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SC refuses enforcement of Foreign Award being ex facie illegal : an award in violation of export policy and the Government order is against "public policy"

The SC on April 22, 2020 {NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIA v. ALIMENTA S.A.} held that in the present case, the award is ex facie illegal, and in contravention of fundamental law, no export without permission of the Government was permissible and without the consent of the Government quota could not have been forwarded to next season.  It was held that the export without permission would have violated the law, thus, enforcement of such award   would   be   violative   of   the   public   policy   of   India.   It was held that on   the happening of contingency agreed to by the parties in Clause 14 of the FOSFA Agreement the contract was rendered unenforceable under section 32 of the Contract Act. It was held that as such the NAFED could not have been held liable to pay damages under foreign award.

It was further held by the SC Bench, comprising of Justice Arun Mishra, Justice M. R. Shah & Justice B. R. Gavai, it is apparent from Clause 14 of the Agreement that during the contract shipment period in the event of the prohibition of export by an executive or legislative act by any of the Government of origin, such restriction   shall   be   deemed by both   the   parties   to   apply   to   the contract. Thus, it was held that   if   the   shipment   becomes   impossible   by reasons mentioned in the clause, the agreement shall be cancelled. 

It was observed that Section 32 of the Contract Act applies in case the agreement itself provides for contingencies upon happening of which contract cannot be carried out and provide the consequences. To this case, it was held that provisions of Section 32 of the Contract Act is attracted and not section 56. It was held that in case an act becomes impossible at a future date, and that exigency is not provided in the agreement on the happening of which exigency, impossible or unlawful, the promisor had no control which he could not have prevented, the contract becomes void as provided in section 56. However, it was held that section 56 also provides liability for a cause where the promisor has agreed to do something which he knew or   with   reasonable   diligence   might   have   known   and   which   the promisee did not know to be impossible or unlawful. It was held that such a promisor must   make   compensation   to   such   promise   and   is   liable   to   pay damages. It was held that the latter part of section 56 is applicable when promisee did not know the act to be impossible or unlawful and that it was not known to the promisor; the action was impossible or unlawful or with reasonable diligence might have known.

In the present case, it was held that because of the clear stipulation in Clause 14 of the Agreement, it is apparent that the parties have agreed for a contingent   contract.  It was held that they   knew   very   well   that   the   Government’s executive, or legislative actions might come in the way as provided in Clause 14 of the Agreement. It was thus held, in this case, section 32 of the Contract Act is attracted and not the provisions of section 56. It was held that it was an agreement to do an act impossible in itself without permission, and that is declared to be void by section 32. It was observed that the contract was capable of being   performed   in   case   the   Government   gave   the   requisite authorization. It  was held that it is not an event that was not in contemplation at the time   of   entering   into   the   agreement.   Government   permission   was necessary. It was observed that Section 56 is not attracted as the promisor and promise both knew the reason in advance as in agreement such a contingency was provided itself in case of Government’s executive order comes in the way, for cancellation of the contract. Thus, it was held that the contract became void on the happening of the contingency, as provided in section 32 of the Contract Act.

In the present case, the High Court observed that it was a case of self­-induced frustration. The SC observed that High Court ignored and overlooked that it was not a case of frustration under section 56 of the Contract Act, but there was a stipulation in Clause 14 of the Agreement, the effect of which was ignored and overlooked, and the said term was based upon the law as applicable in India and was based on export restrictions, it was within the realm of public policy. It was held that the NAFED was a   canalising   agency   and   could   not   have   supplied   without   prior permission of Government, nor could it have lawfully carried forward last year's supply to next year that too limited quota and to supply Government permission was necessary to make it. It was held that enforcement of such an award in violation of export policy and the Government order would be against the public policy as envisaged in section 7 of the Act of 1961.

It was held that in view of Clause 14 of FOSFA Agreement and as per the law applicable in India, no export could have taken place without   the   permission   of   the   Government,   and   the NAFED was unable to supply, as it did not have any permission in the season  to   effect   the   supply,   it   required   the   permission   of   the Government. It was held that the matter is such which pertains to the fundamental policy of India and parties were aware of it, and contracted that in such an exigency as provided in clause 14, the Agreement shall be cancelled for the supply which could not be made.   It was held that it became void under section 32 of the Contract Act on happening of contingency. 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 was concluded that 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.

The question was also raised before the SC concerning the Board of Appeal, enhancing the rate of interest from 10.5 % to 11.25 %. It was held that it was not open to the Board of Appeal to increase the interest in the absence of appeal. 

It was held that the award could not be said to be enforceable, given the provisions contained in Section 7(1)(b)(ii) of the Foreign Awards Act. As per the test laid down in Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp. (1) SCC 644, its enforcement would be against the fundamental policy of Indian Law and the basic concept of justice. Thus, it was held that award is unenforceable, and the High Court erred in law in holding otherwise in a perfunctory manner.

The issue involved in the present appeal is the enforceability of the foreign award.   The questions falling for consideration in present case before the SC were (i)   whether   NAFED   was   unable   to   comply   with   the   contractual obligation to export groundnut due to the Government's refusal?; (ii) whether NAFED could have been held liable in breach of contract to pay damages particularly in view of Clause 14 of the Agreement?; and (iii) whether enforcement of the award is against the public policy of India? All the said questions were answered in favour of NAFED by the SC, while allowing the appeal.

The appellant was not able to comply with the contractual obligation in the present case due to ban imposed by the government on the export of groundnut in the relevant year.

Consequently, the appeal filed   by   the NAFED was   allowed,   and   the impugned judgment and order passed by the High Court was set aside. Award was held to be unenforceable in India by the SC.

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