Delhi High Court Upholds Tribunal Award Allowing Reliance Industries to Extract Migrated Gas, Dismisses Union of India’s Appeal, Reinforces Limited Scope of Judicial Review in Arbitration

Court’s Decision

The Delhi High Court dismissed the Union of India’s appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996, against the majority award of an arbitral tribunal. The court held that the majority award, which found in favor of Reliance Industries Limited (RIL), was legally sound. The court emphasized that the arbitral tribunal’s findings were within the permissible limits of interpretation of the Production Sharing Contract (PSC) and did not warrant judicial interference under the narrow scope of Sections 34 and 37 of the Arbitration Act.

The court upheld the tribunal’s majority ruling that RIL was entitled to extract and sell gas from within its Contract Area under the PSC, even if the gas had migrated from adjoining blocks operated by the Oil and Natural Gas Corporation (ONGC). It held that the PSC did not impose an express prohibition on extracting such gas and dismissed the Union of India’s claims of unjust enrichment and public policy violations.

Facts

1. The Dispute: The Union of India had entered into a PSC with Reliance Industries Limited (RIL) and others for petroleum exploration in Block KG-DWN-98/3 (Reliance Block) in the Krishna-Godavari Basin. An adjoining block, KG-DWN-98/2 (ONGC Block), was operated by ONGC.
2. Allegations of Migration: ONGC alleged that natural gas had migrated from its block into the Reliance Block. A report prepared by DeGolyer and MacNaughton (D&M) in 2015 concluded that the reservoirs were interconnected, leading to migration.
3. Demand Notice: Based on the D&M findings, the Union of India issued a demand notice to RIL, seeking $1.5 billion for unjust enrichment resulting from the production and sale of migrated gas.
4. Arbitral Proceedings: RIL initiated arbitration under the PSC, challenging the demand notice. The tribunal delivered a majority award in favor of RIL, which was challenged by the Union of India under Section 34 of the Arbitration Act but upheld by the Single Judge of the Delhi High Court. The Union of India then filed the present appeal under Section 37.

Issues

1. Whether the PSC permitted RIL to extract and sell gas that had migrated from adjoining blocks.
2. Whether RIL’s alleged non-disclosure of the D&M 2003 report constituted a material breach of the PSC.
3. Whether the dispute involved issues of public law, such as the Public Trust Doctrine, making it non-arbitrable.
4. Whether the arbitral award violated the public policy of India.

Petitioner’s Arguments (Union of India)

1. Violation of the Public Trust Doctrine:
   • Argued that natural resources, such as gas, belong to the people and are held in trust by the government.
   • Contended that RIL could not extract migrated gas without express authorization, as doing so violated the Public Trust Doctrine.
2. Non-Arbitrability:
   • Claimed that the dispute involved public law issues that could not be decided by an arbitral tribunal. The Union argued that the migration of gas was a matter of national importance.
3. Material Non-Disclosure:
   • Asserted that RIL suppressed crucial data, including the D&M 2003 report, which would have enabled the government to order joint development of the blocks.
4. Patent Illegality:
   • Argued that the tribunal’s findings were patently illegal and contrary to the PSC and the Petroleum and Natural Gas Rules, 1959 (PNG Rules).
5. Public Policy Violation:
   • Claimed that the arbitral award was in conflict with the public policy of India, particularly regarding resource governance and transparency.

Respondent’s Arguments (Reliance Industries Limited)

1. Rights Under the PSC:
   • RIL argued that the PSC allowed it to extract all hydrocarbons within its Contract Area, irrespective of whether the gas had migrated from adjoining blocks.
   • Highlighted that there was no express prohibition in the PSC on the extraction of migrated gas.
2. No Material Suppression:
   • Contended that the Union was aware of the potential connectivity between the blocks and had access to relevant data, including the D&M 2003 report.
   • Argued that the alleged non-disclosure did not materially affect the Union’s ability to act.
3. Efficient Resource Utilization:
   • Asserted that the PSC aimed at maximizing resource recovery, which was consistent with RIL’s operations.
4. Arbitrability:
   • Maintained that the dispute revolved around the interpretation of the PSC and was arbitrable under its terms.
5. Public Policy:
   • Argued that the tribunal’s findings did not violate public policy, as the extraction of migrated gas was consistent with the PSC.

Analysis of the Law

1. Scope of Section 37 Appeals:
   • The court emphasized that appeals under Section 37 are limited to examining whether the lower court exceeded its jurisdiction under Section 34. It cannot revisit the evidence or factual findings of the arbitral tribunal.
2. Arbitrability:
   • The court held that the disputes arose from the interpretation of the PSC and did not involve any inalienable sovereign functions or public law issues that would render them non-arbitrable.
3. Public Policy:
   • The court clarified that an arbitral award violates public policy only if it contravenes fundamental principles of law, morality, or justice. The court found no such violation in this case.
4. Material Non-Disclosure:
   • The court agreed with the tribunal’s majority view that the alleged non-disclosure of the D&M 2003 report was not material, as the Union already had sufficient information to act under the PSC.
5. Patent Illegality:
   • The court reiterated that patent illegality applies only to domestic arbitrations and must involve an error apparent on the face of the award. The tribunal’s findings were based on a reasonable interpretation of the PSC and did not meet this standard.

Precedent Analysis

• Ssangyong Engineering v. NHAI:
  • Reinforced that patent illegality cannot be used to challenge plausible interpretations of contractual terms.
• Delhi Metro Rail Corporation v. Delhi Airport Metro Express:
  • Clarified that Section 37 appeals cannot involve a reappraisal of evidence.
• Common Cause v. Union of India:
  • Distinguished from this case, as the PSC explicitly allowed the extraction of hydrocarbons within the Contract Area.

Court’s Reasoning

1. Interpretation of the PSC:
   • The court upheld the tribunal’s finding that the PSC allowed RIL to extract hydrocarbons within its Contract Area, even if they had migrated from adjoining blocks, provided there was no express prohibition.
2. Non-Disclosure:
   • The court agreed with the tribunal that the alleged non-disclosure of the D&M 2003 report was not material, as the Union had sufficient data to act under the PSC.
3. Arbitrability and Public Policy:
   • The court held that the disputes were arbitrable and did not involve any inalienable public law issues. It also found no violation of public policy.

Conclusion

The court dismissed the Union of India’s appeal and upheld the tribunal’s majority award in favor of RIL. The court concluded that the tribunal’s findings were reasonable, consistent with the PSC, and not in violation of public policy.

Implications

• Judicial Interference: The judgment reaffirms the limited scope of judicial interference in arbitral awards under Sections 34 and 37 of the Arbitration Act.
• Contractual Sanctity: Emphasizes the importance of adhering to the terms of commercial contracts, even in disputes involving natural resources.
• Public Policy Doctrine: Clarifies the limited applicability of the public policy doctrine in arbitration disputes.

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