NAFED v. Alimenta SA: Expanding the scope of public policy

The Supreme Court of India in a recent judgment titled NAFED v. Alimenta SA refused to enforce a foreign award under the public policy exception because the award upheld supply of goods contrary to the export policy of India.

With due deference to the reasoning adopted by the Court, it is the humble opinion of the author that the decision in Alimenta overlooks fundamental legal principles laid down by Indian courts while considering objections to the enforcement of an award. In particular, the reasoning in Alimenta is contrary to the law laid down by a co-ordinate Bench of the Court in Vijay Karia v. Prysmian SA, which was pronounced only two months before Alimenta.

This post will first provide a brief overview of the law on refusal to enforce foreign awards in India. The decision in Alimenta will be discussed next, followed by an analysis of the correctness of the decision.

Background of Section 48 of the Indian Arbitration Act

Section 48 of the Act is modeled on Article V of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 and provides for the grounds to refuse enforcement of a foreign award. Section 48(2)(b) provides that enforcement of an arbitral award may be refused if the court finds that the enforcement would be contrary to the public policy of India.

The doctrine of public policy has had a chequered history. In Renusagar, the Court held that enforcement of a foreign award on public policy grounds should be refused only if the enforcement would be contrary to: (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.

This was reiterated by the Court in Shri Lal Mahal, where it was held that unlike domestic awards, patent illegality would not be a ground to refuse enforcement of a foreign award.

To make the position clearer, the Arbitration and Conciliation (Amendment) Act, 2015 inserted an Explanation to Section 48(2)(b), which stated that an award would be contrary to public policy of India only if (i) the making of the award was induced or affected by fraud or corruption or; (ii) the award was in contravention with the fundamental policy of Indian law; or (iii) if the award is in conflict with the most basic notions of morality or justice.

Another Explanation inserted by the 2015 Amendment provided that the test of fundamental policy of Indian law would not entail a review on the merits of the dispute.

Post the 2015 Amendment Act, the following principles were deduced by courts in India through various judgments:

1. It was held in Vijay Karia that mere violation of a legislation would not amount to contravention of fundamental policy of Indian law and would not amount to a violation of public policy.

2. Fundamental policy of Indian law refers to fundamental and substratal legislative policy and not the provisions of any enactment. It refers to core values of India’s public policy as a nation, which may find expression not only in statutes, but also in time-honoured and hallowed principles which have been consistently followed by courts in India.

3. Erroneous application of law, a mistake in law, or a different but feasible interpretation of a contract by the tribunal would not be covered under the public policy ground.

4. Perversity is categorized under the ground of patent illegality which can be used to set aside only domestic awards. Patent illegality appearing on the face of an award is not a ground to refuse enforcement under Section 48.

5. While exercising powers under Section 48, a review of the award on merits is impermissible.

Factual matrix of Alimenta

It is important to note that the law applicable to the enforcement of the award in Alimenta was Section 7 of the Foreign Awards (Recognition and Enforcement) Act, 1961, which applies the same principles as Section 48 of the Arbitration Act.

In 1979-80, a contract was entered into between Alimenta SA and NAFED where the latter had to supply 5000 MT of a commodity. The price per MT was agreed at USD 765. Only 1900 MT could be shipped by NAFED. Clause 14 of the contract provided that in case of prohibition of export by an executive order or by law, the contract would stand cancelled.

In 1980-1981 there was a crop failure in USA which led to an increase in the price of the commodity. An addendum was executed to the contract for shipping the remaining 3100 MT of commodity in double gunny bags during the season 1980-1981, at the extra cost of USD 15 per MT.

While NAFED had permission from the government to enter into exports for three years between 1977-1980, it did not have any permission under the Export Control Order to carry forward exports for the season 1979-1980 to 1980-1981. NAFED claimed that it was unaware of this condition at the time of execution of the addendum. NAFED sought sent various communications to the government for approving the export of the commodity, but its requests were denied.

Disputes arose between the parties, which culminated into an award directing NAFED to pay USD 4,681,000 being the difference between the contract price of USD 15 per MT as damages along with interest.

The enforcement of this award was resisted on the grounds that NAFED was unable to supply because of non-approval from the government and that there was no breach of the contract. The enforcement of the award was against the public policy of India, because the award upheld NAFED’s obligation to supply even though there was no approval from the government.

Findings in Alimenta and their analysis

A major part of the judgment in Alimenta deals with the Court’s discussion on contingent contracts and frustration of contracts. The tribunal’s findings on frustration have not been discussed in the judgment.

Be that as it may, the tribunal’s analysis of frustration and contingent contracts, even if erroneous, could not have been interfered with because a mistake in interpreting or applying the law is not a ground under Section 48.

The Court undertook its own analysis of the effect of Clause 14 of the contract and held that there was no frustration of the contract, but there was a contingent event envisaged under Clause 14 which occurred and led to the cancellation of the contract.

While doing so, the Court seems to have undertaken a review of the award on merits as an appellate court and arrived at its own conclusions on the parties’ liability under the contract. As has been discussed earlier, this is impermissible under Section 48 of the IAA.

Regarding the public policy argument, the Court considered a plethora of judgments and concluded as follows:

“…There was no permission to export commodity of the previous year in the next season, and then the Government declined permission to NAFED to supply. 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.”

This conclusion has been arrived at on the presumption that grant of permission from the government to carry out supplies by NAFED is a fundamental public policy of India. However, the essential question which has not been addressed by the Court is - whether the approval to be obtained from the government is a substratal, core and intrinsic principle of India’s public policy to qualify as a fundamental policy of Indian law or is it a mere violation of law?

The decision in Daiichi may be of some relevance to answer this question. In Daiichi, the award had held the minors to be liable for fraud and misrepresentation. The Delhi High Court refused to enforce the award against minors on the ground that it was the fundamental policy of Indian law to protect minors. Similarly, in Vijay Karia, it was held that a violation of the Foreign Exchange Management Act (FEMA) would not amount to a violation of the fundamental policy of India.

Another aspect which needs consideration is that the award in Alimenta did not direct NAFED to supply commodities without obtaining approval from the government. The award was for damages along with interest. The Court was only required to consider if the award of damages along with interest was against the public policy of India.

This brings us back to the point that the Court overstepped the contours of Section 48 and reviewed the award on merits.

The decisions in Vijay Karia and Alimenta reflect two diametrically opposite approaches to the exercise of powers by a court under Section 48 of the IAA. Had the decision in Vijay Karia been considered by the Court in Alimenta, it may have adopted the pro-enforcement bias and not exceeded the scope of review under Section 48.

There is considerable tussle between adopting a pro-arbitration approach in theory and applying it to cases in practice. The doctrine of public policy needs to be revised continuously and more importantly, applied even more carefully.

The author is an Advocate practicing before the Supreme Court of India, the Delhi High Court and Tribunals in New Delhi.