In a notable decision, the Supreme Court held as unforceable a foreign award on the grounds of being opposed to the "foundational policy of Indian law and basic concept of justice".
The case arose out a dispute between Central Government-agency National Agricultural Co-opeartive Marketing Federation of India(NAFED) and Alimenta SA regarding export of HP groundnuts.
On account of the Government Prohibition (and Export Control Rules as it existed then), NAFED could not export HPS Groundnut to Alimenta S.A. This led to international arbitration proceedings before Federation of Oil Seeds and Fats Associations Ltd., London ("FOSFA"), which culminated in an award in 1989 directing NAFED to pay a sum of USD 4,681,000 with interest @10.5% p.a. to Alimenta S.A.
The quantum was later reduced by the Board of Appeals of FOSFA, and the final award came to the tune of nearly Rs 450 crores.
Later, the Delhi HC allowed the application filed by the Alimenta for enforcement of the foreign award. Challenging this, NAFED came in appeal before the SC.
The SC accepted NAFED's plea that the failure of export was due to government's export control. Hence, any award rendered would not be enforceable being against public policy.
"Enforcement of such an award in violation of export policy and the Government order would be against the public policy as envisaged in section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961", held the bench comprising Justices Arun Mishra, M R Shah and B R Gavai.
The bench held that on account of refusal of the sanction of the government, the contract became void under Section 32 of the Indian Contract Act.
"...no export could have taken place without the permission of the Government, and the NAFED was unable to supply, as it did not have any permission in the season 1980-81 to effect the supply, it required the permission of the Government. 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."
The Court observed that the enforcement of award would be opposed to the public policy of India :
"In our considered opinion, the 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 (supra), 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".
The judgment deals with issues relating to frustration of contracts etc. The decision deals with significant questions of law, which essentially changes the manner in which foreign awards are enforced.
NAFED, which was represented through Mr. Shyam Divan, Sr. Advocate and Aaditya Vijaykumar, Advocate essentially agitated the following questions of law:
(a) The Arbitral Tribunal was constituted in violation of the Delhi High Court's interim orders and is therefore a nullity in the eye of law; (the Supreme Court clearly set out the law on the aspect)
(b) The proceedings before the Arbitral Tribunal were contrary to the basic notions of justice, principles of natural justice and rules of fairness and therefore, against the public policy;
(c) The Arbitrator of Alimenta S.A. could not have become their lawyer in the Board of Appeal; (this issue was settled and it was held that these were ethical issues and this practice was deprecated)
(d) The Board of Appeal ought to have allowed NAFED to appoint its lawyer and thus NAFED's rights were hampered significantly; (this issue was settled to state that although rights may have been taken away however no prejudice was caused to any party. Hence, this was not a sufficient ground to render the award unenforceable.)
(e) The contract was frustrated by the Prohibition imposed by the Government of India and could not have been performed by NAFED. NAFED was thus released from their obligations under the Contract; (this issue was settled and it was clearly stated as to what amounts to frustration and how parties are released from contracts)
(f) In the Appeal filed by NAFED before the Board of Appeal, the Board of Appeal could not have increased the interest payable from 10.50% to 11.25% p.a.; (this issue was settled and it was held that in an appeal filed by NAFED, interest could not have been increased against NAFED)
(g) The Delhi High Court in the order dated 28.01.2000 was wrong in awarding a further interest @18% p.a. on the awarded sum. There was no provision in this regard; (this issue was not decided by the Supreme Court as the award had been rendered to be unenforceable)
(h) The limitation to file the enforcement proceedings was not 3 years but was infact 30 days as per the Limitation Act, 1963; (this issue was not decided by the Supreme Court as the award had been rendered to be unenforceable)
(i) Alimenta S.A. could not have been given the benefit of interest as also the benefit of the exchange rate; (this issue was not decided by the Supreme Court as the award had been rendered to be unenforceable)
(j) What, if at all, was the date of converting the US Dollar decree into Indian Rupees? Would it be the date of the award, the date of the Appellate award, the date that enforcement proceedings were allowed, the date when the appeal was dismissed or the date when monies were deposited in court? (this issue was not decided by the Supreme Court as the award had been rendered to be unenforceable).
Per contra, Mr. C.A. Sundaram, senior counsel appearing on behalf of the respondent, argued that the scope of interference in the enforcement of the foreign award is limited. The award is not against public policy.
NAFED was an agency of the Government of India, which had contracted with Alimenta S.A. to export groundnut from Saurashtra in the year 1979-80. During this contemporaneous period, on account of a Government of India directive coupled with Export Control Rules, as it existed then, NAFED could not export any ground nut whatsoever to Alimenta S.A and thus defaulted in respect of its contractual obligations.
In view of there being an arbitration clause between the parties, Alimenta S.A. invoked arbitration before Federation of Oil Seeds and Fats Associations Ltd., London ("FOSFA"). Naturally, against this action, NAFED approached the Indian Court for interim relief. Various interim orders were passed by the Delhi High Court and also by the Supreme Court of India to restrain FOSFA from constituting the Arbitral Tribunal. However, FOSFA, in absolute defiance of the orders of the Delhi High Court and the Supreme Court, constituted the Tribunal and commenced proceedings.
Subsequently, a Foreign Award dated 15.11.1989 was passed directing NAFED to pay a sum of USD 4,681,000 with interest @10.5% p.a. to Alimenta S.A. It may be pointed out on account of FOSFA's default and non-compliance with interim orders of Indian Courts, NAFED essentially lost their right to appoint their own arbitrator.
Pursuant to the Award passed by FOSFA, an appeal was filed before the Board of Appeal by NAFED challenging the Foreign Award. During the course of appeal proceedings, not only was NAFED denied permission to appoint lawyer before this Board of Appeal, ostensibly under the Rules of FOSFA, but one of the nominee arbitrators appointed by Alimenta S.A before FOSFA became Alimenta S.A.'s lawyer. In other words, the nominee arbitrator of Alimenta S.A. was essentially defending his own award before the Board of Appeal.
The Board of Appeal reduced the quantum of Award to a sum of USD 4,526,000 being the difference between the contract price of USD 765 PMT but unilaterally increased the rate of interest from 10.5% p.a. to 11.25% p.a. from 13.02.1981 to the date of the Award. Surely, in NAFED's own appeal, the interest rates could not have been increased, especially since no cross appeal was filed by Alimenta S.A.
Having succeeded in the Board of Appeal, Alimenta S.A. filed for enforcement of the foreign award in the High Court of Delhi, India. Alimenta S.A. succeeded in the said proceeding as also in the Appellate courts (before Division Bench of the Delhi High Court).
Against these orders, NAFED filed an appeal before the Supreme Court of India, which was accepted.
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