Case: NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIA Vs. ALIMENTA S.A

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 contract which pertains to the CIF contract. The contract entered into was not a Free on Board (FOB) contract3. 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 1979¬80. With the contracted quantity of 5000 metric tonnes, only 1900 metric tonnes could be shipped. The remaining quantity could not be shipped due to damage caused to crop by cyclone etc. in the Saurashtra region. The agreement dated 12.1.1980 was the first agreement. The transaction was governed by covenants 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 cancelled4. 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 August-September, 1980. The second Agreement dated 3.4.1980 is not the subject matter of dispute in the appeal5. 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 restrictions6. In the year 1980¬81, there was crop failure in the United States of America due to which price of commodity rose high in the course of the season. Yet another addendum was executed to First Agreement on 18.8.1980, whereby the period of shipment of the commodity was changed to November-December, 1980 for balance 3100 metric tonnes under the disputed first Agreement7. 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 1980-81 season packed in new double gunny bags with the buyers paying the extra cost of USD 15 per metric tonnes8. It is pertinent to mention that NAFED had the permission of the Government of India to enter into exports for three years between 1977-80 but had no permission under the Export Control Order to carry forward the exports for the season 1979¬80 to the year 1980¬81. At the time of execution of the Addendum, NAFED claimed it was unaware of the said situation of not having requisite authority to enter into the Addendum9. On 21.11.1980, the NAFED intended to perform the first Addendum in the oblivion of the fact that it had no permission under the Export Control Order to carry forward the export for the season 1979¬80 to the next year 1980-81. Being a Canalizing agency for the Government of India, NAFED couldnt carry forward the supply for the subsequent year. NAFED approached the Government of India to grant permission10. 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 season11. On 6.12.1980 and 9.12.1980, NAFED again requested the Government of India to allow the release of quota in the current season to fulfil its commitments under the contracts. The Government did not grant permission. The NAFED informed Alimenta S.A. not to nominate the vessel for shipment of the crop due to the Government of Indias prohibition to supply the contracted quantity12. 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 NAFEDs request to allow export against previous years 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 arbitrator13. On 13.2.1981, NAFED informed Alimenta S.A. that the export of the contracted quantity was not possible because of the Government of Indias executive action banning such exports14. 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 Indias order prohibiting export and also requested to provide it a copy of the FOSFA Arbitration Rules, which was provided by Alimenta S.A. to NAFED on 24.2.1981. The NAFED requested for extension of time for appointing Arbitrator on 5.03.1981, which was extended on 10.3.198115. 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.A16. 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 NAFED17. 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 granted four weeks to file a reply; the case was adjourned to 27.7.1981. The interim order of stay was accordingly extended till 21.7.198118. 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 22.4.198119. 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 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 Court20. 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 NAFED21. 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 proceedings22. 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 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 award23. 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 14.5.199024. Ultimately, the Board of Appeal on 14.9.1990 while deciding the appeal compounded NAFEDs 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, represented the case on behalf of the Alimenta S.A. before the Board of Appeal25. 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 Appeal26. NAFED filed objections to the enforceability of the award, on the ground that it was opposed to the public policy as such unenforceable. There was non-compliance with the provisions contained in section 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 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 orders27. On 9.9.2002, Alimenta S.A. filed an execution petition No.204 of 2002 seeking execution of the decree on 28.1.2000 passed in Suit No.1885 of 1993 in the High Court. The appeal was ultimately held to be not maintainable. It was dismissed on 6.9.2010 on the ground of non-maintainability. The NAFED questioned the decision in the appeal. On 24.11.2010, NAFED filed the present appeal (bearing Civil Appeal No.667 of 2012) for adjudication on merits. There are subsequent developments that are the subject matter of other appeals.

Reasoning: Consequently, NAFED could not have been held liable to pay damagesIt 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 cancelled36. 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 buyers 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 permission37. 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 1978¬79 in 1979-80. It appears that NAFED intended to perform the contract in the oblivion of the fact that being a canalizing agent, it could not have carried out the supply in the next subsequent years38. 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 Governments 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 years contract were lawful and bindingIt 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 Addenda43. 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 Government44. 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.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 Governments 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 Governments executive order comes in the way, for cancellation of the contract. Thus, the contract became void on the happening of the contingency, as provided in section 32 of the Contract Act52. In the present case, the High Court observed that it was a case of self-induced 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 years 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 1961On 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 Act57. It would have been unlawful for NAFED to affect the supply in view of the Governments refusal to accord the permission, and both the parties knew it very well and agreed that the contract would be cancelled in such an exigency for non-supply in quantity. Thus, they were bound by the agreement. The award pre¬supposes supply could have been made after the Governments 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 India58. 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 majeure. In no event, supply could have been made in December 1980 and January 1981 sans permission from the Government of India61. 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 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 voidIn 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 Agreement68. It is apparent from above¬mentioned decisions as to enforceability of foreign awards, Clause 14 of FOSFA Agreement and as per the law applicable in India, no export could have taken place without the permission of the Government, and the NAFED was unable to supply, as it did not have any permission in the season 1980-81 to effect the supply, it required the permission of the Government. The matter is such which pertains to the fundamental policy of India and parties were aware of it, and contracted that in such an exigency as provided in clause 14, the Agreement shall be cancelled for the supply which could 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 necessary69. 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 manner70. 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 Court72. 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 above74. 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 non¬representation by a Legal Representative and to show that it was disabled to put forth its views, we cannot set aside the award on the ground that it would have been proper to allow the assistance of a Legal Representative. Thus, we are not inclined to render the award unenforceable on the aforesaid ground78. 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 proceedings79. 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.