NAFED v. Alimenta S.A.: Indian Supreme Court’s Convolution of Public Policy

By: Anusha Shekhawat & Vatsal Patel


INTRODUCTION

On April 22, 2020, the Supreme Court of India (“SCI”), in National Agriculture Cooperative Marketing Federation of India v. Alimenta S.A. (“NAFED v. Alimenta S.A.”), set-aside an arbitral award in an international commercial Arbitration (“ICA”), on the ground of contravention of public policy of India. This blog aims to analyse how this ruling of the SCI is inconsistent with its previous rulings and convolutes the public policy exception under ICA.

FACTUAL MATRIX OF THE CASE

NAFED was a canalizing agency of the Government of India (“GoI”) which obtained a license under the Export Control Order for export of goods, and Alimenta S.A. was a company incorporated under the laws of Switzerland. Both entered into a standard contract, “FOSFA-20” (i.e. a contract published by the Federation of Oil, Seeds and Fats Association Ltd.), on January 12, 1980, whereby NAFED was supposed to export 5,000  metric tonnes of Indian H.P.S. Groundnut (“commodity”) to Alimenta S.A. (¶ 2).

Unfortunately, NAFED could export only 1,900 metric tonnes of the commodity because of damage being caused to crops by a cyclone. In order to rectify the situation, through addendums to the original contract, it was agreed between both the parties that NAFED would export the remaining 3,100 metric tonnes of the commodity to Alimenta S.A., in the year 1981 (¶¶ 6-7).

However, at the time of execution of the contract, NAFED claimed that its license to export had expired at the end of 1980 because of which it was prohibited under the Indian law i.e. the Export Control Order, from exporting (¶ 8). This claim, on part of NAFED, was augmented by the GoI who refused NAFED’s request to export the commodity after 1980 i.e. the expiry of the license period (¶ 11).

Upon being aggrieved by this, Alimenta S.A. initiated arbitration against NAFED which resulted in an arbitral award in favour of Alimenta S.A, directing NAFED to pay compensation for failing to supply the commodity to Alimenta S.A. (¶ 22).

Subsequently, Alimenta S.A. filed for execution of this arbitral award under Sections 5 and 6 of the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961 (FARE Act, 1961”).

THE JUDGMENT OF THE SUPREME COURT

The SCI held that the arbitral award was against the public policy of India because it violated the fundamental policy of Indian law and the basic concept of “justice” (¶ 69).

The SCI placed great emphasis upon the fact that NAFED was a canalising agency of the GoI and therefore, it required prior consent from the GoI, in order to export the commodity beyond 1980 i.e. after the license period had ended (¶¶ 38, 58). On this basis, the SCI held the opinion of the arbitral tribunal that the supply from NAFED to Alimenta S.A., could have been made even after the GoI had refused such a supply, to be an erroneous position in law. This was so because such an act would have been unlawful on part of NAFED (¶ 57).

In conclusion, the SCI held:

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)

ANALYSIS OF THE JUDGMENT

The scope of the public policy exception in ICA, according to the Indian law(s) on arbitration, has been examined by the SCI on numerous occasions (see a blog post, a journal article and a video). According to Sections 34 and 48 of the Indian Arbitration Act, an award is in conflict with the public policy of India only if it is – firstly, induced or affected by fraud; secondly, in contravention of the fundamental policy of Indian law; and thirdly, in conflict with basic notions of morality and justice.

In NAFED v. Alimenta S.A., the SCI understood the law established in the previous rulings correctly by considering a number of its judgements (¶¶ 61-67). However, it applied this law to the factual matrix in an erroneous manner.

Therefore, there seems to be a convolution over the interpretation of public policy:

Firstly, the SCI in the case of Renusagar Power Co. Ltd. v. General Electric Co. (Renusagar’s Case”) held that for invocation of Section 7(1)(b)(ii) of the FARE Act, 1961 (under which a foreign arbitral award could be set-aside for contravention of public policy) there must be something more than a violation of the law of India (¶ 66 of Renusagar’s Case).  However, it exempted laws enacted in pursuance of the “national economic interest” of the country from the operation of this principle (¶¶ 75-76 of Renusagar’s Case). Furthermore, very recently in Vijay Karia v. Prysmian, it was held that a contravention of public policy of India would happen only if there is a violation of the provisions of legislation which is so basic to Indian law that it is not susceptible of being compromised (¶ 83 of Vijay Karia v. Prysmian).

Similarly, in Cruz City v. Unitech Ltd., the Delhi High Court held that public policy will only mean core values of a member State’s national policy which it cannot be expected to compromise. Additionally, in the court’s opinion “fundamental policy of Indian law” could only mean the “fundamental and substantial legislative policy” and not merely a provision of “any enactment”. (¶ 97 of Cruz City v. Unitech Ltd.).

In NAFED v. Alimenta S.A., the SCI did not consider the Export Control Order (under which the license was issued) to be a law which was enacted to ensure the “national economic interest” of India; or a basic law susceptible of being compromised. Thus, a mere violation of the provisions of the Export Control Order would not constitute a contravention of public policy of India.

Secondly, in NAFED v. Alimenta S.A., the SCI set-aside the arbitral award after re-interpreting the terms of the already interpreted contract and hence, reverted to the approach under the test of “patently illegal”. The test of “patently illegal” under the head of “fundamental policy of Indian law” was introduced by the SCI in the case of ONGC v. Saw Pipes. According to it, an arbitral award can be reviewed by the courts on grounds of illegality or unreasonability (¶ 31 of ONGC v. Saw Pipes). However, through the case of Lal Mahal v. Progetto Grano, the SCI rejected to extend this test of “patently illegal” to review foreign awards and thus, restricted the scope of public policy in foreign awards. (¶  29-30 of Lal Mahal v. Progetto Grano). Moreover, this test of “patently illegal” under “fundamental policy of Indian law” was specifically undone by way of Section 22 of the Arbitration and Conciliation (Amendment) Act, 2015, which excluded “patently illegal” from the definition of public policy. Subsequently, this undoing was explained and affirmed in Ssangyong Engineering & Construction Co. Ltd. v. NHAI (Ssangyong’s Case”) (¶ 31 of Ssangyong’s Case).

Thirdly, in NAFED v. Alimenta S.A., the SCI quoted Redfern and Hunter: Even if blatant, a mistake of fact or law, if made by the arbitral tribunal, is not a ground for refusal of enforcement of the tribunal’s award.However, the SCI did not apply this principle despite it being approved in the recent case of Vijay Karia v. Prysmian (¶ 45 of Vijay Karia v. Prysmian). According to the SCI, the supply of the commodity could not have been made in the absence of prior consent from the GoI, and if it is made, the same would be prohibited under the Export Control Order. On the other hand, the arbitral tribunal upheld that there was no requirement of consent from the GoI. Thus, both had a different opinion over a point of law. However, this indeed cannot be a reason for the SCI to hold the arbitral award contrary to the public policy of India.

Fourthly, in Associate Builder v. DDA, the SCI held that an arbitral award can be against “justice” only if it shocks the conscience of the court (¶ 36 of Associated Builders v. DDA). This was reaffirmed in Ssangyong Engineering & Construction Co. Ltd. v. NHAI (¶ 35 of Ssangyong’s Case). In NAFED v. Alimenta S.A., the SCI held that the arbitral award violated the basic concept of “justice”. However, the SCI gave no reason for holding that the opinion of the arbitral award shocked the conscience of the court.

An arbitral tribunal can indeed have an opposite view from that of the court. Merely having an opposite view from that of the court cannot be considered to shock the conscience of the court.

CONCLUSION

The arbitration ecosystem in India was already in a challenging position before the on-going COVID-19 pandemic, with numerous arbitral awards being challenged before Indian courts. Currently, the situation is exacerbated with business sentiments being low. In such a scenario, the ruling in NAFED v. Alimenta S.A. is not only contrary to the established position in law but may also discourage potential investments when it is most needed during this economic slowdown. Hence, a course correction is required immediately.


(Anusha & Vatsal are currently undergraduates at Institute of Law, Nirma University.)

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