NAFED Case: Enforcement Of Foreign Awards In India – Have The Brakes Been Applied?

Over the last decade, the judiciary and the legislature have been at pains to change the pre-existing judicial discourse and legislative intent to make India a regional hub for arbitration. A logical corollary has been a concerted effort to minimise judicial interference. Particularly in the context of foreign awards (where even after a ruling of enforceability, actual recovery may take years), Indian courts have to the most part, refused to interfere.

The landmark decision of the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co., explained, particularly in the context of a foreign award, the narrow scope of a challenge on grounds that enforcement was contrary to the public policy of the country where the award was brought for enforcement. The Supreme Court held that, “the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.”

Although the judgment was passed under the old arbitration regime and the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961, it has stood the test of time.  Renusagar is relevant even under the current Arbitration and Conciliation Act, 1996, (A&C Act) where Section 48(2)(b) reflects the position set out in Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, (the New York Convention). The criteria and rationale set out in Renusagar have informed the interpretation of similar challenges in subsequent judgments, and also in amendments made in 2015 to the A&C Act.

Two recent decisions of the Supreme Court - Ssangyong Engineering & Construction Co. v. National Highways Authority of India and Vijay Karia v. Prysmian Cavi E Sistemi SRL - quote Renusagar with approval. Both cases note the narrow scope of interference in arbitral awards; particularly foreign awards.

In Ssangyong, India’s apex court set aside a domestic award as being in conflict with the most basic notions of justice and thereby conflicting with the public policy of India.  However, and after dealing with a plethora of case law (starting with Renusagar), to clarify that public policy of India is constricted to mean that an award is contrary to the fundamental policy of Indian, or, that it is against basic notions of justice or morality. Insofar as domestic awards made in India are concerned, an additional ground of patent illegality appearing on the face of the award is available, but only to such illegality as goes to the root of the matter, and not a mere erroneous application of the law.

Vijay Karia was in relation to a foreign award which had been declared enforceable by the Bombay High Court, noting that in the guise of public policy of the country involved, foreign awards cannot be set aside by second guessing the arbitrator’s interpretation of the agreement.  The Supreme Court agreed, and held that ‘[t]he important point to be considered is that the foreign award must be read as a whole, fairly, and without nit-picking. If read as a whole, the said award has addressed the basic issues raised by the parties and has, in substance, decided the claims and counter-claims of the parties, enforcement must follow.’ Several other decisions were relied on to explain that enforcement of a foreign award could not be denied only because it was in contravention with Indian law.

It seemed, therefore, that the intent of the judiciary was clear – and in consonance with the intent of the legislature; arbitral awards, especially foreign awards, come with a degree of sanctity and the courts ought not to interfere unless there is manifest and egregious injustice.

The NAFED Case

In terms of the facts, NAFED was required to supply Alimenta with 5,000 million tonnes of a commodity, under a standard Federation of Oils, Seeds and Fats Associations Ltd (FOSFA) contract. NAFED was a canalising agency of the Government of India and so required permission for export of the commodity from the Ministry of Agriculture, Government of India. Owing to a cyclone which damaged crops, NAFED was able to supply only 1900 MT of the commodity (for which permission was granted by the ministry). The parties entered into two addendums for NAFED to supply the balance amount in the subsequent year, i.e. 1980-81. Although NAFED applied for approval for the export at the agreed price to Alimenta, this was refused (on account of the prices in the subsequent year having increased). The ministry in fact prohibited NAFED from shipping any left-over quantities from previous years.  NAFED was consequently unable to fulfil the contract and informed Alimenta of the ministry’s refusal. Alimenta treated this as NAFED’s default and invoked arbitration before FOSFA in London.

Alimenta applied for enforcement of the award before the Delhi High Court.  After a series of proceedings and appeals, the High Court ultimately held that the award was enforceable and converted it into a decree of the court (as required under the old arbitration regime). NAFED went on to appeal to the Supreme Court.

The Judgment

NAFED’s main submission before the Supreme Court (and which the court ultimately accepted), was that it was unable to fulfil its contractual obligations in view of government’s refusal to permit it to export the commodity, and accordingly, the contract became void and unenforceable in view of Clause 14 of the FOSFA Contract. Consequently, NAFED could not have been held liable to pay damages to Alimenta.

We deal with that below, but what is remarkable in terms of the public policy challenge, is the reasons for which the Supreme Court ruled that the award was not enforceable on account of it being in violation of public policy of India.

In reaching its decision, the Supreme Court appears to have entered into an examination of the merits of the case and the terms of the contract, something which Indian courts have repeatedly held are purely within the realm of the arbitrator.  The decision in Associate Builders v. Delhi Development Authority (relied on in Ssangyong), categorically rules that an award can be set aside on the public policy ground only if it shocks the conscience of the court. It cannot possibly include what the court thinks is unjust on the facts of a case for which it then seeks to substitute its own view for the arbitrator’s, to do what it considers to be justice.

In NAFED however, the Supreme Court stridently dealt with the interpretation and consequences of Clause 14 of the contract, which provided that in the event of any prohibition by the government on export, the unfulfilled part of the contract shall be cancelled. Owing to the government’s refusal, NAFED was not permitted to export the balance commodity and was justified in not making the supply under the contract as it would have violated the Export Control Order.  As such, the unfulfilled part of the contract was required to be cancelled.

The court referred to Section 32 of the Indian Contract Act, 1872 which deals with ‘contingent contracts’ and provides for contingencies upon happening of which the contract cannot be carried out, and the consequences thereof.

The court held that a possible prohibition on export having been specifically envisaged, it was a contingent contract, and once that contingency arose, i.e. the refusal to allow NAFED to export the commodity, the contract was required to be cancelled. [The judgment also distinguished Section 32 from Section 56 of the Contract Act, which deals with ‘frustration’ of a contract and applies where an agreement becomes impossible to perform at a future date on account of an unforeseen exigency not provided for in the agreement.  In this case, the court held that the principle of frustration did not apply given that Clause 14 explicitly provided for the event preventing NAFED from performing its obligations.]

It is surprising that the Supreme Court weighed into detailed provisions of the contract, because it also noted several earlier decisions in relation to public policy, including Renusagar, Associate Builders and Ssanyong. Nevertheless, it concluded that it would be against the fundamental public policy of India to enforce the award.

The court reasoned that as per the law applicable in India, no export could have taken place without the permission of the government, and given the refusal, NAFED could not have supplied the commodity.

The Court explained, “[t]he 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.  … …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.”

Interestingly, the Supreme Court has not taken note of the recent judgment in Vijay Karia, which inter alia ruled that “[t]he fundamental policy of Indian law, as has been held in Renusagar, must amount to a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” refers to the 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”.

The court also ignored the Delhi High Court’s decision in Cruz City 1 Mauritius Holdings v. Unitech which was referred to with approval in Vijay Karia, and which inter alia held that the mere contravention of a provision of law (in that case, Indian foreign exchange law), would not amount to a contravention of the fundamental policy of Indian law justifying the setting aside of a foreign award.

In Vjay Karia, the Supreme Court took a dim view of what it called ‘speculative litigation’, and it imposed costs of Rs 50 lakh against the appellant. We think that this is the right message to send and hope that this trend continues if India hopes to truly have a chance at being a viable regional hub for arbitration.

Shaneen Parikh is a Partner in the dispute resolution team and Surya Sambyal an Associate in the arbitration practice at the Mumbai office of Cyril Amarchand Mangaldas.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.