Enforcement of foreign arbitral awards – NAFED v. Alimenta SA

I. Introduction

Recent decisions of Indian Courts on enforcement of foreign arbitral awards reveal a marked hands-off approach. In particular, the Supreme Court’s decision in Vijay Karia v. Prsymian Cavi[2] (“Vijay Karia”), delivered in February 2020, highlighted the guiding principle that Indian Courts should maintain a pro-enforcement bias when considering enforcement actions.

Nowhere is this pro-enforcement bias more pronounced than in considering challenges on the ground of violation of ‘public policy’. Even traditionally, Indian Courts have considered this ground in a narrow sense. Indeed, Indian Courts have now consistently held that in order to attract the bar of public policy, the enforcement of a foreign award must offend something other than mere provisions of Indian law.

In this context, the Supreme Court’s judgment in NAFED v. Alimenta S.A, which dealt with enforcement of foreign awards under grounds set out in the Foreign Awards (Recognition and Enforcement) Act, 1961 (“Foreign Awards Act”), may only be considered as an outlier.

II. Brief Background

The dispute centred on an agreement (“Agreement”) that NAFED had entered into for export of 5000 metric tonnes of groundnuts to Alimenta. The Agreement was executed for the 1979-80 season and incorporated terms and conditions from the Federation of Oils, Seeds and Fats Associations Ltd (“FOSFA“), 20 standard form contract. Clause 14 of this Agreement provided that in case of prohibition of export by executive order or by law, the Agreement or the unfulfilled part of the Agreement, would be treated as cancelled.

Out of the contracted 5,000 metric tonnes, NAFED could only export 1900 metric tonnes on account of restrictions put by the Government of India owing to crop damage that year.

As a canalizing agency, NAFED required the express permission of the Government of India for any export, which was intended to be carried forward from the previous year to next year. However, when NAFED approached the Government of India for grant of permission to carry forward the supply of the balance stocks, this was refused. The Government made it clear 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.

NAFED’s resulting inability to export led to a dispute between the parties. Alimenta filed for arbitration before FOSFA, London and requested NAFED to appoint a nominee arbitrator.

NAFED did not appoint an arbitrator and instead approached the Delhi High Court for a stay on the arbitration proceedings contending that the agreement did not contain any specific provision for arbitration. Although this stay was granted, arbitration proceedings continued in London and FOSFA proceeded to appoint the arbitrator on behalf of NAFED. Ultimately, however, the Delhi High Court held that parties had indeed opted for arbitration in the agreement. This ruling was subsequently approved by the Supreme Court in 1987.

FOSFA thereafter passed an arbitral award directing NAFED to pay damages with interest at 10.5 % per annum. NAFED, being aggrieved by the award, filed an appeal before the Board of Appeal.  The Board of Appeal rejected the request for representation through solicitors and upheld the award. Further, the Board of Appeal increased the interest rate from 10.5% to 11.25%, despite there being no objection/appeal by Alimenta on the interest rate imposed by FOSFA.

Consequently, in 1993, Alimenta S.A. filed an action under Section(s) 5 and 6 of the Foreign Awards Act in the Delhi High Court, seeking enforcement of the initial award by FOSFA and the appellate award by the Board of Appeal. NAFED filed objections to the enforceability of the award on the ground that the award was opposed to public policy and that there was non­compliance of provisions contained in section 7(1)(a), (b), and (c) of the Foreign Awards Act. NAFED was unsuccessful at the Delhi High Court and ultimately filed an appeal in the Supreme Court.

III. Decision and Analysis

The Supreme Court allowed NAFED’s appeal and refused to enforce both awards. The Court held that the arbitral award was ex-facie illegal and in contravention of fundamental policy of Indian law as it held NAFED liable for damages even when it could not export on account of government restrictions.

Agreement- discharged in view of Clause 14 of the Agreement

The Supreme Court observed that the contract came to an end in terms of Clause 14 of the First Agreement as soon as NAFED received communication from the Government of India, rejecting its request to defer the previous year’s supply.

The Court applied Section 32 of the Indian Contract Act, 1872 and held that the Agreement itself provided for contingencies, upon the happening of which it could not be carried out. Performance under the Agreement was contingent upon the requisite authorisation by the Government. Consequently, the Court held that as soon as the permission for export was refused, Clause 14 was triggered and the unfulfilled part of the Agreement would be considered as cancelled.

The Court held that it would have been unlawful for NAFED to supply after the Government’s refusal to permit such exports. Coming to the awards, the Court held that the awards pre­supposed that supply could have been made after the Government’s refusal. However, if the supply had been made, it would have been unlawful as there was no permission to export commodity of the previous year in the next season.

Awards violated public policy

Section 7(1) (b)(ii) of the Foreign Awards Act provides that the foreign awards will not be enforced if such enforcement is contrary to public policy.

The Court also referred to Renusagar Power Corporation v. General Electric[3] and the formulation of public policy as set out in that decision viz. a foreign award could be challenged as against public policy if it was contrary to (1) fundamental policy of Indian law, (2) the interest of India, and (3) justice or morality. The Court expressly referred to the reasoning in Renusagar where it was observed that something in addition to the contravention of the law was required for refusal of enforcement of a foreign award on the ground that it is contrary to the public policy of India.

In terms of the facts of the present case, however, the Court emphasised that NAFED could neither have supplied, nor lawfully carried forward previous year’s supply without permission of the Government. In this light, the Court observed that the awards were in violation of ‘export policy’ of the Government of India and enforcement of the awards would be in violation of ‘fundamental policy of Indian law and the basic concept of justice’. It is interesting to note that in its analysis, the Court also referred to Section 23 of the Indian Contract Act, 1872, to consider the scope and ambit of the term ‘public policy’. It is crucial to note that Section 23 is a provision in a domestic legislation and understandably considers contracts as opposed to public policy if they are simply in violation of Indian law.

Other objections

NAFED raised another objection on the ground that the appointment of the arbitrator to constitute the Arbitral Tribunal violated the order of the Indian court and as such, was also against public policy. In this regard, the Supreme Court held that though it would have been proper for the FOSFA to comply with the interim orders passed by this Court, the proceedings in which the temporary orders were given were dismissed in 1987. The Court consequently held that this question was to be agitated in 1987, and not in the current proceedings.

Another objection raised by NAFED was the Board of Appeal’s rejection of NAFED’s request for legal representation. The Supreme Court rejected this objection observing that FOSFA Rules barred legal representation and in any event, NAFED had been unable to show any prejudice caused to it on account of being unable to have legal representation before the Board of Appeal.

The Court did frown upon the FOSFA arbitrator defending the award before the Board of Appeal and the increase in the interest rate by the Board of Appeal despite any plea of this nature by Alimenta. However, the Court ultimately did not decide these issues as the awards were held to be unenforceable under the ground of public policy.

IV. Comment

The Supreme Court’s reasoning in this decision is problematic on two fronts.

First, the Court applied Section 32 of the Indian Contract Act, 1872, without considering the fact that Clause 15 of the Agreement expressly provided for English law as the governing law of the Agreement. Indeed, with respect, the judgment suffers from a failure to even consider the governing law of the Agreement and whether the awards were passed in violation of that governing law.

Secondly, there are difficulties with the Court’s reasoning that the awards were in violation of fundamental policy of Indian law simply because they were ostensibly in violation of a particular export policy of the Government of India. The Court did not analyse whether the particular export policy would come within the ambit of the term ‘fundamental policy of Indian law’. In Vijay Karia, the Supreme Court had expressed ‘fundamental policy of Indian law’ as “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”. Unfortunately, Vijay Karia was not cited in this decision. Indeed, whether a particular export policy of the Government of India for a particular time period could be considered as ‘fundamental policy of Indian law’ was questionable. In any event, the judgment suffers from a lack of analysis on this point.

In fact, the Supreme Court’s decision almost appears as a review of the awards on merits, which is contrary to past precedent on how the term ‘fundamental policy of Indian law’ should be construed. The Court’s decision comes at a time when Indian Courts are consistently following the pro-enforcement bias when it comes to foreign arbitral awards. This is exemplified in decisions relating to foreign exchange regulations where Courts have been quite liberal in enforcing awards. Indeed, subsequent to Vijay Karia, the Bombay High Court has refused a challenge to the enforcement of a foreign arbitral award holding that certain put options in the underlying agreement did not violate fundamental policy of India.[4]

Finally, the judgment also shows that a fundamental problem in enforcement of foreign awards remains unaddressed viz. the time taken before Indian Courts for enforcement of awards. The enforcement petition was filed in 1993 and it took almost 27 years for the final decision of the Supreme Court to come in April 2020. While Indian Courts are working towards better timelines, the Supreme Court’s latest judgment shows that much remains to be done.

Authors:
Abhijnan Jha, Senior Associate
Abhishek Singh, Associate

Footnotes:

[1] (2020) SCC Online 381
[2] (2020) SCC Online 177
[3] (1994) Supp (1) SCC 644
[4] BanyanTree Growth Capital LLC v Axiom Cordages Limited & Ors, judgment of the Bombay High Court dated April 30, 2020 in Commercial Arbitration Petition Nos. 475 and 476 of 2019

Date: May 8, 2020