NAFED v. Alimenta S.A.: The Public Policy Exception Debate Reignited?
Keywords: Arbitration and Conciliation Act, Fundamental policy, Public policy, Enforcement, Arbitral award
In the recent judgment of NAFED v. Alimenta SA[i], the Supreme Court of India refused the enforcement of a foreign arbitral award on the ground of violation of the public policy of India, thereby reigniting the debate over justiciability of awards rendered by foreign arbitral tribunals. This article deals with the ‘public policy’ exception to enforcement of foreign arbitral awards, as under section 48 of the Arbitration and Conciliation Act, 1996. In the context of NAFED v. Alimenta, this post will critically analyze the discrepancies in Indian case law on the topic.
Background of the dispute
The National Agricultural Cooperative Marketing Federation of India (“NAFED”) had entered into a contract with Alimenta SA for the supply of 5000 metric tonnes of Indian groundnut (“Commodity”). However, it could supply only 1990 metric tonnes due to a failure in crops caused by a cyclone. Subsequently, the government denied granting permission to supply the remaining amount. Aggrieved, Alimenta SA initiated arbitration proceedings against NAFED before Federation of Oil, Seeds and Fats Associations Ltd. (“FOSFA”), London, as stipulated in the sales contract. Thereafter, FOSFA passed an arbitral award instructing NAFED to pay damages to Alimenta at an interest of 10% per annum. NAFED filed an appeal with the Board of Appeal against this award. The Board of Appeal rejected NAFED’s contentions, and instead, increased the rate of interest from 10% to 11.5% per annum.
Alimenta moved the Delhi High Court under the erstwhile Foreign Awards (Recognition and Enforcement) Act for the execution of this award. NAFED objected to such enforcement stating that the award goes against the public policy of India. The High Court held that the award could be enforced against NAFED. Aggrieved by this decision, NAFED filed the present appeal before the Supreme Court.
The Decision of the Supreme Court
The Supreme Court dealt with the following issues in the present appeal:
(i) Whether NAFED was unable to comply with the contractual obligation to export groundnut due to the Government’s refusal?
(ii) Whether NAFED could have been held liable in breach of contract to pay damages?
(iii) Whether enforcement of the award is against the public policy of India?
NAFED argued that the arbitral award failed to take note of the restrictions imposed by the Government of India, and the enforcement of such awards would result in the ‘unjust enrichment’ of Alimenta. NAFED further argued that it merely acted in the capacity of a canalizing agency for the government, and pursuant to the government’s refusal to permit the export of the Commodity, it could not perform its contractual obligations. Clause 14 of the contract between the parties provided that the agreement would stand canceled in case the shipment of the Commodity became impossible due to prohibition by executive order or a law passed by the Government of India.
The Hon’ble Court was of the opinion that the restriction on export put by the government would come under the ambit of this clause, and hence, NAFED did not have the authority to honor its contract and had justifiable grounds for non-shipment. The court held that the contract between the parties was contingent upon permission by the Government of India, and the contract became void in the absence of such permission. Therefore, NAFED could not be held liable to pay any damages to Alimenta for breach of contract.
A thorough reading of the judgment would establish that the court has ruled on the merits of the original case, and has even interpreted certain clauses of the contract between the parties. As to the issue of breach of public policy, the court observed that a matter pertaining to the export of goods is invariably linked with the public policy of India. The court opined that its enforcement would be against the fundamental policy of Indian Law and the basic concept of justice. Finally, the award was held “ex facie illegal” and thus unenforceable under section 7 of the Foreign Awards Act.
The debate over the ground of “public policy”
This debate over the justiciability of foreign arbitral awards on the ground of violation of public policy has been persistent, and the Indian scenario has lacked stability on this matter. The starting point on this debate was the judgment of the Supreme Court in the Renusagar case[ii], wherein the court tried to incorporate the commonly accepted international convention in this regard. In this case, the Hon’ble court held that the ground of public policy should be constructed narrowly and must be used only in exceptional circumstances. Further, the court opined that the ground should not be used to decide on the merits of the case. However, subsequently, in the case of ONGC v. SAW Pipes Ltd[iii], the court observed that the ground of public policy must be interpreted in a wider manner than what was prescribed in the Renusagar case. The ground of “patent illegality” of the award was also introduced by this judgment, which would render the award unenforceable. While this case arose out of domestic arbitration, the court did not exclude foreign arbitrations from the ambit of its reasoning. The Satyam Case[iv] also followed the same reasoning as the Saw Pipes case, which served as another blow on India’s path to becoming an arbitration-friendly jurisdiction.
Lately, the courts seemed to have softened their approach regarding the public policy ground. In the famous Balco Case[v], the court has declared that Part I of the Arbitration and Conciliation Act, 1996 will only apply to domestic arbitrations, hence a foreign award cannot be challenged on grounds mentioned under section 34. Further, in the Lal Mahal Case[vi], it was held that the ground of patent illegality of the award is not covered under section 48 of the Act, and section 48 does not warrant the courts to decide upon the substantial claims in the award; the courts must refrain from reconsidering the entire matter.
India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) and thus has certain obligations, one of which is the pro-enforcement bias towards foreign arbitral awards. The latest judgment in this regard is the case of Vijay Karia v. Prysmian Cavi E Sistemi SRL, in which the court ruled with pro-enforcement bias and noted that the burden lies on the party challenging the award and that the standard of proving the grounds is high and must be strictly construed.
Impact of the judgment
In the present case, the Hon’ble Court reasoned that since the government of India refused to permit NAFED to fulfill its contractual obligation, the contract between NAFED and Alimenta became void, and its enforcement would violate the public policy of India. However, this interpretation of the fundamental policy of Indian law is inordinately broad and is contrary to the view taken by the Court in the Renusagar case. This matter of non-performance is merely a contractual issue, not a public policy issue that would require the Court’s interference with the award. Violation of a mere export policy or a government order should not qualify as a violation of the fundamental policy of Indian law. The court, while departing from its previous rulings, has misapplied its discretion to rule on an arbitral award on its merits.
India, being a signatory to the New York Convention has the obligation to create a favorable milieu for enforcement of foreign arbitral awards, and this obligation was crystallized by the Apex Court in the Vijay Karia case. However, the Hon’ble court has digressed from the pro-enforcement stance in the present judgment by declaring that mere export restriction may amount to “fundamental policy of Indian law” which would suffice to attract the bar of public policy exception of enforcement.
This decision has left an open end, which has the potential of opening a floodgate of cases challenging arbitral awards on remote grounds, in the guise of a violation of a fundamental policy of the country. Litigants would exploit the ground of violation of public policy to get away from the obligation placed on them by an unfavorable arbitral award. The language used in the judgment stating that an award may be set aside if it is “so unfair and unreasonable that it shocks the conscience of the court” gives unfettered discretion to courts to decide on the merits of an award.
Further, the ratio may encourage the practice of ‘speculative litigation’ – the practice of disputing the validity of an award on a multitude of grounds without sound reason, in the hope that the court might reject the enforcement. This practice has been unequivocally condemned by the Hon’ble court in the Vijay Karia case. The Apex Court needs to rectify this position soon to enable India to honor its obligations under the New York Convention.
[i] National Agricultural Co-Operative Marketing Federation of India vs. Alimenta S.A., Civil Appeal No. 667 of 2012 [ii] Renusagar v. General Electric, (1994) AIR SC 860 [iii] Oil and Natural Gas Corporation Ltd v SAW Pipes Ltd., (2003) 5 SCC 705 [iv] Venture Global v. Tech Mahindra, (2018)1SCC656 [v]Bharat Aluminium Co. and Ors v. Kaiser Aluminium Technical Services Inc and Ors., 2012(3)ARBLR515(SC) [vi] Shri Lal Mahal Ltd. v. ProgettoGrano Spa, 2013(3)ArbLR1(SC) [vii] Vijay Karia v. Prysmian Cavi E Sistemi SRL, Civil Appeal Nos. 1544 of 2020 and 1545 of 2020
This article was coedited by Arnav Maru (Co-founder and Managing Editor) and Yagnesh Sharma (Associate Editor).
Preferred Citation: Nayanikaa Shukla, “Nafed v. Alimenta Sa: The Public Policy Exception Debate Reignited ?”, Arbitration & Corporate Law Review, Published on 21st June 2020.