Delhi High Court: An appeal was filed Union of India through the Ministry of Petroleum & Natural Gas of the Government of India under Section 37 of Arbitration and Conciliation Act, 1996 read with Section 13(1) of Commercial Courts Act, 2015 assailing the order dated 09-05-20233 passed by the Single Judge, whereby the application under Section 34 of Act preferred by it, against the Arbitral Award dated 24-07-2018. Saurabh Banerjee, J., held that the impugned order dated 09-05-2023 passed by the Single Judge and the Arbitral Award passed by the learned Arbitral Tribunal dated 24-07-2018, being contrary to the settled position of law, are set aside as there was a ‘patent illegality’ on the face of the Arbitral Award.
The Union of India (UOI) entered a Production Sharing Contract (PSC) on 12-04-2000 with Reliance Industries Limited (RIL) and Niko Limited for the exploration and production of natural gas. RIL held a 90% participating interest, while Niko held 10%. Subsequently, RIL transferred a portion of its interest to British Petroleum Exploration Limited. The disputes arose when ONGC, which held adjacent blocks, alleged that RIL had extracted gas migrating from ONGC’s fields without authorization. This led to a government-commissioned report in 2015 by DeGolyer and MacNaughton (D&M), which quantified the migrated gas.
Based on the D&M report, the UOI initiated arbitration proceedings, arguing that RIL had unjustly enriched itself by extracting gas beyond its contractual area, violating the PSC and the Public Trust Doctrine. The Arbitral Tribunal, by a majority, ruled in favor of RIL, holding that there was no material breach. However, a dissenting opinion found RIL liable for non-disclosure of crucial reports and recommended full disgorgement of profits. Aggrieved by the majority award, UOI challenged it under Section 34 of the Arbitration and Conciliation Act, 1996, contending that it suffered from patent illegality, conflicted with public policy, and involved non-arbitrable disputes.
The Single Judge dismissed UOI’s application, holding that the arbitration was an ‘International Commercial Arbitration’ and, therefore, the ground of ‘patent illegality’ was not available. The Court also rejected UOI’s claims regarding public policy violations and non-arbitrability. Dissatisfied with this ruling, UOI filed the present petition challenging the impugned order.
The Court noted that since the lead member, like RIL in the present case, in an arbitration proceeding is an Indian entity, the arbitration must be treated as a domestic arbitration and not an International Commercial Arbitration. Thus, the Single Judge while adjudicating the application under Section 34 of the Act, exceeded the jurisdiction as encompassed under the Section 34 of the Act, as such there exist enough cogent reasons for this Court, under Section 37 of the Act to enter the domain of Section 34 of the Act to examine the arbitral award.
On the aspect whether the Single Judge erred in not examining the Arbitral Award passed by the Arbitral Tribunal under Section 34 (2A) of the Act and the existence of ‘patent illegality’ in the said Arbitral Award, the Court observed that as per Article 297, UOI is a depository, holding the natural resources of India as a Trustee, for and on behalf of the people of India and without the explicit and express permission of the UOI, there can be no extraction of the said resources by anyone. Moreover, such explorations/ extractions have to be seen considering Article 297, since it is the duty of the State, which is being delegated, and the entity, which is carrying on with such a duty, will be constrained with the same restraints as the Union and governed by the Constitution. In effect, RIL was supposed to do all those for and on behalf of the UOI, as it was accountable to the UOI by acting in such a manner which was in the public interest of the people of this Country and the UOI. Therefore, the gas coming out of the Reliance Block because of any such extractions belongs to the UOI.
The Court remarked that “a private entity like RIL was/ is always bound by the provisions of Article 297 and that the same is final and conclusive for all extensive purposes, especially in the present scenario whence the Arbitral Tribunal and the Single Judge and we, are also similarly dealing with a dispute of the present nature involving a scarce natural resource i.e., natural gas, exploration/ extraction thereof, public interest of the country and the UOI on the one hand and the interests of a private party like RIL on the other hand.”
The Court stated that Rule 28 and Rule 30 of the 1959 PNG Rules are very clear as they stipulate the conditions to be followed. Also, as per Article 26.1 of the PSC, a contractor like RIL was supposed to divulge all the data available to/ by it qua the petroleum Operations to the UOI. Not stopping therein, also as per Article 26.3 of the PSC, a contractor like RIL was also supposed to keep the UOI informed of all the developments taking place in the contract area during petroleum operations. It is apparent from the findings of the Tribunal that RIL was, in fact, very much in breach of the PSC. This goes onto show that RIL, admittedly, failed to disclose the said D&M 2003 Report, which was in clear violation of Article 26.1 of the PSC by RIL. Not only that, but there was also a clear suggestion of connectively of the reservoirs inter-se the Reliance Block and the ONGC Block. All in all, the said led to taking away the rights of the UOI, to use the said resources as it best deemed fit for the benefit, of the people of this country and/ or of the Union. Since this also led to extraction thereof by RIL without informing the UOI, therefore, there was never any ‘explicit and express permission’ by the said UOI for RIL, to proceed further, significantly, since there is no dispute qua the same, the same has rightly never been challenged by RIL under Section 34 of the Act. Thus, there was never any ‘explicit and express permission’ qua extraction of the said ‘Migrated Gas’ and the findings of the Tribunal are final and are binding upon RIL and, much less, cannot be gone by this Court.
The Court concluded that the Tribunal was wrong in holding that “… …The non-compliance by the claimant did not amount to a material non-disclosure constituting a breach by the Claimant of the PSC and the PNG Rules. … … ”. This is patently erroneous as the breach on the part of RIL could not be said to be insignificant and labelled as being not material. Consequently, the plea of the UOI that the RIL has played a fraud on them cannot be simply brushed aside. Thus, considering the facts and law is against the very terms of the PSC and the doctrine of ‘public policy’, ‘public law’ and ‘Public Trust Doctrine’.
Thus, the Court held that the view of the Arbitral Tribunal “unless such an order is made, the claimant is not prohibited and is permitted to continue its petroleum operations within its contract area in a situation where the reservoir extends beyond its contract area into another”, is patently erroneous, against the fundamental law of India and against the ‘public policy of India’, more so, being in breach of the terms of the PSC and being the technical expert and having the knowhow, it was the fiduciary duty of the RIL to disclose the D&M 2003 Report to the UOI.
[UOI v Reliance Industries Limited, FAO(OS) (COMM) 201/2023, decided on 14-02-2025]
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