National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A., C.A. No. 667 of 2012: Supreme Court of India (decided on 22 April 2020)
Given that the case entails a long history, certain facts are necessary to highlight for understanding the arguments and ultimate findings:
12.01.1980: The National Agricultural Cooperative Marketing Federation of India (NAFED) and Alimenta S.A (Alimenta) entered into 1st agreement supply of groundnuts for the season 1979-80. It was governed by standard form of contract – Federation of Oils, Seeds and Fats Associations Ltd (FOSFA), 20 Contract. Clause 14 of the Agreement provided for Force Majeure and Prohibition. The commodity was partly supplied due to damage caused by cyclone. The balance quantity was 3100 MT.
03.04.1980: The 2nd Agreement was for August September, 1980. The commodity was partly supplied due to government restriction.
18.08.1980: Addendum to 1st Agreement for balance supply of 3100MT. Note: NAFED had no permission under the Export Control Order to carry forward the exports for the season 1979-80 to the year 1980-81, which it claimed to be unaware of.
01.12.1980: When NAFED approached the Government for permission, the Government directed NAFED not to ship any left over quantity.
13.02.1981: This led to disputes and Alimenta filed arbitration before FOSFA, London and asked NAFED to appoint nominee arbitrator.
20.03.1981: NAFED approached Delhi High Court seeking stay of arbitration and it was allowed.
23.04.1981: Disregarding stay granted by the Delhi High Court, FOSFA appointed arbitrator on behalf of NAFED.
11.12.1981: The Delhi High Court decided the case holding that 1st agreement would be governed by arbitration and there was no arbitration agreement in the 2nd Agreement.
30.4.1982: In the SLP preferred by Alimenta, the Supreme Court stayed the arbitration by an interim order.
04.05.1982: FOSFA said the Supreme Court does not have any power to act in the matter and continued with arbitration.
09.01.1987: The Supreme Court upheld the Delhi High Court judgement.
15.11.1989: FOSFA passed arbitral award in favour of Alimenta for a sum of USD 4,681,000 alongwith interest @ 10.5% p.a.
14.05.1990: In Appeal preferred by NAFED before the Board of Appeal, the request for representation through solicitors (law firm) was rejected.
14.09.1990: Board of Appeal increased the interest rate from 10.5% to 11.25%, despite no appeal by Alimenta. Importantly, Alimenta’s nominee Arbitrator represented them before Board of Appeal.
1993: Alimenta filed Suit No.1885 of 1993 in Delhi High Court under Sections 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 seeking enforcement of award and appellate award.
28.01.2000: The Single Judge of the Delhi High Court decided the matter against NAFED and held the award is enforceable.
05.04.2002: In appeal, the DB of High Court had stayed the execution. The interim relief was challenged in the Supreme Court which was modified.
06.09.2010: The DB of High Court held appeal not maintainable.
24.11.2010: NAFED filed the present Appeal before the Supreme Court.
(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 particularly in view of Clause 14 of the Agreement?
(iii) Whether enforcement of the award is against the public policy of India?
□ Whether it was a case of contingent contract or impossibility of performance?
Section 32 of the (Indian) Contract Act, 1872 applies in case the contract itself provides for contingencies, upon happening of which contract cannot be carried out, whereas Section 56 deals with the agreement to do an act after it becomes impossible or unlawful.
Because of the refusal by the Government, it was not permissible to the NAFED to supply to Alimenta. Hence, NAFED was justified in not supplying as it would violate the order and it was not permissible to carry forward the quantity of the previous year to the next year without permission of Government.
It is apparent that the contract came to an end in terms of Clause 14 of the agreement. The parties have agreed for a contingent contract. Thus, in this case, Section 32 of the Contract Act is attracted and not Section 56. It was an agreement to do an act impossible in itself without permission, and that is declared to be void by section 32. Therefore, the provisions of Section 32 of the Contract Act will apply in the present case.
(See Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44; Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522; Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR 1969 SC 110)
□ Whether the ground of prohibition to supply imposed by the Government was sufficient to render the foreign award unenforceable under Section 7 of Foreign Awards Act?
The award is against public policy:
Section 7 of the Foreign Awards Act deals with the conditions for enforcement of foreign awards. Section 7(1)(b)(ii) states that if the court dealing with the case is satisfied that the enforcement of the award is contrary to public policy, the foreign award may not be enforced.
It would have been unlawful for NAFED to affect the supply in view of the Government’s refusal to accord permission. Thus, the performance of the contract would have been against the fundamental public policy of India after the government refused to grant the permission and such an award could not be enforced, given the provisions contained in Section 7(1)(b)(ii) of the Foreign Awards Act. Thus, it would be against the fundamental public policy of India to enforce such an award, any supply made then would contravene the public policy of India relating to export for which permission of the Government of India was necessary.
(See Central Inland Water Transport Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr. 1986 (3) SCC 156; Renusagar Power Co. Ltd. v. General Electric Co., 1994 (1) SCC 644, Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705; Shri Lal Mahal Limited v. Progetto Grano Spa, (2014) 2 SCC 433; Ssanyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India, (2019) 8 SCALE 41)
Re: Arbitrator was appointed in violation of the order passed by the High Court, against the public policy
It was argued that as there was restraint order, the appointment of Arbitrator by FOSFA was illegal and violated order of the Indian Court and it was against the public policy. Consequently, Alimenta could not approach the Indian Court to enforce such an award of the tribunal.
Held: Though the Supreme Court passed an interim order, but ultimately it dismissed the petition of NAFED, and it was open for them to raise the question at the relevant time when the Supreme Court decided the matter in the year 1987. This court permitted the arbitration proceedings to continue. Though it would have been proper for the FOSFA to comply with the interim orders passed by the Supreme Court, said questions ought to have been raised at that stage. The Court declined to entertain and examine the arguments.
Re: NAFED was not allowed to have any legal representation before the arbitral tribunal or in the Board of Appeal
NAFED argued that due opportunity of defending to NAFED was not afforded. It also argued that due to refusal to permit representation through a legal firm in appeal, the NAFED was not able to point out the prejudice caused to it.
Arbitral Tribunal: The rule debars legal representation before the Arbitration Tribunal. Hence the submission as to non-representation before the Tribunal, cannot be accepted.
Board of Appeal: In absence of proof of prejudice caused to NAFED and to show that it was disabled to put forth its views, the award cannot be set aside.
Re: The nominee Arbitrator of Alimenta appeared as a counsel before he Board of Appeal for Alimenta
NAFED argued that the arbitrator could not have defended his award and subvert the basic norms of fairness. The action was against the concept of justice and rules of procedure. Alimenta argued that the practice prevalent at the relevant time in the UK allowed the same.
Held: As per the Indian Law and the ethical standards, the Arbitrator could not have appeared at the second stage to defend arbitration award passed by him, and should have kept aloof. But, NAFED could not place concrete material to substantiate the objection as to prevailing practice and laws of the UK. While the Court declined to decide the issue, it observed that Arbitrator is supposed to follow ethical standards and ought not to have defended arbitration award passed by him in the subsequent judicial proceedings.
Re: Board of Appeal enhanced the rate of interest from 10.5 % to 11.25 %
Held: It was not open to the Board of Appeal to increase the interest in the absence of appeal by Alimenta.
Conclusion by Court:
The award is ex facie illegal, and in contravention of fundamental law, as no export without permission of the Government was permissible and without the consent of the Government quota could not have been forwarded to next season. The export without permission would have violated the law, thus, enforcement of such award would be violative of the public policy of India. On the happening of contingency agreed to by the parties in Clause 14 of the FOSFA Agreement, the contract was rendered unenforceable under section 32 of the Contract Act. As such, NAFED could not have been held liable to pay damages under foreign award.
In the present times, when the Courts are taking pro-enforcement approach in arbitration cases, this judgment may prima facie appear to many arbitration practitioners as detrimental to the trend. But, if one scrutinizes the facts and circumstance of the case, it becomes apparent that the arbitral award and the proceedings had many loopholes which can easily fall within the restrictive criteria of objections to enforcement of foreign award under Indian laws.
Therefore, on taking a balanced approach, it would be reasonable to conclude that the judgement did no wrong in refusing to enforce the foreign award in India.
On the aspect of precedential value, the judgment can be cited an example of violation of ‘public policy’ in India. In my view, this does not lay down any new principle on ‘public policy’, but relies primarily on Renusagar (1994, SC). Importantly, the judgment deals with Foreign Awards Act of 1961 which was repealed by the consolidated legislation – Arbitration and Conciliation Act, 1996. Therefore, it may be very well argued (or rather to distinguish) that the legal interpretation in this case should be confined only to cases of pre-Arbitration Act of 1996.