Supreme Court of India
NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIAversusALIMENTA S.A.
- Citation
- 2020 INSC 345
- Decided
- 22 April 2020
- Disposal
- Appeal(s) allowed
- Bench
- ARUN MISHRA
Holding
The foreign award is unenforceable because the contract was a contingent contract that became void under Section 32 of the Contract Act, and its enforcement would be contrary to Indian public policy.
Summary
The National Agricultural Cooperative Marketing Federation of India (NAFED) entered into a 1979‑80 groundnut export contract with Alimenta S.A. containing an arbitration clause and a contingency provision (Clause 14) that the contract would be cancelled if export was prohibited by the Government. Due to cyclone damage and the Government’s refusal to grant permission to carry forward the quota, NAFED could not fulfil the contract, leading to an arbitration award ordering NAFED to pay damages. NAFED challenged the award, arguing that the contract was a contingent contract void under Section 32 of the Indian Contract Act and that enforcement would violate public policy under Section 7(1)(b)(ii) of the Foreign Awards Act. The Supreme Court held that the contingency clause made the agreement a contingent contract, rendering it void under Section 32, and that enforcing the award would contravene the fundamental policy of Indian law and public policy. Consequently, the foreign award was declared unenforceable and the appeal was allowed.
Issues considered
- Whether NAFED was unable to perform the contract due to Government prohibition, making the contract void under Section 32 of the Contract Act.
- Whether NAFED can be held liable for damages under the foreign arbitral award.
- Whether enforcement of the award would be contrary to public policy under Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961.
- Whether the arbitration proceedings violated the interim stay and procedural fairness requirements.
Legislation cited
- Foreign Awards (Recognition and Enforcement) Act, 1961s. 7(1)(a)(i), s. 7(1)(b)(ii)
- Indian Contract Act, 1872s. 32, s. 56
Subjects
foreign award enforcementpublic policycontingent contractSection 32 Contract ActSection 56 Contract Actarbitration clauseexport controlgovernment prohibitionfrustration of contractNew York Convention
Judgment
[2020] 7 S.C.R. 789 789
NATIONAL AGRICULTURAL COOPERATIVE A
MARKETING FEDERATION OF INDIA
v.
ALIMENTA S.A.
(Civil Appeal No.667 of 2012) B
APRIL 22, 2020
[ARUN MISHRA, M. R. SHAH AND B. R. GAVAI, JJ.]
Foreign Awards (Recognition and Enforcement) Act, 1961:
s.7 – Agreement between NAFED and Alimenta S.A. for export of C
groundnut (commodity) for the season 1979-80 – Agreement
contained arbitration clause – Terms and conditions were as per
FOSFA 20 contract, a standard form of contract – NAFED was a
canalizing agency for the Government of India for export of
commodity – Clause 14 in the agreement was that in case of
D
prohibition of export by executive order or by law, the agreement
would be treated as cancelled – NAFED could not export the entire
quantity due to damage caused to crop by cyclone – Government
did not grant permission to NAFED to carry forward previous year’s
commitment to subsequent year – Because of refusal by Government,
it was not possible for NAFED to supply commodity to Alimenta E
S.A. – Unfulfilled part was required to be cancelled – Arbitration –
Foreign award ordering NAFED to pay damages – Enforcement
challenged – Held: It is provided in s.7(1)(b)(ii) that if the court
dealing with the case is satisfied that the enforcement of the award
will be contrary to public policy, the foreign award may not be
F
enforced – The impugned award is ex facie illegal, and in
contravention of fundamental law, against the public policy as
envisaged in s.7 of the Act of 1961 – 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
– On the happening of contingency agreed to by the parties in Clause G
14 of the FOSFA Agreement, the contract was rendered
unenforceable under s.32 of the Contract Act – As such the NAFED
cannot be held liable to pay damages under foreign award.
Contract Act, 1872 – s.32 – Applicability of – Held: s.32 of
the Contract Act applies in case the agreement itself provides for H
789
790 SUPREME COURT REPORTS [2020] 7 S.C.R.
A contingencies upon happening of which contract cannot be carried
out and provide the consequences – In this case, s.32 of the Contract
Act is attracted and not the provisions of s.56 – It was an agreement
to do an act impossible in itself without permission, and that is
declared void by s.32 – Foreign Awards (Recognition and
Enforcement) Act, 1961.
B
Allowing the appeal, the Court
HELD: 1.1 Section 32 of the Contract Act provides for
enforcement of contingent contracts. Section 56 of the Contract
Act deals with the agreement to do an impossible act or to do
C acts afterward become impossible or unlawful. It also provides
for liability of the promisor to do something which he knew or
might have known with reasonable diligence an act which is
impossible or unlawful; as such, the promisor must make
compensation for the non-performance of the promise.
[Paras 45, 46][812-C, G-H]
D
Davis Contractor Ltd v. Fareham Urban District Council
(1956) 2 All ER 145; Tsakiroglou & Co. Ltd. v. Noblee
& Thorl GmbH, [1961] 2 All ER 179; Ocean Tramp
Tankers Corporation v. V/O Sovfracht, [1964] 1 All ER
161; National Carriers Ltd. v. Panalpina (Northern) Ltd,
E [1981] 1 All ER 161; Pioneer Shipping Ltd. & Ors. v.
BTP Tioxide Ltd.; The Nema, (1981) 2 All ER 1030;
Paal Wilson & Co. A/S v. Partenreederei Hannah
Blumenthal; The Hannah Blumenthal, [1983] 1 All ER
34; Delhi Development Authority v. Kenneth Builders
F & Developers Private Limited and Ors., (2016) 13 SCC
561 – referred to.
1.2 Section 32 of the Contract Act applies in case the
agreement itself provides for contingencies upon happening of
which contract cannot be carried out and provide the
G consequences. To this case, provisions of Section 32 of the
Contract Act is attracted and not section 56. In case an act
becomes impossible at a future date, and that exigency is not
provided in the agreement on the happening of which exigency,
impossible or unlawful, the promisor had no control which he
could not have prevented, the contract becomes void as provided
H in section 56. However, section 56 also provides liability for a
791
cause where the promisor has agreed to do something which he A
knew or with reasonable diligence might have known and which
the promisee did not know to be impossible or unlawful. Such a
promisor must make compensation to such promise and is liable
to pay damages. The latter part of section 56 is applicable when
promisee did not know the act to be impossible or unlawful and
B
that it was not known to the promisor; the action was impossible
or unlawful or with reasonable diligence might have known.
[Para 47][813-A-C]
1.3 In the present case, because of the clear stipulation in
Clause 14 of the Agreement, it is apparent that the parties have
agreed for a contingent contract. They knew very well that the C
Government’s executive, or legislative actions might come in
the way as provided in Clause 14 of the Agreement. Thus, in this
case, section 32 of the Contract Act is attracted and not the
provisions of section 56. It was an agreement to do an act
impossible in itself without permission, and that is declared to be D
void by section 32. The NAFED was a canalising agency and could
not have supplied without prior permission of Government, nor
could it have lawfully carried forward last year’s supply to next
year that too limited quota and to supply Government permission
was necessary to make it. Enforcement of such an award in
violation of export policy and the Government order would be E
against the public policy as envisaged in section 7 of the Act of
1961. [Paras 48, 52][813-D-E; 821-A-B]
Satyabrata Ghose v. Mugneeram Bangur & Co., AIR
1954 SC 44 : [1954] SCR 310; Naihati Jute Mills Ltd.
v. Khyaliram Jagannath, AIR 1968 SC 522 : F
[1968] 1 SCR 821; Boothalinga Agencies v. V.T.C.
Poriaswami Nadar, AIR 1969 SC 110 : [1969] 1 SCR
65; Smt. Sushila Devi and Ors. v. Hari Singh and Ors.
(1971) 2 SCC 288 : [1971] Suppl. SCR 671
– referred to. G
Narayana Chandrasekhara Shenoy and Bros. by sole
Proprietor Narayana Shanbog v. R. Palaniappa
Mudaliar, AIR 1952 Mad. 670; Ram Kumar v. P.C. Roy
& Co. (India) Ltd., AIR 1952 Cal. 335 (338); Kunjilal
Manohar Das v. Durga Prasad Debi Prosad, AIR 1920 H
Cal. 1021 – referred to.
792 SUPREME COURT REPORTS [2020] 7 S.C.R.
A 2. It would have been unlawful for NAFED to affect the
supply in view of the Government’s refusal to accord the
permission, and both the parties knew it very well and agreed
that the contract would be cancelled in such an exigency for non-
supply in quantity. Thus, they were bound by the agreement. The
award pre-supposes supply could have been made after the
B
Government’s refusal. If supply had been made, it would have
been unlawful. Thus, the parties agreed for its cancellation as
such an award is against the basic law and public policy as applied
in India. [Para 57][825-A-B]
3.1 It is provided in Section 7(1)(b)(ii) that if the court dealing
C with the case is satisfied that the enforcement of the award will
be contrary to public policy, the foreign award may not be enforced.
The foreign award may also not be executed in the case as per
section 7(1)(a)(i) if the parties to the agreement under the law
applicable are under some incapacity or agreement is not valid
D under the law. Similar exigency is provided in section 7(1)(a)(ii)
if proper notice of appointment of Arbitrator is not given or the
party was unable to present its case. Section 7(1)(a)(iii) provides
that if the award deals with the questions not referred or contains
decisions on matters beyond the scope of the agreement renders
award unenforceable. Section 7(1)(a)(iv) makes an award not
E capable of enforcement in case the composition of the Arbitration
Tribunal or procedure is not in accordance with the agreement of
the parties. [Para 60][826-G-H; 827-A-B]
Renusagar Power Co. Ltd. v. General Electric Co.,
(1994) 1 Suppl. SCC 644 : [1993] 3 Suppl. SCR 22 –
F relied on.
Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd.,
(2003) 5 SCC 705 : [2003] 3 SCR 691; Shri Lal Mahal
Limited v. Progetto Grano Spa, (2014) 2 SCC 433 :
[2013] 13 SCR 599; Associate Builders v. Delhi
Development Authority, (2015) 3 SCC 49 : [2014] 13
G
SCR 895; Ssanyong Engineering & Construction Co.
Ltd. v. National Highways Authority of India (NHAI),
(2019) 8 SCALE 41; Central Inland Water Transport
Corporation Ltd. & Anr. v. Brojo Nath Ganguly & Anr.
(1986) 3 SCC 156 : [1986] 2 SCR 278 - referred to.
H
793
3.2 Clause 14 of FOSFA Agreement and as per the law A
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.
It became void under section 32 of the Contract Act on happening
B
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 C
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. The
award could not be said to be enforceable, given the provisions
contained in Section 7(1)(b)(ii) of the Foreign Awards Act. Thus,
D
award is unenforceable, and the High Court erred in law in holding
otherwise in a perfunctory manner. As such the NAFED could
not have been held liable to pay damages under foreign award.
[Paras 68, 69, 80][842-F-H; 843-A-C; 850-G]
Manohar Lal (Dead) by LRs. v. Ugrasen (Dead) by LRs.
& Ors.,(2010) 11 SCC 557 : [2010] 7 SCR 346; C.L. E
Subramaniam v. Collector of Customs, Cochin (1972)
3 SCC 542 : [1972] 3 SCR 485; Board of Trustees of
the Port of Bombay v. Dilipkumar Raghavendranath
Nadkarni and Ors. (1983) 1 SCC 124 : [1983] 1 SCR
828; The State of Punjab & Anr. v. Shamlal Murari & F
Anr., (1976) 1 SCC 719 : [1976] 2 SCR 82; Kailash v.
Nankhu & Ors., (2005) 4 SCC 480 : [2005] 3 SCR
289 – referred to.
Case Law Reference
(2016) 13 SCC 561 referred to Para 42 G
[1954] SCR 310 referred to Para 49
[1968] 1 SCR 821 referred to Para 50
[1969] 1 SCR 65 referred to Para 51
H
794 SUPREME COURT REPORTS [2020] 7 S.C.R.
A [1971] Suppl. SCR 671 referred to Para 55
[1986] 2 SCR 278 referred to Para 62
[1993] 3 Suppl. SCR 22 relied on Para 63
[2003] 3 SCR 691 referred to Para 64
B [2013] 13 SCR 599 referred to Para 65
[2014] 13 SCR 895 referred to Para 66
(2019) 8 SCALE 41 referred to Para 67
[2010] 7 SCR 346 referred to Para 71
C
[1972] 3 SCR 485 referred to Para 73
[1983] 1 SCR 828 referred to Para 73
[1976] 2 SCR 82 referred to Para 75
[2005] 3 SCR 289 referred to Para 76
D
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 667 of
2012.
From the Judgment and Order dated 28.01.2000 of the High Court
of Delhi at New Delhi in Suit No. 1885 of 1993.
E Shyam Divan, C.A. Sundram, Sr. Advs., Aaditya Vijay Kumar,
Ms. Liza Baruah, Sunil Mathews, Ms. Akshita Katoch, Udayaaditya
Banerjee, Chitranshul A. Sinha, Anurag Tiwari, Ms. Sabah Iqbal Siddiqui,
Ms. Aditya Chadha, Shailendra Swarup, Ms. Bindu Saxena, Ms. Aparajita
Swarup, Dhruv Chand Saxena, Ms. Rohini Musa, Abhishek Gupta, Zafar
Inyat, Ms. Gunjan Mathur, Advs. for the appearing parties.
F
The Judgment of the Court was delivered by
ARUN MISHRA, J.
1. The question involved in the present appeal is the enforceability
of the foreign award. The main objections for its enforceability are (i)
G whether NAFED was unable to comply with the contractual obligation
to export groundnut due to the Government’s refusal?; (ii) whether
NAFED could have been held liable in breach of contract to pay damages
particularly in view of Clause 14 of the Agreement?; and (iii) whether
enforcement of the award is against the public policy of India?
H
795
2. The NAFED and the Alimenta S.A. entered into a contract for A
the supply of 5,000 metric tonnes of Indian HPS groundnut (for short,
“commodity”). Clause 11 of the contract provided that terms and conditions
would be as per FOSFA, 20 Contract, a standard form of contract which
pertains to the CIF contract. The contract entered into was not a Free
on Board (FOB) contract.
B
3. NAFED was a canalizing agency for the Government of India
for the exports of the commodity. For any export, which is to be carried
forward to next year from the previous year, NAFED required the express
permission and consent of the Government of India, being a canalizing
agency. The said agreement was entered into by NAFED with the
Alimenta S.A. at the rate of USD 765 per metric tonnes (Free on Board). C
The contract was for the season 1979-80. With the contracted quantity
of 5000 metric tonnes, only 1900 metric tonnes could be shipped. The
remaining quantity could not be shipped due to damage caused to crop
by cyclone etc. in the Saurashtra region. The agreement dated 12.1.1980
was the first agreement. The transaction was governed by covenants D
such as Force Majeure and Prohibition contained in Clause 14 of the
Agreement, whereby in case of prohibition of export by executive order
or by law, the agreement would be treated as cancelled.
4. On 3.4.1980, NAFED executed a second Agreement with the
Alimenta S.A. to export 4,000 metric tonnes of the commodity at the E
rate of USD 770 per metric tonnes. The shipment period for both the
contracts was August-September, 1980. The second Agreement dated
3.4.1980 is not the subject matter of dispute in the appeal.
5. In August 1980, NAFED shipped only 1900 metric tonnes of
commodity in receipt to the first Agreement. The balance stocks of 3100 F
metric tonnes of commodity could not be shipped as scheduled, due to
the Government restrictions.
6. In the year 1980-81, there was crop failure in the United States
of America due to which price of commodity rose high in the course of
the season. Yet another addendum was executed to First Agreement on G
18.8.1980, whereby the period of shipment of the commodity was changed
to November-December, 1980 for balance 3100 metric tonnes under
the disputed first Agreement.
7. On 8.10.1980, second Addendum to first Agreement came to
be executed between the parties for supply of 3100 metric tonnes of the
H
796 SUPREME COURT REPORTS [2020] 7 S.C.R.
A commodity. It was agreed that the commodity would be shipped during
the 1980-81 season packed in new double gunny bags with the buyers
paying the extra cost of USD 15 per metric tonnes.
8. It is pertinent to mention that NAFED had the permission of
the Government of India to enter into exports for three years between
B 1977-80 but had no permission under the Export Control Order to carry
forward the exports for the season 1979-80 to the year 1980-81. At the
time of execution of the Addendum, NAFED claimed it was unaware of
the said situation of not having requisite authority to enter into the
Addendum.
C 9. On 21.11.1980, the NAFED intended to perform the first
Addendum in the oblivion of the fact that it had no permission under the
Export Control Order to carry forward the export for the season
1979-80 to the next year 1980-81. Being a Canalizing agency for the
Government of India, NAFED couldn’t carry forward the supply for the
subsequent year. NAFED approached the Government of India to grant
D permission.
10. The Ministry of Agriculture, Government of India, vide letter
dated 1.12.1980 directed NAFED not to ship any leftover quantities
from previous years. It was made clear that the export of commodities
was restricted under a quota system and that NAFED could not carry
E forward the previous years’ commitment to the subsequent year. The
commitment entered into by NAFED was objected to. Apart from that,
the price of the commodity had escalated thrice than the prevailing price
within one year. Inter alia, for the aforesaid reasons, the Government
of India asked NAFED not to implement the previous year contract. It
F was for a particular season.
11. On 6.12.1980 and 9.12.1980, NAFED again requested the
Government of India to allow the release of quota in the current season
to fulfil its commitments under the contracts. The Government did not
grant permission. The NAFED informed Alimenta S.A. not to nominate
G the vessel for shipment of the crop due to the Government of India’s
prohibition to supply the contracted quantity.
12. The Alimenta S.A. on 29.12.1980 treated the telex message
dated 20.12.1980 sent by NAFED as a notice of default made to make
the supply. The Government of India finally rejected NAFED’s request
to allow export against previous year’s contract vide communication
H
797
dated 27.01.1981 because of the restricted export policy and quota ceiling. A
Alimenta S.A. on 5.2.1981 granted the last opportunity to NAFED to
give the final offer, otherwise, the dispute would be referred to arbitration,
and their nominee would be Mr. A.G. Scott. Accordingly, NAFED was
asked to appoint its arbitrator.
13. On 13.2.1981,NAFED informed Alimenta S.A. that the export B
of the contracted quantity was not possible because of the Government
of India’s executive action banning such exports.
14. Ultimately, Alimenta S.A. filed arbitration proceedings before
the Federation of Oil, Seeds and Fats Associations Ltd. (FOSFA), London
on 13.2.1981. NAFED was asked to appoint an Arbitrator within 21 C
days. Alimenta S.A. vide telex dated 18.2.1981 requested to provide the
originals of the Government notices banning the export and the dates on
which they were confirmed. NAFED sent to Alimenta S.A. by its telex
vide letter dated 23.2.1981 the Government of India’s order prohibiting
export and also requested to provide it a copy of the FOSFA Arbitration
Rules,which was provided by Alimenta S.A. to NAFED on 24.2.1981. D
The NAFED requested for extension of time for appointing Arbitrator
on 5.03.1981, which was extended on 10.3.1981.
15. NAFED filed petition bearing OMP No.41 of 1981 on 19.3.1981
against Alimenta S.A. and their Arbitrators before the High Court of
Delhi. Prayer was made restraining Alimenta S.A. and FOSFA from E
continuing the arbitration proceedings inter alia on the ground that
agreement did not contain any specific provision for arbitration. On
20.3.1981, the High Court stayed the arbitration proceedings till 22.4.1981.
NAFED intimated the order of stay by its telex dated 23.3.1981 to
Alimenta S.A. F
16. In utter disregard of the order of interim stay granted on
20.3.1981 by the High Court, the FOSFA by its telex requested NAFED
to appoint Arbitrator on its behalf by 20.4.1981, failing which FOSFA
would appoint an arbitrator on behalf for NAFED.
17. On 9.4.1981, NAFED by telex message through their counsel G
informed FOSFA that it had no jurisdiction to proceed with the arbitration
in view of the order of stay by the High Court and any action taken by
Alimenta S.A. or by Mr. Scott of FOSFA would be illegal and void. On
22.4.1981, the matter came up before the High Court of Delhi. The
counsel on behalf of the Alimenta S.A. was granted four weeks to file a
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798 SUPREME COURT REPORTS [2020] 7 S.C.R.
A reply; the case was adjourned to 27.7.1981. The interim order of stay
was accordingly extended till 21.7.1981.
18. 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
NAFED on 23.4.1981. Thus, the NAFED urged that it was deprived of
B the right to appoint its nominee Arbitrator. The NAFED vide its letter
dated 1.5.1981 informed FOSFA that despite the order of stay by the
High Court, contumacious steps were taken to appoint the Arbitrator on
its behalf and it was further stated that the counsel appearing for Alimenta
S.A., stated in the Court that Alimenta S.A. would not proceed further
in the arbitration. Ultimately, NAFED filed proceedings in the nature of
C contempt on 30.10.1981 on the ground that appointment of Arbitrator on
behalf of the NAFED violated the orders passed by the High Court
dated 20.3.1981 and 22.4.1981.
19. The Delhi High Court decided the said OMP No.41 of 1981
wherein it held that First Agreement would be governed by arbitration
D agreement incorporated in FOSFA 20 Contract while there was no
arbitration agreement between the parties in so far as the Second
Agreement was concerned. On 22.3.1982, Alimenta S.A. filed FAO
(OS) No.24 of 1982 against the order dated 11.12.1981, the same was
later withdrawn. Alimenta S.A. filed a special leave petition before this
E court on 1.4.1982, which was numbered as Civil Appeal No.1755 as
against the order dated 11.12.1981 of the High Court. This court passed
the order on 30.4.1982, restraining Alimenta S.A. and FOSFA to proceed
further in the arbitration. On 4.5.1982, FOSFA sent a telex that this
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 this
F Court.
20. NAFED on 9.1.1984 sought a clarification from the
Government of India as to whether the direction given by the Ministry of
Agriculture not to make the supply was lawful and binding. Ministry of
Commerce, Government of India, stated that directions issued by the
G Ministry of Agriculture refusing fulfilment of previous years contract
was a lawful direction and, as such, was binding on NAFED.
21. Ultimately, this court vide judgment and order dated 9.1.1987
upheld the decision of the High Court dated 11.12.1981. Concerning the
First Agreement, the parties were relegated to pending arbitration, while
H
799
for the Second Agreement, as there was no arbitration clause, the parties A
were relegated to the civil proceedings.
22. On 10.1.1989, NAFED filed its written submission before the
FOSFA, pointing out that it was not allowed to appoint its arbitrator
despite specific order of restraint by the High Court andit was not allowed
to be represented through its counsel. Alimenta S.A. also filed additional B
written submissions on 19.6.1989 before FOSFA. Ultimately, FOSFA
passed an award on 15.11.1989 by which NAFED was directed to pay
a sum of USD 4,681,000 being the difference between the contract
price of USD 765 per metric tonnes plus USD 15 per metric tonnes 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 amount C
was ordered to be paid with interest at the rate of 10.5% per annum
from 13.2.1981 till the date of the award.
23. Being aggrieved by the award, NAFED filed an appeal before
the Board of Appeal on 16.1.1990, however, on 13.5.1990 and 30.5.1990
multiple requests were made by M/s. Clyde and Co. (solicitor firm) to D
represent NAFED before the Board of Appeal, considering there were
special circumstances and Indian law was required to be explained. The
Board of Appeals rejected the request by NAFED to be represented
through its Solicitors on 14.5.1990.
24. Ultimately, the Board of Appeal on 14.9.1990 while deciding E
the appeal compounded NAFED’s issues by enhancing the award,
whereas Alimenta S.A. filed no appeal. NAFED was directed to pay
interest components at the rate of 11.25% instead of 10.5% p.a. The
interest was enhanced in the absence of an appeal by Alimenta S.A.
The Arbitrator nominee of Alimenta S.A., who passed the award, F
represented the case on behalf of the Alimenta S.A. before the Board
of Appeal.
25. The Alimenta S.A. filed a petition as Suit No.1885 of 1993
under sections 5 and 6 of the Foreign Awards (Recognition and
Enforcement) Act, 1961 (for short, “the Foreign Awards Act”) seeking G
enforcement of the initial as well as appellate award passed by the FOSFA
and Board of Appeal.
26. NAFED filed objections to the enforceability of the award, on
the ground that it was opposed to the public policy as such unenforceable.
There was non-compliance with the provisions contained in section
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800 SUPREME COURT REPORTS [2020] 7 S.C.R.
A 7(1)(a), (b), and (c) of the Foreign Awards Act. No notice under section
101 of the Multi State Cooperative Societies Act was given. The execution
was also barred by limitation. It ought to have been filed within 30 days
because of Article 119 of Schedule I of the Limitation Act, 1963, and the
period of three years was not available to seek its enforcement. The
learned Single Judge of the High Court decided the matter against the
B
appellant - NAFED and decided the same finally after 20 months of
delay on 28.1.2000 after hearing the matter and held the award to be
enforceable. A review was sought, which was dismissed on 5.5.2000.
After that, NAFED filed an appeal bearing F.A.O. (O.S) No.205 of
2000 before the Division Bench of the Delhi High Court. The High Court
C entertained it on 28.2.2001 and stayed the execution. The interim order
and the order of appointment was questioned before this Court. This
Court modified the interim order of the High Court dated 28.2.2001 and
disposed of both the petitions of Alimenta S.A. on 5.4.2002 while passing
certain interim orders.
D 27. On 9.9.2002, Alimenta S.A. filed an execution petition No.204
of 2002 seeking execution of the decree on 28.1.2000 passed in Suit
No.1885 of 1993 in the High Court. The appeal was ultimately held to be
not maintainable. It was dismissed on 6.9.2010 on the ground of non-
maintainability. The NAFED questioned the decision in the appeal. On
24.11.2010, NAFED filed the present appeal (bearing Civil Appeal No.667
E of 2012) for adjudication on merits. There are subsequent developments
that are the subject matter of other appeals.
28. Shri Shyam Diwan and Shri Rana Mukherjee, learned senior
counsel argued that enforcement of the award is barred by section
7(1)(a)(ii) of the Foreign Awards Act. The award is against the public
F policy of India on numerous grounds and thus is unenforceable under
section 7(1)(b) of the Foreign Awards Act. The award/ decree does not
deal with the restriction imposed by the Government of India as to the
export of the commodity. Award flouts the basic norms of justice. The
enforcement of such an award would result in the unjust enrichment of
G Alimenta S.A. at the cost of the very survival of the appellant organisation.
The enforcement procedure is barred by limitation. The same was not
brought within 30 days in terms of Article 119, Schedule I of the Limitation
Act, 1963. The learned Single Judge could not have converted the award
into a decree. The learned Single Judge awarded interest at the rate of
18 percent per annum; besides, in case there is exchange deviation by
H
801
way of loss, NAFED would be required to make good such loss. NAFED A
was not given due opportunity to present its case by the Arbitral Tribunal.
Arbitrator-nominee of Alimenta S.A. represented case on behalf of
Alimenta S.A. before the Board of Appeal, award was unfair, and
enhancement of interest in the absence of appeal was also illegal. The
decision is contrary to the public policy of India as laid down in various
B
decisions.
29. Per contra, Mr. C.A. Sundaram, learned senior counsel
appearing on behalf of the respondent 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
C
present its case in the arbitration proceedings. The question of imposition
of ban by the Government was gone into by the Arbitral Tribunal, and
conclusion was recorded that it was a self-imposed restriction by
NAFED. There was no such ban on the export by the Government of
India. Because of the findings recorded by the Arbitral Tribunal,it would
not be open to this Court to go into its correctness. It was open to the D
Board of Appeal to award the interest in the absence of an appeal by the
Alimenta S.A. Learned Single Judge had the jurisdiction to award the
interest while passing decree. There is no bar for the Arbitrator to appear
in the appeal on behalf of the respondent.
30. We first deal with the main submission raised concerning E
whether NAFED was unable to carry out contractual obligation in view
of Government’s refusal to export, as such the contract became void
and unenforceable in view of Clause 14 of FOSFA agreement.
Consequently, NAFED could not have been held liable to pay damages.
31. The argument has to be appreciated in the background of the F
fact that NAFED was a canalizing agency for the Government of India
for the year 1978-1981. For the export to be carried forward from the
previous years, NAFED required express permission and consent from
the Government of India. The first agreement was executed on 12.1.1980
for the supply of the commodity for the season 1979-80. A total of 5,000
metric tonnes were to be exported. However, undisputedly only 1900 G
metric tonnes could be shipped. Addendum was executed on 18.8.1980
to supply a balance of 3100 metric tonnes in November-December, 1980.
Subsequently, on 6.10.1980, another addendum was executed, and it
was agreed that the commodity would be shipped during the 1980-81
season. The NAFED had permission from the Government of India to H
802 SUPREME COURT REPORTS [2020] 7 S.C.R.
A enter into export for three years, i.e., between the period 1977-80 but
had no permission under the Export Control Order to carry forward the
export for the season 1979-80 to the year 1980-81. NAFED claimed
that it was unaware of the said fact that it did not have the requisite
authority to enter into the addendum dated 6.10.1980. Be that as it may.
The fact remains that the Government of India’s permission was required
B
to carry forward the export for the season 1979-80 to the year 1980-81
under the Export Control Order, which was not given. When it was
again sought for, it was specifically refused by the Government of India
on various grounds.
32. Clause 14 of the FOSFA, 20 Contract dated 12.1.1980, entered
C
between the parties is significant in this regard. The relevant Clauses
14, 18, and 20 are extracted hereunder:
“EXTRACTS OF RELEVANT CLAUSES OF FOSFA 20
CONTRACT DATED 12-01-1980 BETWEEN
PETITIONER AND RESPONDENT
D
14. PROHIBITION: In the event, during the shipment period
of prohibition of export of any other executive or legislative act by
or on behalf of the Government of the country of origin or of the
territory where the port/s or shipment named herein is/are situate,
or of blockade or hostilities, restricting export, whether partially
E or otherwise, any such restriction shall be deemed by both parties
to apply to this contract and to the extent of such total or partial
restriction to prevent fulfilment whether by shipment or by any
other means whatsoever and to that extent this contract of any
unfulfilled portion thereof shall be extended by 30 days.
F In the event of shipment during the extended period still proving
impossible by reason of any of the causes in this Clause, the
contract or any unfulfilled part thereof shall be cancelled. Sellers
invoking that Clause shall advice Buyers with due dispatch. If
required, Sellers must produce proof to justify their claim for
G extension or cancellation under the clause.
18. DOMICILE: This contact shall be deemed to have been
made in England, and the construction, validity, and performance
thereof shall be governed in all respect by English Law. Any dispute
arising out of or in connection therewith shall be submitted to
arbitration in accordance with the Rules of the Federation. The
H
803
serving of proceedings upon any party by sending same to their A
last known address together with leaving a copy of such
proceedings at the officers of the Federation shall be deemed
good service, rule of law or equity to the contrary notwithstanding.
20. ARBITATION: Any dispute arising out of this contract,
including any question of law arising in connection therewith, shall B
be referred to arbitration in London (or elsewhere if so agreed) in
accordance with the Rules of Arbitration and Appeal of the
Federation of Oil, Seeds and Fats Associations Limited, in force
at the date of this contract and of which both parties hereto shall
be deemed to be cognizant.
C
Neither party hereto, nor any persons claiming under either of
them shall bring any action or other legal proceedings against the
other of them in respect of any such dispute until such dispute
shall first have been heard and determined by the arbitrators,
umpire or Board of Appeal (as the case may be) in accordance
with the Rules of Arbitration and Appeal of the Federation and it D
was hereby expressly agreed and declared that the obtaining of
an Award from the arbitrators, umpire or Board of Appeal (as the
case may be), shall be a condition precedent to the right of either
party hereto or any person claiming under either of them to bring
any action or other legal proceedings against the other of them in E
respect of any such dispute.”
(emphasis supplied)
It is apparent from Clause 14 of the Agreement 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 F
restriction shall be deemed by both the parties to apply to the contract.
Thus, if the shipment becomes impossible byreasons mentioned in the
clause, the agreement shall be cancelled.
33. The Government of India, Ministry of Agriculture and Irrigation
wrote a letter on December 1, 1980, to the Managing Director of the G
NAFED in which it pointed out that it was undesirable to make the
supply in the current season at the rate of previous years contract and
apart from that no exporter could undertake to export any commodity
with such a wide variation in prices. It was also pointed out that the
export contract of last year is not supposed to be carried forward
H
804 SUPREME COURT REPORTS [2020] 7 S.C.R.
A automatically to next year. The export of the commodity was restricted
under a quota system. NAFED could not agree on its own to move
forward last year’s commitment to the current year without prior approval
of the Government. Therefore, NAFED was asked not to consider taking
up the previous year’s contract for implementation in the current crop
season and inform it to the Government. Para 2 of the letter is extracted
B
hereunder:
“2. I am told that NAFED could not fulfil some of the contracts
for exports last year due to drought in the country. It has been
further reported to me that some move is being made to export
HPS groundnuts during the current season against the contracts
C entered into last year. This will be a most undesirable thing to do
considering that the prices today are almost three time than the
prices prevalent last year. No exporter can undertake to export
any commodity with such a wide variation in prices. Moreover
the export contracts for last year are not supposed to be carried
D forward automatically to the next year. Further the export of HPS
groundnuts is restricted and under a quota system, NAFED cannot
on its own carry forward last year’s commitments to the current
year without getting the prior approval of the Govt. You may,
therefore confirm that NAFED is not considering taking up last
year’s contracts for implementing in the current crop season.”
E
34. After that, NAFED requested the Government of India again
to release quota in the current season to fulfil commitment under the
contract for previous year. On 6.12.1980 and 9.12.1980, letters were
written to the Ministry of Commerce. The NAFED wrote a letter on
9.1.1981 to the Government. The Government vide letter dated 27.1.1981
F in reply to the letter dated 9.1.1981 reiterated that it was not desirable to
permit last year’s commitment in the current year. The letter dated
27.1.1981 is extracted hereunder:
“No.26021/180-T
Government of India
G Ministry of Agriculture
(Department of Agriculture & Cooperation)
(Trade Division)
Krishi Bhawan, New Delhi
H
805
Dated the 27th Jan. 1981 A
To,
Shri S.K. Iyer,
Executive Director (Foreign Trade),
Sapna Building,
54, East of Kailash, B
N.A.F.E.D.,
P.B. No.3580.
Subject:- Export of HPS Groundnut – Last years pending contracts
– reg. C
Sir,
I am to invite a reference to your letter No.HO/CSC/EXP/HPS/
POI/80-81/1334 dated 9th Jan., 1981 on the above subject and to
say that the question of allowing the last year’s contracts of HPS
Groundnuts during current season has been again examined D
carefully. In view of the restricted export policy of this item and
quota ceiling etc. it has not been considered desirable to permit
the last year’s commitments in the current year.
Yours faithfully,
E
Sd/-
(P.C. Ramrakhian)
Director (Trade)”
F
(emphasis supplied)
35. The refusal by the Government came in the way of the NAFED
to affect the supply by exporting the commodity to Alimenta S.A. This
was covered within clause 14 of the Agreement mentioned above. The
G
prohibition was on account of the Government’s refusal.
36. It is apparent from the provisions of the contract dated
12.1.1980 that the quantity of 5,000 metric tonnes, to be increased up to
8,000 metric tonnes, depending upon the availability of stocks. Clause 8
of the Agreement dated 12.1.1980 provided that shipment was to be
H
806 SUPREME COURT REPORTS [2020] 7 S.C.R.
A from Saurashtra port at the buyer’s option during February/March/April
1980. The other terms and conditions were as per FOSFA, 20 contract
terms. Addenda dated 18.8.1980 and 6.10.1980 were executed to the
agreement/ contract dated 12.1.1980. The NAFED had no authority to
enter into export for the previous years without prior permission of the
Government of India, and it executed both the addenda without such
B
permission.
37. The Minutes of Meeting of Business Committee of NAFED,
dated 21.11.1980 at Agenda Item No.4, notes that there were
unseasonable rains in the Saurashtra region and due to cyclone, etc. the
C groundnut crop was severely damaged, and there was less production.
There was less than 50% recovery. There was an escalation of prices
as compared to 1978-79 in 1979-80. It appears that NAFED intended to
perform the contract in the oblivion of the fact that being a canalizing
agent, it could not have carried out the supply in the next subsequent
years.
D
38. The NAFED in the circumstances after receipt of the letter
dated 1.12.1980 of the Department of Agriculture informed the Alimenta
S.A. not to nominate the vessel for shipment for the goods due to the
Government’s prohibition for the supply of the goods. The NAFED wrote
E a letter again on 9.1.1981 and pointed out to the Government that they
were unable to export on account of Government order. The Government
was asked to apprise it of the final decision regarding the export of
commodities to the respondent. Letter dated 27.1.1981 reiterating
prohibition came to be issued in the aforesaid circumstances. It was
taken to be a refusal to supply on the part of the NAFED by the Alimenta
F S.A., and they asked the NAFED to appoint its Arbitrator. Alimenta
S.A. appointed Mr. A.G. Scott as its nominee Arbitrator. Another telex
dated 13.2.1981 was sent by the NAFED informing that it would not be
possible to supply the commodity because of Government action of
banning such export. Later on, confirmation was sought from the
G Government by the NAFED. The Ministry of Commerce, Government
of India, informed NAFED on 9.1.1984 that the directions issued by the
Ministry of Agriculture refusing fulfilment of previous year’s contract
were lawful and binding. The letter of the Government dated 9.1.1984 is
extracted hereunder:
H
807
“VINOD RAI A
DEPUTY SECRETARY
January 8, 1984
To,
Managing Director,
The National Agricultural Cooperative B
Marketing Federation of India Limited,
Sapna Building 54, East of Kailash,
New Delhi – 110024
C
Subject: Execution of HPS Groundnuts Season 1980-81, Non-
fulfilment of Contract entered into During 1979-80 Crop Season
under 1979-80.
Dear Sir,
D
Please refer to your letter No. HO/OSC/HPS/POL/PO-
81/1337 dated the 9th January, 1984, on the above subject.
2. The Ministry of Commerce allocated to NAFED, as the same
canalizing agency for HPS Groundnuts, 50,000 tonnes for export
during the crop season 1980-81. Kindly refer to the letter from E
Joint Secretary Usha Vohra dated 21st October, 1980, to Shri
Shrivastava. This quota was for the new contracts to be entered
into that season at the prevailing market prices. NAFED were
not entitled to use any part of the quota to fulfil the previous years
contracts. Furthermore, I must advice you, as you certainly know,
that you could not have utilized any unused part of the quota for F
the previous year to fulfil old contracts.
3. Ministry of Agriculture notified you that permission for you to
fulfil the previous year’s contracts was refused. This was a lawful
directions which you were bound to obey. However, even without
this express direction you could not have fulfilled these contracts. G
You would have needed from Ministry of Commerce an additional
export quota covering the quantities required. You applied for
additional quota generally and this application was refused in view
of the prevailing market conditions both internally and externally.
H
808 SUPREME COURT REPORTS [2020] 7 S.C.R.
A Most certainly no additional quota would have been granted to
enable you to fulfil old contracts at the previous season’s prices.
Yours faithfully
B
(VINOD RAI)
Deputy Secretary to the Government of India”
It is apparent that the Government of India issued a direction that
was binding upon the NAFED. Without permission, it was not possible
C for the NAFED to carry out its obligation under the Contract and Addenda.
39. It was argued that in common law, frustration does not rescind
the contract ab initio, it brings the contract to an end forthwith, without
more and automatically, in the sense that it releases both the parties
from any performance of the contract while leaving undisturbed any
D legal rights already accrued or payments already made in accordance
with its term. It was further argued that the law later developed through
subsequent decisions wherein it was laid down that advance payments
made were recoverable by a party. The decision in Davis Contractor
Ltd v. Fareham Urban District Council (1956) 2 All ER 145 by Lord
Radcliffe is relied upon wherein the test applied for the frustration of the
E contract is whether there is a radical change in the obligation. It observed:
“… Frustration occurs whenever the law recognises that without
default of either party a contractual obligation has become
incapable of being performed because the circumstances in which
performance is called for would render it a thing radically
F different from that which was undertaken by the contract… there
must be as well such a change in the significance of the obligation
that the thing undertaken would, if performed, be a different thing
from that contracted for.”
(emphasis supplied)
G
40. It was also argued that the House of Lords expressly upheld
frustration in the later cases in Tsakiroglou & Co. Ltd. v. Noblee &
Thorl GmbH, [1961] 2 All ER 179; Ocean Tramp Tankers Corporation
v. V/O Sovfracht, [1964] 1 All ER 161; National Carriers Ltd. v.
Panalpina (Northern) Ltd, [1981] 1 All ER 161; Pioneer Shipping
H Ltd. & Ors. v. BTP Tioxide Ltd.; The Nema, (1981) 2 All ER 1030;
809
Paal Wilson & Co. A/S v. Partenreederei Hannah Blumenthal; The A
Hannah Blumenthal, [1983] 1 All ER 34.
41. Reliance has also been placed on National Carriers Ltd. v.
Panalpina (Northern) Ltd. [1981] 1 All ER 161 wherein Lord Simon
observed:
“Frustration of a contract takes place when there supervenes an B
event (without default of either party and for which the contract
makes no sufficient provision) which so significantly changes the
nature (not merely the expense or onerousness) of the outstanding
contractual rights and/ or the obligations from what the parties
could reasonably have contemplated at the time of its C
execution that it would be unjust to hold them to the literal
sense of its stipulations in the new circumstances; in such a
case the law declares the parties to be discharged from further
performance.”
(emphasis supplied) D
42. Learned senior counsel argued that as there was frustration,
the contract determined automatically; it could not be continued by
affirmation. The appellant has also placed reliance on the decision in
Delhi Development Authority vs. Kenneth Builders & Developers
PrivateLimited and Ors., (2016) 13 SCC 561 wherein the court held E
that the contract of Kenneth Builders with the DDA stood frustrated
and made impractical to perform because of the prohibition imposed on
any construction activity being undertaken on the project land. The Court
observed :
“30. The interpretation of Section 56 of the Contract Act came F
up for consideration in Satyabrata Ghose v. Mugneeram Bangur
& Co., AIR 1954 SC 44. It was held by this Court that the word
“impossible” used in Section 56 of the Contract Act has not been
used in the sense of physical or literal impossibility. It ought to be
interpreted as impracticable and useless from the point of view of
the object and purpose that the parties had in view when they G
entered into the contract. This impracticability or uselessness could
arise due to some intervening or supervening circumstance which
the parties had not contemplated. However, if the intervening
circumstance was contemplated by the parties, then the contract
would stand despite the occurrence of such circumstance. In such
H
810 SUPREME COURT REPORTS [2020] 7 S.C.R.
A an event, “there can be no case of frustration because the basis
of the contract being to demand performance despite the happening
of a particular event, it cannot disappear when that event
happens”. This is what this Court had to say: (AIR pp. 46-49,
paras 9-10 & 17)
B “9. The first paragraph of the section lays down the law in the
same way as in England. It speaks of something which is
impossible inherently or by its very nature, and no one can
obviously be directed to perform such an act. The second
paragraph enunciates the law relating to discharge of contract
by reason of supervening impossibility or illegality of the act
C agreed to be done. The wording of this paragraph is quite
general, and though the illustrations attached to it are not at all
happy, they cannot derogate from the general words used in
the enactment.
This much is clear that the word “impossible” has not
D been used here in the sense of physical or literal impossibility.
The performance of an act may not be literally impossible but
it may be impracticable and useless from the point of view of
the object and purpose which the parties had in view; and if an
untoward event or change of circumstances totally upsets the
E very foundation upon which the parties rested their bargain, it
can very well be said that the promisor finds it impossible to do
the act which he promised to do.
10. Although various theories have been propounded by
the Judges and jurists in England regarding the juridical basis
F of the doctrine of frustration, yet the essential idea upon which
the doctrine is based is that of impossibility of performance of
the contract; in fact impossibility and frustration are often used
as interchangeable expressions. The changed circumstances,
it is said, make the performance of the contract impossible and
the parties are absolved from the further performance of it as
G they did not promise to perform an impossibility.
The parties shall be excused, as Lord Loreburn says:
(F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican
Petroleum Products Co. Ltd. (1916) 2 AC 397 (HL) AC
p. 406)
H
811
‘… If substantially the whole contract becomes A
impossible of performance or in other words impracticable
by some cause for which neither was responsible.’
* * *
17. It must be pointed out here that if the parties do
contemplate the possibility of an intervening circumstance which B
might affect the performance of the contract, but expressly
stipulate that the contract would stand despite such
circumstance, there can be no case of frustration because the
basis of the contract being to demand performance despite the
happening of a particular event, it cannot disappear when that C
event happens. As Lord Atkinson said in Matthey v. Curling,
(1922) 2 AC 180 (HL): (AC p. 234)
‘… a person who expressly contracts absolutely to do a
thing not naturally impossible is not excused for non-
performance because of being prevented by the act of God or D
the King’s enemies … or vis major.’
This being the legal position, a contention in the extreme
form that the doctrine of frustration as recognised in English
law does not come at all within the purview of Section 56 of
the Contract Act cannot be accepted.” E
36. On a conspectus of the facts and the law placed before us,
we are satisfied that certain circumstances had intervened, making
it impracticable for Kenneth Builders to commence the
construction activity on the project land. Since arriving at some
clarity on the issue had taken a couple of years and that clarity F
was eventually and unambiguously provided by the report of CEC,
it could certainly be said that the contract between DDA and
Kenneth Builders was impossible of performance within the
meaning of that word in Section 56 of the Contract Act. Therefore,
we reject the contention of DDA that the contract between DDA
and Kenneth Builders was not frustrated.” G
43. In the present case, parties have agreed, and in Clause 14 of
the Agreement, it was contemplated that during the contract if there is
any prohibition of the export or any other executive or legislative Act by
or on behalf the Government of the Country of origin, the unfulfilled part
of the contract shall be cancelled. Because of the refusal by the H
812 SUPREME COURT REPORTS [2020] 7 S.C.R.
A Government, it was not permissible to the NAFED to make a supply to
the Alimenta S.A. Hence; the unfulfilled part was required to be cancelled.
Thus, NAFED was justified in not making the supply as it would have
violated the Export Control Order, and it was not permissible to carry
forward the quantity of the previous year to the next year because of
the Export Control Order without permission of the Government.
B
44. It is apparent that the contract came to an end in terms of
Clause 14 of the Agreement. The contract became void in view of the
provisions contained in Section 32 of the Indian Contract Act, 1881 (for
short, “Contract Act”). The stipulation in Clause 14 releases both parties
from the performance of the contract.
C
45. Section 32 of the Contract Act provides for enforcement of
contingent contracts. Section 32, along with illustrations, is reproduced
hereunder:
“32. Enforcement of contracts contingent on an event
D happening.—Contingent contracts to do or not to do anything if
an uncertain future event happens, cannot be enforced by law
unless and until that event has happened.”
If the event becomes impossible, such contracts become void.
Illustrations
E
(a) A makes a contract with B to buy B’s horse if A survives C.
This contract cannot be enforced by law unless and until C dies in
A’s lifetime.
(b) A makes a contract with B to sell a horse to B at a specified
price, if C, to whom the horse has been offered, refuses to buy
F
him. The contract cannot be enforced by law unless and until C
refuses to buy the horse.”
(c) A contracts to pay B a sum of money when B marries C. C
dies without being married to B. The contract becomes void.”
G 46. Section 56 of the Contract Act deals with the agreement to do
an impossible act or to do acts afterward become impossible or unlawful.
It also provides for liability of the promisor to do something which he
knew or might have known with reasonable diligence an act which is
impossible or unlawful; as such, the promisor must make compensation
for the non-performance of the promise.
H
813
47. Section 32 of the Contract Act applies in case the agreement A
itself provides for contingencies upon happening of which contract cannot
be carried out and provide the consequences. To this case, provisions of
Section 32 of the Contract Act is attracted and not section 56. In case
an act becomes impossible at a future date, and that exigency is not
provided in the agreement on the happening of which exigency, impossible
B
or unlawful, the promisor had no control which he could not have
prevented, the contract becomes void as provided in section 56. However,
section 56 also provides liability for a cause where the promisor has
agreed to do something which he knew or with reasonable diligence
might have known and which the promisee did not know to be impossible
or unlawful. Such a promisor must make compensation to such promise C
and is liable to pay damages. The latter part of section 56 is applicable
when promisee did not know the act to be impossible or unlawful and
that it was not known to the promisor; the action was impossible or
unlawful or with reasonable diligence might have known.
48. In the present case, because of the clear stipulation in Clause D
14 of the Agreement, it is apparent that the parties have agreed for a
contingent contract. They knew very well that the Government’s
executive, or legislative actions might come in the way as provided in
Clause 14 of the Agreement. Thus, in this case, section 32 of the Contract
Act is attracted and not the provisions of section 56. It was an agreement
to do an act impossible in itself without permission, and that is declared E
to be void by section 32. The contract was capable of being performed
in case the Government gave the requisite authorization. It is not an
event that was not in contemplation at the time of entering into the
agreement. Government permission was necessary. Section 56 is not
attracted as the promisor and promisee both knew the reason in advance F
as in agreement such a contingency was provided itself in case of
Government’s executive order comes in the way, for cancellation of the
contract. Thus, the contract became void on the happening of the
contingency, as provided in section 32 of the Contract Act.
49. This Court in Satyabrata Ghose v. Mugneeram Bangur & G
Co., AIR 1954 SC 44, considered the applicability of sections 32 and 56
while considering the doctrine of frustration of contract. Impossibility
and frustration are used as interchangeable expressions. The principle
of frustration is an aspect of the discharge of a contract. In India, the
only doctrine the courts have to go by is that of intervening impossibility
or illegality as laid down in section 56, and the English decisions in this H
814 SUPREME COURT REPORTS [2020] 7 S.C.R.
A regard may have persuasive value but are not binding. This Court also
considered if the contract contained impliedly or expressly a stipulation,
according to which it would stand discharged on happening of particular
circumstances. The dissolution of the agreement would take place under
the terms of the contract itself. Such cases would be outside the purview
of section 56 of the Contract Act altogether. They would be dealt with
B under section 32 of the Contract Act, which deals with contingent
contracts. This Court held:
“9. The first paragraph of the section lays down the law in the
same way as in England. It speaks of something which is impossible
inherently or by its very nature, and no one can obviously be directed
C to perform such an act. The second paragraph enunciates the
law relating to the discharge of contract by reason of supervening
impossibility or illegality of the act agreed to be done. The wording
of this paragraph is quite general, and though the illustrations
attached to it are not at all happy, they cannot derogate from the
general words used in the enactment.
D
This much is clear that the word “impossible” has not been
used here in the sense of physical or literal impossibility. The
performance of an act may not be literally impossible, but it may
be impracticable and useless from the point of view of the object
and purpose which the parties had in view; and if an untoward
E event or change of circumstances totally upsets the very foundation
upon which the parties rested their bargain, it can very well be
said that the promisor finds it impossible to do the act which he
promised to do.”
10. Although various theories have been propounded by the Judges
F and jurists in England regarding the juridical basis of the doctrine
of frustration, yet the essential idea upon which the doctrine is
based is that of impossibility of performance of the contract; in
fact, impossibility and frustration are often used as interchangeable
expressions. The changed circumstances, it is said, make the
performance of the contract impossible and the parties are absolved
G
from the further performance of it as they did not promise to
perform an impossibility.
The parties shall be excused, as Lord Loreburn says, see –
Tamplin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products
Co. Ltd., 1916-2 AO 297 at p 403 (A).
H
815
“If substantially the whole contract becomes impossible A
of performance or in other words impracticable by some cause
for which neither was responsible.”
In - Joseph Constantine Steamship Line Limited v. Imperial
Smelting Corporation Ltd.’, 1942-AO 154 at p 168 (B) Viscount
Maugham observed that the B
“doctrine of frustration is only a special case of the discharge
of contract by an impossibility of performance arising after the
contract was made.”
Lord Porter agreed with this view and rested the doctrine on the
same basis. C
The question was considered and discussed by a Division
Bench of the Nagpur High Court in Kesari Chand v. Governor-
General-in-CouncilILR (1949) Nag 718 (C), and it was held
that the doctrine of frustration comes into play when a contract
becomes impossible of performance after it is made, on account D
of circumstances beyond the control of the parties. The doctrine
is a special case of impossibility and, as such, comes under Section
56 of the Indian Contract Act. We are in entire agreement with
this view which is fortified by a recent pronouncement of this
Court in Ganga Saran v. Ram Charan, AIR 1952 SO 9 at p 11 E
(D) where Fazl Ali, J., in speaking about frustration observed in
his judgment as follows:
“It seems necessary for us to emphasise that so far as
the courts in this country are concerned, they must look primarily
to the law as embodied in Sections 32 and 56 of the Indian F
Contract Act, 1872.”
We hold, therefore, that the doctrine 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
G
Contract Act. It would be incorrect to say that Section 56 of the
Contract Act 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. It must
be held also, that to the extent that the Indian Contract Act deals
with a particular subject, it is exhaustive upon the same and it is H
816 SUPREME COURT REPORTS [2020] 7 S.C.R.
A not permissible to import the principles of English law dehors
these statutory provisions. The decisions of the English Courts
possess only a persuasive value and may be helpful in showing
how the Courts in England have decided cases under
circumstances similar to those which have come before our courts.
B 15. These differences in the way of formulating legal theories
really do not concern us so long as we have a statutory provision
in the Indian Contract Act. In deciding cases in India the only
doctrine that we have to go by is that of supervening impossibility
or illegality as laid down in Section 56 of the Contract Act, taking
the word “impossible” in its practical and not literal sense. It must
C be borne in mind, however, that Section 56 lays down a rule of
positive law and does not leave the matter to be determined
according to the intention of the parties.
16. In the latest decision of the House of Lords referred to above,
the Lord Chancellor puts the whole doctrine upon the principle of
D construction. But the question of construction may manifest itself
in two totally different ways. In one class of cases the question
may simply be, as to what the parties themselves had actually
intended; and whether or not there was a condition in the contract
itself, express or implied, which operated, according to the
E agreement of the parties themselves, to release them from their
obligations; this would be a question of construction pure and simple
and the ordinary rules of construction would have to be applied to
find out what the real intention of the parties was.
According to the Indian Contract Act, a promise may be
F express or implied Vide Section 9. In cases, therefore, where the
court gathers as a matter of construction that the contract itself
contained impliedly or expressly a term, according to which it
would stand discharged on the happening of certain circumstances,
the dissolution of the contract would take place under the terms
of the contract itself and such cases would be outside the purview
G of Section 56 altogether. Although in English law these cases are
treated as cases of frustration, in India they would be dealt with
under Section 32 of the Indian Contract Act which deals with
contingent contracts or similar other provisions contained in the
Act. In the large majority of cases however the doctrine of
H frustration is applied not on the ground that the parties themselves
817
agreed to an implied term which operated to release them from A
the performance of the contract. The relief is given by the court
on the ground of subsequent impossibility when it finds that the
whole purpose or basis of a contract was frustrated by the intrusion
or occurrence of an unexpected event or change of circumstances
which was beyond what was contemplated by the parties at the
B
time when they entered into the agreement. Here there is no
question of finding out an implied term agreed to by the parties
embodying a provision for discharge, because the parties did not
think about the matter at all nor could possibly have any intention
regarding it.
When such an event or change of circumstance occurs C
which is so fundamental as to be regarded by law as striking at
the root of the contract as a whole, it is the court which can
pronounce the contract to be frustrated and at an end. The court
undoubtedly has to examine the contract and the circumstances
under which it was made. The belief, knowledge and intention of D
the parties are evidence, but evidence only on which the court
has to form its own conclusion whether the changed circumstances
destroyed altogether the basis of the adventure and its underlying
object – Vide Morgan v. Manser, 1947-2 All ER 666 (L). This
may be called a rule of construction by English Judges but it is
certainly not a principle of giving effect to the intention of the E
parties which underlies all rules of construction. This is really a
rule of positive law and as such comes within the purview of
Section 56 of the Indian Contract Act.”
50. The Court followed the decision in Satyabrata Ghose (supra)
in Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522, F
it held that if the contract contains implied or expressly a term according
to which it would stand discharged on the happening of certain
contingencies, dissolution of the contract would take place under the
terms of the contract itself and such cases would be outside the purview
of section 56 of the Contract Act. Such cases have to be dealt with G
under section 32 of the Contract Act. The Court opined:
“7. Such a difficulty has, however, not to be faced by the courts in
this country. In Ganga Saran v. Ram Charan, 1952 SCR 36 =
(AIR 1952 SC 9) this Court emphasized that so far as the courts
in this country are concerned they must look primarily to the law H
818 SUPREME COURT REPORTS [2020] 7 S.C.R.
A as embodied in Section 32 and 56 of the Contract Act. In
Satyabrata Ghose v. Mugneeram,1954 SCR 310 = (AIR 1954
SC 44) also, Mukherjee, J. (as he then was) stated that Section
56 laid down a rule of positive law and did not leave the matter to
be determined according to the intention of the parties. Since under
the Contract Act a promise may be expressed or implied, in cases
B
where the court gathers as a matter of construction that the contract
itself contains impliedly or expressly a term according to which it
would stand discharged on the happening of certain circumstances
the dissolution of the contract would take place under the terms
of the contract itself and such cases would be outside the purview
C of Section 56. Although in English law such cases would be treated
as cases of frustration, in India they would be dealt with under
Section 32. In a majority of cases, however, the doctrine of
frustration is applied not on the ground that the parties themselves
agreed to an implied term which operated to release them from
performance of the contract. The Court can grant relief on the
D
ground of subsequent impossibility when it finds that the whole
purpose or the basis of the contract was frustrated by the intrusion
or occurrence of an unexpected event or change of circumstances
which was not contemplated by the parties at the date of the
contract. There would in such a case be no question of finding out
E an implied term agreed to by the parties embodying a provision
for discharge because the parties did not think about the matter at
all nor could possibly have any intention regarding it. When such
an event or change of circumstances which is so fundamental as
to be regarded by law as striking at the root of the contract as a
whole occurs, it is the court which can pronounce the contract to
F
be frustrated and at an end. This is really a positive rule enacted
in Section 56 which governs such situations.”
51. In Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR
1969 SC 110 again the doctrine of frustration of contract came up for
consideration. It was held that the provisions of section 56 of the Contract
G Act could not apply to self-induced frustration. The relevant portion is
extracted hereunder:
“10. The doctrine of frustration of contract 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
H
819
comes within the purview of Section 56 of the Indian Contract A
Act. It should be noticed that Section 56 lays down a rule of
positive law and does not leave the matter to be determined
according to the intention of the parties.
13. In English law, therefore, the question of frustration of contract
has been treated by courts as a question of construction depending B
upon the true intention of the parties. In contrast, the statutory
provisions contained in Section 56 of the Indian Contract Act lay
down a positive rule of law and English authorities cannot therefore
be of direct assistance, though they have persuasive value in
showing how English courts have approached and decided cases
under similar circumstances. C
14. Counsel on behalf of the respondent, however, contended that
the contract was not impossible of performance, and the appellant
cannot take recourse to the provisions of Section 56 of the Indian
Contract Act. It was contended that under clause 1 of the Import
Trade Control Order No. 2-ITC/48, dated March 6, 1948 it was D
open to the appellant to apply for a written permission of the
licensing authority to sell the chicory. It is not shown by the appellant
that he applied for such permission and the licensing authority had
refused such permission. It was therefore maintained on behalf
of the respondent that the contract was not impossible of E
performance. We do not think there is any substance in this
argument. It is true that the licensing authority could have given
written permission for disposal of the chicory under clause 1 of
Order No.2-ITC/48, dated March 6, 1948 but the condition imposed
in Ex. B-9 in the present case is a special condition imposed under
clause (v) of paragraph (a) of Order No.2-ITC/48, dated March F
6, 1948 and there was no option given under this clause for the
licensing authority to modify the condition of licence that “the
goods will be utilised only for consumption as raw material or
accessories in the licence holder’s factory and that no portion
thereof will be sold to any party”. It was further argued on behalf G
of the respondent that, in any event, the appellant could have
purchased chicory from the open market and supplied it to the
respondent in terms of the contract. There is no substance in this
argument also. Under the contract the quality of chicory to be
sold was chicory of specific description— “Egberts Chicory,
H
820 SUPREME COURT REPORTS [2020] 7 S.C.R.
A packed in 495 wooden cases, each case containing 2 tins of 56 lb.
nett”. The delivery of the chicory was to be given by “S.S. Alwaki”
in December, 1955. It is manifest that the contract, Ex. A-1 was
for sale of certain specific goods as described therein and it was
not open to the appellant to supply chicory of any other description.
Reference was made on behalf of the respondent to the decision
B
in Maritime National Fish Limited v. Ocean Trawlers, Limited
1935 AC 524. In that case, the respondents chartered to the
appellants a steam trawler fitted with an otter trawl. Both parties
knew at the time of the contract that it was illegal to use an otter
trawl without a licence from the Canadian government. Some
C months later the appellants applied for licences for five trawlers
which they were operating, including the respondents’ trawler.
They were informed that only three licences would be granted,
and were requested to state for which of the three trawlers they
desired to have licences. They named three trawlers other than
the respondents’, and then claimed that they were no longer bound
D
by the charter-party as its object had been frustrated. It was held
by the Judicial Committee that the failure of the contract was the
result of the appellants’ own election, and that there was therefore
no frustration of the contract. We think the principle of this case
applies to the Indian law and the provisions of Section 56 of the
E Indian Contract Act cannot apply to a case of “self-induced
frustration”. In other words, the doctrine of frustration of contract
cannot apply where the event which is alleged to have frustrated
the contract arises from the act or election of a party. But for the
reasons already given, we hold that this principle cannot be applied
to the present case for there was no choice or election left to the
F
appellant to supply chicory other than under the terms of the
contract. On the other hand, there was a positive prohibition
imposed by the licence upon the appellant not to sell the imported
chicory to any other party but he was permitted to utilise it only
for consumption as raw material in his own factory. We, are
G accordingly of the opinion that Counsel for the respondent has
been unable to make good his argument on this aspect of the
case.”
52. In the present case, the High Court observed that it was a
case of self-induced frustration. The High Court ignored and overlooked
H that it was not a case of frustration under section 56 of the Contract Act,
821
but there was a stipulation in Clause 14 of the Agreement, the effect of A
which was ignored and overlooked, and the said term was based upon
the law as applicable in India and wasbased on export restrictions, it
was within the realm of public policy. The NAFED was a canalising
agency and could not have supplied without prior permission of
Government, nor could it have lawfully carried forward last year’s supply
B
to next year that too limited quota and to supply Government permission
was necessary to make it. Enforcement of such an award in violation of
export policy and the Government order would be against the public
policy as envisaged in section 7 of the Act of 1961.
53. In Ram Kumar v. P.C. Roy & Co. (India) Ltd.,AIR 1952
Cal. 335 (338), parties were aware of the restrictions imposed by the C
Government on the supply of wagons but expected normal conditions by
the date of performance. Wagon restrictions continued till the date of
performance, and there was a failure to supply. The Court held that the
contract became void, being impossible of performance, and parties were
relieved of their liabilities. In the present case also, parties knew that the D
Government may or may not grant permission and entered into the
contract with the said stipulation. Thus, due to the Government not giving
consent, it became incapable of performance, and therefore, NAFED
could not have been fastened with the liability to pay the enforceable
contract damages. In Ram Kumar (supra) High Court held:
E
“20. Frustration depends on what has actually happened & its
effect on the possibility of performing the contract. Where one
party claims that there has been frustration & the other party
contests it, the Court has got to decide the issue ‘ex post facto’ on
the actual circumstances of the case.
F
“The data for decision are, on the one hand, the terms and
construction of the contract, read ‘n the light of the then-existing
circumstances, and on the other hand the events which have
occurred. It is the court which has to decide what is the true
position between the parties.”
G
‘Denny Mott’s’ case, 1944 A. C. 265. Lord Sumner observed in
the ‘Hirji Mulji’ case (1926) A. C. 497 that the legal effect of the
frustration of the contract does not depend on the intention of the
parties or their opinions or even knowledge as to the events which
brought about the frustration but upon its occurrence in such
circumstances as to show it to be inconsistent with the further H
822 SUPREME COURT REPORTS [2020] 7 S.C.R.
A prosecution of the adventure. In my view, this principle is applicable
in this case.
23. The main object of the contract was the transhipment of the
goods from Bihar to Bengal by Railway & in my opinion, having
regard to the events that have happened the basis of the contract
B has been overthrown. In the absence of express intention of the
parties, I have to determine what is just & reasonable in view of
the non-availability of wagons for transport & the difficulties
created by the restrictions or emergency orders. It may be now
accepted as settled law that when people enter into a contract
which is dependant for its performance on the continued availability
C of a specific thing & that availability comes to an end by reason
of circumstances beyond the control of the parties; the contract is
dissolved. According to Lord Wright, the expression ‘frustration
of the contract’ is an elliptical expression. The fuller & more
accurate expression is ‘frustration of the adventure or of the
D commercial or practical purpose of the contract.’ In my view, the
commercial or practical purpose of this contract was defeated or
overthrown by the refusal on the part of the Govt. to issue permit
& by the non-availability of the transport facilities & the restrictions
& embargoes put by the Govt. & ultimately by requisition of the
stock of the plff. The real object of the contract as contemplated
E by the parties was the purchase or employment of the goods for a
particular purpose & therefore, the doctrine of frustration can be
imported & if necessary, the requisite terms can be implied.”
54. In Kunjilal Manohar Das v. Durga Prasad Debi Prosad,
AIR 1920 Cal. 1021 (1024), parties with full knowledge of the restrictions
F imposed by the Government entered into an agreement to send the goods
by rail. They were aware of Government restrictions. However, the
time when the performance of the contract arrived, the restrictions had
not been removed. It was impossible for the seller to make delivery. In
the circumstances, the Court held, that the contract became void and
G the seller was excused from performance thereof, and the buyer was
held not entitled to recover any compensation from the seller, thus:
“….The principle simply is this, that when you are having regard
to the intention of parties at the time of entering into the contract,
the lawyer is apt to make a mistake if he assumes that the intention
H of the contracting parties is to bring about a state of circumstances
823
such that the legal remedy of damages will require to be resorted A
to, lawyers assuming that it will pervert the intention of commercial
men in cases of this sort. That being so, and applying the principle
that this contract was not a contract made indifferently for the
sale of goods or for the payment of damages, but a contract for
the delivery of goods, it seems to me that performance is,
B
impossible, that the contract having been made upon the assumption
that the normal state of things would have come into existence by
March or April of this year, the intention of the contract would be
perverted, if I was to hold that the sellers are to insure the buyers
against this chance of the control of Government going on. For
these reasons, I answer the questions which have been put to me C
in this way: Firstly:—Did, in the circumstances hereinbefore
mentioned, such a contract become void and were the sellers
excused from the performance thereof? My answer is, “yes,” the
contract became void before breach. Secondly: — Are the buyers
entitled to recover any compensation from the sellers? I answer
D
that “no,” either in respect of goods which were lying ready at the
up-country station which the railway company refused to accept
for despatch or in respect of goods which were not so delivered.
I answer “no” to both parts of the second question because the
performance having become impossible, no tender could have had
any effect upon the railway company. E
It is important in this case to add that this decision proceeds
entirely upon the facts as given to me by agreement, not only the
facts as regards the contract and the position of railway traffic
but also the facts stated as regards the assumptions and intentions
of the parties. When the latter class of facts is not the same, it is F
very probable that different considerations altogether will prevail.”
55. In Smt. Sushila Devi and Ors. v. Hari Singhand Ors., (1971)
2 SCC 288, this Court, while considering section 56, observed that the
impossibility contemplated is not confined to something which is not
humanly possible. If the performance of the contract became G
impracticable, which the parties had in view, then it must be held that the
performance of the agreement had become impossible. The Court opined:
“11. In our opinion, on this point, the conclusion of the appellate
court is not sustainable. But in fact, as found by the trial court as
well as by the appellate court, it was impossible for the plaintiffs H
824 SUPREME COURT REPORTS [2020] 7 S.C.R.
A to even get into Pakistan. Both the trial court as well as the
appellate court have found that because of the prevailing
circumstances, it was impossible for the plaintiffs to either take
possession of the properties intended to be leased or even to collect
rent from the cultivators. For that situation, the plaintiffs were not
responsible in any manner. As observed by this Court in Satyabrata
B
Ghose v. MugneeramBangur and Co., (1954) SCR 310, 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
C 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
D
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
E 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.”
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
F 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.
56. In Narayana Chandrasekhara Shenoy and Bros. by sole
Proprietor Narayana Shanbog v. R. PalaniappaMudaliar, AIR 1952
Mad. 670, a question arose whether the defendant was required to supply
G jaggery by rail, which became impossible by the issuance of a
Government notification controlling the movement of jaggery by rail.
The plaintiff refused to bear the additional expenditure entailed by the
change in the mode of transport. The Court held that even assuming that
the contract had not become impossible of performance, the defendant
did not commit a breach of the contract. In the instant case, export
H became impossible due to Government’s refusal.
825
57. It would have been unlawful for NAFED to affect the supply A
in view of the Government’s refusal to accord the permission, and both
the parties knew it very well and agreed that the contract would be
cancelled in such an exigency for non-supply in quantity. Thus, they
were bound by the agreement. The award pre-supposes supply could
have been made after the Government’s refusal. If supply had been
B
made, it would have been unlawful. Thus, the parties agreed for its
cancellation as such an award is against the basic law and public policy
as applied in India.
58. It is also apparent that the Government rightly objected to the
supply being made at the rate of the previous season in the next season,
particularly when the prices escalated thrice. The addendum was entered C
into subsequently, unfairly, and the parties fully understood that the
Government would not permit export at the rate on which supply was
proposed, and NAFED was acting only as a canalising agent of the
Government of India. Thus, for such an unfair contract, permission was
rightly declined by the Government. In the previous year, the commodity D
could not be supplied due to force majeure. In no event, supply could
have been made in December 1980 and January 1981 sans permission
from the Government of India.
59. Next question arises whether the ground of prohibition to supply
imposed by the Government was sufficient to render the award E
unenforceable in terms of the provisions contained in Section 7 of the
Foreign Awards Act. Section 7 is extracted hereunder:
7. Conditions for enforcement of foreign awards -
(1) A foreign award may not be enforced under this Act—-
F
(a) if the party against whom it is sought to enforce the award
proves to the court dealing with the case that——
(i) the parties to the agreement were, under the law applicable
to them, under some incapacity, or the said agreement is not
valid under the law to which the parties have subjected it, or
G
failing any indication thereon, under the law of the country
where the award was made; or
(ii) that party was not given proper notice of the appointment
of the arbitrator or of the arbitration proceedings or was
otherwise unable to present his case; or
H
826 SUPREME COURT REPORTS [2020] 7 S.C.R.
A (iii) the award deals with questions not referred or contains
decisions on matters beyond the scope of the agreement:
Provided that if the decisions on matters submitted to arbitration
can be separated from those not submitted, that part of the
award which contains decisions on matters submitted to
B arbitration may be enforced; or
(iv) the composition of the arbitral authority or the arbitral
procedure was not in accordance with the agreement of the
parties or, failing such agreement, was not in accordance with
the law of the country where the arbitration took place; or
C (v) the award has not yet become binding on the parties or
has been set aside or suspended by a competent authority of
the country in which, or under the law of which, that award
was made; or
(b) if the court dealing with the case is satisfied that——
D
(i) the subject-matter of the difference is not capable of
settlement by arbitration under the law of India; or
(ii) the enforcement of the award will be contrary to public
policy.
E (2) If the court before which a foreign award is sought to be
relied upon is satisfied that an application for the setting aside or
suspension of the award has been made to a competent authority
referred to in sub-clause (v) of clause (a) of sub-section (1), the
court may, if it deems proper, adjourn the decision on the
enforcement of the award and may also, on the application of the
F
party claiming enforcement of the award, order the other party to
furnish suitable security.”
(emphasis supplied)
60. It is provided in Section 7(1)(b)(ii) that if the court dealing
G with the case is satisfied that the enforcement of the award will be
contrary to public policy, the foreign award may not be enforced. The
foreign award may also not be executed in the case as per section
7(1)(a)(i) if the parties to the agreement under the law applicable are
under some incapacity or agreement is not valid under the law. Similar
exigency is provided in section 7(1)(a)(ii) if proper notice of appointment
H
827
of Arbitrator is not given or the party was unable to present its case. A
Section 7(1)(a)(iii) provides that if the award deals with the questions
not referred or contains decisions on matters beyond the scope of the
agreement renders award unenforceable. Section 7(1)(a)(iv) makes an
award not capable of enforcement in case the composition of the
Arbitration Tribunal or procedure is not in accordance with the agreement
B
of the parties.
61. The question arises when the award can be said to be contraryto
public policy. This Court considered the issue in several decisions. The
expression “public policy” concerning the agreement relates to the public
policy of the country where award is being enforced. Section 23 of the
Contract Act, 1872 deals with what consideration and objects are lawful C
and what not. If the court regards it as immoral or opposed to public
policy, in that event, the consideration or object of agreement is said to
be unlawful, and any agreement of which the object or consideration is
unlawful is void.
62. In Central Inland Water Transport Corporation Ltd. & D
Anr. v. Brojo Nath Ganguly & Anr. 1986 (3) SCC 156, the court observed
that the Contract Act does not define the expression of public policy or
opposed to public policy. The principles governing public policy are
capable of expansionor modification.
63. In Renusagar Power Co. Ltd. v. General Electric Co., 1994 E
Supp. (1) SCC 644, meaning of the expression “public policy” under
section 7(1)(b) (ii) of the Foreign Awards Act came up for consideration
and distinction drawn while applying the rule of public policy between
the matter involving domestic law, and that involving conflict of laws
was explained. The court considered that because of absence of a F
workable definition of ‘international public policy’ in Article V(2)(b) of
New York Convention it is difficult to construe the expression “public
policy” in Section 7(1)(b)(ii) and opined that the doctrine of public policy
under the said provision would mean as the courts in India apply it. This
Court held that enforcement of the foreign award would be refused on
the ground that it was contrary to public policy if such enforcement G
would be contrary to (1) fundamental policy of Indian Law, (2) the interest
of India, and (3) justice or morality. The relevant portion is extracted
hereunder:
“63. In view of the absence of a workable definition of “international
public policy,” we find it difficult to construe the expression “public H
828 SUPREME COURT REPORTS [2020] 7 S.C.R.
A policy” in Article V(2)(b) of the New York Convention to mean
international public policy. In our opinion, the said expression must
be construed to mean the doctrine of public policy as applied by
the courts in which the foreign award is sought to be enforced.
Consequently, the expression ‘public policy’ in Section 7(1)(b)(ii)
of the Foreign Awards Act means the doctrine of public policy as
B
applied by the courts in India. This raises the question whether
the narrower concept of public policy as applicable in the field of
public international law should be applied or the wider concept of
public policy as applicable in the field of municipal law.
65. This would imply that the defence of public policy which is
C permissible under Section 7(1)(b)(ii) should be construed narrowly.
In this context, it would also be of relevance to mention that under
Article I(e) of the Geneva Convention Act of 1927, it is permissible
to raise objection to the enforcement of arbitral award on the
ground that the recognition or enforcement of the award is contrary
D to the public policy or to the principles of the law of the country in
which it is sought to be relied upon. To the same effect is the
provision in Section 7(1) of the Protocol & Convention Act of
1837 which requires that the enforcement of the foreign award
must not be contrary to the public policy or the law of India. Since
the expression “public policy” covers the field not covered by the
E words “and the law of India,” which follow the said expression,
contravention of law alone will not attract the bar of public policy,
and something more than contravention of law is required.
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
F 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
G 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 would mean that
“public policy” in Section 7(1)(b)(ii) has been used in a narrower
H
829
sense and in order to attract the bar of public policy the A
enforcement of the award must invoke something more than the
violation of the law of India. Since the Foreign Awards Act is
concerned with recognition and enforcement of foreign awards
which are governed by the principles of private international law,
the expression “public policy” in Section 7(1)(b)(ii) of the Foreign
B
Awards Act must necessarily be construed in the sense the
doctrine of public policy is applied in the field of private international
law. Applying the said criteria it must be held that the enforcement
of a foreign award would be refused on the ground that it is
contrary to public policy if such enforcement would be contrary
to (i) fundamental policy of Indian law; or (ii) the interests of C
India; or (iii) justice or morality.
67. Having examined the scope of public policy under Section
7(1)(b)(ii) of the Foreign Awards Act, we will now proceed to
consider the various grounds on the basis of which the said provision
is invoked by Renusagar to bar the enforcement for the award of D
the Arbitral Tribunal. As indicated earlier, Renusagar has invoked
the said provision on the ground that enforcement of the award
would be contrary to the public policy for the reason that such
enforcement—
(a) would involve contravention of the provisions of FERA; E
(b) would amount to penalising Renusagar for not disregarding
the interim orders passed by the Delhi High Court in the writ
petition filed by Renusagar;
(c) would enable recovery of compound interest on interest;
F
(d) would result in payment of damages on damages;
(e) would result in unjust enrichment by General Electric;
We will examine the submissions of learned counsel under each
head separately.”
64. In Oil and Natural Gas Corporation Ltd. v. Saw Pipes G
Ltd.,(2003) 5 SCC 705,this Courtopined 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. The court observed:
H
830 SUPREME COURT REPORTS [2020] 7 S.C.R.
A “15. The result is — if the award is contrary to the substantive
provisions of law or the provisions of the Act or against the terms
of the contract, it would be patently illegal, which could be
interfered under Section 34. However, such failure of procedure
should be patent affecting the rights of the parties.
B What meaning could be assigned to the phrase “Public Policy
of India”?
16. The next clause which requires interpretation is clause (ii) of
sub-section (2)(b) of Section 34, which among other things
provides that the court may set aside the arbitral award if it conflicts
C with the “public policy of India.” The phrase “public policy of
India” is not defined under the Act. Hence, the said term is required
to be given meaning in context and also considering the purpose
of section and scheme of the Act. It has been repeatedly stated
by various authorities that the expression “public policy” does not
admit of precise definition and may vary from generation to
D generation and from time to time. Hence, the concept “public
policy” is considered to be vague, susceptible to narrow or wider
meaning depending upon the context in which it is used. Lacking
precedent, the court has to give its meaning in the light and
principles underlying the Arbitration Act, Contract Act, and
E constitutional provisions.
30. It is true that under the Act, there is no provision similar to
Sections 23 and 28 of the Arbitration Act, 1940, which specifically
provided that the arbitrator shall pass award within reasonable
time as fixed by the court. It is also true that on occasions, arbitration
F proceedings are delayed for one or other reason, but it is for the
parties to take appropriate action of selecting proper arbitrator(s)
who could dispose of the matter within reasonable time fixed by
them. It is for them to indicate the time-limit for disposal of the
arbitral proceedings. It is for them to decide whether they should
continue with the arbitrator(s) who cannot dispose of the matter
G within reasonable time. However, non-providing of time-limit for
deciding the dispute by the arbitrators could have no bearing on
interpretation of Section 34. Further, for achieving the object of
speedier disposal of dispute, justice in accordance with law cannot
be sacrificed. In our view, giving limited jurisdiction to the court
H for having finality to the award and resolving the dispute by speedier
831
method would be much more frustrated by permitting patently A
illegal award to operate. Patently illegal award is required to be
set at naught, otherwise it would promote injustice.
31. Therefore, in our view, the phrase “public policy of India”
used in Section 34 in context is required to be given a wider
meaning. It can be stated that the concept of public policy connotes B
some matter which concerns public good and the public interest.
What is for public good or in public interest or what would be
injurious or harmful to the public good or public interest has varied
from time to time. However, the award which is, on the face of it,
patently in violation of statutory provisions cannot be said to be in
public interest. Such award/judgment/decision is likely to adversely C
affect the administration of justice. Hence, in our view in addition
to narrower meaning given to the term “public policy” in
Renusagar case,1994 Supp (1) SCC 644, it is required to be held
that the award could be set aside if it is patently illegal. The result
would be — award could be set aside if it is contrary to: D
(a) fundamental policy of Indian law; or
(b) the interest of India; or
(c) justice or morality, or
(d) in addition, if it is patently illegal. E
Illegality must go to the root of the matter and if the illegality is of
trivial nature it cannot be held that award is against the public
policy. Award could also be set aside if it is so unfair and
unreasonable that it shocks the conscience of the court. Such
award is opposed to public policy and is required to be adjudged F
void.”
Additional tests were laid down. The expression ‘patently illegal’
was also held to be covered in public policy with respect to domestic
awards. Illegality goes to the root of the matter, or if the award shocks
the conscience of the court, it would be patently illegal. The intention of G
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. H
832 SUPREME COURT REPORTS [2020] 7 S.C.R.
A 65. In Shri Lal Mahal Limited v. Progetto Grano Spa, (2014) 2
SCC 433, the ratio of Renusagar (supra) was applied, and it was held
that expression and concept of public policy of India are in its application
is narrower in the enforcement of foreign award than in respect of the
enforcement of domestic arbitral awards. Something more than
contravention of the law is required for refusal of enforcement of a
B
foreign award on the ground that it is contrary to the public policy of
India.This court further opined that the expression “public policy of India”
in section 48(2)(b) has the same import as that of expression “public
policy” in section 7(1)(b)(ii) of the ForeignAwards Act. It further opined
that errors of fact by Board of Appeal obtained by the appellant,relying
C on the report which was inconsistent with the terms of the contract
would not bar enforceability of a foreign award on the ground of being
contrary to the public policy of India andthe court cannot look into the
merits of the award at the stage of enforcement of the foreign awards,
and observed:
D “27. In our view, what has been stated by this Court in
Renusagar, 1994 Supp (1) SCC 644, with reference to Section
7(1)(b)(ii) of the Foreign Awards Act must apply equally to the
ambit and scope of Section 48(2)(b) of the 1996 Act. In
Renusagar,it has been expressly exposited that the expression
“public policy” in Section 7(1)(b)(ii) of the Foreign Awards Act
E refers to the public policy of India. The expression “public policy”
used in Section 7(1)(b)(ii) was held to mean “public policy of
India.” A distinction in the rule of public policy between a matter
governed by the domestic law and a case involving conflict of
laws has been noticed in Renusagar. For all this, there is no reason
F why Renusagar should not apply as regards the scope of inquiry
under Section 48(2)(b). Following Renusagar, we think that for
the purposes of Section 48(2)(b), the expression “public policy of
India” must be given a narrow meaning and the enforcement of
foreign award would be refused on the ground that it is contrary
to the public policy of India if it is covered by one of the three
G categories enumerated in Renusagar. Although the same
expression “public policy of India” is used both in Section
34(2)(b)(ii) and Section 48(2)(b) and the concept of “public policy
in India” is same in nature in both the sections but, in our view, its
application differs in degree insofar as these two sections are
H concerned. The application of the “public policy of India” doctrine
833
for the purposes of Section 48(2)(b) is more limited than the A
application of the same expression in respect of the domestic
arbitral award.
29. We accordingly hold that enforcement of foreign award would
be refused under Section 48(2)(b) only if such enforcement would
be contrary to (1) fundamental policy of Indian law; or (2) the B
interests of India; or (3) justice or morality. The wider meaning
given to the expression “public policy of India” occurring in Section
34(2)(b)(ii) in Saw Pipes is not applicable where objection is raised
to the enforcement of the foreign award under Section 48(2)(b).
47. While considering the enforceability of foreign awards, the C
court does not exercise appellate jurisdiction over the foreign award
nor does it enquire as to whether, while rendering foreign award,
some error has been committed. Under Section 48(2)(b) the
enforcement of a foreign award can be refused only if such
enforcement is found to be contrary to: (1) fundamental policy of
Indian law; or (2) the interests of India; or (3) justice or morality. D
The objections raised by the appellant do not fall in any of these
categories and, therefore, the foreign awards cannot be held to
be contrary to public policy of India as contemplated under Section
48(2)(b).”
66. In Associate Builders v. Delhi Development Authority,(2015) E
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
thestatutes and judicial precedence, (2) need for judicial approach, (3)
natural justice compliance, and (4) standards of reasonableness. The F
concept of justice and morality beside that of patent illegality on
consideration of the various decisions, the court observed:
“18. In Renusagar Power Co. Ltd. v. General Electric Co.,
1994 Supp (1) SCC 644, the Supreme Court construed Section
7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) G
Act, 1961:
“7. Conditions for enforcement of foreign awards.—(1)
A foreign award may not be enforced under this Act—
* * *
H
834 SUPREME COURT REPORTS [2020] 7 S.C.R.
A (b) if the Court dealing with the case is satisfied that—
* * *
(ii) the enforcement of the award will be contrary to the public
policy.”
B In construing the expression “public policy” in the context of a
foreign award, the Court held that an award contrary to
(i) The fundamental policy of Indian law,
(ii) The interest of India,
(iii) Justice or morality,
C
would be set aside on the ground that it would be contrary to the
public policy of India. It went on further to hold that a contravention
of the provisions of the Foreign Exchange Regulation Act would
be contrary to the public policy of India in that the statute is enacted
for the national economic interest to ensure that the nation does
D
not lose foreign exchange which is essential for the economic
survival of the nation (see SCC p. 685, para 75). Equally,
disregarding orders passed by the superior courts in India could
also be a contravention of the fundamental policy of Indian law,
but the recovery of compound interest on interest, being contrary
E to statute only, would not contravene any fundamental policy of
Indian law (see SCC pp. 689 & 693, paras 85 & 95).
27. Coming to each of the heads contained in Saw Pipes[(2003)
5 SCC 705] judgment, ,we will first deal with the head “fundamental
policy of Indian law.” It has already been seen from Renusagar
F [1994 Supp (1) SCC 644] judgment that violation of the Foreign
Exchange Act and disregarding orders of superior courts in India
would be regarded as being contrary to the fundamental policy of
Indian law. To this, it could be added that the binding effect of the
judgment of a superior court being disregarded would be equally
violative of the fundamental policy of Indian law.
G
36. The third ground of public policy is, if an award is against
justice or morality. These are two different concepts in law. An
award can be said to be against justice only when it shocks the
conscience of the court. An illustration of this can be given. A
claimant is content with restricting his claim, let us say to Rs 30
H
835
lakhs in a statement of claim before the arbitrator and at no point A
does he seek to claim anything more. The arbitral award ultimately
awards him Rs 45 lakhs without any acceptable reason or
justification. Obviously, this would shock the conscience of the
court and the arbitral award would be liable to be set aside on the
ground that it is contrary to “justice.”
B
40. We now come to the fourth head of public policy, namely,
patent illegality. It must be remembered that under the Explanation
to Section 34(2)(b), an award is said to be in conflict with the
public policy of India if the making of the award was induced or
affected by fraud or corruption. This ground is perhaps the earliest
ground on which courts in England set aside awards under English C
law. Added to this ground (in 1802) is the ground that an arbitral
award would be set aside if there were an error of law by the
arbitrator. This is explained by Denning, L.J. in R. v.
Northumberland Compensation Appeal Tribunal, ex p Shaw,
(1952) 1 All ER 122: (All ER p. 130 D-E: KB p. 351) D
“Leaving now the statutory tribunals, I turn to the awards
of the arbitrators. The Court of King’s Bench never interfered
by certiorari with the award of an arbitrator, because it was a
private tribunal and not subject to the prerogative writs. If the
award was not made a rule of court, the only course available E
to an aggrieved party was to resist an action on the award or
to file a bill in equity. If the award was made a rule of court, a
motion could be made to the court to set it aside for misconduct
of the arbitrator on the ground that it was procured by corruption
or other undue means (see Statutes 9 and 10 Will. III, C. 15).
At one time an award could not be upset on the ground of F
error of law by the arbitrator because that could not be said to
be misconduct or undue means, but ultimately it was held in
Kent v. Elstob,(1802) 3 East 18, that an award could be set
aside for error of law on the face of it. This was regretted by
Williams, J., in Hodgkinson v. Fernie, (1857) 3 CB (NS) 189, G
but is now well established.”
67. In Ssanyong Engineering & Construction Co. Ltd. vs.
National Highways Authority of India (NHAI), (2019) 8 SCALE 41,
the Court concerning the public policy held:
H
836 SUPREME COURT REPORTS [2020] 7 S.C.R.
A “23. What is clear, therefore, is that the expression “public policy
of India,” whether contained in Section 34 or in Section 48, would
now mean the “fundamental policy of Indian law” as explained in
paragraphs 18 and 27 of Associate Builders (supra), i.e., the
fundamental policy of Indian law would be relegated to the
“Renusagar” understanding of this expression. This would
B
necessarily mean that the Western Geco (supra) expansion has
been done away with. In short, Western Geco (supra), as explained
in paragraphs 28 and 29 of Associate Builders (supra), would no
longer obtain, as under the guise of interfering with an award on
the ground that the arbitrator has not adopted a judicial approach,
C the Court’s intervention would be on the merits of the award,
which cannot be permitted post amendment. However, insofar as
principles of natural justice are concerned, as contained in Sections
18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds
of challenge of an award, as is contained in paragraph 30 of
Associate Builders (supra).
D
26. Insofar as domestic awards made in India are concerned, an
additional ground is now available Under Sub-section (2A), added
by the Amendment Act, 2015, to Section 34. Here, there must be
patent illegality appearing on the face of the award, which refers
to such illegality as goes to the root of the matter but which does
E not amount to mere erroneous application of the law. In short,
what is not subsumed within “the fundamental policy of Indian
law,” namely, the contravention of a statute not linked to public
policy or public interest, cannot be brought in by the backdoor
when it comes to setting aside an award on the ground of patent
F illegality.
30. What is important to note is that a decision which is perverse,
as understood in paragraphs 31 and 32 of Associate Builders
(supra), while no longer being a ground for challenge under “public
policy of India,” would certainly amount to a patent illegality
G appearing on the face of the award. Thus, a finding based on no
evidence at all or an award which ignores vital evidence in arriving
at its decision would be perverse and liable to be set aside on the
ground of patent illegality. Additionally, a finding based on
documents taken behind the back of the parties by the arbitrator
would also qualify as a decision based on no evidence inasmuch
H
837
as such decision is not based on evidence led by the parties, and A
therefore, would also have to be characterised as perverse.
31. Given the fact that the amended Act will now apply, and that
the “patent illegality” ground for setting aside arbitral awards in
international commercial arbitrations will not apply, it is necessary
to advert to the grounds contained in Section 34(2)(a)(iii) and (iv) B
as applicable to the facts of the present case.
33. In Renusagar (supra), this Court dealt with a challenge to a
foreign award Under Section 7 of the Foreign Awards (Recognition
and Enforcement) Act, 1961 [“Foreign Awards Act”]. The Foreign
Awards Act has since been repealed by the 1996 Act. However, C
considering that Section 7 of the Foreign Awards Act contained
grounds which were borrowed from Article V of the Convention
on the Recognition and Enforcement of Foreign Arbitral Awards,
1958 [“New York Convention”], which is almost in the same terms
as Sections 34 and 48 of the 1996 Act, the said judgment is of
great importance in understanding the parameters of judicial review D
when it comes to either foreign awards or international commercial
arbitrations being held in India, the grounds for challenge/refusal
of enforcement Under Sections 34 and 48, respectively, being the
same. After referring to the New York Convention, this Court
delineated the scope of enquiry of grounds Under Sections 34/48 E
(equivalent to the grounds Under Section 7 of the Foreign Awards
Act, which was considered by the Court), and held:
34. Under the Geneva Convention of 1927, in order to obtain
recognition or enforcement of a foreign arbitral award, the
requirements of Clauses (a) to (e) of Article I had to be fulfilled F
and in Article II, it was prescribed that even if the conditions
laid down in Article I were fulfilled recognition, and
enforcement of the award would be refused if the Court was
satisfied in respect of matters mentioned in Clauses (a), (b)
and (c). The principles which apply to recognition and
enforcement of foreign awards are in substance, similar to G
those adopted by the English courts at common law. (See Dicey
& Morris, The Conflict of Laws, 11th Edn., Vol. I, p. 578). It
was, however, felt that the Geneva Convention suffered from
certain defects which hampered the speedy settlement of
disputes through arbitration. The New York Convention seeks H
838 SUPREME COURT REPORTS [2020] 7 S.C.R.
A to remedy the said defects by providing for a much more simple
and effective method of obtaining recognition and enforcement
of foreign awards. Under the New York Convention the party
against whom the award is sought to be enforced can object to
recognition and enforcement of the foreign award on grounds
set out in Sub-clauses (a) to (e) of Clause (1) of Article V and
B
the court can, on its own motion, refuse recognition and
enforcement of a foreign award for two additional reasons set
out in Sub-clauses (a) and (b) of Clause (2) of Article V None
of the grounds set out in Sub-clauses (a) to (e) of Clause (1)
and Sub-clauses (a) and (b) of Clause (2) of Article V postulates
C a challenge to the award on merits.
35. Albert Jan van den Berg in his treatise The New York
Arbitration Convention of 1958: Towards a Uniform Judicial
Interpretation, has expressed the view:
It is a generally accepted interpretation of the Convention
D that the court before which the enforcement of the foreign
award is sought may not review the merits of the award.
The main reason is that the exhaustive list of grounds for
refusal of enforcement enumerated in Article V does not
include a mistake in fact or law by the arbitrator.
E Furthermore, under the Convention, the task of the
enforcement judge is a limited one. The control exercised
by him is limited to verifying whether an objection of a
Respondent on the basis of the grounds for refusal of Article
V(1) is justified and whether the enforcement of the award
would violate the public policy of the law of his country.
F This limitation must be seen in the light of the principle of
international commercial arbitration that a national court
should not interfere with the substance of the arbitration.”
(p. 269)
36. Similarly Alan Redfern and Martin Hunter have said:
G
The New York Convention does not permit any review on the
merits of an award to which the Convention applies and, in this
respect, therefore, differs from the provisions of some systems
of national law governing the challenge of an award, where an
appeal to the courts on points of law may be permitted.”
H
839
(Redfern & Hunter, Law and Practice of International A
Commercial Arbitration, 2nd Edn., p. 461.)
37. In our opinion, therefore, in proceedings for enforcement of a
foreign award under the Foreign Awards Act, 1961, the scope of
enquiry before the court in which award is sought to be enforced
is limited to grounds mentioned in Section 7 of the Act and does B
not enable a party to the said proceedings to impeach the award
on merits.
xxx xxx xxx
65. This would imply that the defence of public policy which is
permissible Under Section 7(1)(b)(ii) should be construed C
narrowly. In this context, it would also be of relevance to mention
that Under Article I(e) of the Geneva Convention Act of 1927, it
is permissible to raise objection to the enforcement of arbitral
award on the ground that the recognition or enforcement of the
award is contrary to the public policy or to the principles of the D
law of the country in which it is sought to be relied upon. To the
same effect is the provision in Section 7(1) of the Protocol &
Convention Act of 1837(sic 1937) which requires that the
enforcement of the foreign award must not be contrary to the
public policy or the law of India. Since the expression “public
policy” covers the field not covered by the words “and the law of E
India” which follow the said expression, contravention of law alone
will not attract the bar of public policy and something more than
contravention of law is required.
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 F
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 G
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 would mean that “public
policy” in Section 7(1)(b)(ii) has been used in a narrower sense H
840 SUPREME COURT REPORTS [2020] 7 S.C.R.
A and in order to attract the bar of public policy the enforcement of
the award must invoke something more than the violation of the
law of India. Since the Foreign Awards Act is concerned with
recognition and enforcement of foreign awards which are governed
by the principles of private international law, the expression “public
policy” in Section 7(1)(b)(ii) of the Foreign Awards Act must
B
necessarily be construed in the sense the doctrine of public policy
is applied in the field of private international law. Applying the
said criteria, it must be held that the enforcement of a foreign
award would be refused on the ground that it is contrary to public
policy if such enforcement would be contrary to (i) fundamental
C policy of Indian law; or (ii) the interests of India; or (iii) justice or
morality.
This judgment was cited with approval in Redfern and Hunter on
International Arbitration by Nigel Blackaby, Constantine Partasides,
Alan Redfern, and Martin Hunter (Oxford University Press, Fifth
D Ed., 2009) [“Redfern and Hunter”] as follows:
11.56. First, the New York Convention does not permit any review
on the merits of an award to which the Convention applies. [This
statement, which was made in an earlier edition of this book, has
since been cited with approval by the Supreme Court of India in
E Renusagar Power Co. Ltd. v. General Electric Co. The court
added that in its opinion ‘the scope of enquiry before the court in
which the award is sought to be enforced is limited [to the grounds
mentioned in the Act] and does not enable a party to the said
proceedings to impeach the Award on merits’]. Nor does the Model
Law.
F
The same theme is echoed in standard textbooks on international
arbitration. Thus, in International Commercial Arbitration by Gary
B. Born (Wolters Kluwer, Second Ed., 2014) [“Gary Born”], the
learned author deals with this aspect of the matter as follows:
G [12] No Judicial Review of Merits of Foreign or Non-Domestic
Awards in Recognition Actions
It is an almost sacrosanct principle of international arbitration that
courts will not review the substance of arbitrators’ decisions
contained in foreign or non-domestic arbitral awards in recognition
proceedings. Virtually every authority acknowledges this Rule and
H
841
virtually nobody suggests that this principle should be abandoned. A
When national courts do review the merits of awards, they labour
to categorize their action as an application of public policy, excess
of authority, or some other Article V exception, rather than
purporting to justify a review of the merits.
[a] No Judicial Review of Awards Under New York and Inter- B
American Conventions
Neither the New York Convention nor the Inter-American
Convention contains any exception permitting non-enforcement
of an award simply because the arbitrators got their decision on
the substance of the parties’ dispute wrong, or even badly wrong. C
This is reasonably clear from the language of the Convention,
which makes no reference to the possibility of a review of the
merits in Article V’s exhaustive list of the exclusive grounds for
denying recognition of foreign and non-domestic awards. There
is also no hint in the New York Convention’s drafting history of
any authority to reconsider the merits of an arbitral award in D
recognition proceedings.
Likewise, the prohibition against review of the merits of the
arbitrator’s decision is one of the most fundamental pillars of
national court authority interpreting the Convention. This prohibition
has repeatedly and uniformly been affirmed by national courts, in E
both common law and civil law jurisdictions. Simply put: “the court
may not refuse to enforce an arbitral award solely on the ground
that the arbitrator may have made a mistake of law or fact”
[KarahaBodas Co. LLC v. Perusahaan PertambanganMinyak Dan
Gas Bumi Negara, 364 F.3d 274, 287-88 (5th Cir. 2004)]. Thus, in F
the words of the Luxembourg Supreme Court [Judgment of 24
November 1993, XXI Y.B. Comm. Arb. 617, 623 (Luxembourg
CourSuperieure de Justice) (1996)]:
The New York Convention does not provide for any control on
the manner in which the arbitrators decide on the merits, with as G
the only reservation, the respect of international public policy. Even
if blatant, a mistake of fact or law, if made by the arbitral tribunal,
is not a ground for refusal of enforcement of the tribunal’s award.
Or, as a Brazilian recognition decision under the Convention held
[Judgment of 19 August 2009, Atecs Mannesmann GmbH v.
H
842 SUPREME COURT REPORTS [2020] 7 S.C.R.
A Rodrimar S/A Transportes Equipamentos Industriais e Armazes
Gerais, XXXV Y.B. Comm. Arb. 330, 331 (Brazilian Tribunal de
Justica) (2010)]:
These questions pertain to the merits of the arbitral award that,
according to precedents from the Federal Supreme Court and of
B this Superior Court of Justice, cannot be reviewed by this Court
since recognition and enforcement of a foreign award is limited to
an analysis of the formal requirements of the award.
Commentators have uniformly adopted the same view of the
Convention [See, for e.g., K.-H. Bockstiegel, S. Kroll & P.
C Nacimiento, Arbitration in Germany 452 (2007)].(at pp. 3707-3710)
Likewise, the UNCITRAL Secretariat Guide on the Convention
on the Recognition and Enforcement of Foreign Arbitral Awards
(New York, 1958) (2016 Ed.) [“UNCITRAL Guide on the New
York Convention”] also states:
D 9. The grounds for refusal Under Article V do not include an
erroneous decision in law or in fact by the arbitral tribunal. A
court seized with an application for recognition and enforcement
under the Convention may not review the merits of the arbitral
tribunal’s decision. This principle is unanimously confirmed in the
E case law and commentary on the New York Convention.”
(emphasis supplied)
68. It is apparent from above-mentioned 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
F 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
G
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
H the Government declined permission to NAFED to supply. Thus, it would
843
be against the fundamental public policy of India to enforce such an A
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.
69. 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 B
Foreign Awards Act. As per the test laid down in Renusagar (supra), 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.
C
70. Though in view of the finding above, it is not necessary to go
into other questions. It was argued that the Arbitrator was appointed in
violation of the order passed by the High Court. The High Court on
20.3.1981 granted interim stay till 22.4.1981. A telex dated 20.3.1981
was sent informing that the High Court granted an interim stay. The
FOSFA vide letter dated 6.4.1981 asked the NAFED to appoint its D
arbitrator by 20.4.1981. On 9.4.1981, NAFED informed FOSFA about
the stay of the arbitration proceedings granted by the High Court. The
interim order was extended on 22.4.1981 till further orders. On 23.4.1981,
Mr. F.A.D. Ralfe, a nominee of the NAFED, was appointed as Arbitrator
by FOSFA in the Arbitration Tribunal in violation of the order passed by E
the High Court.
71. It was also urged that after that, this Court stayed proceedings
on 30.4.1982, it was responded by Alimenta S.A. on 4.5.1982 to NAFED
that this Court did not have authority to stay the arbitration proceedings.
It was also argued that on 1.5.1981, NAFED objected to the appointment F
of Mr. F.A.D.Ralphe for their representation in the arbitration. On
30.10.1981, NAFED filed a writ petition against the Alimenta S.A. and
Arbitrator to prevent the arbitration proceedings. It was further argued
that the appellant was deprived of appointing arbitrators; the same was
against the public policy. As per Rule 1(a) of FOSFA Rules, each party
had the right to nominate its Arbitrators. As per Rule 1(d), the party G
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. A party claiming arbitration could only apply for the appointment
of Arbitrator on behalf of another party. Learned senior counsel further H
844 SUPREME COURT REPORTS [2020] 7 S.C.R.
A urged that the action taken was in contravention of natural justice and is
a nullity violating the interim order of the court as opined in Manohar
Lal (Dead) by Lrs. v. Ugrasen (Dead) by Lrs. &Ors., (2010) 11 SCC
557. In Manohar Lal(supra), the court held thus:
“24. In Mulraj v. Murti Raghunathji Maharaj,AIR 1967 SC
B 1386, this Court considered the effect of action taken subsequent
to passing of an interim order in its disobedience and held that any
action taken in disobedience of the order passed by the Court
would be illegal. Subsequent action would be a nullity.
25. In Surjit Singh v. Harbans Singh, (1995) 6 SCC 50, this
C Court while dealing with the similar issue held as under: (SCC p.
52, para 4)
“4. … In defiance of the restraint order, the alienation/
assignment was made. If we were to let it go as such, it would
defeat the ends of justice and the prevalent public policy. When
D the court intends a particular state of affairs to exist while it is
in seisin of a lis, that state of affairs is not only required to be
maintained, but it is presumed to exist till the court orders
otherwise. The court, in these circumstances has the duty, as
also the right, to treat the alienation/assignment as having not
taken place at all for its purposes.”
E
26. In All Bengal Excise Licensees’ Assn. v. Raghabendra Singh,
(2007) 11 SCC 374, this Court held as under: (SCC p. 387,
para 28)
“28. … a party to the litigation cannot be allowed to take an
F unfair advantage by committing breach of an interim order
and escape the consequences thereof. … the wrong perpetrated
by the respondent contemnors in utter disregard of the order
of the High Court should not be permitted to hold good.”
27. In DDA v. Skipper Construction Co. (P) Ltd.,(1996) 4 SCC
622, this Court after making reference to many of the earlier
G
judgments held: (SCC p. 636, para 18)
“18. … ‘… on principle that those who defy a prohibition ought
not to be able to claim that the fruits of their defiance are good,
and not tainted by the illegality that produced them.’*”
H
845
28. In Gurunath Manohar Pavaskar v. Nagesh Siddappa A
Navalgund, (2007) 13 SCC 565, this Court while dealing with the
similar issues held that even a court in exercise of its inherent
jurisdiction under Section 151 of the Code of Civil Procedure,
1908, in the event of coming to the conclusion that a breach of an
order of restraint had taken place, may bring back the parties to
B
the same position as if the order of injunction has not been violated.
29. In view of the above, it is evident that any order passed by
any authority in spite of the knowledge of the interim order of the
court is of no consequence as it remains a nullity.”
Thus, it was argued that the appointment of the arbitrator to C
constitute the Arbitral Tribunal violated the order of the Indian Court and
it was against the public policy. Consequently, the respondent, Alimenta
S.A., could not approach the Indian Court to enforce such an award
passed by the Arbitral Tribunal.
72. Though this Court passed an interim order, ultimately, it D
dismissed the petition filed on behalf of the NAFED, and it was open to
the appellant to raise the question at the relevant time when this court
decided the matter in the year 1987. This court permitted the arbitration
proceedings to continue.As such, we are of the opinion that though it
would have been proper for the FOSFA to comply with the interim orders
passed by this Court, the proceedings in which the temporary orders E
were given were dismissed way back in the year 1987. At that time, the
question was required to be agitated. This Court permitted to continue
proceedings in 1987. The said questions ought to have been raised at
that stage; we cannot permit the appellant to raise them now. Hence,at
this stage, we are not inclined to entertain and examine merits of the F
argument mentioned above.
73. Learned senior counsel appearing on behalf of the appellant
also argued that NAFED was not allowed to have any legal representation
before the arbitral tribunal or in the Board of Appeal. Rule 3 of the
FOSFA Rules bars the parties from having legal representation before G
the Arbitral Tribunal. However, Rule 6 empowers the Board of Appeal
to allow legal representation to the partiesin case of particular
circumstances. The NAFED through its solicitor M/s. Clyde and
Company submitted letters on 16.1.1990 and 13.5.1990 to permit legal
representation. However, the same was denied by the Board of Appeals.
As such learned counsel argued that due opportunity of defending to H
846 SUPREME COURT REPORTS [2020] 7 S.C.R.
A NAFED was not afforded. For this purpose, reliance was placed on
C.L. Subramaniam v. Collector of Customs, Cochin (1972) 3 SCC
542 wherein the court observed:
“6. Removal from service is a major penalty. Procedure for
imposing major penalties is prescribed in Rule 15 of the Central
B Civil Services (Classification, Control and Appeal) Rules, 1957, a
rule framed under Article 309 of the Constitution. Sub-rule (5) of
that rule provides:
“The Disciplinary Authority may nominate any person to
present the case in support of the charges before the authority
C inquiring into the charges (hereinafter referred to as the Inquiring
Authority. The government servant may present his case with
the assistance of any government servant approved by the
Disciplinary Authority, but may not engage a legal practitioner
for the purpose unless the person nominated by the Disciplinary
Authority as aforesaid is a legal practitioner or unless the
D Disciplinary Authority, having regard to the circumstances of
the case, so permits.”
23. It is needless to say that Rule 15 is a mandatory rule. That
rule regulates the guarantee given to Government servants under
Article 311. Government servants, by and large, have no legal
E training. At any rate, it is nobody’s case that the appellant had
legal training. Moreover, when a man is charged with the breach
of a rule entailing serious consequences, he is not likely to be in a
position to present his case as best as it should be. The accusation
against the appellant threatened his very livelihood. Any adverse
F verdict against him was bound to be disastrous to him, as it has
proved to be. In such a situation, he cannot be expected to act
calmly and with deliberation. That is why Rule 15(5) has provided
for representation of a Government servant charged with
dereliction of duty or with contravention of the rule by another
Government servant or in appropriate cases by a legal practitioner.
G
24. For the reasons mentioned above, we think that there had
been a contravention of Rule 15(5). We are also of the opinion
that the appellant had not been afforded a reasonable opportunity
to defend himself. Hence the impugned order is liable to be struck
down, and it is hereby struck down. The facts of this case are not
H
847
such as to justify any fresh enquiry against the appellant. Hence A
we direct that no fresh enquiry shall be held against the appellant,
and he be restored to the position to which he would have been
entitled to but for the impugned order. The appeal is accordingly
allowed. The appellant is entitled to his costs from the respondents
both in this Court as well as in the High Court.”
B
The decision of Board of Trustees of the Port of Bombay v.
Dilipkumar Raghavendranath Nadkarni and Ors. (1983) 1 SCC 124
has been relied on, wherein it was held:
“9. We concern ourselves in this case with a narrow question
whether where in such a disciplinary enquiry by a domestic tribunal, C
the employer appoints Presenting-cum-Prosecuting Officer to
represent the employer by persons who are legally trained, the
delinquent employee, if he seeks permission to appear and defend
himself by a legal practitioner, a denial of such a request would
vitiate the enquiry on the ground that the delinquent employee had
not been afforded a reasonable opportunity to defend himself, D
thereby vitiating one of the essential principles of natural justice.”
(emphasis supplied)
74. It is not disputed that before the Arbitration Tribunal, the rule
debars legal representation; hence the submission as to non-representation E
before the Tribunal, cannot be accepted.However, in appeal due to refusal
to permit representation through a legal firm, the NAFED was not able
to point out the prejudice caused to it.In the absence of proof of prejudice
caused due to non-representation by a Legal Representative and to show
that it was disabled to put forth its views,we cannot set aside the award
on the ground that it would have been proper to allow the assistance of F
a Legal Representative. Thus,we are not inclined to render the award
unenforceable on the aforesaid ground.
75. Learned senior counsel appearing on behalf of NAFED also
argued that Mr. A.G Scott, the Arbitrator nominated by the respondent,
delivered the award and, after that, appeared as a counsel for Alimenta G
S.A. before the Board of Appeal. Thus, his participation in the appeal
was bad in law. He could not have defended his award and subvert the
basic norms of fairness. The action was against the concept of justice
and rules of procedure, as observed in The State of Punjab & Anr. v.
Shamlal Murari & Anr., (1976) 1 SCC 719, wherein this Court found
H
thus:
848 SUPREME COURT REPORTS [2020] 7 S.C.R.
A “8. It is obvious that even taking a stern view, every minor detail
in Rule 3 cannot carry a compulsory or imperative import. After
all, what is required for the Judges to dispose of the appeal is the
memorandum of appeal plus the judgment and the paper-book.
Three copies would certainly be a great advantage, but what is
the core of the matter is not the number but the presence, and the
B
overemphasis laid by the court on three copies is, we think,
mistaken. Perhaps, the rule requires three copies, and failure to
comply therewith may be an irregularity. Had no copy been
furnished of any one of the three items, the result might have
been different. In the present case, copies of all the three
C documents prescribed, have been furnished but not three copies
of each. This omission or default is only a breach that can be
characterised as an irregularity to be corrected by condonation
on application by the party fulfilling the condition within a time
allowed by the court. We must always remember that processual
law is not to be a tyrant but a servant, not an obstruction but an
D
aid to justice. It has been wisely observed that procedural
prescriptions are the handmaid and not the mistress, a lubricant,
not a resistant in the administration of justice. Where the non-
compliance, tho’ procedural, will thwart fair hearing or prejudice
doing of justice to parties, the rule is mandatory. But, grammar
E apart, if the breach can be corrected without injury to a just
disposal of the case, we should not enthrone a regulatory
requirement into a dominant desideratum. After all, courts are to
do justice, not to wreck this end product on technicalities. Viewed
in this perspective, even what is regarded as mandatory
traditionally may, perhaps, have to be moderated into wholesome
F
directions to be complied with in time or in extended time. Be that
as it may, and ignoring for a moment the exploration of the true
office of procedural conditions, we have no doubt that what is of
the essence of Rule 3 is not that three copies should be furnished,
but that copies of all the three important documents referred to in
G that suit shall be produced. We further feel that the court should,
if it thinks it necessitous, exercise its discretion and grant further
time for formal compliance with the rule if the copies fall short of
the requisite number. In this view and to the extent indicated, we
overrule the decision in Bikram Dass’s case, AIR 1975 Punj&
Har 1 (FB).”
H
849
76. Learned counsel also relied on Kailash v. Nankhu & Ors., A
(2005) 4 SCC 480, in which the court observed:
“28. All the rules of procedure are the handmaid of justice. The
language employed by the draftsman of processual law may be
liberal or stringent, but the fact remains that the object of
prescribing procedure is to advance the cause of justice. In an B
adversarial system, no party should ordinarily be denied the
opportunity of participating in the process of justice dispensation.
Unless compelled by express and specific language of the statute,
the provisions of CPC or any other procedural enactment ought
not to be construed in a manner which would leave the court
helpless to meet extraordinary situations in the ends of justice. C
The observations made by Krishna Iyer, J. in Sushil Kumar Sen
v. State of Bihar, (1975) 1 SCC 774 are pertinent: (SCC p. 777,
paras 5-6)
“The mortality of justice at the hands of law troubles a
judge’s conscience and points an angry interrogation at the D
law reformer.
The processual law so dominates in certain systems as
to overpower substantive rights and substantial justice. The
humanist rule that procedure should be the handmaid, not the
mistress, of legal justice compels consideration of vesting a E
residuary power in judges to act ex debito justitiae where the
tragic sequel otherwise would be wholly inequitable. … Justice
is the goal of jurisprudence — processual, as much as
substantive.”
29. In State of Punjab v. Shamlal Murari, (1976) 1 SCC 719, the
Court approved in no unmistakable terms the approach of F
moderating into wholesome directions what is regarded as
mandatory on the principle that: (SCC p. 720)
“Processual law is not to be a tyrant but a servant, not an
obstruction but an aid to justice. Procedural prescriptions are the
handmaid and not the mistress, a lubricant, not a resistant in the G
administration of justice.”
In Ghanshyam Dass v. Dominion of India, (1984) 3 SCC 46, the
Court reiterated the need for interpreting a part of the adjective
law dealing with procedure alone in such a manner as to subserve
and advance the cause of justice rather than to defeat it as all the
H
laws of procedure are based on this principle.”
850 SUPREME COURT REPORTS [2020] 7 S.C.R.
A 77. On behalf of the respondent, letter dated 17.11.2011 issued by
FOSFAwas relied on stating that even though the FOSFA rules are silent
on the issue of the first tier Arbitrator acting as a representative of the
party in the second tier, i.e., at the appellate stage, the practice prevalent
at the relevant time in the UK allowed the same. The FOSFA mentioned
in the letter that many parties in cases before FOSFA elected to make
B such an appointment with the agreement of the individual arbitrator
concerned, and this practice was prevalent.
78. The Arbitrator appeared at the appellate stage, though, as per
the Indian Law and the ethical standards, the Arbitrator could not have
appeared at the second stage to defend arbitration award passed by
C him, and should have kept aloof. However, no concrete material has
been placed on record to substantiate the objection as to prevailing
practice and law in U.K. at the relevant time. Hence, we are not inclined
to decide the issue in this case. Suffice it to observe that Arbitrator is
supposed to followethical standards, and, in our considered view, ought
not to have defended arbitrationa ward passed by him in the subsequent
D judicial proceedings.
79. The question was also raised concerning the Board of Appeal,
enhancing the rate of interest from 10.5 % to 11.25 %. We hold that it
was not open to the Board of Appeal to increase the interest in the
absence of appeal. As we have held award to be unenforceable under
E section 7 of the Foreign Awards Act, other submission does not survive
for decision.
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
F
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
G 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.
H Devika Gujral Appeal allowed.
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