Violates Public Trust Doctrine: Delhi HC Sets Aside Tribunal's Award Allowing RIL To Explore 'Migrated Gas' Without Express Permission

Factual Matrix:

The Union of India (UOI) entered into a PSC with RIL and Niko Limited with a participating interest of 90%-10%, respectively. By way of a supplementary contract, RIL transferred its participation interest under the parent contract to British Petroleum Exploration Limited (BPEL). RIL and Niko had the right to take cost petroleum in accordance with the provisions of Article 15 of PSC.

The UOI entered into another PSC with Cairn Energy Limited which was later acquired by Oil and Natural Gas Corporation Limited (ONGC). The blocks of RIL and ONGC turned out to be adjoining blocks. Certain disputes arose between ONGC and RIL, and ONGC wrote to UOI stating that there was “…evidence of lateral continuity of gas pools…” between the Reliance block and ONGC block, as both the blocks were connected and there was migration of gas inter-se them.

ONGC filed a writ petition [W.P.(C) 3054/2014] against the UOI and RIL, claiming that since the gas migrated to the RIL's block due to two blocks being inter-connected, RIL had been unjustly enriched by producing and selling the migrated gas. During the pendency of the W.P.(C), ONGC and RIL entered into an “Agreement for Project Management of Independent Third-Party Study”.

The single judge disposed of the W.P.(C). In light of the order of the single judge, D&M submitted its Final Report dated 19.11.2015 concluding that “the integrated analyses indicated connectivity and continuity of the reservoirs across the blocks operated by ONGC and RIL”, and UOI constituted a single member committee of HMJ A.P.Shah to consider the D&M Report 2015 and to recommend a future course of action.

Aggrieved by the DGH's stand before the Shah Committee, RIL withdrew its participation. On 29.08.2016, the Shah Committee issued its Final Report, based on which UOI raised a Demand Notice for 1.74 Billion USD along with interest. RIL, in response, invoked the arbitration clause in terms of Article 33 of the PSC.

The tribunal rendered the award in a 2:1 majority, holding that RIL was not in material breach of the PSC. Aggrieved by the UOI filed a Section 34 application for setting aside the arbitral award as it suffers from patent illegality. Despite holding RIL in breach of Article 26.1 of PSC, the AT observed that the said breach was not a material breach, specifically when RIL was guilty of suppressing D&M 2003, D&M 2004 and D&M 2005 Reports. the award u/s 34 of the A&C Act.

The single judge while dismissing the Section 34 application observed that the arbitration between UOI and RIL was an 'International Commercial Arbitration' and the ground of patent illegality was not available, for the Courts to interfere with the arbitral award.

Aggrieved by the order of the single-judge bench, the UOI filed the present appeal u/s 37 of the A&C Act.

Analysis of the Division Bench:

The arbitral proceedings are domestic arbitration in nature:

While holding the nature of the arbitral proceedings to be domestic in nature, the Court observed that the AT in ¶157 has recorded that RIL is the only claimant in the arbitration and Niko has not been made a party to the arbitral proceedings. The Supreme Court in RIL v. Union of India appointed the third and presiding arbitrator u/s 11(6) of the A&C Act, which was rendered at a pre-adjudication stage; however, the AT recorded the findings pertaining to BP and Niko's participation in the proceedings at a post-adjudication stage.

The single judge erred in not following the unchallenged findings of the AT: “… …the named claimant in this arbitration is RIL… …” instead of the findings of the Supreme Court in RIL v. Union of India.

The AT concluded that RIL, an Indian entity, is the sole claimant, therefore the arbitration has to be treated as a domestic arbitration instead of an International Commercial Arbitration. The Supreme Court in L&T-SCOMI v. MMRDA observed that once it has been concluded that both companies are incorporated in India, the arbitration agreement would not be international commercial arbitration. The single judge while adjudication the Section 34 application exceeded the jurisdiction conferred u/s 34 of the A&C Act.

Therefore, the Court found sufficient cogent reason u/s 37 of the A&C Act to enter into the domain of Section 34 of the A&C Act to examine the arbitral award.

The award was crippled with patent illegality:

The Court observed that the issue of 'patent illegality' involves Article 297 of the Constitution, and 'public policy in India', 'public law' and 'Public Trust Doctrine', being all intertwined, are to be considered. By Article 297 of the Constitution, UOI is a depository holding the natural resources of India as a Trustee, and without the explicit and express permission of the UOI, there can be no extraction of the said resources by anyone.

The Court was of the opinion that the findings of AT pertaining to the implicit permission of the UOI of the 'migrated gas' require consideration. The UOI entered into a PSC with RIL since RIL had the 'technical know-how.' RIL was appointed for a specific and limited purpose of exploring/extracting the natural resources for and on behalf of the UOI.

The law pertaining to this point is settled in RNRL v. RIL, where the Supreme Court held that the profit gained from PSC ideally belongs to the State, which is in a better position to allocate them for the best interest of the people. A private entity like RIL is always bound by the provision of Article 297.

It has been the case of RIL that the permission pertaining to 'Migrated Gas,' if any, was not compulsorily required, and UOI's silence was meant to be deemed a grant of permission. Per Article 26.1 of the PSC, RIL was required to disclose all the data available to it via the Petroleum Operations to the UOI. Per Article 26.1 of the PSC, RIL was required to keep the UOI informed of all the developments taking place in the Contract Area during the course of the Petroleum Operations. In contravention of Article 26.1 of the PSC, RIL failed to disclose the D&M 2003 Report.

The Court observed that the nature of the transaction was in the Country's public interest. RIL cannot be allowed to take and/ or derive the benefit of any silence by the UOI. RIL was guilty of impeding the ONGC's rights through an 'express and explicit' license qua its block, under the NELP. Failure to disclose the D&M 2003 Report, resulted in concealment and suppression of material fact. Such vital factor being ignored by the AT and Single Judge, which compels the Court to interfere u/s 37 of the A&C Act.

There was a significant breach of the terms of PSC on the part of the RIL, however, the AT held that the said breach on the part of RIL was not material. The Court observed finding of the AT was wrong in holding: “…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. …” is patently erroneous as the RIL's breach could not termed as insignificant and be labelled immaterial by the AT.

The findings of the AT were in contravention of the substantive law and the terms of PSC, PTD, 1959 PNG Rules and the fundamental law of the land. The Court further held the opinion of AT: “… … 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…” to be patently erroneous, against the fundamental law of India and against the 'public policy of India'.

After a detailed analysis and findings qua the scope of Section 37 of the Act, there was patent illegality on the face of the arbitral award; subsequently, the Court set aside the order passed by the single judge.

Case Title: Union of India v. Reliance Industries Limited & Ors.

Citation: 2025 LiveLaw (Del) 202

Case Number: FAO(OS) (COMM) 201/2023

Counsel for the appellant: Mr. R. Venkatramani, AGI, Mr. K.K. Venugopal & Mr. Gopal Jain, Senior Advocates with Mr. Amit Dhingra, Mr. Rohit Mahajan, Mr. Siddharth Agrawal, Ms. Kesang Tenzin Doma, Ms. Sayanti Chatterjee, Mr. Abhishek Kr. Pandey & Mr. Raman Yadav, Advocates.

Counsel for the Respondent: Mr. Harish N. Salve, Senior Advocate with Mr. Sameer Parekh, Mr. Ishan Nagar, Mr. Abhishek Thakral, Ms. Sonali Basu Parekh, Ms. Ruchi Chauhan, Ms. Aditi and Ms. Chetna Kai, Advocates for R1.

Ms. Niyati Kohli, Mr. Nilay Gupta and Ms. Tarini Khurana Advocates for R2.

Mr. K. R. Sasiprabhu, Mr. Parth Rishik, Mr. Vishnu Sharma A.S. and Mr. Mohammed Ilyas, Advocates for R3.