The Eternal Enigma of Public Policy under International Commercial Arbitration: NAFED v. Alimenta S.A.

Name of the Case: National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. (2020) SCC OnLine SC 381.

Coram: The Supreme Court of India: Three judge Bench.

Judges: Arun Mishra J., M.R. Shah J., and B.R. Gavai J.

Date of judgement: April 22, 2020.

Facts

·         National Agricultural Cooperative Marketing Federation of India (herein after referred as NAFED), a canalizing agency of the government of India, entered into contracts with Alimenta S.A., on 12/01/1980 for supply of 5000 metric tonnes (herein referred to as mt) of Indian HSP groundnut and NAFED could only supply 1900 mt out of 5000 mt, it violated the contract and two addendums were executed thereafter. The second addendum stated that the remaining goods would be delivered in 1980-81 season with the extra cost of USD 15 per mt.

·         In February, Alimenta S.A. granted the last opportunity to deliver the final offer and apprised that if the contract wasn’t executed, the dispute would be referred to arbitration. Subsequently on 13.2.1981, arbitration proceedings started before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London. NAFED filed a petition against Alimenta S.A. and their arbitrators before the High Court of Delhi (herein referred to as HC) seeking to restrain the proceeds on the ground of absence of any specific provision for arbitration.

·         The HC granted an interim stay but FOSFA neglected it and asked NAFED to appoint an arbitrator, failing which it appointed Mr. F.A.D. Ralfe as the arbitrator representing NAFED. In October, NAFED filed proceedings in nature of contempt on the ground that appointment of the arbitrator was violative of the order passed by HC. The HC decided that the parties were relegated to arbitration for the first agreement and civil proceedings for the second.

·         A Special Leave Petition was filed in the Supreme Court of India (herein referred to as SC) against this order. The SC passed an order restraining Alimenta S.A. and FOSFA to proceed further with arbitration, which was opposed by FOSFA on the grounds that SC had no jurisdiction. In 1987, SC upheld the decision given by HC in December 1981.

·         In November, FOSFA passed an award asking NAFED to pay USD 4,681,000 at an interest of 10.5% per annum from 13.2.1981 till the date of the award as damages. In 1990, NAFED filed an appeal before the Board of Appeals and requested it multiple times to allow M/s. Clyde and Co. (solicitor firm) to represent NAFED. This request was rejected. It directed NAFED to pay an enhanced interest at the rate of 11.25% instead of 10.5% per annum.

·         Alimenta S.A. filed a petition for enforcement of both the awards, which was challenged by NAFED on the ground that it opposed the public policy. On 28.1.2000, a single judge bench of HC decided the matter against NAFED based on Foreign Awards Act 1961, Limitation Act 1963 and the Multi-State Cooperative Societies Act, 2002.

·         NAFED filed an appeal before the division bench of HC which ordered an interim stay on the execution and later disposed of the petitions. In 2002, Alimenta S.A. filed a petition seeking execution of order given by HC on 28.1.2000. It was dismissed on the ground of non-maintainability. On 24.11.2010, NAFED filed the present appeal bearing Civil Appeal No.667 of 2012.

Issues to be decided the Court:

1.      Whether NAFED was unable to comply with the contractual obligation due to the Government’s refusal and if it can be held liable to pay damages particularly in view of Clause 14 of the Contract?

Held:

NAFED had the authority to execute contracts for the period of 1977-1980. It is crucial to mention that it had no permission under the Export Control Order to extend the exports from the season 1979-80 to the year 1980-81. However, clause 14 of the contract contained covenants such as force majeure and prohibition, whereby in case of prohibition by executive order or by law, the unaccomplished part of the contract shall be rescinded. Court observed that Section 32 of the Indian Contract Act, 1872 (herein referred to as Contract Act) would apply with regards to the case in hand and Section 32 is applicable in cases where the agreement itself provides for contingencies that obstruct the execution of the contract and provide the consequences. The circumstances of this case in hand were in accordance with clause 14 and Section 32 of the Contract Act, as the prohibition was on account of government refusal which made it fall under the covenant of prohibition. Now the court considered the above fact in light of the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[1] in which it was stated that if the contract contained a stipulation in accordance with which it shall be discharged on the happening of certain contingencies, the dissolution of the agreement would take place under those terms of the contract itself. Hence, NAFED was justified in not supplying the goods as the contract became void under Section 32 of the Contract Act. The SC held that the government had rightly objected to the supply of goods and it would be unlawful for NAFED to supply them without the permission of the government. This contract had self-induced frustration and both the parties had agreed to the cancellation of the contract in case of prohibition as stated in clause 14. Hence, it would be unfair to enforce the award in such circumstances against NAFED and it cannot be held liable to pay damages to Alimenta S.A.

2.       Whether enforcement of the award is against the public policy of India under Section 7 (i) (b) (ii) of the Foreign Awards Act, 1961?

Held:

The absence of a workable definition of international public policy caused the SC to concomitantly face difficulty in defining it. It explicated that the doctrine of public policy would be at the discretion of the court and resolved to take the wide approach. The court observed  in case of Shri Lal Mahal Limited v. Progetto Grano Spa[2], that the expression “public policy of India” in Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 has the same essence as that of expression “public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act. The court in the same case also talked about the ratio of Renusagar Power Co. Ltd. v. General Electric Co.[3]  and it was affirmed that the court cannot look into the merits of the award at the stage of enforcement.

For a clearer picture with regards to the definition of “public policy” SC again referred Renusagar[4] which gave an untoward significance in elaborating the meaning of the expression “public policy” under section 7(1) (b) (ii) of Foreign Awards Act. It established that an act would be antithetical to the public policy if it was inconsistent with (i) Fundamental policy of Indian laws (ii) Interest of India (iii) Justice and morality. These grounds have been reinforced through ratios of various judgements including Ssangyong Engineering & Construction Co. Ltd v. National Highways Authority of India (NHAI)[5] and Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors[6].

The court further referred to Associate Builders v. Delhi Development Authority[7] where the concept of fundamental policy of Indian law is expressed as (1) compliance of the statutes and judicial precedence, (2) need for judicial approach (3) natural justice compliance, and (4) standards of reasonableness. In the case of Ssangyong[8] it was held that the ground of “patent illegality” as had been enunciated in Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.[9] for domestic awards, shall be discarded for international commercial arbitration in accordance with the Arbitration and Conciliation Act, 1996 and it further discusses public policy in the context of New York Convention.

After considering all the possible definition of term “public policy”, the court applied the same to the circumstances of the case in hand. There was no permission to extend the contract to the next season and the government declined permission to NAFED for any such supply. The promise to export goods without the permission of the government was inconsistent and would have violated the Export policy of India, therefore in light of the above cases and application of the same to the case in hand the SC held that enforcement of the award is against the public policy of India.

Critical Analysis

Fundamental Policy of Indian Laws

It is crucial to understand the meaning of “Fundamental policy of Indian Laws” in this context. A fundamental policy is the core of the statue that if it is contradicted it would defeat the statute. Hence, for an award to be set aside it has to be established that award may breach a substantial principle on which the Indian law is founded. This can further be understood through the Vijay Karia[10]case, where the court rendered that a violation of FEMA would not amount to the violation of the fundamental policy as it is a mere violation of the law and does not shock the conscience of the court. Similarly, in the Daiichi Sankyo Company Limited v. Malvinder Mohan Singh and Ors.[11], the HC held that it was the fundamental policy of Indian law to protect a minor and therefore, the award could not be held enforceable against them. It stated that holding a minor, guilty of fraud through their agent was contrary to the statutory position in India as laid down in the Guardianship Act, 1956 and the Contract Act. To warrant dislodging or invalidating of enforcement of the award, the conflict must be at the root of the statute; it must attack the very principle of the law established in India

Section 32 v. Section 56

The contract drawn between NAFED and Alimenta S.A. was primarily governed by the English law as decided under the clause 18 of the contract and it was predominantly unfair for the court to intervene with the autonomy of the parties. The SC declared the award unenforceable based on section 32 whereas in English law it would be proclaimed as a case of frustration. Section 56 of the Contract Act deals with the agreement to do an impossible act or to do act which afterwards becomes impossible or unlawful.

Section 56 states that where the promisor has promised to do something which he knew, or with reasonable diligence, might have known and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to the promisee for any loss which is sustained through the non-performance of the contract. In the circumstances of this case, NAFED is liable for the loss as it was reasonably expected to know its limitation with regards to extending the contract to the next season. The clause 14 includes the contingency of restrictions by government and does not anticipate the lack of inherent authority on the part of NAFED to enter into second addendum.  

Evidently, NAFED had made a mistake of law which is not a valid ground for breach of contract. The fact that NAFED had authorised the contract makes it primarily impossible to execute due to its lack of authority. Hence, this contract should be considered under section 56 rather than section 32 of the Contract Act.

 Assessment of Merits of the Case

It is an established opinion that the arbitration award is believed to be valid until proven to be contrary. In the case of Associate Builders[12], it was held that the court before which the enforcement of the foreign award is sought may not review the case on its merits at the enforcement stage. Similarly, Ssangyong[13] held that the refusal of enforcement of the award on the basis of the public policy shall be considered only if it shocks the conscience of the court. It is unacceptable for a court to substitute its own sense of justice over that of the arbitrators’. Article V of New York Convention enjoins that the court cannot step into the shoes of the arbitrator and review the award on its merit. Additionally, it is crucial to note that even though the Arbitration and Conciliation Act, 1996 was indistinct about the jurisdiction of courts, the 2015 amendment clearly states that the courts shall not question the award based on its merit at the enforcement stage.

Further, the SC has declared the award unenforceable due to its inconsistency with the public policy. It is crucial to note that the arbitrator has granted an award seeking compensation rather than performance of contract. Hence, NAFED is not required to supply the goods despite the restrictions by the government. It is only expected to compensate for the loss that is caused due to its mistake of law which eventually led to the breach of contract. The SC overlooks the mistake of law committed by NAFED and does not hold it liable for its actions. 

Further, the SC had questioned the merit of the case granted by the tribunal rather than verify the grounds as enumerated in the act. That is inherently incorrect as the international and domestic law is univocal about the non-interference of courts in the merits of the case in such circumstances.

Conclusion

The decision in this case is a turning point in the legacy of arbitration in India. It has given an anomalous judgement and has established a new precedent with nebulous reasoning. The SC does not elucidate the exact rationale behind the decision and has overlooked several aspects throughout the case. It has engaged in a deliberately selective perusal of the relevant precedents that were aligned towards rendering the award unenforceable. It has further expanded the scope of public policy which would likely lead to a rampant misuse if some reasonable restriction is not prescribed soon. The SC doesn’t appraise the Vijay Karia[14] and did not give due acknowledgement to the narrow approach. The advocacy of the unenforceability of award is especially unyielding as there is no firm basis or categorical reason to justify the interference of the SC in the merits of the case at the enforcement stage. Ignoring the presence and overwhelming force of the growing arbitration culture could lead to a huge setback in the Indian Legal system. The legal fraternity will have to take quick and effective steps to ensure that India becomes more open to International arbitration.