Has The ‘Unruly Horse of Public Policy’ Digressed from Its Path?

Introduction

The Supreme Court (‘SC’) in its recent judgment of National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A (‘NAFED’), refused to enforce a foreign arbitral award on the grounds that it was in contravention to the fundamental law of India, and therefore, violative of the public policy. This decision was surprising because just two months prior to the same, the SC, in Vijay Karia v. Prysmian Cavi E Sistemi SRL (‘Vijay Karia’) had adopted a narrow interpretation of ‘public policy’ and allowed the enforcement of a foreign award although it violated the Indian law. This dissension has left everybody contemplating the future judicial discourse surrounding the public policy exception to enforcement of foreign arbitral awards in India. The present article aims at digging deep into the issue and quarrying out various aspects of it, along with understanding the evolution of the term ‘public policy’ in the Indian arbitration law.

Factual Background of the Case

NAFED, a canalizing agency of the Government of India (‘GOI’) entered into a contract with Alimenta S.A. to supply 5000 metric tons (MT) of groundnuts. According to the export policy at the time, NAFED was required to take prior permission from the Ministry of Agriculture, GOI, for exports. In 1980, heavy damage was caused to the crops by a cyclone and NAFED could only supply 1900 MT of groundnuts that year. The parties then entered into two additional agreements for the supply of the remaining volume of the groundnuts in the year 1980-81. However, NAFED’s request for permission to export the groundnuts on the agreed contractual price was denied by the Ministry, because of the surge in the price of the groundnuts during that year. NAFED ad rem had no permission to carry forward the exports to another season and therefore approached the GOI to seek permission to carry forward the exports to another season. GOI, disallowing NAFED, directed it not to carry forward the previous year commitment to the subsequent year. NAFED’s contract with Alimenta was also objected by the GOI on the ground of escalation of price of the commodity thrice within one year. NAFED then informed Alimenta of the GOI’s prohibition to supply the contracted quantity. Considering it as a default on the part of NAFED, arbitration proceedings were invoked by Alimenta before the Federation of Oils, Seeds & Fats Associations Ltd. (‘FOSFA’)London. On 15.11.1989, FOSFA directed NAFED to pay USD 4,681,000 as damages, being the difference between the contracted price and the settlement price for the balance quantity. The Tribunal also awarded interest at the rate of 10.5% per annum from 13.2.1981 till the date of the award. NAFED filed an appeal before the Board of Appeal on 16.1.1990 which was not only rejected but was decided against NAFED, enhancing the rate of interest to 11.25% p.a. This award was upheld in an appeal before the Board of Appeal on 14.05.1990. Alimenta then sought enforcement of the initial award and the appellate award before the Delhi High Court which held in its favour. This was then challenged by NAFED before the SC. As this case related to a contract executed in 1980s, the appropriate legislation to consider, for the SC, was the Foreign Awards (Recognition and Enforcement) Act, 1961 and not the current Arbitration and Conciliation Act, 1996.

Judgment of the SC 

The Apex Court pointed that Clause 14 of the contract between the parties envisaged contingencies, including possible prohibitions on export. This would have the effect of nullifying the contract. The SC observed that since the permission to export was denied by the GOI, the contract attracted section 32 of the Indian Contract Act, 1872 and stood void. Therefore, the non-performance of the remaining contract on the part of NAFED was due to the public policy of India, which if performed would then have contravened the public policy of India relating to export as per Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961. In this scenario, FOSFA should not lumber NAFED with such liability to pay damages.

For this, the court relied on the case of Renusagar Power Co. Ltd. v. General Electric Co. (‘Renusagar’), in which the SC held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality. The court also relied on ONGC v. Saw Pipes, in which the court while dealing with an application under Section 34 of Arbitration Act, 1996 had included patent illegality as a sub-set of public policy for setting aside awards. In ONGC, the SC had opined that if the award is contrary to the substantive provisions of law or the provisions of the Act or against the terms of the contract, it would be patently illegal.

As for the present NAFED case, the SC concluded;

“Resultantly, the award is ex facie illegal, and in contravention of fundamental law, 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.” (¶ 80)

Therefore, the Court held the award in favour of Alimenta unenforceable.

Critical Analysis

This case can be contrasted with the observations of the SC in Vijay Karia; where the issue was whether the violation of the provisions of Foreign Exchange Management Act, 1999 would consequently result in the contravention of the fundamental public policy of India. The apex court succinctly stated that the ‘contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law.’ The same was reiterated by the Delhi High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited, where it observed that the expression ‘fundamental policy of Indian Law’ refers to ‘such core values which cannot be expected to be compromised’. Further, the court noted that the expression includes ‘fundamental and sub stratal legislative policy and not a provision of any enactment.’

But in the present case, the court not only failed to cite either of these judgments, but also failed at providing the rationale for digressing from them. The deviance in the interpretation of the term ‘public policy’ in different cases is possibly due to the lack of clarity about the term in the principle legislation. The broad meaning of Section 34 of the Arbitration Act, 1996 has opened the doors for the judiciary to interpret the term differently, without regard to uniformity, in each novel case.

In the process of deciding the outcome in NAFED, the court relied on Renusagar irrationally. While the Renusagar judgment had enlisted certain grounds on which the enforcement of a foreign award could be refused, it had also observed that the contravention of law alone would not attract the bar of public policy. This strict interpretation of ‘public policy’ in the Renusagar decision was later reaffirmed in the case of Ssangyong Engineering & Construction Co Ltd v National Highways Authority of India (‘Ssyangyong’), in which the court held that an award is in contravention to fundamental policy of Indian law only if it contravenes any law protecting national interest, disregards orders of superior courts in India or violates the principles of natural justice.

Moreover, it is pertinent to note that while an arbitrator looks into the merits of the case, the court’s intervention into the merits should remain very limited. Unless and until the interpretation of the arbitrator shocks the conscience of the court or if it suffers from procedural irregularities, it should not be questioned. However, in NAFED, the SC reviewed the award on merits of the case and scrabbled about the terms of the contract between NAFED and Alimenta. That means that the apex court based its decision on the liabilities of the parties under the contingent contract and against enforcement of the award. This act of nullifying the contract amounts to court going into the merits of the case in order to set aside the decision of the arbitral tribunal. The court equated a violation of an enactment as a violation of public policy, which is directly contradictory to its decision in Vijay Karia. In a haste to have a broad interpretation of ‘public policy’, it seems that the court conveniently chose to ignore the practice of not delving into substantial matters of the contract.

Perhaps the current judgment could be justified due to a similar decision by the HC in C.O.S.I.D. Inc. v. SAIL (‘COSID’) which was, like NAFED, also in the context of the 1961 Foreign Awards Act. Then, the Delhi High Court had held that a contravention of export policy contravenes the public policy of India. But this case can be distinguished from the current contentious NAFED judgment; it is pertinent to note that COSID was decided way before Renusagar judgment which had narrowly interpretated of the term ‘public policy’ under Section 7(1)(b)(ii) of the 1961 Act. Additionally, COSID was in context of an award which was against the government order of ‘banning exports’, which is more likely to affect export policy; unlike the contravention of a restriction or quota in the export policy as in NAFED case.

In support of the SC’s take in NAFED, it was also contended that since the present judgment was passed under the erstwhile Foreign Awards Act, 1961 and not under Arbitration & Conciliation Act, 1996, therefore, the ratio of this judgment should be only confined to those cases where the challenge is under the Foreign Awards Act, 1961 and not Arbitration & Conciliation Act, 1996 However, even this argument does not stand; in Shri Lal Mahal v. Progetto Grano Spa, the court held that the scope of the term ‘public policy’ is the same under both the Section 48 of the Arbitration & Conciliation Act, 1996 and Section 7 of the Foreign Awards Act, 1961 as both of them deal with the enforcement of international arbitral awards.

Therefore, this creates a chasm between the two judgments of Renusagar & Vijay Karia and the recent NAFED decision.

Conclusion

Appositely, this case arose at a time when there was a rigid export-import policy in India. This policy was in light of the necessity back then. Considering the facts, if the case had been decided then, it would not have amounted to such gross digression from its prior decision by the SC, even though, playing with the merits of the facts would still have remained a sully on its part. However, in the present scenario, where the world is facing the COVID-19 pandemic, such a decision of the SC would prove to be detrimental to its evolving stance in the International Arbitration. The decision may also be a factor leading to increase in the discouragement of potential investments when it is needed the most during this economic slowdown.

This decision of the apex court, in the time of limited judicial intervention in arbitration cases may be seen as an example of an unruly horse getting out of control. The unruly horse here is the interpretation of ‘public policy’. This case brings to notice an observation made by Lord Denning in Enderby Town Football Club Ltd v. The Football Association Ltd; ‘with a good man in the saddle, the unruly horse can be kept in control’. With a more uniform approach and carefully delineated definition, it may still be possible to keep the unruly horse of public policy in control with respect to future cases on enforcement of foreign arbitral awards in India.

(This Article has been written by Achintaya Soni, a third-year law student at University Institute of Legal Studies, Panjab University)

Cite As: Achintaya Soni,  ‘Has The ‘Unruly Horse of Public Policy’ Digressed from Its Path?’ (The Contemporary Law Forum, 23 October 2020) <https://tclf.in/2020/10/23/has-the-unruly-horse-of-public-policy-digressed-from-its-path> date of access

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