Expansion of the Scope of Public Policy: Antithesis to the Judicial Discourse in Enforcement of Foreign Awards

[Smriti Shukla and Yash Raj are 3rd year students of National University of Study and Research in Law (NUSRL), Ranchi]

On 22April 2020, the Supreme Court in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. refused the enforcement of a foreign arbitral award on the grounds of violation of public policy. The Court, while allowing the appeal, held the award to be ex facie illegal, and in contravention of the fundamental law and, as such, stated that its enforcement would be violative of the public policy of India. The Court addressed some key issues with regard to the enforceability of foreign arbitral awards and revisited the challenge on the grounds of public policy after the same was recently dealt with by a coordinate bench in Vijay Karia v. Prysmian Cavi E Sistemi SRL.

Introduction

The matter dates back to 1980 when NAFED entered into a supply agreement with Alimenta, which could only be partially fulfilled by NAFED due to the damage of crops by a natural calamity. The parties entered into a second supply agreement to fulfill the previous order. However, the supply was halted due to restrictions imposed by the Government of India on exports. This led to a dispute and Alimenta filed for arbitration before the Federation of Oils, Seeds and Fats Associations Ltd. (FOSFA), London and the same was stayed by the Delhi High Court as well as subsequently by the Supreme Court of India on NAFED’s plea that the second agreement did not have an arbitration clause. FOSFA dismissed the jurisdiction of the Supreme Court of India in the matter and passed an arbitral award in favor of Alimenta. On appeal, the plea of NAFED was rejected by the Board of Appeal and the interest rate of award was increased without any such appeal by Alimenta. Subsequently, Alimenta approached the Delhi High Court for enforcement of the initial as well as appellate award passed by the FOSFA and Board of Appeal. A single judge of the Delhi High Court held the award to be enforceable and the appeal against the enforcement of the award by NAFED was also rejected by the division bench of the Delhi High Court.

Finally, NAFED appealed before the Supreme Court  challenging the enforceability of the award as against public policy, as well as alleging non-compliance with the provisions of section 7(1)(a), (b) & (c) of the Foreign Awards (Recognition and Enforcement) Act, 1961. The Court dealt with the issues of non-compliance of the contractual obligation, force majeure clause and violation of public policy of India.

Approach of the Court

Impossibility vs. Frustration

The Court first discussed the issue regarding the contractual obligation of NAFED due to the Government’s refusal to export and the contract becoming unenforceable in view of Clause 14 of FOSFA agreement, which provided that in the occasion of the prohibition of export by an executive or legislative act by the Government of origin, such restriction shall be deemed by both the parties to be applicable to the contract. The Court foremost stated that NAFED was a canalizing agency for the Government of India for the export of goods and, as such, NAFED required the express permission and consent of the Government of India for carrying forward the exports of previous year to the next year. Thus, the Court held that NAFED was justified, as the supply of goods would have violated the Export Control Order issued by the Government.

The Court held the contract to be void according to section 32 of the Indian Contract Act and distinguished the applicability of the said provision from that of section 56 of the Act, while relying on some of its earlier judgements including, Satyabrata Ghose v. Mugneeram Bangur & Co., The Naihati Jute Mills v Hyaliram Jagannath and others such as Boothalinga Agencies v. V.T.C. Poriaswami Nadar and Smt. Sushila Devi v. Hari Singh. It was provided that section 32 was applicable in the instant matter as the said provision applies in cases where the agreement already provides for contingencies based on which contract cannot be completed and, according to clause 14 of the Agreement, both parties were aware that any government restriction on export would make the performance impossible. It was emphasized: “In this case, ‘expected event’ was a refusal by the Government as agreed to under Clause 14 of the Agreement. On the happening of such an event, it is so fundamental as to be regarded by law as striking at the root.” Thus, it was held that if such supply would have been made, it would be in contravention of the fundamental policy of law in India.

Public Policy of India: An Unruly Horse

The Court next dealt with the issue of challenge to the enforceability of the award on the grounds of violation of public policy as provided under section 7(1)(b)(ii) of the Foreign Awards Act, 1961, which is pari materia with the existing section 48(2)(b) of the Arbitration and Conciliation Act, 1996, as both are based on Article V of the New York Convention. The Court referred to the some notable judgements that applied the test as propounded in Renusagar Power Co. Ltd. v. General Electric Co. that the enforcement of a foreign award can be refused only if such enforcement is found to be contrary to fundamental policy of Indian law, or the interests of India, or justice or morality. Therefore, the Court held the award to be unenforceable under section 7(1)(b)(ii) of the Foreign Awards Act and stated: “As per the test laid down in Renusagar, 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.”

Analyzing the Problematic Approach of the Court

The Indian arbitration ecosystem has been striving to establish India as a beneficial location for arbitration, and the NAFED judgement of the Supreme Court can be said to be an undesirable step in this direction. Indian courts for long have generally refused to interfere with foreign arbitral awards, and have categorically held that review cannot be carried out on the merits of the case while deciding the enforceability of awards. In the instant case, though, the Court delved substantively into the merits of the dispute and assessed the applicability of section 32 of the Indian Contract Act without even considering the aspect of the governing law of the contract which, according to the FOSFA agreement, would have been the English Law. The principle that there will be no judicial review of merits of foreign awards has been provided by the Model Law and highlighted by some noted authorities on international arbitration such as Redfern and Hunter and Gary Born.

The Supreme Court, while referring to test in Renusagar, did not consider some of the substantial aspects of the judgement where it was held that the scope of review for violation of public policy under section 7(1)(b)(ii) of the Foreign Awards Act is narrow. Mere contravention of law alone will not attract the bar of public policy, and something more than contravention of law is required. Relying on the same, in Shri Lal Mahal Limited v. Progetto Grano Spa, the Supreme Court equated the provisions of section 7(1)(b)(ii) of the Foreign Awards Act with section 48(2)(b) of the Arbitration and Conciliation Act, and held that “the expression ‘public policy of India’ must be given a narrow meaning and the enforcement of foreign award would be refused on the ground that it is contrary to the public policy of India if it is covered by one of the three categories enumerated in Renusagar.” The 2015 amendment to the Arbitration and Conciliation Act has included the aforementioned grounds under explanations to section 48(2) of that legislation.

The Court in the instant matter interpreted that the grant of approval by the Government is a fundamental policy of Indian law, which clearly overlooks several precedents where it has been categorically held that scope of intervention is much narrower in foreign awards in comparison to domestic awards. In Ssanyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), it was held that “the scope of enquiry before the court in which award is sought to be enforced is limited to grounds mentioned in Section 7 of the Act and does not enable a party to the said proceedings to impeach the award on merits.

Furthermore, the Supreme Court has neglected its most recent ruling on the subject pronounced in February 2020 in Vijay Karia v. Prysmian Cavi E Sistemi SRL wherein the concept of fundamental policy of law was aptly discussed and it was held that a mere violation of the Foreign Exchange Management Act (FEMA) would not qualify as a contravention of the fundamental policy of Indian law. The Court herein referred to the case of Cruz City 1 Mauritius Holdings v. Unitech Ltd. and explained that the expression “fundamental policy” connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. Further, with regard to fundamental policy of Indian law, the Court emphasized that, “the 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.

Thus, the Supreme Court in NAFED overlooked many substantial precedents on the aspect and superficially applied the Renusagar test. The approach of the courts in Vijay Karia and Ssanyong not to interfere in the merits of a case, thereby providing a narrow scope of review of foreign awards, needs to be fortified in the Indian jurisprudence instead of the rudimentary and stringent approach of the court in NAFED. The evolving jurisprudence in the matter has taken a step back and the legislative intent appears to be defeated which promoted a “no merit-interference” approach by including explanation 2 to section 48(2) of the Arbitration and Conciliation Act by the 2015 Amendment. Therefore, the NAFED ruling may act as an encouragement for parties to challenge enforcement of awards before the courts more frequently on broader grounds of violation of public policy.

Smriti Shukla & Yash Raj

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