NAFED v. Alimenta S.A: Supreme Court Reverses Trend in Public Policy

[Prince Todi is a 3rd year student at Hidayatullah National Law University, Raipur]

The Supreme Court’s decision in NAFED v. Alimenta S.A (Alimenta) (previously discussed here) sparked controversy concerning the interpretation of the term ‘public policy’. The Court refused to enforce a foreign award on the ground that a violation of the Indian law and export restrictions amounted to a violation of the public policy of India. In this post, the author seeks to critique the Court’s ruling in light of settled precedents and argues for a pro-enforcement approach while dealing with foreign awards.

Background

The appellant, NAFED, was a canalizing agency for the Government of India and had permission to perform export operations for the period 1977-1980. It entered into an agreement with the respondent, Alimenta S.A., for the supply of 5,000 MT of Indian groundnut for the season 1979-1980. However, owing to crop damage, NAFED could supply only 1900 MT, pursuant to which two addendums were entered into to supply the balance 3100 MT in the subsequent year (1980-1981). NAFED contacted the Government seeking permission to carry forward the export dues of the previous year (1979-80) but the same was refused citing significant changes in the price of the commodity. When NAFED informed Alimenta of its inability due to the Government’s prohibition, it treated the said information as a breach of contract and invoked arbitration to this effect.

After a round of litigation concerning the stay of arbitral proceedings, the arbitral tribunal rendered the award directing NAFED to pay damages to Alimenta. NAFED in turn unsuccessfully challenged the award before the board of appeal and the Delhi High Court. Consequently, NAFED approached the Supreme Court against enforcement of the award by contending that the prohibition on export by the Government was responsible for its failure to honour the contract, and that such prohibition had the effect of cancellation of the contract in light of clause 14 thereof.

Decision of the Supreme Court

In its decision, the Supreme Court refused enforcement of the award and held that in the absence of the Government’s permission, NAFED was justified in not making the supply of the commodity and as such could not be directed to pay any damages to Alimenta. For this, the Court placed reliance on clause 14 of the agreement and ruled that the contract entered between parties was contingent on the Government’s export policy and fell within the ambit of section 32 of the Indian Contract Act, 1872. Further, the Supreme Court decided that, as soon as the Government refused to grant the permission, the contract became void with no consequential obligations. Referring to various decisions including Renusagar Power Co Ltd. v. General Electric Co., the Court concluded that allowing the enforcement of the arbitral award stood equivalent to directing NAFED to carry out an impossible act which had the effect of violating the public policy of India as envisaged in section 7 of Foreign Awards Act, 1961 (the “Act”).

Analysis

Although the Supreme Court ruling prima facie appears to be just and sound, a closer view reveals fundamental flaws in the reasoning employed by the Court to set aside the arbitral award. These flaws can be attributed to the following reasons:

1. Limited Scope for Interference in the Arbitral Award

It is a settled proposition that the scope of court’s refusal to enforce a foreign award is limited and there exists a presumption of validity of an arbitral award. Article V of the New York Convention, 1958 suggests that the court of enforcement cannot step into the shoes of the arbitrator and review the award on merits. This is essential to ensure that a person who has gone through numerous procedures in the country of origin of the award can reap the fruits as soon as possible. The legislature too appeared to have endorsed this position when, through the Arbitration and Conciliation (Amendment) Act, 2015, expressly restricted the court’s power to review the award on the merits.

However, unlike the established position, the Supreme Court took an in-depth view of the arbitral award, disregarding arbitrator’s findings on the basis of erroneous application of law. It not only perused clause 14 of the contract in great detail, but went to the extent of analysing the minutes of telex exchanges of parties and the Government. Arguably, the Court overlooked its limited jurisdiction and proceeded with the matter exercising powers of a court of appeal. In doing so, the Court indeed turned a blind eye to the principle of party autonomy, exercising which the parties deliberately consented to exclude the court’s jurisdiction and submit the matter to arbitration.

Notably, the Supreme Court’s ruling in NAFED v. Alimenta also departs from the cases of Shri Lal Mahal v. Progetto Grano Spa and Rashtriya Ispat Nigam v. Verma Transport Company wherein it held that the scheme of the Act prohibits the courts from having a “second look” at the foreign award at the enforcement stage, and that the task of an enforcement judge is limited to verifying the grounds enumerated in the Act. This deviation further highlights the Court’s misinterpretation of the powers conferred to it under the Act.

2. Narrow Construction of Public Policy

The scope of public policy under section 7 of the Act as a ground for challenging the enforcement of an award was settled by the Court in Renusagar. In that case, the Court held that the expression public policy must be construed narrowly to mean (i) fundamental policy of Indian law, (ii) interests of India (deleted by the 2015 Amendment Act), and (iii) justice or morality. [See also: Ssangyong Engineering v. National Highways Authority of India and Associate Builders v. Delhi Development Authority]

Furthermore, the Supreme Court in the recent case of Vijay Karia v. Prysmian Cavi E Sistemi Srl accorded clarity to the meaning of the phrase “fundamental policy of Indian law” by holding: “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.”A bare perusal of these decisions indicate a shift to a pro-enforcement approach thereby implying that a higher threshold is required to prove the violation of public policy.

As a complete turnaround, the Supreme Court in NAFED v. Alimenta has attempted to equate violation of Government restrictions and export policy to the public policy of India. It is imperative to note that the Court took cognizance of Renusagar, yet ironically, it stated that if NAFED had made supplies, it would have violated the public policy of India. In the author’s opinion, the Court took a problematic approach in widening the ambit of the term public policy and thus deviated from the expected trajectory. Moreover, such an approach indisputably frustrates the very objective of the New York Convention of ensuring smooth enforcement of arbitral awards. Further, this ruling ultimately reinforces the otherwise harmful interventionist policy of domestic courts and undoes the requirement of a high threshold to mount an attack on the foreign award.

3. Existence of Discretion

There exists an element of discretion of the court to enforce foreign awards, although some of the grounds of refusal have been made out. This argument finds merit in the textual construction of section 7, which uses the word ‘may’ and inter alia provides that “a foreign award may not be enforced under this Act”. The Supreme Court in Vijay Kariavalidated the existence of discretion when it held that ‘where the grounds taken to resist enforcement can be said to be linked to party interest alone and it is capable of waiver or abandonment, a court may well enforce a foreign award, even if such a ground is made out’. Notably, the present dispute arose out of non-fulfillment of contractual obligations between two private parties and largely affected their interests alone, thereby leaving room for the court to exercise its discretion.

Assuming that the Supreme Court followed the correct approach, the author still maintains the stance that non-enforcement of the award equally fell foul of public policy for want of justice. In this regard, Cruz City 1 Mauritius Holdings v. Unitech Limited sheds sufficient light wherein the Court sought to evaluate and strike a balance whether it would be more offensive to public policy to refuse enforcement or vice versa. At this juncture, it is pertinent to note that a total of thirty years have passed since the rendering of the award which is sufficient to state that it is manifestly unjust to refuse its enforcement. Hence, instead of interfering with the public policy doctrine, the Court ought to have appreciated the award and ordered its enforcement.

Conclusion

The landmark decision in Renusagar had put to rest the conundrum surrounding the interpretation of public policy, thereby laying foundation for a pro-enforcement approach in India. However, the Supreme Court in NAFED v. Alimenta has taken an unprecedented overturn by unnecessarily transgressing the permissible degree of interference in construing a foreign award and expanding the scope of public policy. The Court has not only overlooked the element of discretion, but certainly failed to honour the objective of expeditious enforcement behind the introduction of the New York Convention. It is safe to conclude that this decision has opened floodgates for unscrupulous parties to challenge the award, ultimately reinforcing the need of a uniform position on the subject.

Prince Todi 

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