The Supreme Court (“SC”) in the case of National Agricultural Co-operative Marketing Federation of India (NAFED) v. Alimenta SA (decided on April 22, 2020) held that foreign arbitration awards against NAFED is ex facie illegal, and in contravention of fundamental law, as no export without the requisite permissions was permissible and without the consent of the government, quota could not have been forwarded to next season.

Facts

The dispute arose forty years ago in the year 1980 over supply of groundnut to Ailmenta. NAFED, a government agent, and Alimenta had entered into a contract for supply of 5,000 tons of Indian groundnut.

Clause 14 – Prohibition of the contract reads as, “In the event, during the shipment period of prohibition of export of any other executive or legislative act by or on behalf of the Government of the country of origin or of the territory where the port/s or shipment named herein is/are situate, or of blockade or hostilities, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract of any unfulfilled portion thereof shall be extended by 30 days. In the event of shipment during the extended period still proving impossible by reason of any of the causes in this Clause, the contract or any unfulfilled part thereof shall be cancelled.”

For any export, NAFED required the express consent of the government and the transaction was also governed by covenants such as force majeure. Due to crop damage in Saurashtra, only 1900 tons could be supplied, and the rest of the contractually mandated amount was not supplied due to government restricted export policy and quota ceiling.

Alimenta treated NAFED’s non-supply of commodity as a notice of default and initiated arbitration proceedings before the Federation of Oil, Seeds and Fats Associations (“FOSFA”), London, in February 1981. NAFED moved to the Delhi High Court for seeking a stay of the arbitration proceedings, various interim orders were passed by the Delhi High Court. Despite interim orders by the High Court of Delhi, the arbitral tribunal was constituted and FOSFA appointed an arbitrator for NAFED.

Eventually, the High Court of Delhi held that one order of supply was subject to arbitration while the other was relegated to a civil suit. Against the order of the High Court of Delhi, NAFED approached the SC. The SC also passed interim orders. The arbitral tribunal contravened even these interim orders and the arbitration proceeding proceeded before FOSFA and pursuant thereto arbitration award was passed in November 1989, holding NAFED liable to pay USD 4,681,000 as damages and interest.

Ailmenta moved to the Delhi High Court for enforcement, and NAFED objected to the award on the grounds of public policy. The Delhi High Court ruled against NAFED, and consequently an appeal was filed in the SC.

Issues

• Whether NAFED was unable to comply with the contractual obligation to export groundnut due to the Government’s refusal.
• Whether NAFED could have been held liable in breach of contract to pay damages particularly in view of Clause 14 of the agreement.
• Whether enforcement of the award is against the public policy of India.

Arguments

The submissions of the counsel for NAFED were:

• The arbitral tribunal was constituted in violation of the Delhi High Court’s order and thereby a nullity.
• The tribunal was against the basic principles of natural justice, rule of fairness, and against public policy.
• The contract between Ailmenta and NAFED was frustrated due to the prohibition imposed by the government.
• The Delhi High Court in the order dated January 28, 2000 was wrong in awarding a further interest @18% p.a. on the awarded sum.
• The limitation to file the enforcement proceedings was not 3 years but was in fact 30 days as per the Limitation Act, 1963.
• Alimenta could not have been given the benefit of interest as also the benefit of the exchange rate.
• The date of USD decree conversion into Indian Rupees.

The submissions of the counsel for Ailmenta argued that the interference allowed in a foreign award is limited and the award is not contrary to public policy.

Observations of the Supreme Court

The SC referred to Section 32 of the Indian Contract Act, 1872 which deals with ‘contingent contracts’ and provides for contingencies upon happening of which the contract cannot be carried out, and the consequences thereof. It held that a possible prohibition on export having been specifically envisaged, it was a contingent contract, and once that contingency arose, that is, the refusal to allow NAFED to export the commodity, the contract was required to be cancelled.

The SC also distinguished Section 32 from Section 56 of the Indian Contract Act, which deals with ‘frustration’ of a contract and applies where an agreement becomes impossible to perform at a future date on account of an unforeseen exigency not provided for in the agreement. In this case, the court held that the principle of frustration did not apply given the wordings of Clause 14 of the FOSFA and the contract dated January 12, 1980 explicitly provided for the event preventing NAFED from performing its obligations.

The SC also observed that there was no permission to export commodity of the previous year in the next season, and the Government declined permission to NAFED to supply. Thus, it would be against the fundamental public policy of India to enforce such an award, as any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary.

The SC also referred to the settled principles in Renusagar Power Company Limited v. General Electric Company [1994 Supp. (1) SCC 644] (“Renusagar”) in which the apex court held that “the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to: (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.”

The SC also observed the ruling in Vijay Karia v. Prysmian SA (decided on February 13, 2020) that the fundamental policy of Indian law, as has been held in Renusagar, must amount to a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but also timehonoured, hallowed principles which are followed by the courts.

Decision of the Supreme Court

The SC set aside the arbitral award on the grounds of being contrary and violative of Indian public policy.

Vaish Associates Advocates View:

This decision puts to rest a forty-year-old dispute which reinforces the doubt foreign companies may have in the judicial process of Indian courts. The decision of the apex court in Renusagar gave a narrow scope to the challenge of a foreign arbitral award. The sanctity of foreign awards has been respected in subsequent judgements as well.

The observations of the SC in this case although pertains to the provisions of the Foreign Awards Act, 1961 and therefore may be fact specific, however, given the contractual terms and the facts that transpired then, the SC rightfully applied the provisions of the contract act in holding that the contract (especially Clause 14) which was executed was a contingent contract and held that the award is in violation of public policy.

For more information please write to Mr. Bomi Daruwala at [email protected]

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