The NAFED Decision: Conundrum of Enforcing a Foreign Award
[Shreya and Ishani are students at National Law University, Odisha.]
In a landmark judgement rendered by the apex court of India in the case of National Agricultural Cooperative Marketing Federation of India v Alimenta S.A, a foreign award dating back to 30 years was rejected on the ground that it was contrary to the 'fundamental policy of Indian law and basic concept of justice.' The ruling essentially deals with the manner in which the foreign awards are to be treated when the content of it is repugnant to the 'public policy' of India, which is a settled principle under Section 48 of the Arbitration and Conciliation Act 1996. The Indian courts have time and again tried to interpret and limit the term 'public policy' which otherwise could take a wider connotation.
The National Agricultural Cooperative Marketing Federation of India (NAFED) and Alimenta S.A (a Swiss firm) (Alimenta) entered into two contracts during 1979-80, owing to which the former was required to supply the latter with HPS groundnut kernels. However, NAFED, which is a canalising agency for the Indian government for exports of commodities, could not execute the contract in entirety because of restrictions implemented by the government. Additionally, the first contract contained clause 14 which was essentially a force majeure and prohibition clause, thus, laying down the cancellation of the agreement in case an executive order or a law prohibits export. On account of non-performance by NAFED, Alimenta initiated an arbitration proceeding before the Federation of Oil, Seed & Fats Association Ltd (FOFSA). The award was pronounced by FOFSA and then an increased award by the Boards of Appeals was allowed by the Delhi High Court only with respect to the first agreement. NAFED, after failed attempts at appeal stage before the Board of Appeals and the Delhi High Court, ultimately filed the current petition before the apex court to restrain the enforcement of award passed by FOFSA.
Issues Involved and the Judgment Delivered
The three issues involved in the instant case are set out below:
Whether NAFED’s inability to complete its contractual obligations to export groundnut was a result of government’s restrictions on exports?
Whether NAFED could be made responsible for breach of contractual obligations in light of clause 14 of the agreement?
Whether the enforcement of the foreign award opposes the ‘public policy’ of India under Section 48 of Arbitration and Conciliation Act, 1996?
The apex court expounded the inability of the Appellants by relying on the clause 14 mentioned in the contract and orders imposed by the Indian government in order to stipulate the correctness of the foreign award. It observed, “the Government of India issued a direction that was binding upon the NAFED. Without permission, it was not possible for the NAFED to carry out its obligation under the Contract and Addenda.” The apex court concluded that the contract was terminated in view of clause 14 of the agreement and thereafter was rendered void as per Section 32 of the Indian Contract Act 1872. Clause 14 stated that in the event of an embargo on export or any other legislative or executive act by the Indian government, the remaining part of the contract shall stand cancelled. Acquiring export permission was absolutely necessary for the promisor (in this case NAFED) to perform the contract, otherwise the execution of the contract would be impossible. Therefore, the impossibility of obtaining export permission which was the 'expected event' rendered the contract void under Section 32 of the Indian Contract Act 1872.
Moving forward, the court was satisfied that the enforcement of the foreign award in question was repugnant to public policy as laid down in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act 1961 (FAA). The term 'public policy' in relation to an agreement will bear the same importation as the public policy of the nation where the award is being implemented which, in this case, was India. The court in the case of Renusagar Power Ltd v General Electric Co., specified that a foreign award would likely be said to be opposed to public policy and therefore unenforceable if it is contradictory to the:
fundamental policy of law in India;
interest of India; (now excluded after amendment of Arbitration and Conciliation Act 1996) ; or
morality or justice.
In the case Oil and Natural Gas Corporation Ltd. v. Saw Pipes, it was found that an award would be contrary to the ethos of 'public policy' if it shocks the conscience of the court or is ‘patently illegal’. However, this illegality must be significant and not trivial for the purpose of an award to be considered against the public policy. In light of all the above mentioned rationale, the court ruled that performance of contract by NAFED without the Indian government’s permit would have amounted to contravention of public policy of India and, therefore, NAFED cannot be encumbered with the liability to pay damages which could lead to unjust enrichment of the respondent.
Analysis and Remarks
The apex court followed the precedents rendered in the case Shri Lal Mahal Ltd v Progetto Grano Spa, and abstained to adjudge the current case on the basis of its merit of the award as it was at the stage of enforcement of foreign awards. However, instead of explicit bar on reviewing a case on merits at the stage of award, the apex court proceeded with a detailed review of evidence conducted by the arbitral tribunal. Additionally, it disregarded the finding of the arbitral tribunal that it was NAFED which had suggested the government to place restrictions on the export with a motive to extract a higher price and this clearly amounts to a 'self-induced' frustration. In doing so, it showed utter disregard to the finding of FOFSA and held the contract to be frustrated erroneously. Also, while adjudging the enforceability of a foreign award, the concept of public policy of India must be imparted a narrower meaning.
Further, for the exceptions of ‘public policy’ contained in the FAA to be applicable in order to refuse the enforceability of a foreign award on the grounds that it opposes the ‘public policy of India’, something more than violation of law is mandated. We have already discussed that for an arbitral award to be repugnant to the public policy of India, it has to be against the 'fundamental policy' of the law in India. This was elaborated in a recent judgment by the apex court wherein Section 48(2)(b) of the Arbitration and Conciliation Act 1996 was in question and it was held that the 'fundamental policy' alludes to 'the core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honoured, hallowed principles which are followed by the courts.' This means that the contravention of a fundamental policy of India would occur when some legislation or legal principle which has become a cardinal virtue to the law in India is compromised. Further, it is important to note that the expression 'public policy' occurring in Section 7(1)(b)(ii) of FAA has the same connotation as the expression 'public policy of India' occurring in Section 48(2)(b) of Arbitration and Conciliation Act 1996. Yet, it is evident in the judgment that the apex court did not put any emphasis on why the refusal of permit by the Indian government and the export control order would be considered as the 'fundamental policy of law in India' thereby not substantiating its finding that the impugned foreign award was contrary to the public policy of India.
The Ministry of Commerce (MoC) which deals with exports of Indian products formulates, implements and monitors the foreign trade policy by providing the basic policy framework to be followed for regulation and promotion of exports and trade. Now it is understandable that MoC has to look after the national interest for maintaining the balance in economy to meet impending contingencies. NAFED’s request to export previous year's products was refused as a product belonging to a particular season could not have been carried forward to the next. Thereafter, another request to allow 'current season' products was also refused by the government. An export order prohibiting the release of quota belonging to the 'current season' and the possible reasoning behind it cannot be considered as the legal principle which has core value for India and thereby not making it a 'fundamental public policy of India'.
While the 2015 amendment explicitly lays down the limited scope available for interference in the merits of interpretation of an arbitral award, yet the apex xourt has entirely dived into the merits of current case. While discussing the enforceability of a foreign award, a narrower approach is applied which the court did not follow. The apex court did not enunciate as to why it finds an export control ban as so basic and uncompromising part of India’s national policy. We may conclude that the apex court took an interventionist approach and did not take notice of the pro-enforcement approach resorted to in the Vijay Karia case, thereby showcasing a questionable position of India as an arbitration seat.