Enforcement of Foreign Awards: Two Steps Forward, One Step Back?

[This is a Guest Post by Kaustav Saha, who is a Delhi-based lawyer.]

This post will examine the Supreme Court’s most recent interpretation of the public policy exception to enforcement of foreign awards in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. (‘NAFED’).It is submitted that the court’s application of the public policy exception to refuse enforcement of the foreign award in question was flawed and shows that even today, notwithstanding the legislative attempt to clearly articulate the contours of the public policy exception by way of the 2015 amendments to the 1996 Act, courts can, on occasion, greatly exceed their jurisdiction to review a foreign award on this ground.

The material facts in NAFED were that arbitration proceedings were initiated by Alimenta before the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London in relation to a dispute concerning NAFED’s failure to supply the entire contracted quantity of 5000 tons of Indian HPS groundnut pursuant to a contract entered into in 1980. The key issue in both the arbitration and enforcement proceedings was whether NAFED was prevented from performing its obligations by order of the Government of India. NAFED’s excuse for not supplying the required quantity was that it did not have government permission by way of export quotas to use the next year’s stock of groundnuts to make up the supply deficiency of a previous year. The arbitrator decided this issue in favour of Alimenta, the claimant, and held that NAFED was not prevented from performing its obligations. As a result, by way of award dated 15.11.1989, damages and interest were awarded in favour of Alimenta, and confirmed by an appellate award by FOSFA’s Board of Appeal dated 14.09.1990, which also enhanced the rate of interest payable. Alimenta sought enforcement of both awards in India.

The Supreme Court observed that NAFED was prevented from performing its obligations by way of a government order, and as a result, by operation of Clause 14 of the FOSFA 20 standard form contract incorporated by agreement between the parties, this was a force majeure event which had the effect of terminating the contract. It also observed that Clause 14 was in the nature of a contingent contract covered by Section 32 of the Indian Contract Act and the exception of self-induced frustration would only apply to cases covered by Section 56 of the Act. As a result, the court held that on a combined reading of Clause 14 and Section 32 of the Contract Act, the contract had become void and parties were released from their obligations. Therefore, neither the foreign award, which awarded damages against NAFED for failure to perform the contract, nor the appellate award, could be enforced in India as they were contrary to public policy, being “ex facie illegal, and in contravention of fundamental law.”

It is submitted that the court’s reasoning and conclusion are flawed on a number of grounds:

First,when examining the position of law on the issue, the court relied on the well established Renusagar case which was decided under the Foreign Awards (Recognition and Enforcement) Act, 1961 [‘1961 Act’], also applicable to the present case. However, the court also examined cases decided under the 1996 Act, particularly the Shri Lal Mahal case, which adopted the principles laid down in Renusagar to the 1996 Act. It is therefore curious that the court did not take notice of its own decision by a three-judge bench in Vijay Karia v Prysmian E Sistemi SRL. The Supreme Court in Vijay Karia held the foreign award in question to be enforceable and also laid down important principles about the application of Section 48 of the Act, powerfully reiterating the limited jurisdiction of the court to interfere with foreign awards. While it remains speculation whether taking note of this decision would have altered the outcome in NAFED, it is submitted that the pro-arbitration approach outlined by the court in Vijay Karia may well have led to a different outcome.

Secondly, it is submitted that the court’s approach in NAFED amounts to review of a foreign award on merits in the guise of public policy. The court expressly states that its refusal to enforce is solely based on the ground that the award of damages for a contract that became void would render the foreign award contrary to the public policy of India. This conclusion is in turn based on findings that NAFED required permission from the government to supply the required goods, that this permission was never given, that Clause 14 would come into operation and render the contract void, and that this was not a case of self-induced frustration. It is submitted that all of these findings are entirely within the domain of the arbitrator and the court does not have jurisdiction under Section 48 to review them. In fact, at para 29 of the judgement, the court notes a submission on behalf of Alimenta S.A. that “The question of imposition of ban by the Government was gone into by the Arbitral Tribunal, and conclusion was recorded that it was a self­-imposed restriction by NAFED. There was no such ban on the export by the Government of India.” Curiously, the court does not deal with this submission at all and proceeds to examine the issue itself, without setting out the arbitrator’s reasoning and conclusion on this crucial point. It is also relevant to note that Clause 18 of the FOSFA 20 contract made English law the law applicable to all questions regarding the “construction, validity and performance” of the contract. Despite noting this provision, the court inexplicably goes on to examine the Indian legal position on frustration of contract, notes that Indian law and English law are different on the issue, and rests its conclusion on the basis of its own understanding of Indian law (an earlier post has examined and disputed the validity of this understanding, but that is a separate matter). Leaving aside questions of the correctness of the court’s analysis, the important argument here is that the court’s purported application of the public policy exception amounts to a review on merits and is not even contemplated by the Renusagar definition of public policy, let alone the more recent authorities on the subject. Even assuming that the court considered the government’s export quotas as constituting the ‘fundamental policy of Indian law’, the judgement is completely silent on what provisions of law the court is relying upon to reach this conclusion or for that matter, what the arbitrator’s findings on this issue were.

Thirdly, there is a troubling inarticulate premise for the court’s decision, which would perhaps be more justifiable as a major premise than public policy. In the enforcement proceedings, NAFED had also raised a number of objections as to the conduct of the arbitration proceedings, and inter alia contended that it had not been given a fair opportunity of presenting its case. Several allegations of bias were made, notably that Alimenta’s nominee arbitrator in the first instance arbitration acted as its counsel before the Board of Appeal, and that the Board of Appeal enhanced the rate of interest without even a prayer for such relief being made by Alimenta. In addition, the court notes that the arbitration proceedings had been continued by FOSFA in disregard of interim orders by Indian courts directing that the arbitration proceedings be stayed. While these factors are noted or examined only briefly, and the court makes it clear in para 79 that the other grounds urged by NAFED are not material to its decision as the award is contrary to public policy, there is a very real chance these factors influenced the ultimate decision of the court to refuse enforcement. It is submitted that while the court does not attach much importance to them, these facts raise considerable doubt about the fairness of the arbitration proceedings, and would have been arguable grounds to refuse enforcement. While the facts of every case are undoubtedly different, and NAFED does not depart from the legal principles laid down in earlier authorities, it is nonetheless a matter of concern that courts are still prone to misapplying the public policy exception in such a stark manner. It is respectfully submitted that future cases would do well to treat NAFED as an outlier in a line of otherwise progressive authorities, particularly as it does not take note of the three-judge bench’s decision in Vijay Karia.

Published by Sharad Bansal

Advocate, Bombay High Court

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