The Nafed-Alimenta judgment shows it might perhaps be time for Parliament to intervene and clarify the notion of public policy in the context of foreign arbitral awards

The Supreme Court, in its recent judgment in the case of Nafed vs Alimenta SA, refused to enforce a foreign arbitral award in a case dealing with groundnut export in the 1980s. In dealing with an old case when India was a closed economy, it seems to have unintentionally pushed our law back by a few decades, given that it goes against the grain of settled principles previously enunciated by the Supreme Court on enforcement of Foreign Arbitral Awards. The facts of each of the cases dealt with by the apex court would differ, but the legal principles seem to be at variance with each other.

The scope of refusing enforcement of a foreign arbitral award is extremely limited, according to the statute. One narrow ground for refusal is that the award violates a nation’s core values. This is an onerous “public policy” ground of refusing enforcement, besides being subjective. However, according to the Supreme Court’s own precedent, it is not triggered by a mere violation of executive orders or Indian statutory provisions. The waters have now been muddied by the Nafed ruling, a mere two months later.

While the case unfolded over many years, the core facts are simple. National Agriculture Cooperative Marketing Federation of India (Nafed) was able to ship only 1,900 out of 5,000 metric tonnes of groundnut to Alimenta SA, a Swiss firm in 1979-80 due to destruction of the crop. Under a later addendum to the Agreement, Nafed agreed to ship such shortfall in 1980-81, oblivious of the fact that under the applicable Export Control Order, it had permission to export between 1977 and 1980, and could not carry this forward to 1980-81. The foreign arbitration award went against Nafed, which was directed to pay a sum of $4,681,000 (with interest). This award was enhanced in an appeal before the Board of Appeal (ie, the designated appellate body in cases where arbitration is conducted before Federation of Oils, Seeds and Fats Associations or “Fosfa”).

Alimenta moved the Delhi High Court far back in 1993 to enforce the arbitral award, a requirement under the statute. Nafed lost multiple sets of proceedings before the high court, and ultimately filed an appeal before the Supreme Court in 2010. Keep in mind, therefore, that the final outcome of Alimenta’s enforcement proceedings has fructified after 27 years of first filing for enforcement in India. Delays in Indian judicial proceedings have been a frequent hammering theme in the international business fraternity. Take for instance the award in a BIT arbitration in the White Industries case, under the India-Australia BIT, where the tribunal held that delay in the Indian legal system violated India’s obligation to provide the investor with an “effective means” of enforcing its rights, which brought judicial delays in India squarely into international focus.

The time taken in arriving at a result in the Nafed case is unfortunate and injures India’s reputation, especially since it is aspiring to be a pro-arbitration jurisdiction. More regrettable will be the manner in which the international business fraternity will view the recent verdict as unsettling established principles (in the Alimenta case), thus preventing enforcement.

First, the judgment of the Supreme Court delves deep into the merits of the case and sifts through the evidence, which is decidedly against the “pro-enforcement” ethos of the New York Convention. The New York Convention forms the bedrock of an enforcement provision in our current arbitration statute; ie, the Arbitration and Conciliation Act, 1996. However, this Convention is also the foundation underlying the Foreign Awards (Recognition and Enforcement) Act, 1961, which was applicable in this case (since the enforcement proceedings were initiated in 1993, three years before the enactment of the present statute). Entering into the merits of a dispute at the appellate or enforcement stage is impermissible in the case of domestic awards, let alone foreign awards (where the standard is more stringent). This is clear from a judgment handed down last year by the Supreme Court in Ssangyong Engineering (2019) case.

Second, and far more egregious, is the Supreme Court’s understanding of what constitutes “public policy” grounds for refusing enforcement of a foreign arbitral award. Previously, in two cases – the Ssangyong decision and Shri Lal Mahal Ltd (2014) – the Supreme Court had held that public policy grounds for refusing enforcement of foreign awards were narrower than the grounds available for interfering with domestic awards. The Court, in these two decisions, had also clearly laid down that something more than a mere contravention of Indian law would be required for a foreign award to violate India’s public policy. As recognised by the Supreme Court in February this year, in Vijay Karia (2020) case, this is logical, since foreign arbitral awards often involve an application of the laws of a foreign jurisdiction, which parties have agreed to in advance. Inevitably, therefore, foreign law applied to a particular case and the law in the jurisdiction where enforcement is sought may run up against each other.

In the Vijay Karia case, the Court refused to interfere where a foreign award was challenged on the purported basis that it ran contrary to certain Exchange Control norms in the Non-Debt Instruments Rules under Fema, on the rationale that the provisions in question did not represent a core value recognised in India. Two months later, the Supreme Court has diluted the standard, with little explanation, holding that the award in the Nafed case violated public policy, on the basis that Nafed did not have government permission to export groundnut at the relevant time under an applicable export control order. Significantly, no effort was made to examine as to how such archaic trade regulation, when India was a closed economy, could have violated a ‘core value’ today (at the time of enforcement), even if it was part of the nation’s public policy in 1980s. In fact, the Court explicitly remarked “[t]he export without permission would have violated the law, thus, enforcement of such award would be violative of the public policy of India”. These principles essentially elevate executive actions, notwithstanding the decision-making hierarchy to the level of public policy norms, and runs contrary to the Supreme Court’s own pronouncements, which have refused to accord such status even to statutes passed by Parliament. Presumably, a larger bench of the Supreme Court will have to clarify the correct position. Meanwhile, this decision will create uncertainty in the minds of investors and international businesses looking towards India for trade, apart from hampering all strides India has made from a legislative standpoint by way of changes to the Arbitration Act to enhance its credibility in the sphere of arbitration in general, and with respect to enforceability of foreign awards in particular. Perhaps, this could be an opportune moment for Parliament to intervene and clarify the notion of public policy in the context of foreign arbitral awards, making it clear that mere statutory violations do not contravene public policy.

Mukesh Butani is Managing Partner at BMR Legal. Karan Lahiri is an Advocate practicing before the Supreme Court of India.