India has made great strides in the development of its arbitration jurisprudence over the last decade. However every now and then there will come a decision which will shake practitioners out of a false sense of complacency. On 22 April 2020 a three judge bench of the Supreme Court of India passed a judgement refusing to enforce a foreign award invoking the ‘public policy’ talisman. The basis for this refusal, in NAFED v Alimenta SA (‘NAFED Judgement’), was that the Court found the contract to be void and that enforcement of such an award would be contrary to the public policy of India. In the recent years, courts in India have passed decisions rejecting challenges on public policy grounds and enforcing foreign awards in several high profile matters, such as Daiichi and Docomo. News of the NAFED Judgement was met with surprise and some apprehension. Does the judgment signify a radical change in India’s out look towards enforcement of foreign awards? Has the Indian Supreme Court turned the clock backward, undoing the enormous developments made in the field of arbitration? The present article analyses the NAFED Judgement to answer the above questions.
A brief overview of the facts is necessary for our analysis. The contract and dispute between the parties dates back to the year 1980. NAFED, a government agency was to export a fixed quantity of ground nut to Alimenta SA. The contract was governed by the Federation of Oils, Seeds and Fats Associations Ltd (FOSFA) Rules which was incorporated by reference and provided for arbitration. Due to a cyclone in Saurashtra, India, NAFED was only able to supply part of the agreed quantity. Parties executed addendums to the contract as per which NAFED agreed to supply the remaining quantity of ground nut in the next season of 1981. While intending to perform the addendum obligations, NAFED came to realise that it did not have the requisite permissions from the government of India to ship the remaining quantity of ground nut. NAFED approached the government for permission which was denied. Accordingly, NAFED was unable to perform its obligations and Alimenta SA invoked arbitration before FOSFA at London in 1981.
In 1989, FOSFA passed an award against NAFED and awarded Alimenta SA damages which was upheld by the Board of Appeal, FOSFA.
Alimenta SA applied to enforce the award before the High Court of Delhi which allowed the enforcement. Subsequently, NAFED approached the Supreme Court of India challenging the order allowing the enforcement on the ground that the enforcement would be contrary to public policy under Section 7(1)(b)(ii) of the Foreign Award (Recognition and Enforcement) Act, 1961 (‘Foreign Awards Act’). While the Foreign Awards Act was repealed by the Arbitration and Conciliation Act, 1996 (the Act), Section 48 of the Act which provides for the refusal to enforce a foreign award on the public policy ground has been found to be pari materia to Section 7(1)(b)(ii).
More alarming than the Supreme Court’s decision to refuse the enforcement of a foreign award, is the manner in which it arrives at this this conclusion. The Court undertook a detailed re-examination of the terms of the contract and also chose to adopt a different interpretation from that taken by the tribunal. The tribunal had considered the issue of refusal of permission to NAFED in depth, and concluded it was a self-serving restriction which led to the imposition of damages on it. This is clear from the decision of the High Court which refrained from second guessing the tribunal’s decision and upheld the award.
The Supreme Court on the other hand specifically reviewed clause 14 of the contract and found it to provide for a contingency, the happening to which would lead to the contract being cancelled. Having determined that the contract in question was a contingent contract, the Supreme Court relied on Section 32 of the Indian Contract Act. It concluded that upon the refusal of permission to NAFED, the contingent event had kicked in, and the contract stood cancelled or void. Accordingly, NAFED could not be saddled with the liability for not performing its obligations and the enforcement of the award would violate the public policy of India. From a review of the decision of the High Court, it appears that it was not NAFED’s argument that the contract was void on account of being a contingent contract. NAFED’s stand opposing the enforcement of the award was that the enforcement would be contrary to the Government’s prohibition which was contrary to public policy.
No one suggests that every foreign award is enforceable in India as a matter of right. The Courts are well within their power to consider whether the enforcement of a foreign award would be consonance with the public policy of that jurisdiction. This examination must however be done within the settled jurisprudence on enforcement of awards.
Interestingly, the NAFED Judgement itself refers to a series of landmark decisions of the Supreme Court from Renusagar, ONGC Saw Pipes, Shri Lal Mahal, Associate Builders, Ssangyong Engineering and Construction which settled the principle that the scope of interference by courts in enforcement of foreign awards is limited. The Renusagar decision, relied on in the NAFED Judgement for applying the test of fundamental policy of India, also held that a review of the award on its merits was outside the scope of Section 7 of the Foreign Awards Act and contrary to the intention to Article V of the New York Convention. Further, the decision of Sri Lal Mahal, another three judge bench of the Supreme Court, had clarified that the tribunal’s interpretation of the contract or reliance on inadmissible evidence would not fall within the objection of ‘public policy’. This judgement was rendered in light of Section 48 of the Arbitration Act, akin to Section 7 of the Foreign Awards Act. In re-examining the contract and taking a different interpretation as to its terms, the Supreme Court can be said to have acted as an appellate court, which it is not. It certainly appears as if the Court went beyond the scope of examination, as laid out by established jurisprudence, in refusing enforcement of the award.
The decision in Renusagar also laid down the scope of what constituted public policy for the enforcement of a foreign award. This was limited to i. fundamental policy of India, ii. interest of India or iii. justice or morality grounds. The NAFED Judgement relied on the fundamental policy of India ground to hold that the enforcement of an award which was from a void contract as per Indian laws was within the realm of fundamental policy and would be contrary to public policy of India. If we ignore the process of how the Supreme Court came to this conclusion, its ultimate finding that the enforcement of an award with respect to a contract that was void is against India’s public policy is not that controversial. The nature and validity of a contract goes to the root of the matter and enforcing an award originating from a void agreement could be seen to be within the ambit of the fundamental policy of India and as an extension the public policy of India.
Finally we must examine Supreme Court’s repeated observation that had the contract been performed by NAFED without necessary permission, it would have been in violation of the export policy of India. Resultantly, the enforcement of such an award would be contrary to public policy. While this does not appear to be reasoning for ultimately refusing the enforcement (since the contract was never performed), it does beg consideration. It has been held time and again by the Supreme Court in a catena of decisions that the mere violation of Indian law cannot be said to be contrary to public policy of India to refuse enforcement of an award. Renusagar settled the principle long back that an objection to the enforcement of foreign award on the ground that it was prohibited under Indian law, should be in relation to the enforcement of the award and not pertain to its merits. A similar finding was made by the Delhi High Court in the much celebrated decision of DOCOMO. In this case, the buyer of shares was refused permission from the Reserve Bank of India to perform its obligation which lead to an award for damages against it. Examining the objection that the enforcement of the consent terms by parties, giving effect to the Award was violative of Indian law, the Court differentiated from the enforcement of an award of damages from the actual performance of the contract. The NAFED Judgement also does not consider a recent decision of the Supreme Court in Vijay Karia v Prysmian Cavi E Sistemi Srl & Ors where the Court upheld the above principle that the mere violation of the Indian law would not lead be contrary to public policy.
To answer the questions raised at the beginning to the article, the NAFED Judgement does not appear to dilute the settled principles regarding the enforcement of foreign awards in India. The Supreme Court has quoted the established jurisprudence on the subject even though it seems to have veered off course while conducting a review of the award on its merits. The Court’s observation that the enforcement of a contract violative of Indian law, is against public policy would be contrary to settled jurisprudence. However, the precedential value of this finding for future cases remains unclear. Importantly, the finding that a void contract is unenforceable as being against public policy of India could be said to be within the confines of the jurisprudence applying a narrow application of the ‘public policy’ ground. The enforcement of foreign awards is the key measure of the robustness of any arbitration regime and it is to be hoped that this decision does not start a judicial trend towards their curtailment.
Contributed by: Ila Kapoor, Partner; Shruti Sabharwal, Principal Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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