NAFED v. Alimenta: Whether 'Fundamental Policy of India' Was Falsely Relied Upon for Setting
[Deeksha and Bodhisattwa are students at Maharashtra National Law University, Mumbai.]
The Hon’ble Supreme Court of India has seemingly put an end to an enforcement battle in National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S. A. (Alimenta) which had been ongoing for almost 40 years now. In its decision dated 22 April 2020, the court set aside a foreign arbitral award on the ground that the agreement which the parties had entered into was void under Section 32 of the Indian Contract Act 1872 (Contract Act), its enforcement thus being against the public policy of India. The authors in this article argue that the court has erroneously relied upon the ground of fundamental policy of India for setting aside the foreign award.
NAFED was a canalizing agency which was required to seek permission of the Government of India before carrying out exports. Pertinently, NAFED was permitted to enter into exports for three years between 1977-80 but it had no permission to carry forward the exports for the season 1979-80 to the year 1980-81. NAFED and the Alimenta S.A. entered into a contract for the supply of 5,000 MT of Indian HPS groundnut. The contract was set for the season of 1979-80. However, NAFED was able to ship only 1900 MT due to the damage caused to the crops by the cyclone. Thereafter, two addendums were entered into to supply the remaining 3,100 MT groundnut in the next year, but since NAFED failed to seek permission of the government to carry forward the exports to next year, the contract could not be executed. The transaction was governed by covenants such as force majeure and prohibition contained in clause 14 of the agreement (whereby in case of prohibition of export by executive order or by law, the agreement would be treated as cancelled).
When NAFED informed Alimenta about its inability to execute the contract, Alimentia referred the dispute for arbitration on the grounds of breach of contract to which NAFED however responded by seeking stay of the arbitral proceedings. After a series of petitions filed concerning the stay of arbitration proceedings, the Supreme Court to NAFED’s success ordered stay of the arbitral proceedings. Despite the stay, the arbitral tribunal proceeded to pass an award by which NAFED was directed to pay damages for such breach of contract. Aggrieved by the award, NAFED filed an appeal to the Board of Appeal which was rejected. The Alimenta then filed a petition seeking enforcement of the award passed by the arbitral tribunal and its appellate board. The learned single judge of the High Court held the award to be enforceable. Hence, the present appeal was filed by NAFED before the Apex Court.
The court opined that the case pertained to the fundamental policy of India as under the Indian law, the government’s permission was necessary to be taken by NAFED to carry forward any export to next year. And in this case, since NAFED lacked the permission to effect the supply, no export could have taken place. The parties were aware of such an exigency and accordingly as per the clause 14, the agreement was deemed to be cancelled when the supply could not be made. The court thereby held that the contract is void under Section 32 of the Contract Act and there was no question of liability of NAFED to pay damages.
It seems that the Hon’ble Supreme Court while rejecting the enforceability of the foreign award because of it being contrary to the public policy has falsely relied upon the ground of 'fundamental policy of India'. One of the leading cases where the 'fundamental policy of India' was defined for the first time was in the case of Renusagar. In the present case, the court though relied upon its decision in Renusagar, it was only for the purpose of the ground laid down for refusal of enforcement of the foreign award. In Renusagar, the court had also observed that the contravention of law alone would not attract the bar of public policy and something more than contravention of law was required. However, in NAFED, this observation made by the court was not stressed enough. The Renusagar’s decision was later reaffirmed in the case of Ssyangyong, another decision on which the court placed their reliance upon. In Ssyangyong, the court while setting aside a domestic award because of it being contrary to the most basic notions of justice and morality, noted that an award is in contravention to fundamental policy of Indian law if it contravenes any law protecting national interest, disregards orders of superior courts in India or violates the principles of natural justice (in line with Renusagar).
Surprisingly, the court did not take note of its recent judgments in Vijay Karia which inter alia ruled 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 notion, which may find expression not only in statutes but also in time-honoured, hallowed principles which are followed by the courts.” Similarly, the court also neglected the Delhi High Court’s decision in Cruz City 1 Mauritius Holdings v. Unitech Limited, wherein it was ruled that the expression 'fundamental policy of India' referred to the principles and the legislative policy on which the Indian statutes / laws are founded and connotes the basic and substantial rationale, values and principles which form the bedrock of laws in our country.
Importantly, in all the above decisions that the court cited, it has been unanimously agreed that the term 'fundamental policy of India' shall be construed narrowly, and the domestic courts shall only interfere with the enforcement of the foreign award if there has been a grave and manifest injustice. Therefore, it is astounding that the court placed its reliance upon all these judgments only to conclude that the foreign arbitral award was to be set aside. The court reasoned that since the permission was denied to NAFED and no export could have taken place without the permission of the government, it would be against the fundamental policy of India to enforce such an award because any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary.. Thus, the court seems to have ruled that obtaining the permission of the government wherever necessary is the law and any contravention of this law (by carrying out exports without such permission) contravenes the fundamental policy of India. The court, however, failed to explain how exports carried forward by NAFED in the next year (not neglecting the fact that NAFED had permission to export for the previous three financial years and only lacked permission to carry forward the export to the next year) without the government’s permission had contravened the fundamental policy of India in this case. The decision by the court would have made more sense if it had sufficiently commented upon how obtaining the government’s permission wherever necessary was so fundamental and formed one of the core values of our laws that it could not be compromised in any case. It would have been more logical if the court instead of taking a deep dive into the detailed provisions of the contract and examining the merits of the case had examined the reasons for denial of the government’s permission (i.e. rise in the price of the commodity) and had probed into the question that whether any of these reasons were based on the fundamental policy of India. The necessary examination in this case would have been weighing these reasons against the duty of the domestic courts to enforce the foreign award as far as possible. An enquiry of this nature was conducted in Renusagar’s case where the court while setting aside a foreign arbitral award since it was in contravention to the Foreign Exchange Regulation Act 1973 (FERA) had also taken a step further to look into the objects and purposes behind enacting the FERA.
The decision in NAFED, therefore, no doubt leaves us with certain sets of unanswered questions - first, whether all exports made without the permission of the government for which such permission is a necessary pre-condition will be against the fundamental policy of India; second, and most importantly, if the reason for the denial of the government’s permission is as trivial as any procedural irregularity, whether, in such situations too, the exports made against the requisite permission will be held in contravention of the fundamental policy of India. To conclude, the decision not only marks a step taken back from making India an arbitration friendly destination but is also fatal from the point of view of future implications of its decision that every export made without the government’s permission is in contravention of the fundamental policy of India.