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Analyzing the SC judgment of NAFED vs. Alimenta S.A: Revisiting the ‘Public Policy’ contours

Contributed by: P&A Law Offices

On 22 April 2020, the Supreme Court of India, in National Agriculture Cooperative Marketing Federation of India vs. Alimenta S.A declined enforcement of an award of the Federation of Oil, Seeds and Fats Association Ltd. (FOFSA), London as being contrary to the public policy of India. This has triggered a debate on the applicability of the public policy test in India while enforcing foreign awards.

In a contract for export of Indian HPC groundnuts by NAFED to Alimenta S.A, the contracted quantity could not be exported on account of cyclone and other conditions and NAFED sought permission from the Government of India to carry forward the exports to the next season. The Government of India denied such carry forward in view of the export policy and NAFED could not perform its obligations. Alimenta initiated arbitration and an award was passed in its favor in 1989 to the tune of USD 4,681,000, which was enhanced by the FOFSA Board of Appeal in 1990. While the arbitration was on, certain interim orders were passed by Indian Courts (Delhi High Court and Supreme Court) staying the arbitration process. However, the arbitration process continued despite such orders. NAFED was not able to appoint its arbitrator and NAFED’s nominee was appointed by FOFSA.

Alimenta sought enforcement of the award in Indian Courts and enforcement of the award was affirmed by the Delhi High Court. NAFED filed an appeal before the Supreme Court in 2012, which was decided by the Supreme Court on 22 April 2020.

The Supreme Court of India made three broad observations, viz. (i) refusal or non-grant of permission by the Government of India to NAFED for carrying forward of exports of previous years prevented NAFED from fulfilling its contractual obligations; (ii) in view of (i), Section 32 (contingent contracts) of the Indian Contract Act, 1872 (“Contract Act”) is attracted instead of Section 56 (frustration), since the parties presumed a possibility of the Government of India refusing to grant permission to carry forward exports; and (iii) the award being contrary to the fundamental policy of Indian Law.

The refusal by the Government of India to NAFED was in the form of inter-se communication with NAFED. It was communicated to NAFED that ‘in view of the restricted export policy of this item and quota ceiling etc., it has not been considered desirable to permit last year’s commitments in the current year’. Although, the communications (as reproduced in the judgment by the Supreme Court) do mention the ‘export policy’ of India and the commodity in question being a restricted commodity, one of the arguments that may be put forth is, inter-se communication may not be construed as ‘prohibition under law’. This also raises a pertinent question and that is, whether the court could have gone into the merits of the award. It is settled position that a court cannot go into the merits of the award while adjudicating on enforcement.

The Supreme Court thereafter examined Sections 32 (contingent contracts) and 56 (frustration) of the Contract Act to ultimately hold that Section 32 would have application in the given facts and not Section 56. Section 32 of the Contract Act stipulates ‘contingent contracts’ to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contract becomes void. Clause 14 of the contract between NAFED and Alimenta stipulated force majeure as also, prohibition by an executive order or change in law (including a government order, executive or legislative act). Clause 18 of the agreement between NAFED and Alimenta stipulated ‘English Law’ as the governing law, therefore, it could be argued as to how the Supreme Court analyzed Indian Law and not the law chosen by the parties? One of the probable reasons for this could be the similarities between the English Law (and Common Law) and Indian Law. Although the English concept of ‘frustration’ is much wider, it may be considered that some of the provisions in the Contract Act are narrow codification of the Common Law and therefore, resort to Indian Law by the Supreme Court in this case would not have had a substantial bearing.

Lastly, the Supreme Court has held that the award is contrary to fundamental policy of Indian Law.

The public policy doctrine in India has evolved by way of judicial precedents and broadly include four (4) facets for declining enforcement of an award viz. (i) the fundamental policy of Indian law; (ii) the interest of India; (iii) justice or morality; and (iv) patent illegality. Also, fundamental policy of Indian Law means (1) compliance of the statutes and judicial precedents, (2) need for judicial approach, (3) natural justice compliance, and (4) standards of reasonableness.

‘Patent Illegality’ was introduced as an amendment to the Arbitration and Conciliation Act, 1996, in the year 2015. However, this ground is restricted to domestic awards. The scope of public policy qua enforcement of foreign awards in India is rather limited and narrow, as comparted to domestic awards.

The Supreme Court’s reasoning for the finding that the award is contrary to fundamental policy of Indian law is the fact that NAFED couldn’t have performed its contract in absence of permission by the Government of India (thereby attracting Section 32 of the Contract Act) and the permission couldn’t have been granted in view of the ‘export policy of India’. In a recent judgment (Vijay Karia), the Supreme Court had narrowed down the scope of ‘due process objections’ and held that even if a foreign award is inconsistent with a statute (in that case, the Foreign Exchange Management Act, 1999), such award would be enforceable. The Supreme Court referred to a Delhi High Court judgment in the case of Cruz City Mauritius Holdings vs. Unitech Limited ((2017)239 DLT 649) wherein it was observed at Para 96 that:

It plainly follows from the above that a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the principles and the legislative policy on which Indian Statutes and laws are founded. The expression "fundamental policy" connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country.

In view of the Vijay Karia Case, it could be strongly contended that a mere violation of a statute may not be sufficient to declare the award unenforceable. Whether the inter-se communication between the Government of India and NAFED could be sufficient to demonstrate ‘public policy’ is a reasonably debatable issue, however, considering the export restrictions which were prevailing at the relevant time in respect of the commodity in question, the Supreme Court has construed the denial/prohibition to carry forward exports to be the ‘public policy’ or ‘fundamental policy’ of Indian law.

The judgment in NAFED vs. Aliemnta brings the focus back on the public policy debate and reaffirms the position that public policy must be construed as the courts apply it. While a pro-enforcement approach is certainly needed to give a boost to the arbitration landscape in India, and in the recent past courts have risen to the occasion and given this area a much needed impetus, there still exists a fair room for courts to deny enforcement if the courts find that there are elements which indicate towards a deviation from the fundamental policy or public policy of Indian law.

Contributed by: P&A Law Offices

The above article has been authored by Mr. Vijay Purohit MCIArb, Associate Partner.

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