Which direction is the Unruly Horse of ‘Public Policy’ headed in India?

Harshvardhan Tripathi[i]


Pursuing the dream of developing India as a popular arbitration jurisdiction, the Indian Courts and legislature in recent times have shown a commitment to minimum judicial interference in foreign arbitral awards. However, the ghost of the public policy exception has often crept back from its grave to haunt the judicial development and undo the progress made. This conundrum has already led to immense legal uncertainty in India and it continues to remain a vexata quaestio to the present day. Recently, in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. (“NAFED”) a full bench of the Supreme Court of India refused to enforce a foreign arbitral award on the grounds of it being in contravention of the fundamental law of India, and therefore, violative of the public policy.


This is surprising because a coordinate bench of the Supreme Court, only two months before NAFED, in Vijay Karia v. Prysmian Cavi E Sistemi SRL (“Vijay Karia”) had adopted a narrow interpretation of ‘public policy’ and allowed the enforcement of a foreign award even though it violated Indian law. Because of the two seemingly contradictory approaches adopted by the Supreme Court, the question in all everyone’s mind is: How does the conflict between NAFED and Vijay Karia shape the judicial discourse surrounding Public Policy exception in India?


Background

NAFED was a canalizing agency of the Government of India, which entered into a contract with Alimenta S.A. (“Alimenta”) to supply 5000 metric tons (MT) of groundnuts. The export policy of the time required NAFED to take permission from the Ministry of Agriculture, Government of India, before exporting. In 1980, a cyclone caused heavy damage to the crops and NAFED could only supply 1900 MT of groundnuts that year. The parties then entered into two additional agreements that stipulated the supply of the remaining volume of the groundnuts in the year 1980-81 by NAFED. However, because of surge in the price of the groundnuts in 1980-81, NAFED’s request for permission to export the groundnuts on the agreed contractual price was denied by the Ministry. NAFED was further prohibited from exporting any previous remaining quantities to Alimenta. On account of NAFED’s default, Alimenta then invoked arbitration proceedings before the Federation of Oils, Seeds & Fats Associations Ltd. (“FOSFA”), London.


In 1989, FOSFA directed NAFED to pay USD 4,681,000 as damages (along with interest) to Alimenta. This award was upheld in an appeal before the Board of Appeal on May 14, 1990. When Alimenta applied to the Delhi High Court for the enforcement of the award, after a long-drawn series of proceedings and appeals, the High Court allowed its enforcement and granted a decree for the same. This decree was then challenged by NAFED before the Supreme Court. The Apex Court noted that Clause 14 of the contract envisaged contingencies, such as a possible prohibition on export, which on arising would have the effect of nullifying the contract. Since permission to export was denied, the contract for export became void under Section 32 of the Indian Contract Act, 1872. The Court noted that since NAFED could not fulfil its contractual obligation because of the prevailing public policy related to export as decided by the Ministry of Agriculture, the FOSFA award should not have saddled NAFED with the liability to pay damages. The Supreme Court found the award patently illegal on this ground and opined that enforcement of the award should be refused because it violates the “fundamental public policy” of India.


Where did the Supreme Court go wrong?

The Supreme Court in NAFED committed the grave error of re-examining the entire issue on the merits of the case and substituting the arbitral tribunal’s interpretation of the contract with its own. Furthermore, even though the governing law of the contract as per the FOSFA agreement was the English Law, principles of the Indian Contract Act were applied to declare the contract void on account of the happening of the contingent event.


However, the most problematic part of the judgment is the wide interpretation of ‘public policy’ adopted by the Court.


To grasp the essence of the Indian position on the public policy exception, a reference must be made to the seminal 1994 ruling of Renusagar Power Co. Ltd. v. General Electric Co. (“Renusagar”), where the Supreme Court was called upon to determine the scope of public policy under Section 7(1)(b) (ii) of the Foreign Awards Act (now repealed and pari materia with Section 48 of the present Arbitration and Conciliation Act, 1996). The Court referred to Article I(c) of the Geneva Convention, 1927and Section 7(1) of the Protocol and Convention Act, 1937), to infer that the legislative intent behind the usage of the expression ‘public policy’ under Section 7(1)(b) (ii) was to construe it narrowly. For attracting the bar of public policy, something more than mere violation of India’s laws would be required. The Court held that enforcement of foreign awards in India would be refused only if contrary to:

  1. The fundamental policy of Indian Law,

  2. The interests of India, and

  3. Justice or morality.

The approach of interpreting ‘public policy’ narrowly as posited by Renusagar, was adopted by the Supreme Court in the subsequent rulings of Shri Lal Mahal, Ssangyong, and most recently in Vijay Karia.

In Vijay Karia, a coordinate bench of the Supreme Court explained that the meaning of ‘fundamental policy of Indian law’ 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-honored, hallowed principles which are followed by the Courts.

In NAFED, the Apex Court declared a violation of export policy as tantamount to the contravention of the fundamental policy of Indian law without justifying its distinctive ‘fundamental’ nature. It escaped the Court’s attention that the determination of the export policy is an executive act. Seeking approval for export from the Ministry is not a core, uncompromisable, intrinsic principle of Indian law, but rather an ordinary law whose violation does not meet the threshold in Renusagar to qualify as a breach of the ‘fundamental’ policy of the Indian law.


Compare, for instance, the Delhi High Court’s judgment in Daiichi Sankyo Company Limited v. Malvinder Mohan Singh and Ors, where an award was sought to be enforced against minors for fraud and misrepresentation. It was refused because the protection of minors against contractual liability was a fundamental policy of Indian law. Daiichi indicates that the threshold for refusing enforcement requires a violation of the most basic principles or laws of India. In NAFED, the Supreme Court erred in equating the violation of export policy to be tantamount to the violation of ‘fundamental policy’ in India.


What lies ahead

It is reasonable to conclude that NAFED chips away India’s image of a jurisdiction with a pro-enforcement arbitral approach. Unfortunately, it might also open up floodgates of similar cases in which a broad interpretation of the ‘public policy’ exception is sought to be justified based on ‘unique factual matrix’. In such a scenario, it can only be hoped that the Supreme Court of India, in the near future, conclusively ties down the unruly horse of public policy that it let loose in NAFED.


However, one may argue that,

  • The Supreme Court’s refusal to enforce the arbitral award, in this case, is a fact-specific decision and does not set up a general precedent for the disputes on the same issue. Hence, its impact on the evolving Indian jurisprudence of ‘public policy’ should not be over-estimated. When seen from this vantage point, NAFED is merely an aberration from the pro-enforcement attitude of the Indian Courts;

  • NAFED directly conflicts with the approach adopted in Vijay Karia and therefore will require referral of the question to a larger bench of the Supreme Court to conclusively settle the conflict. This opportunity should be utilized to lay down specific safeguards that prevent a whimsical stretching of the notion of the ‘public policy’;

  • ·The three-pronged test set out in Renusagar will continue to occupy the field, shaping the core understanding of ‘public policy’ in India. Irrespective of NAFED’s legal validity in the future, when faced with a similar issue, the courts in India can rely on recent case laws by the Supreme Court of India with the arguably ‘correct’ legal position: Ssyanyong and Vijay Karia;

Although refusing the enforcement of foreign awards in India on the ‘public policy’ exception is still rare, the courts should be wary of frequently relapsing into the broad interpretation of ‘public policy’ in the future. This is particularly pertinent in cases like NAFED and Patel Engineering Ltd. where one of the parties is the state instrumentality. Courts should also be wary of adopting a protectionist stance by refusing enforcement of foreign awards against Public Sector Units. PSUs should be treated at par with private business entities and not infantilized by the Court.


[i] Harshvardhan Tripathi is a fourth-year student at National Academy of Legal Studies and Research (NALSAR), Hyderabad. Any query on the article can be directed to harshvardhanlp@gmail.com.


Which direction is the unruly horse of P
Download • 173KB

Preferred Citation: Harshvardhan Tripathi, Which direction is the unruly horse of ‘Public Policy’ headed in India?, Arbitration & Corporate Law Review, Published on 19th July 2020.


This article was reviewed by Shebani Bharagava (Managing Editor) and Ritika Acharya (Associate Editor).

126 views

ACLR is a platform curated solely for informational and educational purposes. The publications featured on the platform are the personal views of the authors. They neither reflect the views of the editors and advisors nor any other person associated with it. Third-party links in the posts are provided for the convenience of the reader and ACLR takes no responsibility for their content. The purpose of this blog is limited to impart legal opinion and knowledge, as opposed to legal advice which must be always be sought from qualified legal practitioners only.

Arbitration & Corporate Law Review©2020 All rights reserved. The material published on ACLR cannot be duplicated or reproduced without the express and written permission of the concerned authors and the editors. It may be referred to, provided due credit is given to ACLR© in the form of a correct reference to the original content.