Effect of NAFED v. Alimenta SA on the Perception of India as an Arbitration-Friendly State
Updated: Oct 5, 2020
Author : Aparna Tripathi
The NAFED v. Alimenta S.A. judgement stirred up arguments on whether India is going on an arbitration-friendly path or not. Not enforcing a foreign arbitral award is a rare course taken by the Indian judiciary. In the present Apex Court in the Indian judicial system decided to not enforce a foreign arbitral award. Before discussing the issue, it is imperative to know the facts of the case in the light of which this analysis is based.
Summary of NAFED v. Alimenta S.A.
Facts of the case -
NAFED, i.e. National Agricultural Cooperative Marketing Federation of India was a canalising agency of the Government of India for exports of commodities. Both parties, i.e. NAFED and Alimenta S.A., entered into a contract in 1980 for the supply of 5,000 metric tonnes of Indian HPS Groundnut. Of the agreed quantity, NAFED was able to supply only 1900 metric tonnes of groundnut due to force majeure conditions as the Saurashtra region was hit by a cyclone. Due to non-fulfilment of the contract, the contract stood cancelled as per Clause 14 of the contract and an Addendum was executed between the parties for supply of the remaining quantity. The supply was to be made in the following year, i.e., in 1981. NAFED was initially given permission by the Government of India under the Export Control to export quantities from 1977 to 1980. No permission was sought under the Export Control Order for carrying forward the supplies in the next year as apparently NAFED was unaware that it lacked the authority to enter into addendum and needed permission for the same. Consequently, NAFED could not deliver the supplies and it approached the Government for granting of requisite permission. The Ministry of Agriculture directed NAFED to not ship the supplies as export of commodities was restricted under a quota system. Another reason given for not executing the addendum was that the price of the groundnuts had escalated to thrice its original price within a year. Again, NAFED sought permission from the Government which was denied and this was communicated to Alimenta S.A, which was viewed as notice of default. A final denial was given by the Government in January 1981 keeping in view the restricted export policy and quota ceiling. In February 2020, Alimenta S.A. gave an ultimatum to NAFED for fulfilling the contract or they would have no choice but to refer the matter to arbitration. NAFED informed Alimenta that export was not possible. Alimenta filed arbitration proceedings before the Federation of Oil, Seeds and Fats Associations Ltd. (FOFSA), London. NAFED was asked to appoint an arbitrator.
Meanwhile, NAFED filed a petition on 19.03.1981 praying to restrain the arbitration proceedings arguing that there was no specific provision for arbitration in the Agreement. The High Court of Delhi was pleased to stay the proceedings but FOFSA disregarded the order of Delhi HC and once again requested NAFED to appoint an arbitrator. NAFED communicated that the proceedings are stayed by the Delhi HC and that if they continue with proceedings, it would be illegal and void. Delhi HC gave time to Alimenta to file a reply and the stay was extended till 21.07.1981. However, an arbitrator was appointed on behalf of NAFED in utter disregard to the HC’s order. Against this action, NAFED moved the Court for contempt by Alimenta. An order was made against Alimenta to which it moved the Supreme Court through SLP and the Supreme Court too, ordered to refrain from continuing the arbitration proceedings. However, FOSFA communicated to NAFED that the SC had no power to act in the matter or to stay the arbitration and continued with the proceedings. The SC upheld the order of Delhi HC whereby it said that of the two agreements, the first one had an arbitration clause but the clause was absent in the second agreement. Hence, it said the arbitration proceeding pertaining to the second agreement should be dropped and the matter should proceed as per civil proceedings.
Subsequently, NAFED filed its written statements in the arbitration proceedings arguing that the proceedings were stayed by the courts in India and that FOSFA should not have appointed an arbitrator on behalf of NAFED when the proceedings were restrained. It was also argued that NAFED was not allowed to be represented through counsels. FOSFA passed an award on 15.11.1989 against NAFED, ordering it to pay a sum of USD 4,681,000. The interest of 10.5% was also payable.
Aggrieved by the arbitral award, NAFED filed an appeal before the Board of Appeal. In the Board of Appeal proceedings, NAFED’s request to be represented by their solicitors was not granted. The arbitral award passed by FOSFA was upheld and the interest rate was increased to 11.25%.
It is also interesting to note that the nominee arbitrator of Alimenta was the person who represented Alimenta in the Board of Appeals.
Alimenta S.A. moved the Delhi HC for enforcement of Award under Foreign Awards (Recognition and Enforcement) Act, 1961. NAFED challenged the enforceability of the award but the order was passed against NAFED. Subsequently, an LPA was filed. The SC stayed the execution of the award. The petitions were disposed of on 05.04.2002. An appeal which was filed was dismissed on grounds of non-maintainability in 2010. NAFED filed an appeal to the SC.
Enforcement of award is barred by Section 7(1)(a)(ii) of the Foreign Awards Act.
The award is against the public policy of India and hence is violative of Section 7(1)(b)(ii) of the Foreign Awards Act.
The award flouts the basic norms of justice as NAFED was not given due opportunity to represent itself.
Notice under Section 101 of the Multi-State Cooperative Societies Act was not given.
The enforcement procedure is barred by limitation as it was brought from enforcement within 30 days as per Article 119 of Schedule I of Limitation Act.
Representation by Alimenta S.A. was unfair.
Enhancement of interest in the absence of an appeal by the Board of Appeals is illegal.
The Hon’ble Supreme Court refused the enforcement of the award on the basis that the arbitral award is contrary to the public policy of India.
In Vijay Karia v. Prysmian S.A., a case with similar issues was adjudicated by the Hon’ble Supreme Court and the judgement was delivered in February 2020. The issues, in this case, were similar to the NAFED’s case and are as follows:
The Party was not given an appropriate opportunity to present its case.
That the foreign arbitral award was against the public policy of India, hence unenforceable.
Enforcement of the award would mean a violation of the public policy of India.
Enforcement of the award would violate principles of natural justice.
In this case, the plea for not enforcing was rejected earlier and the Supreme Court took the view that there are no provisions for appeal under Section 50 of the Arbitration and Conciliation Act against orders enforcing foreign awards. It was also held by the Court that mere violation of legislation would not mean contravention of fundamental policies and public policy.
The Need to Pay heed to Vijay Karia judgement
The Vijay Karia Judgement was disregarded by the Court in NAFED v. Aliemnta. The reason for the same is that the order for NAFED was reserved by the Court long before the Vijay Karia judgement was pronounced. Hence, the Vijay Karia judgement had no effect on NAFED.
Unenforceability of Award
Section 48 of the Arbitration and Conciliation Act enumerates conditions for enforcement of foreign awards. Sub-section (1)(b) states that if a party was not given proper notice of the appointment of the arbitrator or the arbitral proceedings or was otherwise unable to present the case, then an award against such party cannot be enforced. According to NAFED’s arguments, it can be drawn that an arbitrator was appointed by the FOSFA themselves when communication of the order of stay was made. Also, NAFED was not given an opportunity for presenting its case through counsel which weakens the position of the party.
Section 48(2)(b) of the Act says that a Court may refuse enforcement of an arbitral award if the enforcement of the award would be contrary to the public policy of India. Although an explanation is given with this section, many areas are still open for judicial consideration. In the present case, the policy in question is the export policy of India and if the contract would have been performed by NAFED, it would have been against the law.
The reliance was also placed by the Supreme Court on section 32 of the Indian Contract Act which talks about contracts contingent on the happening of events. According to this section, it was not possible for NAFED to perform the contract.
As far as the discussion regarding India being a not-so-conducive country for arbitration is concerned, in my opinion, this decision would not have a negative effect on the image of India. If one is to see closely, the case dates back to 1980-81 when there was no LPG (Liberalisation, Privatisation and Globalization) Policy. The pre-LPG era was full of problems for extra-territorial trade.
It is also to be kept in mind that it is a possibility that Courts would have favoured Alimenta if the orders of Indian Courts were respected. Contrary to that, orders made by Delhi High Court and Supreme Court were disregarded not on one occasion but continuously. This act also led to the violation of the principle of natural justice of Audi Alteram Partem. This violation of the basic notion of justice in arbitration proceedings has to be viewed as a violation of public policy and fundamental laws.
Also, apparently the new judgement of Vijay Karia (which is because the order for NAFED was reserved before 2020), the guidelines laid down, in that case, would be followed which portrays India as an arbitration-friendly State. Also, the NAFED v. Alimenta judgement does not overrule any previous judgement.
Along with Vijay Karia, in another case, M/s Centrotrade Minerals v. Hindustan Copper Ltd., the Court again enforced the foreign arbitral award. This can be viewed as that the Indian Courts have always adopted the course of award implementation.
The NAFED V. Aliemta judgement can be termed as one of its kind due to the complex nature of its facts and situations. In my view, this judgment instead of instilling fear in minds of the foreign parties would build confidence in the minds of Indian parties that their courts are present to rescue them in times of misuse of powers and laws.