Supreme Court terms foreign arbitral award against NAFED as “illegal”.

Supreme Court on Thursday settled a 39-year-old arbitration dispute in favour of National Agricultural Cooperative Marketing Federation of India (NAFED) and saved the company from a potential hit of $1.6 billion.

Terming the international arbitral award of 1989 of the Federation of Oil, Seeds and Fats Associations Ltd (FOSFA) against NAFED as ex-facie illegal, the apex court said no export could have taken place without the permission of the government.

In January of 1980, NAFED and a Swis company, Alimenta SA, entered into an agreement for export of 5,000 tonne of groundnut. According to the agreement, if prohibition of exports by an executive order or by law, the agreement would be treated as cancelled. NAFED being a canalising agency for the government, needed the nod from the government for any exports.

In August 1980, NAFED was only able to successfully export 1,900 tonne, owing to damage caused to the crops due to cyclonic conditions in Saurashtra region. On seeking the government nod for the export of balance 3,100 tonne, the government clarified that export of commodities was restricted on a quota system and restrained NAFED from exporting the balance 3,100 tonne.

In February of 1981, Swiss Alimenta SA launched arbitration proceedings against NAFED seeking damages. In September of 1990, NAFED was slapped with damages of $4.7 million and 11.25 percent interest from February 1981 to the date of arbitral award.

Interestingly, for the nine year period between February 1981 and September 1990, the arbitral award along with the interest stacked up to around $9 million. What followed the arbitral award of 1990, were three rounds of litigation stretching across 29 years.

Alimenta SA had sought to execute the arbitral award to get the payout first in the Delhi High Court and in the Supreme Court. Through this period of 29 years, Alimenta SA had sought an 18 percent rate of interest to be paid from the date of the arbitral award to the date of payment.

With an interest rate of 18 percent, applicable on the arbitral award of $9 million for a period of over 29 years – the stakes were as high as $1.6 billion or over Rs 12,000 crore (USD = 76 INR).

A bench headed by Justice Arun Mishra, however, held that any export by NAFED, without permission would have violated the law. The apex court, thus, concluded that enforcement of the award would be against “public policy”.

Under India’s new arbitration regime, “public policy” is one of the few grounds available to Indian courts to set aside an international arbitration award. The apex court held that the award is in contravention of fundamental law and held that NAFED could not have been held to pay damages.

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