Vijay Karia and NAFED: Aggravating the Conundrum of Enforcing Foreign Awards in India

[This guest post is authored by Kunal Katariya. He is a counsel, based in Mumbai, who practices before the Bombay High Court and tribunals in Mumbai and occasionally in the Hon’ble Supreme Court of India, with a particular focus on securities, commercial and corporate litigation. He also regularly appears in arbitrations.]

Vijay Karia and NAFED: Aggravating the Conundrum of Enforcing Foreign Awards in India

Not long ago, many believed that the Supreme Court of India had made up its mind to follow the principle of “least interference” while determining enforceability of  foreign arbitral awards under Section 48 of the Arbitration and Conciliation Act 1996 (Arbitration Act).

In Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.[1] (Karia), the Supreme Court recently bolstered this belief while imposing rather unusually high costs in dismissing an appeal against the Bombay High Court’s decision to allow enforcement of foreign awards.

Barely two months after Karia, another coordinate bench of the Court in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A.[2] (NAFED) set aside an order passed by the Delhi High Court allowing enforcement of a foreign arbitral award. Interestingly, NAFED does not cite Karia.

In this post, the author argues that NAFED is inconsistent with the Supreme Court’s previous stance of ensuring minimum judicial interference with foreign awards. Using the Supreme Court’s rationale in Karia, the author has attempted to bring out the contrasting standards that have applied in refusing enforcement of an award in NAFED.

Facts in Karia

Four arbitral awards were passed by a sole arbitrator in arbitrations administered by the London Court of International Arbitration (LCIA) (Karia awards).

The Respondents (original claimants) alleged material breaches of the parties’ joint venture agreement and loss of effective control over the joint venture company on account of the Appellant’s breaches. The Appellants filed counterclaims alleging breach of inter alia non-compete obligations, interference with the management of the joint venture company.

In the Karia awards, the sole arbitrator determined that the Appellants had materially breached the joint venture agreement. The Appellants were directed to sell their shareholding to the Respondents at a discounted price and perform all acts necessary to effect this sale.

Although the remedy was available, the Appellants did not challenge the award before English Courts.

When the Respondents sought enforcement of the awards before the Bombay High Court, the Appellants filed objections under Section 48 of the Arbitration Act. The objections included:

  • lack of opportunity to present the case;
  • the awards being contrary to the Foreign Exchange Management Act, 1999 (FEMA) as the same prohibits sale of shares at a discounted price to a non-resident entity and therefore being against the fundamental policy of Indian law;
  • challenge on the merits of the claim; and
  • lack of appreciation of evidence by the arbitrator.

The Bombay High Court rejected these objections and allowed enforcement of the Karia awards. This order was then challenged before the Supreme Court by way of a special leave petition under Article 136 of the Constitution (SLP).

Findings of the Supreme Court

The Supreme Court acknowledged two aspects.

First, the legislative intent permitted an appeal against an order refusing enforcement of a foreign arbitral award, but not against an order allowing enforcement of a foreign arbitral award. The Supreme Court observed that “…the policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award on the extremely narrow grounds contained in Section 48 of the Act and which have been rejected…”.

Second, the Supreme Court has a narrow jurisdiction under Article 136 of the Constitution while dealing with such appeals, i.e. where an arbitrator and a High Court have already looked into the issues on merits.

The Supreme Court also considered a gamut of cases while reiterating the settled legal principle of “minimum interference” with foreign arbitral awards; including the following:

  • Shri Lal Mahal Ltd. v. Progetto Grano SPA[4] (Shri Lal Mahal), where the Court held that enforcement of a foreign award would be refused under Section 48 (2)(b) only if such enforcement would be contrary to (a) fundamental policy of Indian law; (b) the interests of India; or (c) justice and morality. The wider meaning given to the expression “public policy of India” in Section 34(2)(b)(ii) in ONGC v. Saw Pipes Ltd.[5] is not applicable while determining enforcement o of foreign awards. Enforcement objections under Section 48 and challenge to an award under Section 34 stood on a completely different footing.

  • Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India[6] (Ssangyong), where, following Renusagar, the Court laid down further principles on what constitutes the “fundamental policy of Indian law” and the extremely limited scope for interference with foreign arbitral awards. The Supreme Court also considered several judgements from Singapore and the United States of America for interpreting the “public policy” exception while enforcing a foreign award.

  • Cruz City 1 Mauritius Holdings v. Unitech Limited[7] (Cruz City), where the Delhi High Court enforced a foreign award even though it may have been violative of FEMA. The Court held that the discretion to disallow enforcement is limited to the circumstances stated in Section 48, in which case a balancing act may be performed by the Court enforcing a foreign award.

The Court observed that a violation of fundamental policy of Indian law must entail a breach of some legal principle or legislation which is so basic to Indian law that it is not susceptible of being compromised. “Fundamental Policy” was held to be the core values of India’s public policy as a nation, which may find expression not only in statutes but also time honoured, hallowed principles which are followed by Courts.”

It was reiterated that the scope of inquiry under Section 48 does not permit review of the foreign award on merits. Section 48 was amended by the Arbitration and Conciliation (Amendment) Act, 2015 to delete the ground “contrary to the interest of India”.

It was clarified that, in any case, refusal to enforce a foreign award is discretionary. Courts can choose to enforce foreign awards even if there exist some grounds of objection under Section 48.

The Court concluded that the Appellants were indulging in speculative litigation; with the fond hope that by flinging mud on a foreign arbitral award, some of the mud so slung would stick. Despite the court’s limited jurisdiction under Article 136, a lot of the Court’s time was taken by a case that had already been dealt with by four exhaustive awards. The Bombay High Court had allowed enforcement. Accordingly, the Court dismissed the appeal with costs of Rs. 50 Lakhs to be paid by the Appellants to the Respondents.

NAFED

In NAFED, another coordinate bench decided against enforcing a 31-year old award (NAFED Award) in a dispute which had undergone substantial litigation.

Interestingly, like in Renusagar, the Court was once again dealing with a matter seeking enforcement of a foreign award under the Foreign Awards (Recognition and Enforcement) Act, 1961 (1961 Act).

Factual background

The dispute arose from the parties’ transactions in 1979-81. NAFED was required to supply Alimenta with 5,000 MT of Indian HPS groundnut (the Commodity) under a standard ‘Federation of Oils, Seeds and Fats Associations Ltd’ (FOSFA) contract.

Initially, owing to a cyclone which damaged crops, NAFED was unable to supply the full quantity. The parties then entered into two addendums in 1980 for NAFED to supply the balance amount in the subsequent year, i.e. 1980-81 (along with the addenda, referred to as ‘Contract’).

Since NAFED was a canalizing agency of the Government of India, NAFED applied for permission from the Ministry of Agriculture (Ministry). The Ministry refused; and even prohibited NAFED from shipping any left-over quantities from previous years.  Consequently, NAFED was unable to fulfil the contract.

Alimenta invoked arbitration before FOSFA in London. NAFED filed a suit in the Delhi High Court seeking an injunction against the arbitration proceedings. The High Court directed the parties to go to arbitration.

The FOFSA-appointed arbitrator passed an award directing NAFED to pay approximately USD 4.7 million, along with interest at 10.5% per annum. While NAFED filed an appeal before the FOFSA Board of Appeals, not only was the appeal dismissed but also NAFED was directed to pay interest at 11.25% per annum (Appellate Award).

The Respondent filed an application before the Delhi High Court seeking enforcement of the NAFED Award and Appellate Award in India under sections 5 and 6 of the 1961 Act. A Single Judge of the High Court held the award to be enforceable. NAFED’s appeal to a Division Bench was held to be not maintainable.

While Alimenta filed for execution, NAFED challenged the High Court’s decision by way of an SLP before the Supreme Court.

Supreme Court’s findings

The Supreme Court considered the Contract in detail. Specifically, Clause 14 provided that during the shipment period, in the event of the prohibition of export by an executive or legislative act of any Government of origin, such restriction shall be deemed by both the parties to apply to the contract. The Court also analysed the correspondence between NAFED and the Government of India. Several judgements on contingent contracts and frustration of contracts were discussed.

The Court held that the Contract was a contingent contract under Section 32 of the Indian Contract Act, 1872. It was held unenforceable on account of the lack of permission from the government. Interestingly, the court observed as follows:

58. It is also apparent that the Government rightly objected to the supply being made at the rate of the previous season in the next season, particularly when the prices escalated thrice. The addendum was entered into subsequently, unfairly, and the parties fully understood that the Government would not permit export at the rate on which supply was proposed, and NAFED was acting only as a canalising agent of the Government of India. Thus, for such an unfair contract, permission was rightly declined by the Government. In the previous year, the commodity could not be supplied due to force majeure. In no event, supply could have been made in December 1980 and January 1981 sans permission from the Government of India.”

“68… Thus, it was not open because of the clear terms of the Arbitration Agreement to saddle the liability upon the NAFED to pay damages as the contract became void. 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.” (emphasis supplied)

The NAFED Award and Appellate Award were thus refused enforcement by the Supreme Court.

Comment

With due respect, it appears that the Supreme Court did in fact go on to review the merits of the NAFED Award; despite a well settled position to the contrary. The Court appears to have substituted its view on the interpretation of Clause 14 for the view taken by the arbitral tribunal and thus departed from the settled principle of “no review on merit”. The Court has in fact attempted to identify the reasons as to why the Government did not grant the permission to NAFED and also held that the contract was ‘unfair’.

While the Court considered the judgements in the case of Renusagar, Saw Pipes, Shri Lal Mahal, and Ssanyong, the NAFED Award and Appellate Award  were nevertheless held unenforceable on the basis that the contract had become void. This is also despite observing that while deciding enforceability of foreign awards, courts cannot take a second look on the merits of the matter.

The Court further held that the Ministry’s refusal to grant a supply permission was a matter covered by the fundamental policy of India in Section 48. This is in stark contrast with Karia, where the Court upheld the law laid down by Cruz City that a violation of FEMA would not necessarily amount to violation of fundamental policy of Indian law. It is noteworthy that the NAFED Court has not considered the judgement of the coordinate bench in Karia while refusing enforcement for a 31-year-old foreign award.

The NAFED Court did not seem to disagree on the principles of law laid down in the previous judgements.  But, by holding a Government Order to be “fundamental policy of Indian law”, the Supreme Court has effectively reopened the scope of what constitutes the fundamental policy of Indian law; a matter which was well settled by several cases all the way till Karia.

It is necessary to point out that the fact that the judgment was passed under the 1961 Act; which may be a distinguishing feature for foreign awards which are to be enforced under Section 48.  However, the spirit of Renusagar has been kept alive, bolstered even, in subsequent decisions – right up to Karia. Respectfully, therefore, the Supreme Court should perhaps have restricted itself to the standards laid down in Renusagar and clarified by subsequent decisions.

The Supreme Court has delivered several progressive steps on reducing the scope of judicial interference with foreign awards. However, with respect, it appears that NAFED is a massive step backward.

[1] Civil Appeal No. 1544 of 2020, judgment dated 13 February 2020

[2] Civil Appeal No. 667 of 2012, judgment dated 22 April 2020

[3] (1994) Supp (1) SCC 644

[4] (2014) 2 SCC 433

[5] (2003) 5 SCC 705

[6] Civil Appeal No. 4779 of 2019, judgment dated 8 May 2019

[7] (2017) 239 DLT 649

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