeal before the Board of Appeal. The Board of Appeal compounded the woes of the NAFED by enhancing the amount of damages to be paid despite no appeal for such enhancement being filed by Alimenta. Subsequently, Alimenta filed a suit for the enforcement of the initial as well as appellate award passed by the FOSFA and Board of Appeal before the Delhi High Court. NAFED objected to enforcement of award majorly on two grounds: firstly, that the award is against the “public policy” and secondly that the NAFED was not allowed to appoint its arbitrator. The High Court rejected the objections raised by NAFED and held the award to be enforceable and non-violative of public policy.

Judgment of the Court

The Supreme Court rejected the arbitral award passed against the NAFED and observed that the addendum executed between the parties was dependent on the permission of the central government and since the government refused to carry forward the exports to next year, NAFED could not be said to have violated the agreement. The court added that enforcement of the award would have resulted in the violation of the fundamental policy of India as any further supply would have contravened the export policy of the government of India and hence a violation of public policy. The court also referred to its judgment in Renusagar Power Co. Ltd. v. General Electric Co.(1994 AIR 860) (hereinafter, “Renusagar”) where enforcement of a foreign award was sought to be refused for violating statutory provisions of Foreign Exchange Regulation Act (“FERA”). The court said that the enforcement of a foreign award could be refused if it is contrary to (1) Fundamental policy of Indian law; or (2) the interest of India or (3) justice or morality. Further, in Renusagar, it was observed that the “provisions contained in FERA have been enacted to safeguard economic interest of India and violation of said provisions would be contrary to public policy of India.”

Analysis

Was invoking “public policy” good in eyes of law?

The court has arrived on the findings on the assumption that the permission of the government before exporting the commodity is part of the fundamental policy of the country. But the pertinent question is whether the approval of the government comprises the very intrinsic or core principle of India’s public policy.

In the case of Vijay Karia v Prysmian Cavi (2020 SCC OnLine SC 177) (hereinafter, “Vijay Karia”), the Supreme Court was faced with the question- whether violation of the provisions of Foreign Exchange Management Act (“FEMA”) would amount to a contravention of the fundamental public policy of Indian Law. Answering the above contention, the court said that the mere violation of a provision would not amount to contravention of the fundamental policy of Indian law and therefore parties cannot invoke the defense of public policy in such cases. The court further added that- “Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law.”Similarly, in the case of Cruz City 1 Mauritius Holdings v. Unitech Limited (2017 SCC Online Del 7810) (hereinafter, “Cruz City”), the court observed that the mere violation of a provision of law (FEMA in this case) cannot be said to be a violation of the fundamental public policy of Indian law. But, in the present case, the court failed to cite either of the judgments (Vijay Karia or Cruz City) and rationale for digressing from them. Also, the court failed to elaborate upon why the government’s order of banning exports was considered as part of the fundamental policy of Indian law.

In Cruz City, the court observed that the expression “fundamental policy of Indian Law” refers to “such core values which cannot be expected to be compromised”. Further, the court noted that the expression includes “fundamental and substratal legislative policy and not a provision of any enactment.” Foreign awards may be based upon foreign law which may be at variance with the Indian law, but terming such as violation of “fundamental policy of Indian law” would be against the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter, “Convention”). One of the fundamental objectives of the Convention is to ensure that the international awards are enforced irrespective of the award not being in conformity to the national laws. Therefore, the defense of public policy must be invoked only when such core and intrinsic principle is violated which is not susceptible to being compromised under any circumstance.

Court cannot go into the merits of the case

It is a well-settled position that courts cannot go into the merits of the case at the stage of enforcement of the arbitral award. In the present case, the arbitral tribunal observed that NAFED was in default at the time of executing addendum to the agreement and should have anticipated that sales cannot be carried forward in light of the ban by the central government. The tribunal also stated that NAFED had induced the government to restrict the ban on exports and demanded a higher price from Alimenta for the goods sold and this was observed as self-induced frustration on the part of NAFED. But the Supreme Court in the present case says that the principle of frustration shall not be applicable in the present case as the agreement had Clause 14 which explicitly states that agreement shall stand cancelled in case of prohibition on exports. And then relying upon Section 32 of the Indian Contract Act, 1872, the court stated that the contract became void when the government imposed a ban on the export of the goods. This act of nullifying the contract amounts to court going into the merits of the case to overturn the decision of the arbitral tribunal.

Indian law applied when parties agreed to be governed by English law

Also in the present case, the arbitral tribunal had arrived at its finding on the application of English law as the agreement stipulated that performance under the agreement shall be governed by English law. But the Supreme Court overturned such a decision by applying Section 32 of the Indian Contract Act despite parties agreeing to be governed by English law which clearly establishes a wrong precedent going forward. Such wrongful application goes against the principle of giving effect to the “intention of the parties”.

Can this judgment be a valid precedent?

The court in the present case has taken an approach which is radically different from previous cases like Cruz City and Vijay Karia. But since the court never referred to Vijay Karia or Cruz City, it can still be very well argued that Vijay Karia holds the correct position and remains unchanged and therefore the present case ought to be treated as an exception rather than the rule since broadening the scope of “public policy” is not only against the settled precedents but also prevents the country from emerging as an arbitration hub.

Since the judgment was passed under the erstwhile Foreign Awards Act, 1961 and not under A&C Act, it could be argued that the ratio of this judgment should be confined to only those cases where the challenge is made under the Foreign Awards Act and not under A&C Act. But in the case of Shri Lal Mahal v. Progetto Grano Spa (2014 (2) SCC 433), the court has held that the scope of the term “public policy” would be same under both the Section 48 of the A&C Act and Section 7 of the Foreign Awards Act as both deals with enforcement of international arbitral award. This would create a dichotomy as Renusagar and Vijay Karia has favored narrower interpretation of the term “public policy” for enforcement of “arbitral award” and stressed upon the three principles laid down in Renusagar while in the present case NAFED has given much broader interpretation to the term and had gone beyond the principles laid down in Renusagar.

Conclusion

The court should have given narrow interpretation to Section 48 of the A&C Act which would have been in compliance with the principle of “minimal judicial interference” and should not have entertained the appeal on the merits of the case. Second-guessing the decision of the arbitrator was never the intention behind the enactment of the Convention and Section 48 of the A&C Act and such shall not be done unless the award is so unreasonable that it shocks the conscience of the court. The decision will hamper all the strides which have been taken over the past several years to make India an arbitration hub and will compel the international investors to re-evaluate their decision to trade in India. This is the right time for the Parliament to throw some clarity on the extent of the provision by clarifying that mere violation of statutory law should not be considered as a violation of “public policy”.

Courts should also be persuaded to confine their scope of review and should be discouraged from re-appreciating the merits of the case at the enforcement stage. A wide interpretation of such “undefined” term would portray the enforcement mechanism of the country in a very bad light. Also, considering the pro-enforcement approach by the judges, it would be interesting to see how parties in future place reliance upon the government directives for not performing the contract and how courts construe such defense.

The judgment also highlights the dismal state of enforcement mechanism of arbitral awards in the country. The plea for enforcement was filed in 1993 and the court took 27 years to arrive at the decision. Though significant efforts have been made in the past to reduce the time taken in enforcement of the award, much still remains to be done specially for enforcement of foreign awards to make India a viable regional hub for arbitration.


* Anirudh is a student in his penultimate year of studies at National Academy of Legal Studies and Research (NALSAR) University of Law, Hyderabad. He can be reached via his LinkedIn or emailed at 3010anirudh@gmail.com.


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