The Supreme Court of India, recently pronounced judgment in the case of National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A.1 ("NAFED Judgment") on enforcement of a foreign award and interpretation of the term 'public policy'.

Upon reading the NAFED judgment, at first glance, one may fear that the Supreme Court has softened its pro-enforcement policy qua foreign awards maintained by it for several decades and recently affirmed in Vijay Karia and Ors. v. Prysmian Cavi E Sistemi SRL and Ors.2 ("Vijay Karia"). However, a deeper insight into the judgment may reveal that there are several factors and reasons owing to which the Courts may, going forward, lean towards the stricter approach canvased by Vijay Karia and earlier judgments instead of adopting the softer view taken in NAFED Judgment.

This Article seeks to provide an analysis of the varying, and in some manner conflicting, positions vis-à-vis the enforcement of foreign award in India post NAFED Judgment and attempts to answer the judicial implications of the two judgments on future litigations around recognition and enforcement of foreign awards.

An Analysis of the Vijay Karia Judgment: Scope of 'Public Policy' under Section 48:

In February 2020, a 3-Judge bench of the Supreme Court in Vijay Karia, reaffirmed the pro-enforcement approach of Indian Courts and narrow scope of 'public policy' for resisting enforcement of foreign awards under Section 48 of the Arbitration and Conciliation Act, 1996 ( "Arbitration Act").

In Vijay Karia, the Supreme Court was dealing with dispute arising out of a Joint Venture Agreement between the shareholders of Ravin Cables Ltd., including Appellant, and Respondent Prysmian Cavi E Sistemi SRL. Respondent therein initiated the arbitration proceedings on the ground of certain breaches committed by the Appellant. The Appellant in its counterclaim also alleged certain breaches by the Respondent. Ultimately, the Award was passed in favour of the Respondent and it was directed that the Appellants shall sell shares to the Respondent at a discounted rate.

When the matter came up before Supreme Court for enforcement of the foreign award, it was argued on behalf of the judgment debtor that the direction for transfer of shares by Appellant - a resident of India to a person resident outside India, at a rate lesser than the market rate would be in violation of the FEMA Rules and therefore such a transfer is in violation of public policy of India.

To answer this question, the Court referred to the scheme of FEMA which observed that if a particular act violates any provision of FEMA or the Rules framed thereunder, permission of the Reserve Bank of India may be obtained post-facto, if such violation can be condoned. The Court went on to observe that the alleged breach did not pertain to any smuggling activity which involves depletion of foreign exchange, thus, even if the said breach was proved, the same would not mean violation of the fundamental policy of Indian law.

The Apex Court reaffirmed the long-standing position that the object of Section 48 is to recognize and enforce foreign arbitral awards and it is subject to extremely narrow and limited exceptions, which are grounds of refusal, or in the words of Justice Rohinton Fali Nariman, the pigeon-holes of Section 48. These pigeonholes may appear to be visual equivalents of the grounds under Section 34; however, they are to be applied and interpreted differently, in a much more restrictive manner for awards rendered by arbitral tribunals seated outside India.

In Vijay Karia, the Supreme Court emphatically endorsed the need for a restrictive approach to the grounds of Section 48 for refusing enforcement of arbitral awards. It reiterated the principles of interpretation laid down in Renusagar3, wherein the Supreme Court enunciated that the public policy defence may be allowed only if the foreign award is contrary to (i) the fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality.

Significantly, the Vijay Karia judgment has further referred to what is called the fundamental policy of India. Following the principle enunciated in Renusagar, the Court observed that a breach of fundamental policy of India equates to a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. The Court attempted to define the fundamental policy in the following terms:

"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 time-honoured, hallowed principles which are followed by the Courts."

The Court further referred to the Arbitration and Conciliation (Amendment) Act, 2015, which inter alia, amended Section 48 of the Arbitration Act, to delete the ground of "contrary to the interest of India". In this context the Court further reiterated the explicit mandate of Section 48- that the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

Thus, the Vijay Karia judgment converged, fortified, and emphatically affirmed that something more than mere contravention of law is required for refusal of enforcement of a foreign award on the ground that it is contrary to the public policy of India. Similar position has been laid down by earlier judgments of Supreme Court in Shri Lal Mahal.4

With this judgment, it seemed that the Supreme Court was well on its course to adopt a strict pro-enforcement judicial policy and had put an end to any speculation regarding the restrictive scope of Section 48.

Analysis of NAFED Judgment:

In NAFED Judgment, however, another 3 Judge bench of the Supreme Court of India, derailing the pro-enforcement approach cemented by the judgment of Vijay Karia, refused enforcement of foreign award by invoking Section 7 (1) (b) (ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 ("Foreign Awards Act") on the ground that it would contravene the export policy of India and would be against the fundamental public policy.

In this case, the National Agricultural Cooperative Marketing Federation of India ("NAFED") and the Alimenta S.A. entered into a contract for the supply of 5,000 metric tonnes of Indian HPS Groundnut. However, due to the damage caused to crop by cyclone etc., in the Saurashtra region, NAFED could ship only 1900 metric tonnes, instead of 5000 metric tonnes which was contracted for.

Subsequently, on 18.08.1980, by way of an addendum, both parties agreed that the balance 3100 metric tonnes of the goods would be carried forward and shipped during the 1980-81 season. However, being only a canalizing agency, NAFED could not have carried forward the supply of balance goods without the permission from the Government of India. NAFED sent several requests to the Government of India for granting permission to release its quota in order to fulfill its contractual obligations, but the same was refused.

Owing to the non-supply, Alimenta S.A. filed arbitration proceedings before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London. FOFSA vide Award dated 15.11.1989, directed NAFED to pay a sum of USD 4,681,000, along with an interest of 10.5% per annum from 13.2.1981 till the date of the Award. The Appeal filed by NAFED before the Board of Appeals was also dismissed.

Alimenta S.A. filed for execution of the Foreign Award under Section 5 and 6 of the Foreign Awards Act before the Delhi High Court. NAFED filed objections to the enforceability of the Award, on the ground that it was opposed to the public policy, as such unenforceable. NAFED's objection against enforceability were rejected and the Foreign Award was held to be enforceable. Thereafter, NAFED approached the Supreme Court of India, and challenged the enforceability of Foreign Award.

The Supreme Court vide its final judgment has held the award to be unenforceable on the ground that it violates the public policy of India. The public policy, as expounded in this judgment, has been deployed by the Court on two counts- first- the realm of violation of Indian Law, which in the present case is Section 32 of the Indian Contract Act, 1871 (hereinafter "Contract Act") and second- the realm of fundamental policy of India relating to exports.

On the first count, the Court has given a finding that the contract between the parties was a contingent contract. It held that since the parties entered into a contingent contract, it became void under Section 32 of the Contract Act, upon the non-occurrence of the contingency. The Court further held that the imposition of liability to pay damages on a contract which had become void under Section 32, vide the Foreign Award in question, was violative of the fundamental law of India.

The second count of 'public policy', held to be breached by the foreign award, was the Indian policy relating to export of commodities. In reaching the aforesaid conclusion, the Supreme Court touched upon the concept of lawfulness of the object of the contract vis-à-vis Section 23 of the Contract Act. The Court observed that if the object of a contract is immoral or opposed to public policy, the said contract will be treated as void. The Supreme Court further relied upon Central Inland Water Transport Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr.5, to hold that the principles governing public policy are capable of expansion or modification.

It is evident that in deciding the present case, the Supreme Court has largely been driven by considerations of fundamental domestic laws. The outcome of this case may suggest that foreign awards shall go through stricter scrutiny and may be confronted with expanded and somewhat modified notions of public policy. The principles of narrow interpretation of public policy for resisting enforcement of Foreign Arbitral Awards, have slightly drifted into an area of latitudinous construction.

Thus, one may fear that by drifting away from the key international principles relating to enforcement of foreign awards, this judgment may impede in a sturdy alternate dispute resolution regime and India's journey towards becoming an international arbitration hub may somewhat be hampered.

However, a closer scrutiny of the judgment would show that there are several reasons because of which the Courts dealing with the question of enforceability of a foreign award may be more inclined to follow the pro-enforcement approach laid down by Vijay Karia and earlier judgments instead of the lenient view adopted by NAFED.

A. NAFED may be based on its own peculiar facts:

The principle question that came before the Supreme Court in NAFED case was that in the absence of requisite permission for export from the Government of India, can it be said that the party which failed to export has breached the contract and consequently it is liable to pay damages. The Court examined the relevant clauses of the contract between the parties and concluded that it was a contingent contract, the contingency being Government of India's permission for export. In this factual context, Court held that the impugned Final Award presupposes that even in the absence of permission, export was possible in terms of the contract. Thus, in the view of the Court, the Final Award in question was in teeth of Section 23 and Section 32 of the Contract Act and in violation of fundamental policy of India.

Therefore, it can be argued that NAFED Judgment must be seen strictly in the light of the peculiar facts and circumstances of the case where a foreign award had the effect of enforcing an otherwise void contract between the parties.

B. NAFED may be held to be per incuriam - Vijay Karia not considered:

Even though in both NAFED and Vijay Karia, the Court was examining the fundamental policy of India in the context of violations of domestic laws, NAFED Judgment, which came later, did not take into account the findings and observations made in Vijay Karia. In fact, there is not even a mention of Vijay Karia in the NAFED judgment, although almost all the major legal judicial pronouncements have been discussed thereunder.

While the two judgments appear to follow different trajectories in their assessment of when violations of law also violate fundamental policy of India, there also appears to be a gap in elucidating the concept. Where, on one hand, Vijay Karia painstakingly differentiates between 'mere breaches' and violations of fundamental policy, on the other hand, NAFED Judgment substitutes its own findings on violation, and concludes that such violations would mean breaching the fundamental laws of India. It can thus be argued that NAFED Judgment is seemingly per incuriam.

The discussions on how the breaches of Indian laws in relation to contracts and export policy, form part of India's fundamental policy, are seemingly missing in the NAFED judgment.

C. NAFED does not disagree with earlier judgments in Renusagar or Shri Lal Mahal on the scope of public policy

It is interesting to note that while refusing to enforce the award, the Supreme Court has heavily relied upon the test laid down in the Renusagar and Shri Lal Mahal. In fact, the NAFED judgment at length discusses and relies upon the relevant legal authorities that call for the restrictive and narrow approach towards refusing enforcement of awards. Furthermore, the judgment has not explicitly added any more facet to the concept of public policy than what has been propounded by Renusagar or Shri Lal Mahal or Vijay Karia.

It is only in the application of the said judicial principles that while reaching the conclusion it adopted a much more lenient approach to the term public policy.

Thus, it is unlikely that the NAFED judgment would affect the whole course of pro-enforcement approach in India more so because NAFED does not, in principle, disagree with Renusagar or Shri Lal Mahal or Vijay Karia.

D. NAFED was dealing with Section 7(1)(b)(ii) of Foreign Awards Act, 1961 which now stands repealed:

Notably, the Supreme Court, in NAFED matter was dealing with a challenge to a Foreign Award under Section 7 of the Foreign Act. With the promulgation of the Arbitration Act, the Foreign Awards Act was repealed, and the provisions of Section 7 were incorporated in Section 48 of the Arbitration Act. Any challenge to the enforceability of the foreign awards would now have to be dealt with by the Courts under Section 48 of the Arbitration Act and as such the Court may not be bound to follow the ruling in NAFED.

This is more so because subsequently, the Law Commission in its Report No. 246 of the Government of India, inter alia, expressed the need for a definitive and restrictive interpretation to the words "public policy". The 246th Law Commission Report was adopted in the Arbitration and Conciliation (Amendment) Act, 2015, which amended Section 48 of the Arbitration Act by adding Explanation 1 and 2. Vide this Amendment, the scope of public policy was restricted to (1) fraud or corruption in the making of the award; (2) award is in conflict with the fundamental policy of Indian Law; or (3) award is in conflict with the most basic notions of morality or justice. Further by way of Explanation II, it was added that the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. As a result of this amendment in 2015, the scope of the term "public policy" has been further narrowed than what existed in Section 7 of the Foreign Awards Act.

The wordings of Section 7(1)(b)(ii) of Foreign Awards Act plainly envisaged a wider basis for non-enforcement than what is contemplated under the statutory prescriptions of Section 48(2)(b) of the Arbitration Act. In formulating Section 48(2)(b) and through the amendment of 2015, the Indian lawmakers sought to limit the scope of public policy doctrine as far as possible. Therefore, there might not be major contradistinctions between the two provisions, but there is little doubt the current provision i.e. Section 48, is much more restrictive and stringent.

Hence it may be argued that the judgment in NAFED may not be given precedence over Vijay Karia, when the Court is dealing with objection to enforcement of award under Section 48 of the Arbitration Act.

E. NAFED Judgment appears to be silent on how the criteria of "fundamental public policy of India" has been met in the case:

As seen above, a string of judgments prior to NAFED Judgment have clearly held that the court should be circumspect in refusing enforcement of award and the approach of a Court must be pro-enforcement.

Apart from the above, the general pro-enforcement orientation of the New York Convention also points to a narrow interpretation of the public policy ground. An expansive interpretation would vitiate the main purpose of the Convention which is to remove unwarranted obstacles in the enforcement of arbitration awards. The international trend emerging from the courts throughout the world is to take a robust view of the application of the New York Convention in letter and spirit.

Further, the judgments prior to NAFED, including Vijay Karia held that fundamental policy of India 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 has been described as "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."

Curiously, the Supreme Court did not specifically discuss how the facts of the said case are covered by the narrow concept of the term "public policy" given by several judgments in the past, except for saying that no export could have taken place without the permission of the Government and the matter is such which pertains to public policy of India. NAFED Judgment is, unfortunately, silent on how the above criteria of violation of fundamental policy has been met by the Foreign Award passed in the said case.

The judgment indicates that in certain situations, India's export policy also forms part of fundamental laws of India and its non-compliance in international commercial transactions, may be regarded as violation of public policy of India. However, how and in what manner does the relevant policy in relation to export of a particular good assumes the character of fundamental policy of India has not been discussed.

F. NAFED is against well settled principle of law that the execution/enforcement Court cannot examine the award on its merits:

All previous judgments have stated in no uncertain terms that Court before which a Foreign Award is presented for enforcement cannot review the merits of the foreign award.

However, NAFED Judgment has somewhat deviated from this principle. A reading of the judgment show that the Court seems to have weighed the merits and demerits of the Award. In fact, it has gone on to hold that "the award presupposes supply could have been made after the Government'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.". It further states "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."

Conclusion - Will the NAFED Judgment affect the judicial approach towards Enforcement of Foreign Arbitral Awards?

Question of enforceability of a foreign award involves a balance which should be weighed heavily in favour of the enforcement of award. The purpose of the Act will stand defeated, if every minute variation in the laws and policies of different countries, could be used as a ground to refuse enforcement of foreign award on the ground that such a variation is against the public policy of the country where enforcement is sought.6

Though the judgment in NAFED is a rare occasion where the objections raised by the judgment debtor against the enforcement of the award have been allowed, such approach should only be an exception to the rule and must be invoked sparingly. The reasons mentioned above are only some of the factors which may be considered by the Courts for following the stricter and narrower approach canvassed by Vijay Karia and treating NAFED Judgment as an exception.

Footnotes

1. National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A.; Civil Appeal No. 667 of 2012 (Decided on 22.04.2020)

2.Vijay Karia and Ors. vs. Prysmian Cavi E Sistemi SRL and Ors.; Civil Appeal No. 1545 of 2020, (Decided on 13.02.2020)

3. Renusagar Power Co. Ltd. vs General Electric Co.; 1994 Supp (1) SCC 644

4. Shri Lal Mahal Limited vs Progetto Grano Spa; (2014) 2 SCC 433

5. Central Inland Water Transport Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr; 1986 (3) SCC 156

6. O.P Malhotra on the Law and Practice of Arbitration and Conciliation, 3rd Edition, Pg 1712.

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