Foreign Award Not Enforceable If Contract Dependent On Government Policy, Rules Supreme Court

The Supreme Court has held that foreign arbitral awards cannot be enforced for contracts whose fulfilment is contingent on government policy as it set aside a 30-year-old arbitral award against the National Agricultural Cooperative Marketing Federation of India.

The dispute arose from a contract between NAFED and Swiss firm Alimenta S.A. for the supply of 5,000 metric tonnes of Indian HPS groundnut during 1979-1980. Out of this, only 1,900 tonnes were shipped owing to factors such as crop damage in the Saurashtra region. The following year, NAFED approached the government to allow it to export the remaining quantity but the permission was officially denied on Jan. 27, 1981, after repeated requests. The remaining amount couldn’t be shipped due to government restrictions. The federation officially informed this to Alimenta on Feb. 13, 1981.

This led Alimenta to initiate arbitration proceedings in London at the Federation of Oil, Seed and Fats Association Ltd. and NAFED approached the Delhi High Court to restrain the proceedings. Despite this, the federation appointed an arbitrator on behalf of NAFED and in 1989 the arbitral award mandated NAFED to pay $46,81,000 with interest rate of 10.5 percent per annum from Feb. 13, 1981, till the date of the award. The rate of interest was later increased to 11.25 percent by the board of appeal.

A three-judge bench headed by Justice Arun Mishra, however, noted in its judgment that the terms of the contract mandated that if any obligation remains unfulfilled due to any prohibition of export or any other act of the government, the unfulfilled part of the contract will be cancelled. The government, it said, was justified in declining permission for export the next year owing to factors such as increase in price of the commodity by nearly three times in a year.

“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,” the bench noted. “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 performance of the contract would have been against the public policy of India after the government refused permission to export and it would be against the public policy of India to enforce such an arbitral award, said the top court.