UN-ENFORCEABILITY OF FOREIGN AWARDS IN INDIA: SUPREME COURT REVISITS THE SCOPE OF PUBLIC POLICY
Shanelle Umarwadia, 5th year, Institute of Law, Nirma University, Ahmedabad.
Excerpt: The Apex Court has the power to reject enforcing foreign awards if they are in contrast to Public Policy of India. The blog discusses how the Court interpreted the meaning of ‘Public Policy’ through the recent case of NAFED V Alimenta SA. In the present case, the court protected the Government agency of its breach of contract on grounds that the present contract was rendered void as it was opposed to a Government notification and any award passed in favor of such contract would be against Public Policy of India. The Court referring to its previous decisions in Renusagar Power v General Electric and ONGC v Saw Pipes, declared the foreign award passed by FOSFA unenforceable.
The Supreme Court once again in the National Agricultural Cooperative Marketing Federation of India V Alimenta S.A case, has reiterated its decision to not enforce a foreign award which is in contrast with the Public Policy of India.
The case between the government agency NAFED and Swiss Company Alimenta SA, was pertaining to a breach in contract when NAFED on account of the Government Prohibition Rules could not export HP groundnuts to Alimenta SA. The dispute was then referred to arbitration, and proceedings were initiated before the Federation of Oil Seeds and Fats Associations Ltd., London (FOSFA).
The issue arose between the parties when NAFED initiated a stay order against FOSFA to continue with its arbitration proceedings on the grounds that the agreement between NAFED and Alimenta did not have an arbitration clause. Despite such order by Delhi High Court, FOFSA continued with its proceedings, passing a final award for a sum of USD 4,681,000 along with interest rate of 10.5% per annum against NAFED.
Alimenta SA approached the Delhi High court for enforcement of this foreign award which was accepted by the High Court and an enforcement order was so passed. An appeal was presented before the Supreme Court by NAFED against enforcement of the foreign award on the ground that it was opposed public policy under section 7(1)(b) of the Foreign Awards Act.
The Supreme Court protected the government agency on the basis of various precedents which have widened the meaning of Public Policy so as to include numerous matters.
Approach of the Court:
1. Void Agreement: The Court on reading upon the facts came to the conclusion that the Government of India, Ministry of Agriculture and Irrigation wrote a letter on December 1, 1980, to NAFED stating that it should not take up the previous years’ commitments without prior approval of the Government. Then later when NAFED asked for permission to continue its contract with Alimenta, the Government explicitly denied permission. It was argued that the present contract was put to an end, and it is followed as per the doctrine of frustration. As per this doctrine, frustration does not rescind the contract ab initio but it brings the contract to an end forthwith and automatically releases the parties from any performance of the contract. While it must be remembered that this does not hamper any legal rights already accrued or any payments or already made.
In the present case, clause 14 of the agreement mentioned that,
“during the contract if there was any prohibition of the export or any other executive or legislative act by or on behalf of the Government of the Country of origin, the unfulfilled part of the contract shall be cancelled.”
Therefore, stating that NAFED was justified in not making such supply.
Section 32 of the Indian Contract Act is attracted in this case as it states that in case of contingencies provided in the contract cannot be carried out, such contract would be void.
2. Un-enforceability of award: The question that arose was whether the ground of prohibition to supply imposed by the Government was sufficient to render the award unenforceable. Here the Court referred to section 7 (1)(b)(ii) of the Foreign Awards Act, 1961, which states that the award will not be enforced if is contrary to public policy. If the court regards it as immoral or opposed to public policy, then in that event, the object or agreement is said to be unlawful as under section 23 of the Contract Act.
The Court relied on the landmark cases on Public Policy. In the case of Renusagar Power Co. Ltd. v. General Electric Co, the meaning of ‘public policy’ came up for consideration and distinction drawn while applying the rule of public policy between the matter involving domestic law, and that involving conflict of laws was explained. The court stated that because there is an absence of a proper definition of ‘international public policy’ under Article V (2)(b) New York Convention, it is difficult to even construe the expression under Indian laws. Therefore, laying down a test, it stated that enforcement of foreign awards can be refused on the grounds of public policy if such enforcement would be contrary to:
a) Fundamental Policy of Indian Law
b) The Interest of India
c) Justice or morality.
While the case of Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., widened the scope of Public Policy of India under the Arbitration and Conciliation Act, 1996 to state that an award could be set aside if it is contrary to:
a) fundamental policy of Indian law; or
b) the interest of India; or
c) justice or morality, or
d) in addition, if it is patently illegal.
The court in this case added the term “patent illegality” and went on to explain the same as:
“Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks the conscience of the court.”
Also the case of Associate Builders v. Delhi Development Authority, was referred which stated that the concept of fundamental policy of Indian law would mean:
(a) Compliance of the statutes and judicial precedence,
(b) need for judicial approach
(c) natural justice compliance and
(d) standards of reasonableness.
Finally, the court held that it was apparent from the above decisions that no court has the power to enforce an award that is contrary to any prevailing Government order, or any existing law and it will be considered ex facie illegal. Hence, the contract was void under section 32 of the Contract Act, making it unenforceable.
The Judiciary has been vested with the power to interpret the law, but with power comes responsibility. This power must not be used to give a completely new perspective to such law. The Apex Court through its decision in cases such as Renusagar Power and ONGC v Saw Pipes have laid down tests that have wide enough to be interpreted in unnecessary divergent manners. Due to lack of legislative insight, these cases have been used as landmark precedents.
In the present case, since NAFED could not fulfill its duty due to the Government orders and FOSFA continued the arbitral proceedings despite the stay orders from the Courts, the foreign award so passed was held to be against public policy and therefore unenforceable.
In a country like India, which is striving hard to ameliorate its economy, foreign investment acts like an aid. But the present decision comes as a step back to foreign investors. This decision has not only inexplicitly given validity to breaching of contract due to Government orders but has also left the foreign company remediless. In a time where India is willing to expand foreign relations and invite foreign investors, such decisions would only act as repellent.