The parties in question i.e. the Appellant and the Respondent entered into a contract dated 12.01.1980 (“first agreement”) for supply of 5000 metric tons of India HPS groundnut (“the said goods”) at the rate of USD 765 PMT for the season 1979-1980. The Contract was not a Free on Board contract but a CIF contract as per the terms of Federation of Oils, Seeds and Fats Association (“FOSFA”).
The Appellant was a canalizing agency for the Government of India for exports of the said goods. The Appellant therefore, required an express permission from the government while carrying forward any export quantity from the previous year to the coming year.
On 03.04.1980, the Appellant entered into another agreement for export of 4000 MT at the rate of USD 770 PMT (“second agreement”), the shipment period for which was August-September, 1980. This agreement is not the subject matter of dispute in this appeal.
The Appellant could only ship 1900 MT out of the total quantity of 5000 MT as agreed under the first agreement due to damaged crops because of a cyclone. The balance 3100 MT of the said goods could not be shipped as scheduled due to Government restrictions.
It is pertinent to note that the first agreement contained a Force Majeure and Prohibition clause under Clause 14 whereby, a prohibition of export by the order of the executive or by law would be treated as a cancellation of the agreement.
In 1980-81, due to a crop failure in the United States of America, the price of the said goods increased in the course of season leading to execution of an Addendum to the first agreement whereby the period of export was changed to November – December, 1980 for the balance 3100 MT. On 08.10.1980, second addendum to the first agreement was executed wherein it was agreed that the said goods would be shipped during 1980-81 season, whereby the said goods would be packed in new double gunny bags with the buyers paying extra cost of USD 15 PMT.
The Appellant had permission of the Government of India to enter into exports for a period of three years between1977-80 but had no permission to carry forward the exports for the season 1977-80 to the year 1981. The Appellant claimed that they were not aware of this restriction at the time of executing the addendums to the first agreement.
The Appellant approached the Government of India for permission to release the quota in the current season to fulfil its commitments under the contracts, however the same was denied by the Ministry of Agriculture on 01.12.1980. The Appellant again requested for the permission to fulfil contracts on 06.12.1980 and 09.12.1980 but the same were rejected again.
This was informed to the Respondent on 13.02.1981, who was asked not to nominate the vessel for shipment of the crop due to the prohibition to supply the contracted quantity. This message was treated as a Notice of Default made to make the supply.
The Respondent therefore, filed arbitration proceedings before FOFSA, London on 13.02.1981 and the Appellant was asked to appoint an Arbitrator within 21 days. Vide Telex dated 18.02.1981, the Respondent requested the Appellant to send originals of the Government’s notices banning the exports to the Respondents, which was sent by the Appellant on 23.02.1981. On the same day. the Appellant also requested the Respondent to send a copy of the FOSFA Arbitration Rules, which were sent by the Respondent on 24.02.01981. On 05.03.1981 the Appellant asked for an extension in appointment of arbitration beyond the period of 21 days and this was request was honoured on 10.03.1981.
On 19.03.1981 the Appellant filed a petition bearing OMP No. 41 of 1981 against the Respondent and their Arbitrators before the Delhi High Court praying to restrain such arbitration proceedings as the agreement did not contain any specific arbitration clause. Accordingly, vide order dated 20.03.1981 the arbitration proceedings were stayed till 22.04.1981 by the Delhi High Court. This order was intimated to the Respondent on 23.03.1981 by the Appellant.
In disregard of the order of interim stay granted on 20.3.1981 by the High Court, the FOSFA by its telex requested the Appellant to appoint an Arbitrator on its behalf by 20.04.1981, failing which FOSFA would appoint an arbitrator on behalf of the Appellant. Through a telex message on 09.04.1981, the Appellant informed the Respondent and FOSFA that it had no jurisdiction to proceed with the arbitration in view of the order of stay by the Delhi High Court and any action taken by the Respondent. or by Mr. Scott of FOSFA would be illegal and void.
On 22.04.1981, the Delhi High Court adjourned the matter and extended the interim relief granted to the Appellant till 21.07.1981. However, in disregard of the order passed by the High Court, FOSFA appointed Mr. F.A.D. Ralfe as an Arbitrator on behalf of the Appellant on 23.4.1981. Thus, the Appellant urged that it was deprived of the right to appoint its nominee Arbitrator and vide its letter dated 1.5.1981 informed FOSFA that despite the order of stay by the High Court, perverse steps were taken to appoint the Arbitrator on its behalf and it was further stated that the counsel appearing for the Respondent stated in the High Court that the Respondent would not proceed further in the arbitration. Ultimately, the Appellant filed proceedings in the nature of contempt on 30.10.1981 on the ground that appointment of Arbitrator on behalf of the Appellant violated the orders dated 20.3.1981 and 22.4.1981, passed by the Delhi High Court.
On 11.012.1981 the Delhi High Court held in OMP No. 41 of 1981 that the first agreement would be governed by the arbitration agreement incorporated in FOFSA 20 Contract while there was no arbitration agreement between the parties in so far as the second agreement was concerned. Resultantly, on 22.03.1982, the Respondent filed filed FAO (OS) No.24 of 1982 against the order dated 11.12.1981 and the same was later withdrawn.
On 01.04.1982 the Respondent filed a Special Leave Petition which was numbered as Civil Appeal No.1755 as against the order dated 11.12.1981 of the Delhi High Court. On 30.04.1982 the Supreme Court passed an order restraining the Respondent and FOSFA to proceed further in the Arbitration. On 04.05.1982, FOSFA sent a telex that the Supreme Court had no power to act in the matter nor to stay the arbitration and continued with the proceedings in violation of the order passed by the Supreme Court.
Vide order dated 09.01.1987 the Supreme Court upheld the decision of the Delhi High Court dated 11.12.1981 and relegated the parties to arbitration for the first agreement and to civil proceedings for the second agreement since there was no arbitration clause in the second agreement. Accordingly, the Appellant filed its written submission before the FOSFA on 10.01.1989 while pointing out that it was not allowed to appoint its Arbitrator despite specific order of restraint by the Delhi High Court and it was not allowed to be represented through its Counsel. The Respondent also filed additional written submissions before FOFSA on 19.06.1989.
On 15.11.1989, FOFSA passed an award directing the Appellant to pay a sum of USD 4,681,000 being the difference between the contract price of USD 765 PMT plus USD 15 PMT for double bags and the settlement price of USD 2275 per metric tonnes plus USD 15 per metric tonnes for double bags as damages. The Appellant was ordered to pay interest @ 10.5% per annum from 13.02.1981 till the date of the award.
On 16.01.1990 the Appellant filed an appeal against the award dated 15.11.1989 before the Board of Appeal (‘the Board’) and several requests were made by the Appellant to be represented by their solicitors since there were special circumstances and Indian Law was required to be explained. However, these requests were not accepted by the Board on 14.05.1990.
On 14.09.1990 Board enhanced the award against the Appellant while deciding the Appeal and the Respondent filed no appeal. The Appellant was directed to pay interest @ 11.25% per annum instead of 10.5% per annum. The Arbitrator nominee of the Respondent who passed the original arbitration award represented the case on behalf of Respondent before the Board.
The Respondent thereafter, filed a petition as Suit No.1885 of 1993 under Section 5 and 6 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (“the Foreign Awards Act”) seeking enforcement of award passed by FOFSA and the Board of Appeal. The Single Judge of the Delhi High Court rendered the award to be enforceable vide order dated 28.01.2000.
The Appellant filed an Appeal bearing F.A.O. (O.S) No. 205 before the Division Bench of the Delhi High Court and stayed the execution on 28.02.2001. However, the stay and the order of appointment was questioned before the Supreme Court and the Supreme Court modified the interim order of the Delhi High Court dated 28.02.2001 and disposed of both the petitions in question on 05.05.2000 while passing certain interim orders.
On 09.09.2002, the Respondent filed an execution petition bearing Execution Petition No. 204 of 2002 seeking execution of the decree dated 28.01.2000 passed in Suit No. 1885 of 1993. The Appeal filed in the Delhi High Court was held to be non-maintainable and was dismissed on 06.09.2010. The Appellant, aggrieved by the said dismissal, filed the present Appeal bearing Civil Appeal No. 667 of 2012 before the Supreme Court for adjudication on merits.
ISSUES BEFORE THE SUPREME COURT
The following issues were considered by the Supreme Court:
- Whether the Appellant was unable to comply with the contractual obligation to export groundnut due to the Government’s refusal?
- Whether the Appellant could have been held liable in breach of contract to pay damages particularly in view of Clause 14 of the Agreement?
- Whether enforcement of the award is against the public policy of India?
The Appellant contended that:
- The award is against the public policy of India and therefore, unenforceable under Section 7 (1) (b) of the Foreign Awards Act;
- It doesn’t deal with the restrictions imposed by the Government;
- Ignores the basic norms of justice in furtherance of which, such enforcement will result in unjust enrichment of the Respondent at the cost of survival of the Appellant;
- The enforcement of award is barred by limitation and the Single Judge wrongly enforced the award into a decree; and
- The Appellant was not given an opportunity to present its case before the Arbitral Tribunal.
The Respondent, on the contrary, contended that:
- The scope of interference in enforcement of the award is limited;
- Award is not against public policy of India;
- Due opportunity was given to the Appellant to present its case;
- The ban on export was a self-imposed restriction by the Appellant.
The Court while discussing the issues on merits, referred the clauses of the contract and the Government orders of restriction too in order to adjudicate the fairness of the enforcement of the foreign award. The Court observed that;
“…It is apparent that the Government of India issued a direction that was binding upon the NAFED. Without permission, it was not possible for the NAFED to carry out its obligation under the Contract and Addenda.”
The Court referred to the common law doctrine of frustration while relying upon various precedents and held that the contract came to an end in terms of Clause 14 of the Agreement and became void in view of Section 32 of the Indian Contract Act, 1872. As per clause 14 of the Agreement, parties had agreed for a contingent contract and therefore, the situation shall fall under Section 32 of the Indian Contract Act, 1872 and not Section 56. The Supreme Court noted that the Appellant is a canalizing agency of the Government and cannot supply without prior approval of the Government. The Delhi High Court overlooked that the doctrine of frustration is not under Section 56 of the Indian Contract Act, 1872. The Supreme Court drew precedence from Smt. Sushila Devi and Ors. v. Hari Singh and Ors., (1971) 2 SCC 288 and observed:
“In this case, ‘expected event’ was a refusal by the Government as agreed to under Clause 14 of the Agreement. On the happening of such an event, it is so fundamental as to be regarded by law as striking at the root. As such, we are of the opinion that the contract was rendered void in terms of section 32 of the Contract Act.”
This Bench based reliance on the judgment of this Court in Satyabrata Ghose v. Mugneeram Bangur and Co., (1954) SCR 310, which is the leading precedent on the interpretation of the Doctrine of Frustration as entrusted in the Indian Contract Act, 1872. This bench interpreted the applicability of Section 32 and not Section 56 of the Indian Contract Act from Satyabrata Ghose whereby applicability of Section 56 has been elaborated as follows:
“… the doctrines of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act. The view that Section 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible. If the performance of a contract becomes impracticable or useless, having regard to the object and purpose the parties had in view, then it must be held that the performance of the contract has become impossible. But the supervening events should take away the basis of the contract, and it should be of such a character that it strikes at the root of the contract.”
With regard to the aspect of the unenforceability of the award since it was against the public policy of India, the Court placed reliance on Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, whereby this Court opined that the phrase “Public Policy of India” in the Arbitration and Conciliation Act, 1996 under Section 34 (2) (b)
(ii), with respect to domestic awards, should be given a wider meaning. Additionally it was held thereby that illegality goes to the root of the matter, or if the award shocks the conscience of the court, it would be patently illegal. Keeping in mind the various tests that were laid down by the Supreme Court in Saw Pipes, this Court further observed as follows:
“64. The intention of the party should be gathered from the agreement. It was observed that severe procedural defects in the arbitration proceedings might provide enough ground for refusal to uphold the award. In the instant case, we are not on the issue of procedural irregularities while considering the aspect above concerning the public policy; we have to consider the case mainly given Clause 14 of the Agreement.”
The Court was satisfied that enforcement of such foreign award shall be against the public policy of India and therefore, the award was denied enforcement. This Court further held that the award could be enforced as per Section 7 (1) (a) (i) of the Foreign Awards Act which protects the parties who are under inability to perform their obligations because of laws applicable or because of invalidity of the agreement.
Thereafter, the Court dealt with the issue of when can an award be declared to be against public policy, leading to several interpretations of the term ‘public policy’ under several decisions. The Court drew precedence from a few judgments in the following manner:
“66. In Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49, the Court relied on the decision in Renusagar (supra) for interpreting the expression “public policy.” The court held that the concept of the fundamental policy of Indian Law to mean (1) compliance of the statutes and judicial precedence, (2) need for judicial approach, (3) natural justice compliance, and (4) standards of reasonableness.”
In terms of the terms of the contract between the parties herein and the applicability of Section 32 of the Indian Contract Act, 1872 along with the interpretation of public policy pertaining to the facts of this matter, this Court concluded that:
“68. It is apparent from abovementioned decisions as to enforceability of foreign awards, 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 1980-81 to effect the supply, it required the permission of the Government. 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 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 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.”
Hence, the Court held that the Appellant could not have been held liable to pay damages under a foreign award and this appeal was allowed. Resultantly, the impugned order of the Delhi High Court was set aside. The Court held as follows:
“80. Resultantly, 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. The export without permission would have violated the law, thus, enforcement of such award would be violative f the public policy of India. 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. As such the NAFED could not have been held liable to pay damages under foreign award.
81. The appeal filed by the NAFED is thus allowed, and the impugned judgment and order passed by the High Court is set aside. Award is held to be unenforceable. No costs. ”
This judgment has interpreted the applicability of the doctrine of frustration to the merits of the case in terms of Section 32 and not Section 56 of the Indian Contract Act, 1872 by seeking guidance from several landmark judgements that have settled the law pertaining to the applicability of this doctrine to contracts in India.
The other important aspect of this judgment is that the Court refused the enforcement of a foreign award on the ground that such an award was against the public policy of India and further went on to extensively discuss the applicability and interpretation of public policy, based on the merits of the case.
The Supreme Court has in the instant case, tried to go against the pro-enforcement stance taken by most of the precedents for example, Ssanyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI), (2019) 8 SCALE 41, Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp. (1) SCC 644 or even the recent case of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL (Civil Appeal No. 1544 of 2020).
The Courts in India while moving towards a pro-arbitration age with minimal judicial intervention, have consistently discouraged mention and arguments on merits of the case when the award is before the Bench for enforcement. Questioning of the arbitrator’s interpretation of the agreement while hearing the parties should neither be performed nor be promoted by the Courts in India.
The Supreme Court ruled against the case of Renusagar Power Co. Ltd. v. General Electric Co., 1994 Supp. (1) SCC 644 and held:
“66. Article V(2)(b) of the New York Convention of 1958 and Section 7(1)(b)(ii) of the Foreign Awards Act do not postulate refusal of recognition and enforcement of a foreign award on the ground that it is contrary to the law of the country of enforcement and the ground of challenge is confined to the recognition and enforcement being contrary to the public policy of the country in which the award is set to be enforced. There is nothing to indicate that the expression “public policy” in Article V(2)(b) of the New York Convention and Section 7(1)(b)(ii) of the Foreign Awards Act is not used in the same sense in which it was used in Article I(c) of the Geneva Convention of 1927 and Section 7(1) of the Protocol and Convention Act of 1937.”
This decision of the Supreme Court shall raise multiple questions with respect to India being an appropriate seat of arbitration. This decision might also create legal hurdles in interpretation of public policy and enforcement of foreign awards under the Act.
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