The NAFED Judgment: Enlarging the Ambit of Public Policy
The Supreme Court on April 22, 2020, in the case of National Agricultural Cooperative Marketing Federation of India v Alimenta S. A declared a foreign award unenforceable on the ground that it would be against the public policy of our country (if enforced) because the provisions of the agreement violated Section 32 of the Indian Contract Act, 1872 and export restrictions imposed at that time period.
Facts of National Agricultural Cooperative Marketing Federation of India v. Alimenta S. A
The appellant National Agricultural Cooperative Marketing Federation of India (NAFED) (a canalizing agency for the Indian government and were performing export operation for the period of 1977-1980) had entered into two contracts during 1979-80, with respondents Alimenta, under which it was obligated to supply HPS groundnut kernels to the respondents. However, due to crop damage and certain export restrictions such could not be executed as agreed. The first contract included a force majeure and prohibition clause (clause 14), which allows the cancellation of the agreement in case an embargo on export or any other legislative or executive act by the Indian government.
Treating this as a violation of the agreement respondent invoked an arbitration proceeding before FOSFA in London. An award was passed against NAFED which directed them to pay USD 4,681,000 as damages to respondents. The said award by FOFSA was further approved by the Board of Appeals and Delhi High Court which ultimately led to the appellants file the present petition before the Supreme Court of India, to restrain the enforcement of the said award.
Issues Involved in National Agricultural Cooperative Marketing Federation of India v. Alimenta S. A
The issues involved in the present case are mentioned below:
- Whether NAFED’s inability to fulfill its contractual obligations was due to the government’s restriction on export?
- Whether the enforcement of the foreign award would amount to a breach of public policy of India under Section 48 of Arbitration and Conciliation Act, 1996?
The Judgment: National Agricultural Cooperative Marketing Federation of India v. Alimenta S. A
In its decision, the Apex Court refused to enforce the said award and held that due to the government’s restrictions, NAFED was justified in not fulfilling its contractual obligation and consequently cannot be made liable to pay any damages to Alimenta. To come to this conclusion, the Court relied on the clause 14 of the first contract and held that the said contract being contingent on the Government’s export policy can be rendered void as per Section 32 of the Indian Contract Act, 1872. Further, the court held that the enforcement of the present foreign award would be violative of the public policy of India as envisaged in section 7(1)(b)(ii) of Foreign Awards Act, 1961. For this, the court referred to various judgments and concluded that in light of government’s restriction, any supply made would contravene the public policy of India.
Analysis of Judgement in National Agricultural Cooperative Marketing Federation of India v. Alimenta S. A
The present judgment seems to reverse the trend which our judiciary was following when it comes to interpreting the term “Public Policy” of our country. In the case of Renusagar Power Ltd v. General Electric Co., the court has settled that a foreign award would contravene public policy if it is contradictory to the: fundamental policy of law in India; interest of India; (removed by 2015 Amendment act) or morality or justice. [See also: Ssanyong Engineering v. National Highways Authority of India and Associate Builders v. Delhi Development Authority]
Next in the case of Oil and Natural Gas ltd. vs. Saw Pipes, court held that an award would be violative of ‘public policy’ if it shocks the conscience of the court. Moreover, in the recent case of Vijay Karia v. Prysmian Cavi E Sistemi Srl court explained the phrase “fundamental policy of Indian law” as “core values of India’s public policy as a nation, which may find expression not only in statutes but also time-honored, hallowed principles which are followed by the Courts.”
Also in the cases of Shri Lal Mahal v. Progetto Grano Spa and Rashtriya Nigam v. Verma Transport Company it was held that the basic scheme of Arbitration Act is that it prohibits courts from having a “Second look” at foreign award when they are at enforcement stage and also, that the task of enforcement judge is restricted to verifying the grounds which are enumerated in the Act.
Thus if we try to link the approach of the court in above all cases we can conclude that the “exception” of not enforcing foreign award on the ground of contravention of public policy requires a higher threshold to be proved. Equating a mere contravention of law (as done in the present case) to the contravention of public policy of our country amounts to the violation of the pro-enforcement approach which our courts have been trying to follow lately.
We may conclude that the court in National Agricultural Cooperative Marketing Federation of India v Alimenta S. A has taken the interventionist approach by diving into the merit of the case. Though lately a trend was followed by our court according to which a narrower meaning was assigned to the term “public policy” when it comes to non-enforcement of a foreign award, but such has been a turnaround in the present case. While we may argue that present judgment can be fact-specific, but it has nevertheless put us in a questionable position for a principle which was a settled one earlier.
 Main.sci.gov.in (2020), https://main.sci.gov.in/supremecourt/2010/37543/37543_2010_31_1503_21810_Judgement_22-Apr-2020.pdf (last visited Jul 7, 2020). 1994 AIR 860.  AIR 2019 SC 5041.  (2015) 3 SCC 49.  (2003) 5 SCC 705.  Civil Appeal No. 1544 of 2020, judgment dated 13 February 2020.  (2014) 2 SCC 433.  2006 (7) SCC 275.
Author Details: Akansha Uboveja (Hidayatullah National Law University)