- Ashika Jain and Lakshay Garg
The biggest conundrum in the enforcement of the Arbitration award in India started with a 2012 landmark judgment whereby the Supreme Court in Balco case held that part 1 of the act[i] would not be applicable to foreign seated arbitrations. Thereby drawing a clear demarcation between Indian and foreign seated arbitrations.
For the last few decades, there has been ambiguity contemplating the enforcement of arbitral awards on the ground of Public Policy. The apex court has laid down several rules in the preceding cases, yet these rules cannot be applied as a straight-jacket formula. In a recent judgment of the Apex court, wherein enforcement of a foreign arbitral award was challenged on the grounds that it encroaches upon the Public Policy principle, the court pronounced the judgment which is likely to revolutionize and reconstruct the Public Policy test.
Evolution of “Public Policy” Throughout Landmark Judgements
The test for what constitutes public policy has gone through sundry screenings. The touchstone to determine the same has been evolved after a plethora of judgments by the apex court. Yet, there is no one size fits all policy, as each case requires the Court to play according to the factual matrix. The issue pertaining to the ambit and determination of “public policy” came before the court in the Renusagar Case.[ii] The court explicated that a violation of Indian law is not a sufficient ground to attract the defence of the public policy. Subsequently, in the ONGC case[iii], the apex court expanded the ambit of the test thereby upholding that the award shall not infringe the statutory provisions of Indian law or terms of the contract. Violating them would be considered as patently illegal. Thereafter, with the ruling in Venture Global[iv], the foreign arbitral awards became amenable to challenge and subject to the broader test of “public policy” as enunciated in the ONGC case. These three cases namely ONGC, Bhatia International[v] and Venture Global opened the floodgates for the petitions to challenge an arbitral award under Section 34 of the Arbitration Act. In Phulchand[vi] case, the Supreme Court took a step further, holding that even if the award attains finality, the parties have the power to re-enter the matter, thereby expanding the scope of “public policy” in such a way that the expressions under section 34 and section 48 became synonymous.
Factual Matrix of the Case
On 12 January 1980 NAFED entered into a contract with Alimenta, whereby it agreed to ship 5,000MT groundnuts for the year 1979-1980. However, due to unfavorable weather conditions, the crops failed and NAFED could supply only 1,900MT during the said period. It was agreed that the remaining quantity would be supplied in 1980-1981 and subsequent amendments were made to the contract in order to facilitate the same. A distinguished provision under the contract was Clause 14, which provided that the agreement would be cancelled in case of an export ban by an executive or legislative act of the government of India. NAFED was a canalizing agency for the government of India and it had to obtain prior permission from the government in order to carry forward any export from the previous year. When NAFED applied for permission, the government denied the same. Treating the non-shipment of the remaining commodity as default, Alimentacommenced arbitration proceedings before FOSFA. NAFED approached the High Court and Supreme Court to restrain the arbitration proceeding against it. Finally, in 1987, the Supreme Court assigned the parties to the arbitration pending before FOSFA.
The Court held that NAFED was merely a canalizing agency for the Government of India. It required express permission from the government in order to carry forward the exports and could not do so on their own accord. Since the refusal of the government was covered by clause 14 agreement, the said agreement became impossible to perform[vii] and was liable to be cancelled.
The court discussed at length on whether the matter falls under section 32 of the contracts act or under Section 56 of the act. The court followed the ratio laid in Satyabhadra Ghosh[viii] case in which it was held that terms according to which the contingencies occurring would make it stand discharged, the dissolution of the contract would take place as per terms mentioned in the contract. Such a case would be outside the purview of Section 56. The court opined that if the parties do contemplate the possibility of an intervening circumstance, but expressly stipulate that the contract shall stand regardless, a case of the frustration of contract cannot be made. Since clause 14 provided that in case of any legislative or executive interference, the unfulfilled part will stand cancelled, and section 32 would operate.
The court examined section 7 of the Foreign Awards Act, 1961. It is trite law that what constitutes public policy has not been defined and the principles governing public policy are capable of modification and expansion[ix]. The court, therefore, held that since the permission to export was denied by the Government of India, the contract became void. Further, the performance of the contract despite the refusal to export would be in contravention to the Export Control order, making this action against the public policy of India.
The present case concerns itself with the enforceability of Foreign Award where the Supreme Court relied predominantly on the factual matrix and decided the case based on merits. The court rectified the erroneous belief of the Arbitral Tribunal and affirmed the appellant’s claim that the ban on the export of the commodity was not a self-imposed ban, but one imposed by the government. Hence, the situation would be dealt with in accordance with clause 14 of the agreement. Furthermore, it opined that the government was well within its powers when it objected to the supply and declined the permission to ship the remaining quantity of the commodity.
Analysis and the Road Ahead
The present decision relied upon the test set out in Renusagar, which can be considered as a good law insofar as enforcement of an Award with regard to public policy is concerned. The resolved position while determining a public policy defence, permissible under section 7 (1)(b)(ii) of the Foreign Awards Act, is that the scope of such defence needs to be construed narrowly. In the present case, the court differed from this notion and broadened the scope for interpreting what constitutes Public Policy. The Court thoroughly scrutinized the facts of the dispute and concluded that the shipment could not be exported due to want of Government approval. This opened the gateway that helped in determining whether a specific aspect of an award transgressesIndian Public Policy.
The key issue (with respect to public sector undertakings)is whether the executive acts of the government can be construed as a change in law, or whether when such a direction is breached, it constitutes sufficient grounds for invoking public policy principle. Furthermore, the probability of such a decision giving rise to a cause of action for bilateral treaty arbitrations is of great importance and therefore requires a microscopic analysis.
The Public policy works as a strategy for the parties and is brought into the arguments in order to create a basis for challenging the enforcement of an award in the country. It is true that adherence to the public policy shall be ensured in cases where it is warranted. On the hind side, it is undeniable that its interpretation should be laid on the strictest grounds possible. An undefined and wide interpretation would only paint the enforcement mechanism of arbitral awards in a bad light. There are numerous issues where one party relies on a government directive as a defence for non- performance. It will be an interesting scenario to observe as to whether this judgment will have any ripple effect on those disputes.
Another interesting element, in this case, was the distinction laid by the court between Section 32 and Section 56 of the Contract Act, 1872. It has been observed that at times parties bring the case for the frustration of contract under section 56 of the Act, whereas it is later observed that according to the facts, the case should have been brought under section 32 of the Act. It is suggested to the parties that that in cases where the contract agreement is based on contingency i.e. occurrence of some event renders the contract void, section 32 will come into force and none of the parties will be held liable for the damages. This accurate observation may go a long way in getting some clarity on where the said sections will be applicable. For instance, in this pandemic-stricken situation (where force majeure claims have become the norm), the decision in the present case along with the decision in Energy Watchdog case[x] provides for the much-needed direction to concretize the test for force majeure.
The authors are law students at GNLU, Gandhinagar.
[i] Bharat Aluminium Company V. Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552.
[ii]Renusagar Power Co. Ltd. V. General Electric Company 1994 Supp (1) SCC 644.
[iii]ONGC v. Saw Pipes (2003) 5 SCC 7058.
[iv] Venture Global V Satyam Computers (2008) 4 SCC 190.
[v]Bhatia International v. Bulk Trading SA (2002) 4 SCC 105.
[vi]Phulchand Exports Limited V. O.O.O. Patriot (2011) 10 SCC 300.
[vii]Ram Kumar v. P.C. Roy & Co. (India) Ltd., AIR 1952 Cal. 335 (338).
[viii]Satyabhadra Ghose v. MugneeramBangur, 1954 AIR 44.
[ix]Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156.
[x]Energy Watchdog v. Central Electricity Regulatory Commission (2017) 14 SCC 80.