On April 22, 2020, the Supreme Court of India (“SC”), in National Agriculture Cooperative Marketing Federation of India v. Alimenta S.A. (“NAFED v. Alimenta S.A.”), set-aside an arbitral award in an international commercial Arbitration (“ICA”), on the ground of contravention of public policy of India.
NAFED was an agency involved in canalizing for the Government of India (hereinafter, referred to as GOI), that obtained a license under the Export Control Order for export of goods. Alimenta S.A. was a company affiliated with the laws of Switzerland.
Both entered into a contract, “FOSFA-20” (a contract published by the Federation of Oil, Seeds and Fats Association Ltd.), on January 12, 1980, whereby NAFED were to export 5,000 metric tonnes of Indian Groundnut to Alimenta S.A.
NAFED could export only 1,900 metric tonnes of the commodity because the crops were damaged by the cyclone. To pacify the situation, through amendments to the original contract, it was agreed that NAFED would export the remaining 3,100 metric tonnes of the commodity to Alimenta S.A., in the following year 1981.
However, at the time of execution of the contract, NAFED claimed that its license to export had expired at the end of 1980 because of which it was prohibited under the Indian law i.e. the Export Control Order, from exporting. The GOI refused NAFED’s request to export the commodity after 1980 i.e. the license period would get expired.
Aggrieved by this, Alimenta S.A. initiated arbitration against NAFED which resulted in an arbitral award in favour of Alimenta S.A, directing NAFED to pay compensation for failing to supply the commodity to Alimenta S.A.
Subsequently, Alimenta S.A. filed for execution of this arbitral award under Sections 5 and 6 of the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961 (“FARE Act, 1961”).
The SC held that the arbitral award was against the public policy of India because it violated the fundamental policy of Indian law and the basic concept of “justice”
In conclusion, the SC held:
“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, the 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.”
The arbitration ecosystem in India was already in a challenging position before the on-going COVID-19 pandemic, with numerous arbitral awards being challenged before Indian courts. Currently, the situation is exacerbated with business sentiments being low. In such a scenario, the ruling in NAFED v. Alimenta S.A. is not only contrary to the established position in law but may also discourage potential investments when it is most needed during this economic slowdown. Hence, a course correction is required immediately.
There have been several instances where numerous arbitral awards have been challenged before the court of law. The arbitration system in India is already in a fledging position because it is affecting the business ecosystem. The ruling in NAFED v, Alimenta S.A could potentially discourage the potential investments in the country, especially when we are dealing with a big economic slowdown. It is also opposed to the established position in law. Therefore, a remedy is required for this right away.