The Indian Supreme Court’s Judgment in NAFED v. Alimenta S.A.: Retrogressive or Wholly Irrelevant? Implications for India’s Pro-Arbitration Project

Author: Sathvik Chandrashekar*

Much has been written about the Indian Supreme Court’s judgment in NAFED v. Alimenta S.A.^[1] The judgment has sparked well-justified criticism for broadening the use of the “public policy” ground for refusing the enforcement of a foreign award.^[2] After taking a hands-off approach towards the enforcement of foreign awards in several prominent cases,^[3] the Court’s deviance from the hands-off approach in NAFED has been criticized for having turned the clock back; to undo all of the strides the Court had made in strengthening the principle of “minimum interference, maximum support.”

This post seeks to argue that the Court must rightly be criticized, but the Court’s decision does not disturb the progress made by Indian Courts toward favouring the enforcement of foreign awards. The post will first briefly summarize the holding of the Court and its treatment of the public policy ground. Second, this post will argue that Indian Courts are not bound to follow the decision because the judgment is based on a now repealed legislation- the Foreign Awards Act, 1961. After the enactment of the Arbitration and Conciliation Act in 1996 and ensuing amendments, the Foreign Awards Act has been wiped out both on paper and in practice.

THE COURT’S TREATMENT OF THE PUBLIC POLICY GROUND: CLOUDED BY ITS REHEARING OF THE MERITS

The underlying dispute arose 40 years ago, in 1980, between the National Agricultural Cooperative Marketing Federation of India (“NAFED”) and Alimenta S.A.. NAFED and Alimenta S.A. had entered into a sales contract for the sale of ground-nuts. The dispute resolution clause provided for arbitration under the rules of the Federation of Oils, Seeds and Fats Associations (“FOSFA”).

The prior consent of the Indian Government was required for NAFED to export the groundnuts. The contract contained a cancellation clause, which stipulated that the contract would be cancelled in the event the permission to export was denied. A part of the contract could not be performed because the Government of India denied permission. Alimenta S.A initiated arbitration proceedings against NAFED before the FOSFA. The tribunal after a detailed consideration of the cancellation clause passed an award of damages in favour of Alimenta S.A..

Alimenta S.A. filed a petition to enforce the award before the Delhi High Court, which allowed enforcement.^[4] NAFED immediately moved the Supreme Court to challenge the decision.

Before proceeding to rule on the enforceability of the award, the Court re-examined an issue that had already been decided by the tribunal in a thorough manner. The Court went into “whether NAFED was unable to carry out its contractual obligations in view of the Government’s refusal to export.” For this, the Court re-did an analysis of the cancellation clause. The Court concluded that the parties had agreed upon a contingent contract – the contingent event being the grant of Government permission. The Court relied on Sec. 32 of the Indian Contract Act, which states “Contingent contracts…  cannot be enforced by law unless and until that [Contingent] event has happened”, to hold that since the contingent event of government approval did not take place, the contract was void.  As the underlying contract itself was void, NAFED was not liable to pay damages. The Court’s refusal to enforce seems to have stemmed from this view on the merits.

The Court went on to refuse enforcement because the award “pre-supposes supply could have been made after the Government’s refusal.” Such an award would be “against the basic law and public policy as applied in India.” The refusal to grant permission was a matter pertaining to the “fundamental policy of India”- and further, once the contract was voided, enforcing an award that directs payment of damages would contravene the public policy of India.

The approach of the Court is indeed problematic on two fronts – first, the merits determination has informed the Court’s use of the Public Policy exception. The Court’s reliance on its own merits determination is truly shocking; especially given the precedents quoted extensively by the Court categorically state that Indian arbitration law does not “enable a party to the said (Enforcement) proceedings to impeach the award on merits.”^[5]

Second, the Court has ignored the well settled proposition of Indian arbitration law that a mere contravention of law is not a violation of public policy- something more is required to shock the conscience of the courts. The thrust of the Court’s refusal to enforce is that NAFED could not have been expected to contravene the Government’s refusal to export the groundnuts. There were no additional grounds offered along with this prospective contravention of law to justify the decision of the Court.

THE FOREIGN AWARDS ACT, 1961: A SKELETON IN THE CLOSET

 Despite the problematic nature of the decision, Indian Courts are not bound by the judgment because the decision is based on an interpretation of the old law— the Foreign Awards Act, 1961. Before the enactment of the Arbitration & Conciliation Act, 1996, the enforcement of domestic and foreign awards was regulated by separate legislations. The enforcement of domestic awards was governed by the Arbitration Act, 1940 while foreign awards governed by the New York Convention were enforced under the Foreign Awards Act, 1961.

In 1996, the Arbitration and Conciliation Act was enacted – bringing enforcement of domestic and foreign awards under the same umbrella legislation. Sec. 85(1) of the 1996 Act repeals all of the existing arbitration legislations up to the date of enactment including the Foreign Awards Act, 1961. Therefore, the Foreign Awards Act has been entirely erased from the statute books and is now truly a skeleton in the closet.

There is a slender exception created by the 1996 Act to this position of repeal. The provisions of the repealed legislation will only apply where an arbitral proceeding is commenced before August, 1996 unless otherwise agreed by the parties. Any dispute arbitrated after 1996 will be brought under the new regime. Therefore, for a party seeking an enforcement of a foreign award in a post 1996 proceeding, the judgment is of no consequence, because the legislation interpreted by the Court has been replaced.

In practice, the number of awards governed by the Foreign Awards Act are few. To illustrate, before this judgment, the only time an application was substantively adjudicated by the Supreme Court under Sec. 7 of the Foreign Awards Act was almost 2 decades ago in 2001.^[6] Looking at the decades that have passed separating these 2 judgments, enforcement under the Foreign Awards Act is truly a rare occurrence. One can safely say that the Foreign Awards Act is now history; and the Supreme Court’s judgment in NAFED is not binding.

COULD THE SUPREME COURT HAVE ARRIVED AT THE SAME DECISION UNDER THE NEW REGIME?: THE PROGRESS MADE BY THE 2015 AMENDMENT

A cynical party might question that even if the decision is not technically binding; can interpretations of the Foreign Awards Act continue to be applied to the 1996 Act? Has the Law departed from the Foreign Awards Act sufficiently—so much so, that a distinction will have to be drawn to render a correct decision?

The first question is worth considering. Both the Foreign Awards Act and the 1996 Act retain the phrase “contrary to public policy.” To gauge the meaning of public policy under Indian Law, the Supreme Court has relied on interpretations of the old law even after its repeal—but these interpretations, barring Phulchand Exports v. O.O.O Patriot^[7] have been used to drive home the limited meaning to be ascribed to public policy and  the narrow scope of review available to courts to interfere with foreign awards at the enforcement stage.

Despite this continued reliance, the answer to the second question is an emphatic yes- both in text and practice. The text of the rest of the provision, except the term “public policy” itself, has been altered so radically that an equivalence cannot be drawn between the two provisions.

To illustrate the difference, a comparison of the Public Policy exception in the Foreign Awards Act and the 1996 Act as it stands today is undertaken below.

As can be seen from the table above, the 1996 Act contains built-in safeguards, including a clear enumeration of public policy and bar of review on merits, which protect against any possible judicial indiscipline. These safeguards leave less room for Courts to ignore precedents and read the public policy ground more broadly than ideal like in NAFED. On the other hand, the Foreign Awards Act does not contain any qualifiers or restrictions to a court’s understanding of public policy. As long as the subjective standard of the “Court dealing with the case is satisfied”, the foreign award may be set aside on the public policy ground.

While vague phrases that can lead to multiple interpretations such as “fundamental policy of Indian Law” continue to be employed, there are clearly codified boundaries that a court cannot cross. Even if a court has a different view of public policy, such a view must remain embedded within the boundary-principle of no merits determination.

The Supreme Court recently had the opportunity to consider Section 48 along with the newly inserted Explanations in Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL and Ors.^[8] The Court categorically held that the 1996 Act bars enforcing courts from “second guessing the arbitrator’s interpretation of the agreement of the parties.” That is exactly what the Court in NAFED has done – it has not only cast aside the arbitrator’s determination for its own, it has then used this finding to invoke the Public Policy exception. Such a finding is exactly what the 1996 Act and subsequent rulings curtail; a ruling on public policy has to be based on the award alone and cannot involve any foray into the merits.

The manner in which the Supreme Court’s ruling in NAFED will be treated in the future remains to be seen. One can optimistically hope that no importance is given to such a decision. If the text and spirit of the new Arbitration Law in India is any indicator, it will remain an aberration.

[1] NAFED v. Alimenta S.A., (2020) SCC OnLine SC 381 (India).

[2] Globalarbitrationreview.com, Is “public policy” back to haunt enforcement in India? (May 7, 2020), https://globalarbitrationreview.com/article/1226599/is-%E2%80%9Cpublic-policy%E2%80%9D-back-to-haunt-enforcement-in-india; Indiacorplaw.in, Expansion of the Scope of Public Policy: Antithesis to the Judicial Discourse in Enforcement of Foreign Awards (May 11, 2020) https://indiacorplaw.in/2020/05/expansion-of-the-scope-of-public-policy-antithesis-to-the-judicial-discourse-in-enforcement-of-foreign-awards.html.

[3] Daiichi Sankyo Company Limited v. Malvinder Mohan Singh And Ors, Delhi High Court, (2018) SCC OnLine 6869 (India).

[4] Alimenta S.A. v. NAFED, Delhi High Court, (2000) SCC OnLine 72 (India).

[5] Ssangyong Engineering and Construction Company Limited v. NHAI, (2019) 15 SCC 131 (India).

[6] Smita Conductors Ltd vs Euro Alloys Ltd, (2001) 7 SCC 728 (India).

[7] Phulchand Exports v. O.O.O Patriot, (2011) 10 SCC 300 (India) (emphasis added). Later overruled by Shri Lal Mahal Ltd. v. Progetto Grano Spa,  (2014) 2 SCC 433.

[8] Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL and Ors, (2020) SCC OnLine SC 177 (India).

*Sathvik Chandrashekar is a graduate of the NALSAR University of Law.