NAFED vs Alimenta S.A.: Enforceability of Foreign Award in Light of Government Export Restrictions

In this case, the Supreme Court of India delved into the enforceability of a foreign arbitral award between the National Agricultural Cooperative Marketing Federation of India (NAFED) and Alimenta S.A. The dispute arose due to NAFED’s inability to fulfill its export commitments under a contract for the supply of groundnuts. The primary issue was whether NAFED could be held liable for damages for failing to fulfill the contract due to the Government of India’s refusal to grant permission for the export, as well as whether the enforcement of the foreign arbitral award was contrary to Indian public policy.

The agreement between NAFED and Alimenta S.A. stipulated that the export of the commodity was subject to government approval, and this became a critical factor in the dispute. NAFED, acting as a canalizing agency for the Indian Government, faced restrictions due to the Government’s refusal to allow the continuation of the export under the conditions stipulated in the contract. This led to the question of whether the contract should be considered void under the Indian Contract Act due to frustration of performance.

Petitioner Arguments:

NAFED argued that the enforcement of the arbitral award should be refused on the grounds that it violated the public policy of India, particularly due to the government’s prohibition on the export of the commodity. They contended that the contract had become impossible to perform due to the governmental actions, and thus, it was unfair to hold them liable for damages. Furthermore, they argued that they were not given adequate opportunity to present their case in the arbitration proceedings, and the arbitrator nominated by the opposing party had a conflict of interest by also representing Alimenta S.A. at the appellate stage.

Respondent Arguments:

Alimenta S.A., on the other hand, argued that the award was not contrary to Indian public policy. They maintained that NAFED had been given a fair opportunity to present its case in the arbitration, and the issue of the export restriction was examined and adjudicated by the Arbitral Tribunal. Alimenta S.A. pointed out that NAFED’s failure to meet its obligations was due to its own internal issues, not due to any government-imposed restrictions. They also argued that the enhancement of the interest rate by the Board of Appeal was valid since no appeal was filed by Alimenta S.A.

The Court’s Analysis:

The Court noted that Clause 14 of the agreement between the parties allowed for the cancellation of the contract in the event of governmental restrictions on export. This provision was crucial in determining the outcome of the case. The Court observed that NAFED, as a canalizing agency, required government permission to carry forward the export commitment from the previous season. The government’s refusal to grant such permission rendered the performance of the contract impossible.

Furthermore, the Court ruled that the contract became void in accordance with Section 32 of the Indian Contract Act. This section applies to contingent contracts and provides that if a contract becomes impossible due to the happening of a specified event, it cannot be enforced. The Court emphasized that NAFED was justified in not fulfilling the contract because it could not legally perform the obligation due to the government’s prohibition.

On the issue of public policy, the Court concluded that the enforcement of the foreign award would violate Indian public policy. The award required NAFED to pay damages for a contract that was rendered void due to a government prohibition, which was in line with the public policy of India regarding export restrictions. The Court cited previous rulings that highlighted the importance of public policy in the enforcement of foreign awards, particularly when such enforcement would violate the fundamental principles of Indian law.

Conclusion:

The Supreme Court held that the arbitral award in favor of Alimenta S.A. was unenforceable under Section 7 of the Foreign Awards Act. The judgment emphasized the role of public policy in the enforceability of foreign awards, particularly when such awards conflict with government restrictions or laws that are fundamental to the functioning of the Indian economy. The appeal by NAFED was allowed, and the enforcement of the foreign award was set aside.

Petitioner Name: National Agricultural Cooperative Marketing Federation of India (NAFED).
Respondent Name: Alimenta S.A..
Judgment By: Justice Arun Mishra, Justice M.R. Shah, Justice B.R. Gavai.
Place Of Incident: India.
Judgment Date: 22-04-2020.

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