In recent Judgment by 3-Judge Bench of Supreme Court in NAFED v. Alimenta S.A, SC Bench has stated that foreign award against the fundamental policy of Indian Law and the basic concept of justice cannot be enforced.
SC Bench comprising of Justice Arun Mishra, Justice MR Shah, Justice BR Gavai further stated that,"it would be against the fundamental public policy of India to enforce such an award, any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary".
Facts of the Case:
NAFED and the Alimenta S.A. entered into a contract for the supply of 5,000 metric tonnes of Indian HPS groundnut. NAFED was a canalizing agency for the Government of India for the exports of the commodity. For any export, which is to be carried forward to next year from the previous year, NAFED required the
express permission and consent of the Government of India, being a canalizing agency.The contract was for the season 197980. With the contracted quantity of 5000 metric tonnes, only 1900 metric tonnes could be shipped. The remaining quantity could not be shipped due to damage caused to crop by cyclone etc. in the Saurashtra region.
The transaction was governed by covenants such as Force Majeure and Prohibition contained in Clause 14 of the Agreement, whereby in case of prohibition of export by executive order or by law, the agreement would be treated as cancelled.second Addendum to first Agreement came to be executed between the parties for supply of 3100 metric tonnes of the commodity. It was agreed that the commodity would be shipped during the season packed in new double gunny bags with the buyers paying the extra cost of USD 15 per metric tonnes.NAFED had the permission of the Government of India to enter into exports for three years between 1977-80 but had no permission under the Export Control Order to carry forward the exports for the season to the year 1980-81.
NAFED intended to perform the first Addendum in the oblivion of the fact that it had no permission under the Export Control Order to carry forward the export for the season 1979-80 to the next year 1980-81. Ministry of Agriculture, Government of India, vide letter directed NAFED not to ship any leftover quantities
from previous years. It was made clear that the export of commodities was restricted under a quota system and that NAFED could not carry forward the previous years' commitment to the subsequent year.
Alimenta S.A. filed arbitration proceedings before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London on 13.2.1981. NAFED was asked to appoint an Arbitrator
NAFED filed petition bearing OMP No.41 of 1981 on 19.3.1981 against Alimenta S.A. and their Arbitrators before the High Court of Delhi. Prayer was made restraining Alimenta S.A. and FOSFA from continuing the arbitration proceedings. High Court stayed the arbitration proceedings till 22.4.1981. In disregard of the order passed by the High Court, FOSFA appointed Mr. F.A.D. Ralfe as an Arbitrator on behalf of the NAFED. FOSFA passed an award on 15.11.1989 by which NAFED was directed to pay a sum of USD 4,681,000 being the difference between the contract price of USD 765 per metric tonnes plus USD 15 per metric tonnes for double bags and the settlement price of USD 2275 per metric tonnes plus USD 15 per metric tonnes for double bags as damages. NAFED filed an appeal before the Board of Appeal
Board of Appeal on 14.9.1990 while deciding the appeal compounded NAFED's issues by enhancing the award, whereas Alimenta S.A. filed no appeal. NAFED was directed to pay interest components at the rate of 11.25% instead of 10.5% p.a. The interest was enhanced in the absence of an appeal by Alimenta S.A.The Arbitrator nominee of Alimenta S.A., who passed the award, represented the case on behalf of the Alimenta S.A. before the Board of Appeal.
Alimenta S.A. filed a petition as Suit No.1885 of 1993 under sections 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (for short, “the Foreign Awards Act”) seeking enforcement of the initial as well as appellate award passed by the FOSFA and Board of Appeal. The High Court entertained it on 28.2.2001 and stayed the execution. The interim order and the order of appointment was questioned before this Court. This Court modified the interim order of the High Court dated 28.2.2001 and disposed of both the petitions of Alimenta S.A. on 5.4.2002 while passing certain interim orders.
In 2002, Alimenta S.A. filed an execution petition seeking execution of the decree on passed in Suit in the High Court. The appeal was ultimately held to
be not maintainable. It was dismissed on 6.9.2010 on the ground of nonmaintainability. The NAFED questioned the decision in the appeal. On 24.11.2010, NAFED filed the present appeal (bearing Civil Appeal No.667 of 2012) for adjudication on merits.
Questions Before Supreme Court:
Question involved in the present appeal is the enforceability of the foreign award. The main objections for its enforceability are
- whether NAFED was unable to comply with the contractual obligation to export groundnut due to the Government's refusal?;
- whether NAFED could have been held liable in breach of contract to pay damages particularly in view of Clause 14 of the Agreement?
- whether enforcement of the award is against the public policy of India?
Supreme Court's Decision:
SC Bench has stated that,"Government rightly objected to the supply being made at the rate of the previous season in the next season, particularly when the prices escalated thrice. The addendum was entered into subsequently, unfairly, and the parties fully understood that the Government would not permit export at the rate on which supply was proposed, and NAFED was acting only as a canalising agent of the Government of India. Thus, for such an unfair contract, permission was rightly declined by the Government. In the previous year, the commodity could not be supplied due to force majeure. In no event, supply could have been made in December 1980 and January 1981 sans permission from the Government of India".
Bench enunciated that,"The matter is such which pertains to the fundamental policy of India and parties were aware of it, and contracted that in such an exigency as provided in clause 14, the Agreement shall be cancelled for the supply which could not be made. It became void under section 32 of the Contract Act on happening of contingency. 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.
"There was no permission to export commodity of the previous year in the next season, and then the Government declined permission to NAFED to supply. Thus, it would be against the fundamental public policy of India to enforce such an award, any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary" Bench stated.
SC Bench arrived at the conclusion that the the foreign arbitral award could not be said to be enforceable, given the provisions contained in Section 7(1)(b)(ii) of the Foreign Awards Act. As per the test laid down in Renusagar case, its enforcement would be against the fundamental policy of Indian Law and the basic concept of justice. Thus, we hold that award is unenforceable, and the High Court erred in law in holding otherwise in a perfunctory manner.
SC Bench further pointed our on issue of Arbitrator representing the Alimenta SA before Board of Appeals that,"his participation in the appeal was bad in law. He could not have defended his award and subvert the basic norms of fairness. The action was against the concept of justice and rules of procedure". Bench further observed that,"Arbitrator is supposed to follow ethical standards, and, in our considered view, ought not to have defended arbitration award passed
by him in the subsequent judicial proceedings".
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