Delhi High Court: In a petition filed by Union of India (petitioner) through the Ministry of Petroleum and Natural Gas under section 34 of the Arbitration & Conciliation Act, 1996 ) challenging the arbitral award dated 24-07-2018 (‘impugned award’) delivered by a 2:1 majority of the arbitral tribunal, which decided the disputes that had arisen between the Ministry of Petroleum & Natural Gas of the Government of India and Reliance Industries Limited (respondent), Niko (NECO) Limited and British Petroleum Exploration (Alpha) Limited from a Production Sharing Contract (PSC) related to exploration and extraction of natural gas from a block in the Krishna-Godavari Basin off the coast of Andhra Pradesh in India. Anup Jairam Bhambhani, J., upholds the arbitral award for lack of any grounds for interference.
Reliance was one of the constituents of the ‘Contractor’, the other two being Niko and (subsequently) British Petroleum, and Reliance was the ‘Operator’. Reliance was the claimant in the arbitral proceedings, and the Ministry was the respondent. By way of the impugned award, two of the members of the arbitral tribunal have decided certain issues in favour of Reliance, whereas the third member has decided the matter in favour of the Ministry. In essence and substance, the majority has held inter-alia that “Reliance is fully entitled to produce all hyrdrocarbons resulting from Petroleum Operations conducted within its Contract Area which may include hydrocarbons that could have migrated from an adjacent block.”
The PSC was signed between the Ministry on the one hand and 02 corporate entities viz. Reliance Industries Limited and Niko on the other, and by way of a supplementary contract Reliance transferred a portion of its ‘participating interest’ in favour of British petroleum. The disputes arose when Oil and Natural Gas Corporation Limited informed the Directorate General of Hydrocarbons regarding the evidence of the gas pools of the Reliance Block and the ONGC Blocks appeared to relate to possible migration of gas between the two blocks.
Thus, a writ petition was filed wherein the Court directed the Ministry to consider the report produced by the expert agency which was to undertake an independent third-party study to verify the claimed continuity and migration of gas from the ONGC Blocks to the Reliance Block. These proceedings brought to the fore relating to the issue of migration of gas from the ONGC Blocks to the Reliance Block, which subsequently led to disputes between the Ministry and Reliance.
The Court noted that the scope and ambit of section 34 of A&C Act, it is not permissible for a court to undertake a merits review of the decision taken by an arbitral tribunal. However, in order to decide the objections filed under Section 34, it is certainly within the remit of the court to undertake an appraisal of the arbitral award, to see if it falls within any of the limited grounds of challenge available under Section 34.
Issue, Observation and Analysis
Issue 1: Was the Arbitration an International Commercial Arbitration?
The Court noted that the disputes that were the subject matter of arbitration in the present case, relate back to the main contractual rights of all the parties under the PSC. Thus, the arbitral proceedings in the present case amounted to an ‘international commercial arbitration’ and therefore, the scope of interference by this court under section 34 A&C Act is even narrower, and the ground of challenge canvassed by the Ministry that the arbitral award proceeds on ignoring evidence on record, or draws inferences with no evidence, is not tenable in challenge to the arbitral award, since those would fall within the ambit of ‘patent illegality’.
Issue 2: Did the arbitration involve a question of ‘public law’ making the dispute non-arbitrable?
On the contention that the ‘gas’ under question is a ‘natural resource’, thus, migrated gas vests in the Union and is covered by the ‘public trust doctrine’ making it a subject of public law further making it no-arbitrable, the Court stated thatthe claim in the notice for disgorgement was not a claim made under public law but was founded on the alleged breach by Reliance of the terms of the PSC. Since the PSC, as also the PNG Rules, contemplated arbitration as a remedy for disputes arising therefrom, the claim for disgorgement was certainly amenable to arbitration. Just because the commodity that was the subject matter of the disputes, viz. natural gas, is a natural resource that vests in the Union, would not make it any the less so.
The Court opined that the reference to abrogation of sovereignty over a natural resource refers to the disposition of the ‘title’ or ‘ownership’ of natural gas by the Union to a third party. In the present case, since the limited role of Reliance was to explore and extract natural gas as a licensee, the title to the natural gas was never passed to Reliance. The natural resource viz. natural gas was neither ‘bought’ nor ‘sold’ as between Reliance and the Ministry; thus, the public trust doctrine was not contravened.
Issue 3: Is the impugned arbitral award in conflict with the ‘public policy of India’?
The Court noted that while the Ministry has alleged that Reliance has committed fraud in suppressing the D&M Report-2003, the arbitral tribunal has correctly held that though Reliance had an obligation to disclose the D&M Report-2003, and had failed to comply with that obligation, the contravention was not material as the Ministry had multiple opportunities to direct joint-development even in the absence of the D&M Report- 2003. Reliance has also complied with all other aspects of the PSC like it has divided all profits derived from the production of all natural gas including migrated gas in the manner provided by the PSC.
Issue 4: Was the transaction between the contesting parties Governed by the ‘public trust doctrine’?
The Court observed that Reliance has acted in furtherance of the public trust doctrine by extracting petroleum in the most ‘efficient and commercially sensible manner’. The arbitral tribunal has interpreted the articles of the PSC while keeping in mind the statute that governs it, to hold that the PSC “does not prohibit but permits” the extraction of migrated gas. Thus, there is no infirmity in what the arbitral tribunal has concluded.
The Court held that the conclusions drawn by the arbitral tribunal are such that a reasonable person would reach them. Suffice it to say that the view taken by the arbitral tribunal is most certainly a ‘possible view’, which calls for no interference.
[Union of India v Reliance Industries Limited, 2023 SCC OnLine Del 2666, decided on 09-05-2023]
Advocates who appeared in this case :
Mr. K.K. Venugopal, Attorney General for India with Mr. A.K. Ganguli, Senior Advocate with Ms. Mamta Tiwari, Ms. Swati Sinha, Mr. Vijay Kumar & Mr. Debesh Panda, Advocates for the Petitioner;
Mr. Harish Salve, Senior Advocate with Mr. Sameer Parekh, Mrs. Sonali Basu Parekh, Mr. Ishan Nagar, Mr.Prateek Khandelwal, Mr. Manu Bajaj and Ms. Chetna Rai, Advocate for Rl. Mr. Dayan Krishnan, Senior Advocate with Mr. Mahesh Agarwal, Ms. Niyati Kohli, Mr. Pranjit Bhattacharya Ms. Manavi Agarwal and Mr. Shravan Niranjan, Advocates for R2. Mr. Sasiprabhu, Mr. Vishnu Sharma, Mr. Tushar Bhardwaj, Mr. Vinayak Maini and Mr. Prakhar Agarwal for the R3.