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This article is written by Dhawal Srivastava, a student currently pursuing B.A. LL.B (Hons.) from the Rajiv Gandhi National University of Law. The recent judgment of the Supreme Court in NAFED vs. Alimenta S.A. has been elaborately elucidated in this article.

Introduction

In the last few years, with the boom in the field of Alternative Disputes Resolution, it has been observed that there have not been many disciplined and coordinated efforts by both the Parliament and the Judiciary to facilitate the becoming of India into an arbitration hub. One of the major obstacles to this ambitious objective has been the intervention of the Indian courts in matters related to and decided by arbitration. The Supreme Court, in NAFED vs. Alimenta S.A., has changed a perception with regards to the role of the judiciary in matters relating to arbitration, especially with respect to the enforceability of the foreign award in India and has ruled it as an infringement of the country’s public policy.

About the Case

Parties involved in the case

The two parties that are a part of the case in hand are :

  • Alimenta SA is a Switzerland-based company that was founded in 1967 and is a part of the Consumer Discretionary sector. 

Facts of the Case

As per a trade contract signed between NAFED and Alimenta S.A., the former was required to deliver 5000 metric tonnes (henceforth referred to as MT) of Hand Picked and Selected or HSP Groundnuts (hereafter referred to as ‘commodity’) to the latter under a FOSFA or Federation of Oil, Seeds and Fats Association standard in 1979-80. Because of a cyclone that hit the concerned areas in India that year, crops were damaged. On the approval of the government, NAFED was only able to export 1900 MT of the commodity to Alimenta S.A. that year. Subsequently, the parties extended the contract by adding two ‘addendums’ for the canalizing agency to export the remaining 3100 MT of the commodity next year, that is, in 1980-81. Due to crop failure that occurred in the United States of America during this year, there was an increase in the price of the commodity by 15 USD. 

The government refused to grant permission for export to Alimenta on the agreed price due to the aforestated hike and prohibited it from shipping the remaining quantity from the leftover of the previous years. Because of this restriction, NAFED was unable to dispense the terms of the contract which was held as a default on its part by Alimenta which applied for arbitration before FOSFA in London.

Consequently, on 15th November 1989, the Association pronounced an award in favour of Alimenta S.A. which was also upheld in an appeal against it on 14th May 1990. Hence, along with an interest of 10.5 percent per annum, NAFED was directed to pay a reward of USD 4,681,000 to the aggrieved party as damages. Years after the grant of this award, Alimenta filed an appeal before the Delhi High Court which upheld the enforceability of the concerned Award and also converted it to a decree in pursuance of the then existing legal framework on 28th January 2000. NAFED went to the Supreme Court of India for an appeal against the High Court’s verdict.

Key Issues of NAFED in its appeal

NAFED contended that the agency could not be held liable for not being able to perform the obligations laid down in the trade contract due to the barring on the part of the government from pursuing the export of the remaining commodities to Alimenta S.A. Because of this event, as per the conditions enlisted in Clause 14 of the FOSFA agreement, NAFED argued that the contract was deemed void and unenforceable and thus it can not be made liable to pay the damages. The issue of the award as against the ‘public policy’ of India was also raised in NAFED’s defence. 

NAFED also contended that there was no notice served under section 101 of the Multi-State Cooperative Societies Act of 2002 and the execution was restricted by the limitation under Article 119, Schedule 1 of the Limitation Act, 1963.

Features of the judgment

The Supreme Court announced the verdict in favour of NAFED and held that: 

  1. The enforcement of the award stands tenable and refused on the ground that in the absence of the government’s sanction, it was a justified move on the part of NAFED to not continue with the export of the remaining commodities to Alimenta. The Court emphasized heavily on clause 14 of the agreement for coming to this conclusion.
  2. The apex court also made a lucid distinction between Section 32 and Section 54 of the Indian Contract Act, 1872, viz. contingent, and frustrated contract. In this case, the court held that the contract was contingent or dependent on the export policy of the Government of India and thus, fell within the scope of section 32 of the Indian Contract Act, 1872.
  3. In the implementation of the aforestated provision of law, the court held that the contract between NAFED and Alimenta was deemed null and void, ending all contractual compulsions on former at the time of the dismissal of the Government’s permission.
  4. In pursuance of Section 7 of the Foreign Awards (Recognition and Enforcement) Act of 1961 and taking cognizance of the test that was laid down in the Renusagar Power Co. Ltd. vs. General Electric Co., it was concluded that post the prohibition by the Government, the obligation was converted into an impossible task, and performance of the same would have led to the contravention of the requisite public policy of India. Thus, the enforcement of the award was cancelled by the Supreme Court.

Critical Appraisal 

The judgment is seen by many jurists as having a negative impact on the arbitration sector of the Indian legal system and has been criticized on the following grounds: 

Limited Jurisdiction of courts on the arbitral award

In Union of India vs. Jai Narain Misra, a principle was enunciated by the Supreme Court with regards to the validity of an arbitral award and the court’s limited role in annulling it. This was also upheld by the Parliament in the introduced Amendment to the Arbitration and Conciliation Act of 2015. Moreover, it is also a settled premise that the courts do not have much discretion to control the enforceability of foreign awards, which is also promised by Article V of the New York Convention as it seeks to reward the aggrieved party who had to face a lot of procedural complications in getting a favourable arbitral award by the concerned authority in the country of origin. 

In the NAFED case, there was a complete departure from the limited jurisdiction that is sanctioned to the Court with respect to the legal analysis of the award. There was also a violation of the principle of party autonomy which guaranteed the parties with the provision of having an out-of-court settlement and adopt the method of arbitration for the same.

Departure from the recent Karia Judgement

In its most recent judgment, Vijay Karia and Ors. vs. Prysmian Cavi E. Sistemi SRL and Ors., the issue was whether the violation of FEMA rules for the implementation of the foreign award should be counted as a contravention of the public policy of India. The Supreme Court had upheld both the principles of the Renusagar judgment and New York Convention while expressly stressing upon a “pro-enforcement bias” of the award for the signatory regimes of the Convention. The verdict shifted the burden of proof of enforcement of the award on the opposing party as the Court took notice of the fact as how the public policy of an involved country cannot be used as an excuse for setting aside the award. The Supreme Court also reemphasized on the pervasive objective of the New York Convention of precluding the national laws from shadowing the due course of the arbitration. 

Analysis of ‘public policy’

In the Renusagar judgment, the Supreme Court laid down the determining principles of defining what exactly constituted the ‘public policy’ of India. These were as follows: 

  1.  It should be an intrinsic, basic policy of the Indian legal system.
  2. The public policy in hand should be in the interest of India. However, this principle was omitted post the passage of the 2015 Amendment of the Arbitration and Conciliation Act.
  3. It should be guided by the essential fundamentals of morality and justice.

Even in the Karia judgment, the Supreme Court reiterated the rationale that the aforementioned definition which provided a restrictive nature to what formed ‘public policy’ in India was essentially done so in order to promote the enforcement mechanism of the arbitral awards and support alternate dispute resolution systems. 

However, in the NAFED case, there was a complete overturn from the precedents as the government restrictions and the guidelines governing exports of the country were linked and associated with the public policy of the country by the apex court. This led to the expansion of the otherwise narrow definition provided by the Renusagar judgment of the public policy and is definitely not pro-arbitration as it now open floodgates for more interventions on the part of the national courts with respect to the foreign award which should ideally be vested in a higher threshold. The Court also ignored the Delhi High Court’s judgment in Cruz City 1 Mauritius Holdings vs. Unitech (which is referred to in the Karia judgment) wherein amongst other things, it was held that a mere violation of a legal provision would not tantamount to that of an essential policy of Indian law to justify the non-enforcement of the foreign award.

Applicability of English Law

As per the agreement between the two parties, it was laid down that the obligations to perform the terms of the contract shall be governed by English Law. Moreover, the tribunal had also announced the arbitral award in pursuance of the English law. By the application of the Indian Contract Act, 1872 in the judgment, it can be perceived as a wrong exercise of the court’s jurisdiction and with respect to the provisions of the contractual agreement.

Court’s distinction of contracts

Taking into account clause 14 of the agreement between the parties, the court also specified the points of difference between a frustrated and contingent contract. However, a mistaken interpretation of any law by the (foreign or not) arbitral tribunal is not a sufficient ground to be considered under Section 48 of the Arbitration and Conciliation Act that stipulates provisions for the enforcement of foreign awards.

Conclusion

With a rise in the business possibilities and entrepreneurship in the Indian economy, the significance of arbitration in the country has reached newer heights. By providing a restrictive definition of ‘public policy’ in the Renusagar judgment and the subsequent amendments to the Arbitration Act, the Indian judiciary and the legislature respectively exhibited their intention of promoting the enforcement of arbitral awards (whether foreign or not) and thus encouraging a better environment for arbitration to bloom in the country. 

However, with the NAFED judgment, the apex court has set a risky precedent with respect to the interventionist approach of the domestic courts, the transgression of their jurisdiction with respect to determining matters around foreign arbitral awards and defining what exactly constitutes ‘public policy’. The principle of discretion of two parties who had agreed to adopt arbitration as a dispute redressal mechanism also stands prone to the intercession of the judiciary.

The judgment has also brought to the forefront the bungling state of affairs of the status of arbitral awards and their enforcement in the country. It took almost three decades since the filing of the plea for enforcement of the award to arrive at a final decision by the court. The unnecessarily protracted time that takes place for the execution of the arbitral awards, specifically the foreign ones, acts as a great impediment to India’s progress towards becoming an internationally recognized centre of arbitration and suitable efforts should be made for resolving the issue.

References


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