2020 (4) TMI 895 - SC - Indian Laws

Enforceability of the foreign award - Compliance with the contractual obligation to export groundnut due to the Government's refusal or not on the part of NAFED - whether NAFED could have been held liable in breach of contract to pay damages particularly in view of Clause 14 of the Agreement? - whether enforcement of the award is against the public policy of India? HELD THAT - 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. 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 - 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 void on the happening of the contingency, as provided in Section 32 of the Contract Act. This Court in SATYABRATA GHOSE VERSUS MUGNEERAM BANGUR CO. 1953 (11) TMI 19 - SUPREME COURT , 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. The Court followed the decision in Satyabrata Ghose in NAIHATI JUTE MILLS LTD. VERSUS KHYALIRAM JAGANNATH 1967 (10) TMI 66 - SUPREME COURT , 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. 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 India. 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? - HELD THAT - 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(1)(a)(ii) if proper notice of appointment of Arbitrator is not given or the party was unable to present its case. Section 7(1)(a)(iii) provides that if the award deals with the questions not referred or contains decisions on matters beyond the scope of the agreement renders award unenforceable. Section 7(1)(a)(iv) makes an award not capable of enforcement in case the composition of the Arbitration Tribunal or procedure is not in accordance with the agreement of the parties. When the award can be said to be contrary to public policy? - HELD THAT - 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 void - It is apparent from various 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. 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. 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. The appeal filed by the NAFED is thus allowed - the impugned judgment and order passed by the High Court is set aside. Award is held to be unenforceable.

Summary

Issues Involved:
1. Enforceability of the foreign award.
2. Compliance with contractual obligations by NAFED due to Government's refusal.
3. Liability of NAFED for breach of contract under Clause 14 of the Agreement.
4. Enforcement of the award against public policy of India.

Detailed Analysis:

1. Enforceability of the Foreign Award:
The Supreme Court examined whether the foreign award could be enforced against NAFED. The primary objections were based on the argument that NAFED could not comply with the contractual obligations due to the Government's refusal to permit the export of groundnuts, the applicability of Clause 14 of the Agreement, and whether the enforcement of the award was against the public policy of India.

2. Compliance with Contractual Obligations by NAFED Due to Government's Refusal:
The Court observed that NAFED, being a canalizing agency for the Government of India, required express permission from the Government to carry forward exports from one year to the next. The Government refused permission to carry forward the exports for the season 1979-80 to 1980-81. Clause 14 of the Agreement stipulated that in the event of prohibition by an executive or legislative act by the Government, the contract would be deemed canceled. The Court concluded that the Government's refusal to grant permission was a valid reason for NAFED's inability to fulfill the contractual obligations, thus rendering the contract void under Section 32 of the Indian Contract Act.

3. Liability of NAFED for Breach of Contract Under Clause 14 of the Agreement:
The Court held that due to the Government's refusal, the contract was rendered void as per Clause 14 of the Agreement. The prohibition by the Government was a valid ground under the contract to cancel the unfulfilled portion. Consequently, NAFED could not be held liable to pay damages for non-performance, as the contract had become void on the occurrence of the specified contingency.

4. Enforcement of the Award Against Public Policy of India:
The Court emphasized that enforcement of the award would be contrary to the public policy of India. It was noted that enforcing the award would violate the fundamental policy of Indian law, as NAFED was prohibited from exporting the commodity without Government permission. The Court referred to Section 7(1)(b)(ii) of the Foreign Awards Act, which allows refusal of enforcement if it is against public policy. The Court concluded that enforcing the award would contravene the fundamental policy of Indian law and the basic concept of justice, thus making the award unenforceable.

Conclusion:
The Supreme Court allowed the appeal filed by NAFED, setting aside the High Court's judgment and holding the foreign award unenforceable. The Court found that the award violated the fundamental policy of Indian law and public policy, as NAFED was prohibited from exporting the commodity without Government permission. The contract was rendered void under Clause 14 of the Agreement and Section 32 of the Indian Contract Act, relieving NAFED from liability to pay damages under the foreign award.