Foreign arbitral award against NAFED unenforceable: SC

The Supreme Court on Wednesday held as "unenforceable" the international arbitral award of 1989 of the Federation of Oil, Seeds and Fats Associations Ltd (FOSFA) against India's NAFED for not supplying entire contracted quantity of 5,000 metric tonnes of groundnut to foreign firm Alimenta S.A in 1979-80.

The National Agricultural Cooperative Marketing Federation of India (NAFED) and the Alimenta S.A had entered into the contract for supply of 5,000 metric tonnes of Indian groundnut for the season 1979-80 and out of the contracted quantity, only 1900 metric tones could be shipped due to the damage caused to the crop by a cyclone in the Saurashtra region.

Ultimately, FOSFA on November 15, 1989 had passed an award against NAFED asking it to pay a sum of "$ 4,681,000 being the difference between the contract price of $ 765 per metric tonnes plus $ 15 per metric tonnes for double bags and the settlement price of $ 2275 per metric tonnes plus $ 15 per metric tonnes for double bags as damages."

The arbitral amount was ordered to be paid with interest at the rate of 10.5 per cent annually from February 13, 1981 till the date of the award.

Later, the Board of Appeal, while deciding the appeal of NAFED against the award, enhanced it and directed the Indian state firm to pay interest components at the rate of 11.25 per cent instead of 10.5 per cent per annum.

A bench comprising Justices Arun Mishra, M R Shah and B R Gavai took note of the law on the issue relating to foreign award and clause 14 of FOSFA agreement and said that no export could have taken place without the permission of the Government, and NAFED was unable to supply, as it did not have any permission for that year 1980-81.

"In our considered opinion, 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...,its enforcement would be against the fundamental policy of Indian law and the basic concept of justice. Thus, we hold that award is unenforceable, and the High Court erred in law in holding otherwise in a perfunctory manner," Justice Mishra said in the judgement.

The bench said the award was "ex facie illegal" and in contravention of fundamental law as 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 of 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," it said.

The court held it was not open for the foreign firm to saddle the liability upon 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," it said.

The court held that NAFED was unable to comply with the contractual obligation to export groundnut due to the Government's refusal and it cannot be held liable in breach of contract to pay damages.

The agreement was for the supply of 5000 metric tonnes of groundnut, but only 1900 metric tonnes could be shipped. The remaining quantity could not be shipped due to damage caused to crop by cyclone and later, the government did not allow NAFED to send the remaining 3,100 metric tonnes to the foreign firm and it led to arbitral proceedings and court cases between parties.

The court said, "the Clause 14 of the FOSFA Agreement made clear 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, if the shipment becomes impossible by reasons mentioned in the clause, the agreement shall be cancelled."