NAFED v. Alimenta SA and the Fundamental Policy of Indian Law

[Surbhi Shah is a 2019 graduate of the National Law School of India University, Bengaluru]

A previous post on this Blog discussed the decision of the Supreme Court in National Agricultural Cooperative Marketing Federation of India (NAFED) v. Alimenta S.A.[1] It has been argued that the Supreme Court in its review of the merits of the foreign award and ultimate decision to refuse enforcement has delivered a judgement that contravenes established judicial precedent and international principles relating to a review of the merits of foreign awards. This post analyses some pertinent points of this case relating to the scope and interpretation of public policy, but it does not venture into the substantive law pertaining to the force majeure clause and frustration of contract under the Indian Contract Act, 1872.

In NAFED, the Court decided to refuse enforcement on the basis that the “public policy” ground in section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961 is invoked for the following reasons:

  • Clause 14 of the agreement signed between the parties contains a force majeure clause, according to which the contract stands cancelled due to the Government’s refusal of permission to carry out the supply to Alimenta;

  • Under section 32 of the Contract Act, the agreement was in fact a contingent contract, and is void on the happening of the contingency i.e. the refusal of permission by the Government; and

  • The enforcement of the award would be in violation of the export policy of India as per the Government order.
Violation of export policy may fall within “fundamental policy of Indian law”

While the first two reasons necessarily involve an impermissible review on merits, the export policy argument of the Court stands plausibly as the most legitimate ground for refusing to enforce a foreign award. It is established that merely the breach of a provision of an enactment does not permit a court to refuse enforcement of an arbitral award. According to the holding in Renusagar Power Co. Ltd. v. General Electric Co. and a catena of subsequent decisions, the violation must be such that it offends the core values of India’s legislative policy, which the country cannot be expected to compromise. It must be a breach of the fundamental and substratal legislative policy of India. In the same case, it was held that the Foreign Exchange Regulation Act, 1973 (FERA) was a law that had been enacted to serve “national economic interest” by the conservation of foreign exchange. This led the Court to conclude that an award that violated the provisions of FERA would be against the public policy of India. In the most recent case of Vijay Karia v. Prysmian Cavi E Sistemi Srl, the Court cited Renusagar to hold that “fundamental policy” of a country may find expression not only in statutes but also “time-honoured, hallowed principles that are followed by the Courts”. The Bombay High Court in Pol India Projects Ltd v. Aurelia Reederei Eugen Friederich GmbH, as cited in Cruz City I Mauritius Holdings v. Unitech Limited, held that a court while considering the question of whether to “decline enforcement of a foreign award on the ground of public policy, is also required to consider the nature of the policy that is alleged to have been contravened. The approach of the Court… should favour enforcement of a foreign award and if the public policy considerations can be addressed without declining recognition of the foreign award, the Court would lean towards such a course.” [emphasis added]

Considering these points, it is a valid argument to state that the third ground of a “violation of export policy” is the only legally permissible ground in the present case for the Court to refuse enforcement since it could be a more fundamental breach of legislative policy. However, disappointingly, in the confounding reasoning of the court, it has not made the export policy ground explicit and distinct from the other two points. It has also not provided any analysis or explanation for why, despite citing the Renusagar holding (that a mere violation of law will not suffice to refuse enforcement of an award), the breach of export policy in this case does not fall within that same ground, and is more in line with the substratal legislative policy and national economic interest which validly allow the Court to refuse enforcement of the award. The Court fails to consider as a preliminary question whether an export policy which is an executive order could be considered to be “law” as it is understood under section 48(2)(b)(ii) of the Arbitration Act, 1996 (“public policy” under section 7(i)(b)(ii) Foreign Awards (Recognition and Enforcement) Act, 1961 has the same connotation as the expression “public policy of India” under section 48(2)(b) of the Arbitration Act, 1996). Another question that relates to the logical consistency of the case is: if the Court has decided that the contract is void, how does it also state that a performance of the contract would have violated export policy and consequently “public policy” if performance itself is not obligatory? It seems as if the Court in its attempt to refuse enforcement has provided different grounds in the alternative as reasons for refusal.

The award is not directly violative of export policy

A somewhat unusual observation that emerges from this judgement is that despite the validity of the argument that a breach of export policy may be the only permissible ground for the Court to intervene, it can be noted that the direction in the award itself does not violate any law or policy. The award does not order that NAFED make the supply as per the contract. It merely instructs that damages be paid for what it finds to be a breach of contract. In Vijay Karia, the foreign award directed the purchase of shares by the award debtor at a discounted rate. This was contended to be in direct violation of the FEMA (Non-Debt Instrument) Rules, 2019 and hence in violation of the fundamental policy of Indian law. In Cruz City as well, the award directed the award debtor, Unitech, to make payment against the delivery of shares, which in effect meant that Unitech had to make an investment which was not permissible without the approval of the Reserve Bank of India (RBI). In this case, the agreements, which were structured to ensure a predetermined return on equity, were themselves contended to be illegal and the award was argued to be against the public policy of India.

A distinction between the types of awards mentioned above is apparent. One award directly orders the breach of a law, whereas the other directs that pecuniary liability should be incurred, i.e., damages should be paid founded upon a breach of law. In NAFED, it is the Court’s decision that it does not wish to enforce an award that has been arrived at by a breach of the law. This is more in line with the second bracket of awards as described above and there is no direct breach of law that has been compelled by the award.

The question that now arises is whether this distinction between awards, i.e., one instructing a direct breach of law versus an indirect one, so to speak, is of any consequence in the process of setting aside an arbitral award. Should the treatment by courts differ? Can the latter kind of award i.e. an indirect one also be held to be in breach of the “fundamental policy of Indian law” or is it more in line with the “patent illegality” ground for refusal of enforcement of arbitral awards?

This brings us to the difference between the “fundamental policy of Indian law” and “patent illegality.” The latter is not available as a ground for refusal of enforcement of an award rendered in an international commercial arbitration. For this reason, it may be important to examine the differences between the two criteria.

Fundamental Policy of Indian law and Patent Illegality

The case of Ssangyong Engineering and Construction Company Ltd. v. National Highways Authority of India, which relies on some aspects of Associate Builders v. Delhi Development Authority, sheds some light on the above. The contravention of a law protecting national interest, disregarding orders of superior courts in India and breach of principles of natural justice such as audi alteram partem (according to Renusagar) fall within the ground of “fundamental policy of Indian law.” “Patent illegality”, on the other hand according to Associate Builders, must appear on the face of the award and refers to such instances when there is illegality that goes to the root of the matter, but excludes an erroneous application of law by an arbitral tribunal or re-appreciation of evidence by an appellate court. This ground may be invoked if inter alia (i) the view taken by an arbitrator is an impossible one while construing a contract, (ii) the award does not give any reasons for the holding, (iii) an arbitrator exceeds jurisdiction to answer questions beyond a contract or his terms of reference, and (iv) if a perverse finding is arrived at based on no evidence, or overlooking vital evidence, or based on documents taken as evidence without giving notice to the parties. It seems that the two grounds operate in different spheres, although there may be a slight overlap depending on the facts and circumstances of the case.

As for the question raised above, patent illegality does not appear to be able to accommodate either of the two types of arbitral awards. There is no specific category within patent illegality (though it cannot be exhaustively defined) that deals with awards that direct the incurring of a pecuniary liability founded on a breach of law. A contravention of law is only a ground available under the “fundamental policy of Indian law.” According to Ssangyong, “patent illegality appearing on the face of the award… refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.” [emphasis added]

Therefore, the metric on which a breach of law or an illegality has to be judged is only the standard under “fundamental policy of Indian law”, which is that the law breached must pertain to the “substratal legislative policy” and “national economic interest.” Therefore, in both an award that directly orders the breach of a law, as well as one that directs that pecuniary liability should be incurred founded upon a breach of law, the breach must remain one that is not a mere contravention of a statute. It must be one that is more foundational and linked to public policy or public interest as per Renusagar. The Supreme Court’s judgement in this case is silent on this difference, and it does not offer an explanation either for why a breach of export policy is a breach of the fundamental policy of Indian law. In the lack of clarity in its reasoning, this case raises a lot more questions than it answers and, as has been rightly suggested, has the potential to encourage more challenges to arbitral awards by expanding the scope of public policy in India.

Surbhi Shah

[1] For facts and ruling, please refer to the earlier post.

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