A Full bench consisting of Justice Arun Mishra, Justice M.R. Shah and Justice B.R. Gavai decided the case of National Agricultural Co-Operative Marketing Federation of India vs. Alimenta S.A.
It held that if the contract is dependent upon a known contingent event, it is void under Section 32. Prior knowledge of such impossibility is a prerequisite.
Brief facts of the case
National Agricultural Co-Operative Marketing Federation of India (“NAFED”) was an agency for the Government of India. This was for the exports of the Indian HPS groundnut (“commodity”) for the year 1978-1981. To carry forward the export, NAFED required permission from the Government of India. Clause 11 of the contract provided that terms and conditions would according to the Federation of Oil, Seeds and Fats Associations Ltd., (“FOSFA”) 20 Contract. It is a standard form of contract.
The first agreement executed agreed for a total export of 5,000 metric tonnes. But, only 1900 metric tonnes could be shipped. The remaining was then agreed to be shipped during the 1980-81 season. The NAFED had permission from the Government of India to enter into export for the period 1977-80. But, it had no permission to carry forward the export to the following year 1980-81. They applied for the permission. The Government of India rejected it.
NAFED informed Alimenta S.A. that the export was not possible, because of the executive action banning such exports. Ultimately, Alimenta S.A. filed for arbitration proceedings before the FOSFA, London. NAFED was asked to appoint an Arbitrator within 21 days. NAFED filed petition against Alimenta S.A. and their Arbitrators before the High Court of Delhi. The Court stayed the arbitration proceedings. Yet, FOSFA appointed an Arbitrator on behalf of NAFED in disregard of the High Court order. Thus, the NAFED urged deprivation of the right to appoint its nominee Arbitrator.
Petitioner’s Arguments
Shri Shyam Diwan and Shri Rana Mukherjee, appeared for the Appellant. He argued that the award is against the public policy of India. Thus, it has to be unenforceable under Section 7(1) (b) of the Foreign Awards Act. Also, the award does not deal with the Government of India’s restriction on the export of the commodity.
Respondent’s Arguments
Mr. C.A. Sundaram, learned senior Counsel appeared on behalf of the Respondent. He argued the scope of interference in the enforcement of the foreign award is limited. The award is not against public policy. The due opportunity was given to the NAFED to present its case in the arbitration proceedings. The Arbitral Tribunal went into the question of the Government’s ban. The conclusion recorded was that NAFED had self-imposed this restriction.
Supreme Court’s View
The Court first delved upon the reason NAFED was unable to carry out the contractual obligation. And if was because of the Government’s refusal to export.
It would have been unlawful for NAFED to supply in view of the Government’s refusal to permit. Because of the clear stipulation in Clause 14 of the FOSFA Contract, it is apparent that the parties have agreed for a contingent contract. Thus, they were bound by the agreement. If supply had been made, it would have been unlawful.
The second issue was whether Government’s prohibition to supply was enough to render the award unenforceable. This was in terms of the provisions contained in Section 7 of the Foreign Awards Ac, 1961.
Section 7(1) (b) (ii) of the Foreign Awards Act provides that the Court dealing with the case has to be satisfied. If the enforcement contrary to public policy is proved, the award may not be enforced.
Clause 14 of FOSFA Agreement and as per the law applicable in India, export cannot take place without permission of Government. 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 pertains to the fundamental policy of India. And parties being aware of it, and contracted as provided in Clause 14, the Agreement will 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 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. This is relating to export for which permission of the Government of India was necessary.
The third issue discussed was with reference to the appointment of Arbitrators. As per Rule 1(d) of FOSFA Rules, the party claiming arbitration can only apply to FOSFA for the appointment of an arbitrator on behalf of the other party. As there was restraint order, the appointment of Arbitrator by FOSFA under Rule 1(d) of the Rules was illegal.
Court’s Decision
Supreme Court held that no export without permission of the Government was permissible. 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.
Happening of contingency in Clause 14 of the FOSFA Agreement in will render contract unenforceable under Section 32 of the Contract Act. As such the NAFED could not have been held liable to pay damages under foreign award.
The appeal was allowed. The impugned judgment and order passed by the High Court was set aside. Also, the award is held to be unenforceable.
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