Under a standard FOSFA contract, National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED) was required to supply Alimenta SA with 5,000 MT groundnut. NAFED is a canalising agent and needs the permission of export from the Government of India and the Ministry of Agriculture. NAFED was able to supply only 1900 MT of the Commodity due to a cyclone in which the crops were damaged. Two addendums were signed for NAFED to supply the balance amount in the next year, i.e. 1980-81. NAFED refused to export the commodity due to the increase in prices. The Government did not allow NAFED from shipping any remaining stock from previous years. NAFED wasn’t able to complete the contract and also informed Alimenta about the government’s refusal. Alimenta invoked arbitration before FOSFA in London against NAFED. The arbitrator passed an award against NAFED on November 15, 1989, which was upheld in an appeal on May 14, 1990. NAFED was directed to pay USD 4,681,000 as damages and interest to Alimenta. Alimenta SA applied for enforcement of the Award before the Delhi High Court which ultimately held that the Award was enforceable. NAFED appealed to the Supreme Court.
Was it the Government of India who denied the export of groundnuts? Can NAFED be held liable to pay the damages under Clause 14? Is enforcement of the foreign award against the public policy of the nation?
Arguments of the Appellant
- The arbitral award is contrary to section 7(1)(b) of the Foreign Awards Act. The said award is contrary to public policy in as much as NAFED was not permitted to make its legal representation before the arbitral tribunal and/or the board of appeal. NAFED was deprived of an opportunity to defend its case.
- The arbitral award fails to consider and/or deal with the restrictions placed by the Central Government stipulated in Clause 14 of the contract.
- NAFED had no permission under the Export Control Order to carry forward export for the year 1979-80 to the year 1980-81. Such permission was categorically refused by the government.
- With reference to Clause 14 of the said contract, during the contract period, the prohibition of export by executive or legislative act of Government, shipment becomes impossible and the agreement shall be cancelled.
- The present contract was contingent upon the event/Government permission specified therein and in light of Clause 14, on refusal of such permissions by the Government the contract becomes void in terms of Section 32 of the Contract Act
- The enforcement procedure was barred by limitation as the application was not brought within 30 days thus violating Article 119, Schedule 1 of the Limitation Act, 1963.
- A.G. Scott, the arbitrator nominated by the respondent delivered the award initially and then appeared for the respondent before the Board of Appeal. Thus, his participation before the Board was bad in law and contrary to the basic norms of fairness, the concept of justice and principles of natural justice.
- The Board of Appeal could not have enhanced interest from 10 per cent to 11.25 per cent, payable by NAFED. Hence the award, ought not to be enforced under Section 7 of the Foreign Awards Act.
- The Learned Single Judge of the High Court could not have converted such award into a decree.
Arguments of the Respondent
- Scope of interference in the enforcement of foreign awards is extremely limited.
- In common law, the situation under Clause 14 of the Contract could at best be a case of frustration of contract.
- Frustration of a contract does not rescind the contract ab initio. It releases both parties from any performance while leaving undisturbed any legal rights already accrued or payments already made in accordance with the terms of such contract.
- As the law developed through subsequent decisions, it has been held that advance payments already made were recoverable by a party, before the supervening event/incident took place.
- Reliance was placed on a decision in the case of Davis Contractor v/s Fareham Urban District Council reported in (1956) 2 ALL E.R.; 145; by Lord Radcliffe on the proposition of radical change in the obligation to contend that no such situation arose in the present case.
- Reliance was also placed on another English Court decision in the case of National Carriers v/s Panalpina (Northern) Ltd. reported in (1981) 1 ALL E.R. 161; where frustration of contract takes place on the happening of a supervening event significantly changing the nature of outstanding i.e. non-performed contractual rights/obligations and does not disturb what had already been done/performed/paid.
- Reliance was placed on the famous judgement of our Supreme Court in the case of Central Inland Water Transport v/s Brojonath Ganguly reported in (1986) 3 SCC 156; to emphasise the expression ‘Public Policy’ and thus contend that the present award was not contrary to such public policy in terms of this judgement.
- The award was not contrary to public policy and/or Section 7(1)(b)(ii) of the Foreign Awards Act which must be construed in the sense public policy doctrine is applied in the field of private international law.
- Ordinarily, the grounds for refusing enforcement of a foreign award is contrary to the fundamental policy of Indian Law, interest of India, justice or morality do not apply in the facts of the present case.
- The Honourable Court must not refuse to enforce the arbitral award solely on the ground that the arbitrator may have committed a mistake of law and/or fact (5th Circuit 2004 decision in the Karaha Bodus Co. LLC.).
- FOFSA was relied on stating that though the FOSFA Rules are silent on the issue of the first-tier arbitrator who then acted as a representative of the party in the second tier i.e. at the appellate stage, according to the practice then prevalent in the UK which allowed the same.
The award could not be said to be enforceable, given the provisions contained in Section 7(1)(b)(ii) of the Foreign Awards Act. As per the case of Renusagar (supra), the enforcement of the foreign award would be against the fundamental policy of Indian Law and the basic concept of justice. It had been observed that the award was illegal and no export is permissible without the consent of Government of India. Therefore, without the consent of the Government, quota could not have been forwarded to next season. The enforcement of the award would be a violation of the public policy of India and therefore such award would be deemed unenforceable.
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The Court also held that it was not open to the Board of Appeal to increase the interest in the absence of appeal. The court has held the award to be unenforceable under section 7 of the Foreign Awards Act.
The Court observed that the arbitrator should not have appeared at the second stage to defend the arbitration award passed by him, and should have kept aloof. However, no concrete material had been placed on record to substantiate the objection as to prevailing practice and law in U.K. at the relevant time. Hence, they are not inclined to decide the issue in this case. Suffice it to observe that the Arbitrator is supposed to follow ethical standards, and, in their considered view, ought not to have defended the arbitration award passed by him in the subsequent judicial proceedings.
The award is illegal and any sort of export or import is not permissible without the permission or grant or order from the Government authorities. There would be a violation of the NAFED went against the decision of the Government and it would hinder the public policy of India. According to the FOSFA Agreement, Clause 14 was unenforceable under Sec.32 of the Contract Act. Therefore, it was found that NAFED is not liable to indemnify under the foreign award. Therefore, the order by the high court is set aside.
- One ought to remember the difference between sections 32 and 56 of the Contract Act while drafting the clauses, particularly the Force Majeure Clause.
- Contracts / Agreements drafted after lockdown is lifted should be carefully done, considering the difference between performance being contingent on an event and impossibility of performance under section 56.
- Arbitration Clauses are severable as held and independent of the contract in which they are contained.
- Difference between a domestic arbitration, international commercial arbitration and foreign awards under the Act is to be noted carefully. The Foreign Awards Act specifically section 7 thereof is to be considered for enforcement of foreign awards.
- The amendments to the Arbitration Act of 2015 gazetted on 31st December 2015 and 2019 gazetted on 9th August 2019, should be carefully kept in mind in drafting the arbitration clause as this will have a significant impact, going forward.
IN THE SUPREME COURT OF INDIA
Civil Appeal No. 667 of 2012
Decided On: 22.04.2020
Arun Mishra, M.R. Shah and B.R. Gavai, JJ.
Bar and Bench- NAFED vs Alimenta SA- 2nd March 2020
Surbhi Shah- India Corp Law- 14th June 2020
2020 SCC OnLine SC 381
Satyabrata Ghose v. Mugneeram Bangur and Co., (1954) SCR 310
Narayana Chandrasekhara Shenoy and Bros. by sole Proprietor Narayana Shanbog v. R. Palaniappa Mudaliar, AIR 1952 Mad. 670
Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp (1) SCC 644
Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
Saw Pipes [(2003) 5 SCC 705]
See Section 48 of the Indian Arbitration Act
See Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961
See Section 32 of Indian Contract Act
See Section 56 of Indian Contract Act
BY- Sangram Subhash Kokate | Government Law College, Mumbai