NAFED vs Alimenta S.A. [AIR 1987 SC 643]

FACTS OF THE CASE

1. 12^th January 1980 (First Agreement) – National Agricultural Cooperative Marketing Federation of India (NAFED). They enter into a contract with Alimenta S.A, as into Supply of 5,000 metric tonnes of Indian HPS groundnut.It is a commodity to Alimenta.
2. Contract Period was for the year 1979-1980
3. Terms and Conditions of Contract– Standard Form of Federation of Oils, Seeds and Fats Association, London(FOSFA) 20, contract (Clause 11). Clause 14 was the prominent providers in the contract. It states that in case of prohibition of export due to any executive or legislative act of the Government. Therefore the agreement or any unfulfilled part would be cancelled. According to the terms of the contract, NAFED was require to ship 5000 MT of that commodity between the stipulate contract time. That is between 1979-1980, but only 1900 MT was shipped by NAFED within the agreed period and the remaining quantity of 3100 MT couldn’t be shipped. It is because the crops were damage by weather conditions (Cyclone) in Saurashtra region.
4. On October 8, 1980, Shipment of remaining quantity was agreed to take place during 1980-81, through vide addendum to contract.
5. NAFED was the canalizing agency for the Government of India, in regard to exports of the commodity. And, for any export to be carry forward to next year from the previous year. NAFED has explicitly require the express permission and consent o the Government of India.
6. Significantly, NAFED was permit by the Government of India to export for three years time period. It is between 1977-80. But it had no permission under the Export Control Order to carry forward the export from 1979-80 to 1980-81.
7. During the time of Execution, NAFED claim that it was unacquaint of the fact. It does not have the requisite authority to enter into the Addendum.
8. NAFED request Government of India to grant the permission for the export of the said commodity; for the period of 1980-81. But Ministry of Agriculture, Government of India direct NAFED not to ship leftover quantities from previous years. It was made crystal clear by the Government of India to NAFED; that the export of commodities was restrict under a quota system. As a result, NAFED cannot carry forward the previous year’s commitment to the subsequent year.
9. The transaction was administer by covenants such as Force Majeure and Prohibition. According to clause 14 of the said agreement, it states that in the case or any situation of prohibition of export due to executive order or by the law. Then the agreement would be consider as cancel.
10. As NAFED was not able to execute the export. Because of this Alimenta S.A initiat Arbitration Proceedings before FOFSA on February 13^th, 1981. And request NAFED to appoint the Arbitrator within the time period of 21 days.
11. NAFED also acquired a stay order from Delhi High Court, on the happening of the arbitration proceedings.
12. April 23^rd, 1981- FOFSA appointed an Arbitrator on behalf of NAFED.
13. Prohibitory Order was also pass by the Supreme Court, but FOFSA claime during the arbitration proceedings. That courts in India have no power to act in the matter of arbitration proceedings. Therefore, parties were referred by the Supreme Court to take pending arbitration, regarding First Agreement concerned.
14. November 15, 1989- FOFSA pass an award. According to which NAFED was direct to pay the sum of USD 4,681,000. And the amount was require to be paid with interest rate @ 10.5% per annum, from February 13, 1981. Till the date of the award.
15.  January 16, 1990 – NAFED filed an appeal before the Board of Appeal
16. September 14, 1990-  Board od Appeal, as on the matter o deciding the appeal pronounced by NAFED; although Alimenta S.A has not filed any appeal. Ultimately, NAFED was directed to pay interest component @ 11.25%instead of 10.5% p.a
17. Alimenta S.A filed suit under section 5 and 6 of the Foreign Awards, before Delhi High Court. For seeking enforcement of the initial as well as appellate award pass by FOFSA and Board of Appeal.
18. The dispute finally reach the Supreme Court under an appeal which was file by NAFED. The Supreme Court was require to adjudicate the matter on merits.

ISSUES

The main highlighting issue in the present appeal was, Whether the foreign award is enforceable in India or not.

The issue of Enforceability of the Foreign Award was decided through three further issues-

(1) Whether NAFED was unable to comply with contractual obligations to export groundnut due to Government refusal

(2) Whether NAFED was liable for breach of contract to pay damages, in view of clause 14 of the agreement

(3) Whether impugned of the said award was against the Public Policy of India or not

ANALYSIS

ARGUMENTS

NAFED

Impugned order was against the Public Policy of India, and therefore it is unenforceable as per to Section 7(1)(b)(ii) of the Foreign Awards. Due considerations were not observe in the impugn order as the restriction was impose by the Government on the export of the commodity.

According to Section 7(1)(a)(ii) of the Foreign Awards Act, enforcement of the award barr. The award ignores the basic structure and norms of justice and enforcement of the award, thereby will result in the unjust enrichment of Alimenta. Limitation Period issue also raise,  because as per Article 119, Schedule I of the Limitation Act, 1963, the enforcement proceedings are barr by limitation as they are not initiate within the time period of 30 days.

And NAFED was not entrust with due and reasonable opportunity to present its case. As the arbitrator nominee of Alimenta only represent the case on behalf of Alimenta, before the Board of Appeal,

ALIMENTA

Scope of Interference in respect to the enforcement of the impugn award is limit. And subsequently, the tribunal has found that the award was not against the public policy as the ban of exports was not impose by the government. But the real truth is that it was a self-impose restriction by NAFED and as per to the observations made by the tribunal. It was not open to the court in the proceedings under the foreign awards act to purview the merits of the case.

JUDGEMENT

The court placed its emphasis on the interpretation and application of the clause 14 of the contract, Section 32 of the Contract Act and Section 7 of the Foreign Awards Act.

The main focus of the court was on Clause 14 of the contract, as it provides for the cancellation of the agreement, in case the shipment becomes impossible, including the reasoning of the prohibition of export either by an executive or legislative order or act of the government of the country. The court observed that NAFED was not able to perform its contractual obligations, as being the canalizing agent of the government, it cannot carry out the export due to the restriction imposed by the government.

Regarding non-performance of the contractual terms and rescinding of the contract, the court observed and distinguished the difference between Section 32 and Section 56 of the Indian Contract Act with reference to Satyabrata Ghose v Mugneeram Bangur & Co[1] , the court pronounced that Section 32 of the Indian Contract Act, will be applicable in case if the agreement provides for contingencies upon happening of certain events, and thereby contract cannot be carried out, whereas Section 56 of the Indian Contract Act, emphasis on those agreements where it is required to do an impossible act or to do acts which will afterwards become impossible or unlawful.

Therefore, with this observation, the court opine that as per to the facts in hand. Provisions of Section 32 of Contract Act would be applicable. As there is a clear specification of contingency as per to the clause 14 of the contract. As the NAFED was not able to carry out the contractual terms as per to the contract. It was also anticipate in the contract, that in case the performance of an impossible act. Where the instant matter occur and eventually of Government refusal to grant the necessary permission, would turn the contract to be void.

Therefore, the court held that foreign award presupposes that supply was still possible. Despite the refusal made by the government, but the supply undertake would be consider Unlawful’ and in ‘Violation of Public Policy’. The addendums to the contract as for supplying of the remaining quantities were enter by both the parties. And the parties also fully understand that in case if the government did not allow to carry forward the export supply for the remaining quantities. And eventually NAFED would not be able to perform its part of the bargain, and it is evident that supply could not be made without the permission of the government. Parties agree for the cancellation of the agreement. As such the foreign award was against the basic law and public policy as applied in India.

Section 7 of the Foreign Awards Act provides that Award cannot be enforced if it is against the public policy. The court placed much reliance on the importance of Public Policy, with referring to the precedents, such as in  Renusagar Power Co. Ltd. v General Electric Co.[2] Therefore, it was say by the court that the matter in hand involves the fundamental policy of India. And the parties were aware of the same and still agree that in case of any such contingency. The agreement would stand cancel in respect to the supply of good, which could not be done.

As a result, the impugned award cannot hold NAFED liable for the payment of damages, for that type of contract which has become void, because the remaining supply order could not be carried forward as it was violating the Export Control Order and the refusal of the government to grant permission for carrying forward the quantity of the previous year to the following year.

OBSERVATION

a) The judgement set out the Domicile clause of the agreement, which clearly states that the structure, validity and performance is require to be govern by the English Law. Another prominent clause was that in case of any legislative or executive order, the resultant exports are prohibit, then the contract will be cancel. In this, the Supreme Court, proceed to analyse the correspondence between the parties and establishing the purpose and impact of this clause. And apply Section 32 of the Indian Contract Act, and says that the contract is void, without any considerate explanation, as into the applicability of Section 32 of Contract Act, and why there is no frustration of the contract, and why English Law is not applicable.

b) Reference by the Supreme Court to the letters sent by government ti NAFED. As for declining the permission for carrying forward the export of goods, and two reasons were mention-

Pricing of the groundnut has increase significantly, in respect to the contract price. NAFED cannot carry forward the previous year commitment to next year for export of good. And this was restrict under the quota system, as per to the Export Control Order, and subsequently, as per to Section 7 of the Act 1961. The court held that enforcement of such award in defilement of government orders and export policy, would be categorise as against the public policy.

The Hon’ble court has duly considered the scope and nature of Public Policy about the cases from Renu Sagar case[3] to Ssangyong case, but there is no presence of reasoning for the scope of Fundamental Policy. Supreme Court did not refer to the ruling of. Vijay Karia & Ors. Vs. Prysmian Cavi E Sistemi SRL & Or[4] In this case, it was held that Fundamental Policy of Indian Law, must amount to a breach of legal principle or legislation, which is of such nature that it cannot be compromised. The Hon’ble Supreme Court did not give adequate reasoning as to how the export control order and government refusal for granting the permission to export amounting to Fundamental Policy of India.

CONCLUSION

The court has increased the scope of Public Policy as in the case for defence only, as for enforcement purposes, but by not properly reviewing the reasoning of the previous landmark cases. Many aspects of the case were not adequate attention, and the court has remain silent on many aspects of the case.

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References:

[1] AIR 1954 SC 44

[2] 1994 Supp. (1) SCC 644

[3] Renusagar Power Co. Ltd. v. General Electric Co.1, 1994 Supp. (1) SCC 644

[4] Vijay Karia & Ors. Vs. Prysmian Cavi E Sistemi SRL & Or, decided on February 13^th, 2020