The approach of the Indian judiciary has consistently been pro-enforcement, particularly in respect of foreign arbitral awards. Indian courts have, time and again, construed the parameters for resisting enforcement of foreign awards narrowly, as a reflection of its pro-arbitration/enforcement approach. However, the recent decision of the Supreme Court of India (Supreme Court), in National Agriculture Cooperative Marketing Federation of India v. Alimenta S.A.1 , appears that the scope of judicial intervention is ever expanding.
The National Agricultural Co-operative Marketing Federation of India (NAFED) and Alimenta S.A. (Alimenta) entered into an agreement dated 12 January 1980 (Agreement) for the supply of 5,000 (five thousand) metric tonnes of Indian HPS groundnut (Commodity).The Agreement was entered into at the rate of USD 765 (seven hundred and sixty-five US Dollars) per metric tonnes, for the shipment between August-September, 1980.
NAFED was the canalizing agency for the Government of India (Government) for the export of the Commodity. For any export which was to be carried forward to the next year from the previous year, NAFED required the express permission and consent of the Government.
Out of the contracted quantity of 5,000 (five thousand) metric tonnes, only 1,900 (one thousand and nine hundred) metric tonnes could be shipped. In the year 1980 to 1981, there was a crop failure in the United States of America due to which the price of the Commodity rose high in the course of the season. An addendum to the Agreement came to be executed between the parties on 18 August 1980, whereby the period of shipment of the Commodity was changed to November – December, 1980, for the balance 3100 (three thousand and one hundred) metric tonnes.
Subsequently, a second addendum dated 08 October 1980 came to be executed between the parties for supply of the balance 3100 (three thousand and one hundred) metric tonnes of the Commodity. It was agreed that the commodity would be shipped during the 1980-1981 season, packed in new gunny bags, at an extra cost of USD 15 (fifteen US Dollars) per metric tonnes.
NAFED had the permission of the Government to enter into exports for 3 (three) years between 1977-1980, but no permission was granted under the export control order to carry forward the exports to the year 1980-1981. Being a canalizing agency for the Government, NAFED could not carry forward the export for the subsequent year and therefore, NAFED approached the Government for such permission.
The Government, by way of its letter dated 01 December 1980, directed NAFED not to ship any leftover quantities from previous years. The Government objected to addendums entered into by NAFED on the ground that the export of commodities was restricted under a quota system and that NAFED could not carry forward the previous year's commitment to the subsequent year. It was further stated that the price of the Commodity had become thrice the prevailing value within one year. Subsequent requests made by NAFED were also rejected by the Government.
Thereafter, NAFED intimated Alimenta of the Government's prohibition on the supply of the contracted quantity of the Commodity and accordingly, requested Alimenta to not nominate a vessel for shipment of the Commodity.
Alimenta treated the said request of NAFED as a notice of default on the part of NAFED to supply the Commodity. Aggrieved by the same, Alimenta filed arbitration proceedings before the Federation of Oils, Seeds and Fats Association Limited (FOSFA), London on 13 February 1981.
Instead of appointing an arbitrator, NAFED approached the High Court of Delhi (High Court)2 , seeking a stay of the arbitration proceedings on the ground that the Agreement did not contain an arbitration clause. Even though NAFED obtained a stay on the arbitration proceedings from the High Court, FOSFA proceeded to appoint an arbitrator on behalf of NAFED and continued with the arbitration proceedings in London. Eventually, the High Court relegated the parties to arbitration. The said decision of the High Court was upheld by the Supreme Court in the year 1987.
Thereafter, the arbitration proceedings culminated into an award dated 15 November 1989, whereby NAFED was directed to pay USD 4,681,000 (four million, six hundred and eighty-one thousand US Dollars) as damages, along with interest at the rate of 10.5% (ten and half percent) per annum. An appeal against the said award was filed by NAFED before the Board of Appeal, FOSFA. The Board of Appeal, while rejecting the appeal, enhanced the rate of interest payable by NAFED to 11.25% (eleven-point twenty five percent), in the absence of any representation in this behalf by Alimenta.
Subsequently, Alimenta filed a suit3 before the High Court under Sections 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (Foreign Awards Act), seeking enforcement of the initial award passed by FOSFA.
NAFED filed objections to the enforceability of the award on the following grounds: -
- The award was opposed to the public policy of India and was as such unenforceable;
- The provisions of Sections 7(1)(a), (b) and (c) of the Foreign Awards Act had not been compiled with;
- No notice under Section 101 of the Multi State Cooperative Societies Act, 2002 was given; and
- The execution proceedings were barred by limitation as the said proceedings ought to be filed within 30 days in terms of Article 119 of Schedule-I of the Limitation Act, 1963.
The learned single judge of the High Court decided the matter against NAFED and held that the award was enforceable and non-violative of the public policy of India. The said decision of High Court dated 28 January 2000 was under challenge in the subject appeal before the Supreme Court.
FINDINGS OF THE SUPREME COURT
Whether NAFED could have been held to be liable to pay damages for breach of the Agreement, in view of Clause 14 of the Agreement?
The Supreme Court took note of the fact that the parties had contemplated and agreed in clause 14 of the Agreement that if during the period of the Agreement, there was any prohibition on the export, by or on behalf of the Government, the unfulfilled part of the contract would be cancelled. Due to the Government's refusal, it was not possible for NAFED to export the commodities to Alimenta and therefore, NAFED was justified in not exporting the Commodity as it would have been in violation of the export control order. It was held that, in terms of clause 14, the Agreement came to an end as soon as it received a refusal from the Government.
It was noted that Section 32 of the Indian Contract Act, 1881 (Contract Act) applies in cases where the agreement itself provides for contingencies, upon happening of which the contract cannot be carried out. The Supreme Court took the view that since the Agreement had come to an end in terms of clause 14, the Agreement had become void in view of the provisions contained in Section 32 of the Indian Contract Act. It was held that in view of the clear stipulation contained in clause 14 of the Agreement, it was apparent that the parties had agreed for a contingent contract. The parties were well aware that the Government's action might come in the way of the performance of the Agreement and therefore, Section 32 of the Contract Act was attracted and not Section 56. The Supreme Court reiterated its earlier decisions in Satyabrata Ghose v. Mungeeram Bangur & Co.4 , Naihati Jute Mills Ltd. v. Khyaliram Jagannath5 and Boothalinga Agenices v. V.T.C. Poriaswami Nadar6 .
Further, it was held that NAFED, being the canalizing agency, could not have exported the commodities without the prior permission of the Government, nor could it have lawfully carried forward last year's supply to the next year, without the prior permission of the Government. Enforcement of such an award was in violation of the export policy as well as the Government's orders and therefore, against the public policy as envisaged in Section 7 of the Foreign Awards Act.
Reliance in this regard was placed on Ram Kumar v. P.C. Roy & Co. (India) Ltd.7 , where parties were aware of the restrictions imposed by the Government on the supply of wagons but expected normal conditions till the date of performance. Wagon restrictions continued till the date of performance and there was a failure to supply. The High Court of Calcutta held that the contract became void, being impossible of performance and parties became relieved of their liabilities. The Supreme Court relied upon the findings of the said decision to hold that the parties in the present case knew that the Government may not grant permission and entered into the contract with the said stipulation. Therefore, due to the Government not giving its consent, the Agreement became incapable of performance.
Further Reliance was placed on Kunjilal Manohar Das v. Durga Prasad Debi Prasad8 where the parties, with full knowledge of the restrictions imposed by the Government entered into an agreement to send the goods in question by rail. At the time of the performance of the contract, the restrictions were not removed. The Calcutta High Court took the view that the contract became void and the seller was excused from performance thereof.
Reliance was also placed on the decision in Sushila Devi and Ors. v. Hari Singh and Ors.9 , where the Supreme Court, while considering Section 56 of the Contract Act, observed that the impossibility contemplated is not confined to something which is not humanly possible. It was held that if the performance of the contract became impracticable, then it must be held that the performance of the agreement had become impossible. By placing reliance on this decision, the Supreme Court held that in the present case, the Agreement was rendered void in terms of Section 32 of the Contract Act.
By placing reliance upon the aforesaid decisions, the Supreme Court came to the conclusion that it would have been unlawful for NAFED to accept the supply of the commodities in view of the Government's refusal to accord permission and that both the parties had agreed that the Agreement will get cancelled in such an exigency. It was held that the award pre-supposed that the supply could have been made after the Government's refusal. However, such a supply would have been unlawful and therefore, the award was against the basic law and public policy, as applied in India.
Whether the prohibition to supply, imposed by the Government was sufficient to render the award unenforceable in terms of Section 7 of the Foreign Awards Act?
The Supreme Court placed reliance on the decision in Central Inland Water Transport Corporation Ltd. & Anr. Vs. Brojo Nath Ganguly & Anr.10 , where it was held that Contract Act does not define the expression public policy or opposed to public policy and therefore, the principles governing public policy are capable of expansion and/or modification.
Further Reliance was placed on the decision in Renusagar Power Co. Ltd. v. General Electric Co.11 where the meaning of public policy under Section 7(1)(b) of the Foreign Awards Act came up for consideration. The Supreme Court had taken the view that in the absence of a workable definition of 'international public policy' in Article V(2)(b) of the New York Convention, it would be difficult to construe the expression public policy in the Foreign Awards Act and opined that the doctrine of public policy under the Foreign Awards Act would have the meaning given by the courts in India. The enforcement of a foreign awards can therefore be refused on the following grounds: -
- The award is against the fundamental policy of Indian law;
- The award is against the interest of India;
- The award is against justice or morality.
Reliance was also placed on the decisions in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. , Shri Lal Mahal Limited v. Progetto Grano Spa13 , Associated Builders v. Delhi Development Authority14 and Ssanyoung Engineering and Construction Co. Ltd. v. National Highways Authority of India15 .
Based on the aforesaid judicial precedents, the Supreme Court took the view that in terms of Clause 14 of the Agreement and as per the law applicable in India, no export could have taken place without the permission of the Government. NAFED was unable to supply, as it did not have the permission of the Government for the export. The Supreme Court held that the matter was such that it pertained to the fundamental policy of India and the parties being aware, contracted that in such an exigency as provided in clause 14, the Agreement shall be cancelled for the supply which could not be made.
Therefore, the Agreement became void under Section 32 of the Contract Act on happening of the contingency.
The Supreme Court held that the liability to pay damages could not have been saddled upon NAFED in view of the clear terms of the Agreement. Therefore, any supply would have contravened the public policy of India relating to export. Accordingly, the Supreme Court came to the conclusion that it would be against the fundamental policy of India to enforce such an award and therefore, the said award could not be said to be enforceable in terms of the provisions contained in Section 7(1)(b)(ii) of the Foreign Awards Act.
While the judgment stands as a contrast to the long line of judicial precedents on minimal judicial interference during enforceability proceedings, it also opens a debate as to what extent the public policy of India would include such polices which may not qualify as fundamental principles on which Indian law is founded, so as to render a foreign award unenforceable. The question gains momentum, especially in light of the judgment of the High Court of Delhi in Cruz City 1 Mauritius Holdings v. Unitech Limited16 , wherein it was observed that violation of any provision of an enactment would not tantamount to violation of fundamental policy of law in India.
In the instant case, the subject matter was export policy which is susceptible to changes introduced by the government from time to time and therefore introducing a caveat that the violation of export polices qualifies as violation of public policy of India may open flood gate before the Supreme Court in so far as enforcements proceedings are related. It may not be wrong to state that the Supreme Court, in the instant case, has construed the public policy in a broader sense instead of opting for a narrow approach. Having said that, it remains to be seen how such an interpretation would be construed by courts in India for cases falling under the Arbitration and Conciliation Act, 1996, considering the fact that the current judgment was rendered in light of the Foreign Awards Act, which stands repealed.
1 Civil Appeal number 667 of 2012 delivered on 22 April 2020
2 OMP number 41 of 1981
3 Suit number 1885 of 1993
4 AIR 1954 SC 44
5 AIR 1968 SC 522
6 AIR 1969 SC 110
7 AIR 1952 Cal. 335
8 AIR 1920 Cal. 1021 (1024)
9 (1971) 2 SCC 288
10 1986 (3) SCC 156
11 1994 Supp. (1) SCC 644
12 (2003) 5 SCC 705
13 (2014) 2 SCC 433
14 (2015) 3 SCC 49
15 (2019) 8 SCALE 41
16 (2017) 239 DLT 649
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