No Acts & Articles mentioned in this case
1
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.667 OF 2012
NATIONAL AGRICULTURAL COOPERATIVE
MARKETING FEDERATION OF INDIA … APPELLANT
VERSUS
ALIMENTA S.A. … RESPONDENT
J U D G M E N T
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) 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?
2.The NAFED and the Alimenta S.A. entered into a contract for 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
2
contract which pertains to the CIF contract. The contract entered into
was not a Free on Board (FOB) contract.
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). The contract was for the season 197980. 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 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
rate of USD 770 per metric tonnes. The shipment period for both the
contracts was AugustSeptember, 1980. The second Agreement dated
3.4.1980 is not the subject matter of dispute in the appeal.
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5.In August 1980, NAFED shipped only 1900 metric tonnes of
commodity in receipt to the first Agreement. The balance stocks of
3100 metric tonnes of commodity could not be shipped as scheduled,
due to the Government restrictions.
6.In the year 198081, 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 18.8.1980, whereby the period of shipment of the commodity was
changed to NovemberDecember, 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
commodity. It was agreed that the commodity would be shipped
during the 198081 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
197780 but had no permission under the Export Control Order to
carry forward the exports for the season 197980 to the year 198081.
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.
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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
197980 to the next year 198081. 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 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
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 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
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nominate 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
dated 27.01.1981 because of the restricted export policy and quota
ceiling. 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 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
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
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FOSFA Arbitration Rules, which was provided by Alimenta S.A. to
NAFED on 24.2.1981. 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
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.
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
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
7
granted four weeks to file 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
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 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
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
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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 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 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 for the Second Agreement, as there was no arbitration clause,
the parties 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 and it was not
allowed to be represented through its counsel. Alimenta S.A. also filed
9
additional 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 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
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 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,
10
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 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 noncompliance with the provisions contained in section
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 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 entertained it on 28.2.2001 and stayed
11
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.
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
nonmaintainability. The NAFED questioned the decision in the
appeal. On 24.11.2010, NAFED filed the present appeal (bearing Civil
Appeal No.667 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
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 Alimenta S.A. at the cost of the very survival of the appellant
organisation. The enforcement procedure is barred by limitation. The
12
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 way of loss, NAFED would be
required to make good such loss. NAFED 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 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 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 selfimposed 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 Board of Appeal to award the interest in the absence of an
13
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
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
fact that NAFED was a canalizing agency for the Government of India
for the year 19781981. 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 197980. A
total of 5,000 metric tonnes were to be exported. However,
undisputedly only 1900 metric tonnes could be shipped. Addendum
was executed on 18.8.1980 to supply a balance of 3100 metric tonnes
in NovemberDecember, 1980. Subsequently, on 6.10.1980, another
addendum was executed, and it was agreed that the commodity would
be shipped during the 198081 season. The NAFED had permission
from the Government of India to enter into export for three years, i.e.,
between the period 197780 but had no permission under the Export
14
Control Order to carry forward the export for the season 197980 to
the year 198081. 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 to carry forward the
export for the season 197980 to the year 198081 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
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
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 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.
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 extension or cancellation
under the clause.
15
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 serving of
proceedings upon any party by sending same to their 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 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.
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 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 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
restriction shall be deemed by both the parties to apply to the
contract. Thus, if the shipment becomes impossible by reasons
mentioned in the clause, the agreement shall be cancelled.
33.The Government of India, Ministry of Agriculture and Irrigation
wrote a letter on December 1, 1980, to the Managing Director of the
16
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
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 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 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 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.”
34.After that, NAFED requested the Government of India again to
release quota in the current season to fulfil commitment under the
17
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 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
Ministry of Agriculture
(Department of Agriculture & Cooperation)
(Trade Division)
Krishi Bhawan, New Delhi
Dated the 27
th
Jan. 1981
To,
Shri S.K. Iyer,
Executive Director (Foreign Trade),
Sapna Building,
54, East of Kailash,
N.A.F.E.D.,
P.B. No.3580.
Subject:-Export of HPS Groundnut – Last years pending contracts –
reg.
Sir,
I am to invite a reference to your letter
No.HO/CSC/EXP/HPS/POI/ 80-81/1334 dated 9
th
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 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,
Sd/-
(P.C. Ramrakhian)
Director (Trade)”
(emphasis supplied)
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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
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 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 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 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 197879 in 197980. It appears that NAFED intended to perform
19
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.
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 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 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 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
20
and binding. The letter of the Government dated 9.1.1984 is extracted
hereunder:
“VINOD RAI
DEPUTY SECRETARY
January 8, 1984
To,
Managing Director,
The National Agricultural Cooperative
Marketing Federation of India Limited,
Sapna Building 54, East of Kailash,
New Delhi – 110024
Subject: Execution of HPS Groundnuts Season 1980-81, Non-
fulfilment of Contract entered into During 1979-80 Crop Season under
1979-80.
Dear Sir,
Please refer to your letter No. HO/OSC/HPS/POL/PO-81/1337
dated the 9
th
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 Joint
Secretary Usha Vohra dated 21
st
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 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. 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. Most
certainly no additional quota would have been granted to enable you
to fulfil old contracts at the previous season’s prices.
21
Yours faithfully
(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 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 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 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 different from that
which was undertaken by the contract… there must be as well such a
22
change in the significance of the obligation that the thing undertaken
would, if performed, be a different thing from that contracted for.”
(emphasis supplied)
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 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.
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 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 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)
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
23
Delhi Development Authority vs. Kenneth Builders & Developers Private
Limited and Ors., (2016) 13 SCC 561 wherein the court held 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 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 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 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)
“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
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 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 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.
24
10. Although various theories have been propounded by the
Judges 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 from the further performance of it as 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)
‘… If substantially the whole contract becomes 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 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
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 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.”
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 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.”
25
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 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.
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.
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 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."
26
If the event becomes impossible, such contracts become void.
Illustrations
(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 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."
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 nonperformance of the promise.
47.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 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 in section 56. However, section 56 also provides liability for a
cause where the promisor has agreed to do something which he knew
27
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 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 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 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 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
28
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 & 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 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 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
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.
29
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 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
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
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).
“If substantially the whole contract becomes impossible 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
“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.
The question was considered and discussed by a Division Bench of
the Nagpur High Court in Kesari Chand v. Governor-General-in-
Council ILR (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 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 (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
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
30
impossibility or illegality of the act agreed to be done and hence
comes within the purview of Section 56 of the Indian 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 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.
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 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
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 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 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 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
frustration is applied not on the ground that the parties themselves
agreed to an implied term which operated to release them from the
performance of the contract. The relief is given by the court on the
ground of subsequent impossibility when it finds that the whole
31
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 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 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 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
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, 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 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 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
32
according to the intention of the parties. Since under the Contract Act
a promise may be expressed or implied, in cases 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 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 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 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 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 Act could not apply to selfinduced 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
comes within the purview of Section 56 of the Indian Contract 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
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
33
be of direct assistance, though they have persuasive value in showing
how English courts have approached and decided cases under similar
circumstances.
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 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 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
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 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, 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 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 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 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 Indian Contract Act cannot apply to a case of “self-induced
34
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 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 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 selfinduced frustration. The High Court ignored and overlooked
that it was not a case of frustration under section 56 of the Contract
Act, but there was a stipulation in Clause 14 of the Agreement, the
effect of which was ignored and overlooked, and the said term was
based upon the law as applicable in India and was based 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 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
35
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 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:
“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.
"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."
'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
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 has been
36
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 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
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 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
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 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 of the
contracting parties is to bring about a state of circumstances such that
the legal remedy of damages will require to be resorted to, lawyers
assuming that it will pervert the intention of commercial men in cases
37
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, 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 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 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.
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 very probable that
different considerations altogether will prevail.”
55.In Smt. Sushila Devi and Ors. v. Hari Singh and 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
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 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
38
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 Ghose v. Mugneeram Bangur 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
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 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 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 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. Palaniappa Mudaliar , AIR 1952
Mad. 670, a question arose whether the defendant was required to
supply 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
39
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 became impossible due to Government’s refusal.
57.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 nonsupply in quantity. Thus, they
were bound by the agreement. The award presupposes supply could
have been made after the 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.
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 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 could not be supplied due to force
40
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
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---
(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
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
(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 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
(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----
(i) the subject-matter of the difference is not capable of
settlement by arbitration under the law of India; or
41
(ii) the enforcement of the award will be contrary to public
policy .
(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 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 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(i)(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 capable of enforcement in case the composition of the
Arbitration Tribunal or procedure is not in accordance with the
agreement of the parties.
61.The question arises when the award can be said to be contrary
to public policy. This Court considered the issue in several decisions.
The expression “public policy” concerning the agreement relates to the
42
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 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. & 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
expansion or modification.
63.In Renusagar Power Co. Ltd. v. General Electric Co., 1994 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
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
43
be refused on the ground that it was contrary to public policy if such
enforcement 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
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 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
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 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 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 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 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
44
would mean that “public policy” in Section 7(1)(b)(ii) has been used
in a narrower sense 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 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 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 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;
(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;
(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 Ltd., (2003)
5 SCC 705, this Court opined 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:
“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
45
under Section 34. However, such failure of procedure should be patent
affecting the rights of the parties.
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 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 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 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
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 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 for having finality to the award
and resolving the dispute by speedier method would be much more
frustrated by permitting patently 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 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 affect the
administration of justice. Hence, in our view in addition to narrower
46
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:
(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.
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 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 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.
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
47
contravention of the law is required for refusal of enforcement of a
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 Foreign Awards Act. It further
opined that errors of fact by Board of Appeal obtained by the
appellant, relying 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 and the court
cannot look into the merits of the award at the stage of enforcement of
the foreign awards, and observed:
“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 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 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 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 concerned. The application of the
"public policy of India" doctrine for the purposes of Section 48(2)(b)
is more limited than the application of the same expression in respect
of the domestic arbitral award.
48
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 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 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. 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) 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 the statutes and judicial precedence, (2) need for
judicial approach, (3) natural justice compliance, and (4) standards of
reasonableness. The 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) Act, 1961:
“7. Conditions for enforcement of foreign awards.—(1) A
foreign award may not be enforced under this Act—
** *
(b) if the Court dealing with the case is satisfied that—
49
** *
(ii) the enforcement of the award will be contrary to the public
policy.”
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,
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 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 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 [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.
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 lakhs in a statement of claim
before the arbitrator and at no point 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."
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 law. Added to this ground
50
(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)
“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 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 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, 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:
"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 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, 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).
26. Insofar as domestic awards made in India are concerned, an
additional ground is now available Under Sub-section (2A), added by
51
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 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 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 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 as such decision is not based on evidence led
by the parties, and 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) 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, 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 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 (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
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
52
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 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 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 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 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
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.
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. 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:
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." (Redfern & Hunter, Law and
Practice of International Commercial Arbitration, 2nd
Edn., p. 461.)
53
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 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
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 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 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
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 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 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 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
54
enforcement would be contrary to (i) fundamental 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 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 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.
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:
[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 virtually nobody suggests that this principle should
be abandoned. 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-
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.
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
55
any authority to reconsider the merits of an arbitral award in
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 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" [Karaha Bodas Co. LLC v. Perusahaan
Pertambangan Minyak Dan Gas Bumi Negara, 364 F.3d 274,
287-88 (5th Cir. 2004)]. Thus, in the words of the Luxembourg
Supreme Court [Judgment of 24 November 1993, XXI Y.B.
Comm. Arb. 617, 623 (Luxembourg Cour Superieure 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
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. 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
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.
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:
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 case law and commentary on the New York Convention.”
56
(emphasis supplied)
68. It is apparent from abovementioned 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
without the permission of the Government, and the NAFED was
unable to supply, as it did not have any permission in the season
198081 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 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 the
Government declined permission to NAFED to supply. Thus, it would
be against the fundamental public policy of India to enforce such an
award, any supply made then would contravene the public policy of
India relating to export for which permission of the Government of
India was necessary.
57
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
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.
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 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 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
58
proceedings. It was also argued that on 1.5.1981, NAFED objected to
the appointment 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 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 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 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 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,
59
it would defeat the ends of justice and the prevalent public
policy. When 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.”
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
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 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.’
*
”
28. In Gurunath Manohar Pavaskar v. Nagesh Siddappa 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 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
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.
60
72.Though this Court passed an interim order, ultimately, it
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 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 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
the Arbitral Tribunal. However, Rule 6 empowers the Board of Appeal
to allow legal representation to the parties in 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
61
defending to 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 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
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 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 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 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.
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 such as to justify
any fresh enquiry against the appellant. Hence 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.”
62
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, 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, 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 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 nonrepresentation 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 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
63
for Alimenta 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 thus:
“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 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
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 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 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 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 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) .”
64
76.Learned counsel also relied on Kailash v. Nankhu & Ors., (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 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. 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 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
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 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
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 laws of procedure are
based on this principle.”
77.On behalf of the respondent, letter dated 17.11.2011 issued by
FOSFA was relied on stating that even though the FOSFA rules are
65
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 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 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 follow ethical standards, and, in our
considered view, ought not to have defended arbitration award passed
by him in the subsequent 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
section 7 of the Foreign Awards Act, other submission does not
survive for decision.
66
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 would have violated the law, thus, enforcement of such
award would be violative of the public policy of India. On the
happening of contingency agreed to by the parties in Clause 14 of the
FOSFA Agreement the contract was rendered unenforceable under
section 32 of the Contract Act. As such the NAFED could not have
been held liable to pay damages under foreign award.
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.
…………………………..J.
(ARUN MISHRA)
…………………………..J.
(M.R. SHAH)
New Delhi; …………………………..J.
April 22, 2020. (B.R. GAVAI)
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