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Supreme Court of India: Foreign Awards against Fundamental Policy of Indian Law not Enforceable

Updated: Jun 2

Ananya Pratap Singh, MCIArb, MSIArb M.Phil, University of Colombo (Present), LL.M (Int. Business Laws), National University of Singapore

In National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. Civil Appeal no. 667 of 2012 decided on 22 April 2020, the Supreme Court of India refused to enforce a Federation of Oil, Seeds and Fats Associations Ltd. (‘FOSFA’) award, holding it to be against the fundamental policy of Indian Law. In this case, the award debtor was not able to perform its contractual obligations owing to imposition of a ban by the Government of India (‘GOI’) on a contractual commodity which was the subject of bargain amongst the parties in their underlying contract. However, under the prohibition clause of the underlying contract, the parties specifically agreed that in such an eventuality (prohibition of export by executive order or by law), the contract will stand cancelled. The Supreme Court interpreted the prohibition clause in light of Section 32 of the Indian Contract Act, 1872 (‘Contract Act’) which renders a contingent contract void in case the underlying contract between the parties itself provides for contingencies upon happening of which contract cannot be carried out. Clearly, by way of prohibition clause, the parties have considered and agreed to render the contractual bargain as void in the eventuality of imposition of such a ban by GOI. This in turn renders such an award as passed against the fundamental policy of Indian law (without considering Section 32 of the Contract Act) falling in teeth of ‘public policy’ ground of refusing to enforce a foreign award provided under Section 7(1)(a), (b), and (c) of the Foreign Awards (Recognition and Enforcement) Act, 1961 (‘Foreign Awards Act’) which is akin to Section 48 of the Arbitration & Conciliation Act, 1996 . Detailed case analysis given below:


Factual Matrix

NAFED and the Alimenta entered into a contract under which NAFED was a canalizing agency for GOI which required express permission and consent from GOI for the export to be carried forward from the previous years. The transaction was governed by covenant of prohibition (‘Prohibition Clause’) contained in the underlying Agreement, whereby in case of prohibition of export by executive order or by law, the agreement would be treated as cancelled.

Dispute arose due to short supply by NAFED on account of cyclone in India. By way of an addendum, the balance supply was agreed to be supplied in another season next year. Pertinently, whilst NAFED had the permission from GOI to enter into exports, it had no permission to carry forward the exports to another season.

In view thereof, NAFED approached the GOI to seek permission to carry forward the exports to another season. GOI directed NAFED not to carry forward the previous year commitment to the subsequent year and in turn objected the commitment entered into by NAFED with Alimenta since the price of the commodity had escalated thrice than the prevailing price within one year. When NAFED’s request was rejected by GOI second time, NAFED informed Alimenta not to nominate the vessel for shipment of the crop due to GOI’s prohibition to supply the contracted quantity. This was taken as default of supply by Alimenta, who later filed arbitration proceedings before FOSFA London. The invocation of arbitration by Alimenta was challenged by NAFED before the Delhi High Court, which, after granting a protem relief, ultimately held that agreement between the parties would be governed by arbitration agreement incorporated therein. This view was upheld by the Supreme Court as well and the parties were relegated to pending arbitration.

Subsequently, the award was rendered by the tribunal against NAFED who unsuccessfully assailed it before the Board of Appeal of FOSFA. Meanwhile Alimenta filed execution of the initial as well as appellate award passed by the tribunal and Board of Appeal before the High Court. The enforceability of the award was objected by NAFED on the ground that it was opposed to the public policy pursuant to Section 7(1)(a), (b), and (c) of the Foreign Awards Act. The award was held enforceable by the High Court and after several rounds of litigation, the execution of award was challenged by NAFED before the Supreme Court in the present proceedings.


Parties Contentions

NAFED inter alia argued that the award is against the public policy of India as it does not deal with the restriction imposed by GOI as to the export of the commodity and thus is unenforceable under section 7(1)(b) of the Foreign Awards Act. On the other hand, Alimenta inter alia contended that the question of imposition of ban by the Government was gone into by the Arbitral Tribunal, and conclusion was recorded that it was a self­imposed restriction by NAFED. There was no such ban on the export by the GOI. Thus, because of the findings recorded by the Arbitral Tribunal, it would not be open to the Court to go into its correctness. The award is not against public policy. Moreover, the scope of interference in the enforcement of the foreign award is limited.


Judgement

The Court observed that for the export to be carried forward from the previous years, NAFED required express permission and consent from GOI. In addition, pursuant to Prohibition Clause of the Agreement, during the contract shipment period in the event of the prohibition of export by an executive or legislative act by any of the Government of origin, such restriction shall be deemed by both the parties to apply to the contract. Thus, if the shipment becomes impossible by reasons mentioned in the clause, the agreement shall be cancelled. In view thereof, the Court held that the refusal by GOI was covered within the Prohibition Clause of the agreement and the prohibition was on account of the GOI’s refusal.

Further, it is also apparent that GOI’s refusal to grant permission to NAFED to carry forward the export from the previous years rendered it impossible for NAFED to perform its obligation under the contract and addenda. Thus, the contract became void in view of Section 32 of the Indian Contract Act, 1872 (‘Contract Act’) (Enforcement of contingent contracts) which applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out. In view thereof, on co-joint reading of Prohibition Clause with Section 32 of the Contract Act, the Court concluded that GOI’s refusal to grant permission releases both parties from the performance of the contract relying on Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44, Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522.

As a sequitur, the court held that the award pre­supposes supply could have been made by NAFED after the GOI’s refusal. If supply had been made, it would have been unlawful. Thus, the parties agreed for its cancellation as such an award is against the basic law and public policy as applied in India. In view thereof, the Court held that enforcement of such an award in violation of export policy and the GOI’s order would be against the public policy as envisaged in section 7 of the Foreign award Act.

The court reiterated that the expression “public policy” concerning the agreement relates to the public policy of the country where award is being enforced. Section 23 of the Contract Act deals with what consideration and objects are lawful and what not. If the court regards it as immoral or opposed to public policy, in that event, the consideration or object of agreement is said to be unlawful, and any agreement of which the object or consideration is unlawful is void.

The enforcement of the foreign award would be refused on the ground that it was contrary to public policy if such enforcement would be contrary to (1) fundamental policy of Indian Law, (2) the interest of India, and (3) justice or morality.[1]

The expression and concept of public policy of India are in its application is narrower in the enforcement of foreign award than in respect of the enforcement of domestic arbitral awards. Something more than contravention of the law is required for refusal of enforcement of a foreign award on the ground that it is contrary to the public policy of India. The expression “public policy of India” in section 48 (2)(b) of the Arbitration & Conciliation Act, 1996 has the same import as that of expression “public policy” in section 7(1)(b)(ii) of the Foreign Awards Act.[2]

Thus, in view of Prohibition Clause in the agreement and as per the law applicable in India, no export could have taken place without the permission of GOI, and the NAFED was unable to supply, as it did not have any permission to effect the supply, it required from Government. The matter is such which pertains to the fundamental policy of India and parties were aware of it, and contracted that in such an exigency as provided in the prohibition clause of the Agreement shall be cancelled for the supply which could not be made. It became void under section 32 of the Contract Act on happening of contingency. Thus, it was not open because of the clear terms of the Arbitration Agreement to saddle the liability upon the NAFED to pay damages as the contract became void. Thus, it would be against the fundamental public policy of India to enforce such an award, any supply made then would contravene the public policy of India relating to export for which permission of GOI was necessary.


Comments

In view of this judgement, the term fundamental policy of Indian law as encompassed in the ‘public policy’ of India can be explained as under:

[1]Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp. (1) SCC 644

[2] Shri Lal Mahal Limited v. Progetto Grano Spa, (2014) 2 SCC 433


Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with.

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