Delhi High Court Upholds Arbitral Award In Favour Of Reliance; Dismisses GOI’s Challenge Alleging Fraud And ‘Unjust Enrichment’ In Relation To Gas Extraction

The Ministry in 2016 had raised a demand of over USD 1.72 billion upon Reliance towards the “disgorgement of ‘unjust enrichment’”, allegedly made by the latter under the PSC. The Ministry had claimed that Reliance had extracted and sold extra gas that had migrated into its block from the adjourning blocks belonging to the Oil and Natural Gas Corporation Limited (ONGC), which it was not permitted to do.

The Ministry had alleged that Reliance had committed a fraud by suppressing and failing to disclose a 2003 report produced by the expert agency - M/s. DeGolyer & MacNaughton (D&M), which was issued 6 years before commencement of commercial operations by Reliance in 2009, where it was concluded that the blocks allocated to Reliance and ONGC constituted a single “reservoir”.

The High Court upheld the majority arbitral award passed by a three-member Arbitral Tribunal, which had ruled that Reliance was permitted to extract the migrated gas under the PSC and that the “Public Trust Doctrine” was not contravened.

Noting that as per the Arbitral Tribunal, Reliance’s failure to disclose the 2003 D&M Report was not a material contravention, the court held that the factual conclusions arrived at by the Tribunal cannot be second-guessed by the court under Section 34 of the Arbitration and Conciliation Act (A&C Act).

Apart from Reliance, M/s. Niko (NECO) Limited and M/s. British Petroleum Exploration (Alpha) Limited were also the constituents of the “Contractor” under the PSC; Reliance being the “Operator” under the contract with respect to the ‘Petroleum Operations’.

After the Ministry raised a demand on Reliance towards “disgorgement of ‘unjust enrichment’”, Reliance invoked the arbitration clause and the matter was referred to arbitration.

The majority award held that Reliance was fully entitled to produce all hyrdrocarbons resulting from the Petroleum Operations conducted within its Contract Area, which may include hydrocarbons that could have migrated from the adjacent block.

In the petition filed under Section 34 of the A&C Act before the Delhi High Court, the Ministry argued that the finding of the Majority Tribunal that Reliance cannot be made accountable for extracting and selling gas from outside its Contract Area, was in the teeth of the overriding “Public Trust Doctrine”. It contended that the said doctrine is part of the “fundamental policy of Indian law” and therefore, an integral part of the “public policy of India”. It further averred that the subject matter of the dispute fell within the public law arena, being covered by the Public Trust Doctrine, and thus it was not arbitrable.

It also contended that the majority decision was illegal and perverse, since the Arbitral Tribunal overlooked vital evidence on record. Thus, the arbitral award was vitiated by “patent illegality” appearing on the face of it.

The court reckoned that the notice invoking arbitration was issued by Reliance on behalf of itself, British Petroleum, as well as Niko, who all held participating interests in the Reliance Block. Further, the arbitral award determined the interests of not just Reliance but also of British Petroleum and Niko. Thus, the court concluded that the arbitral proceedings were an “international commercial arbitration” within the meaning of section 2(1)(f) of the A&C Act, and as a consequence, the ground of “patent illegality” under Section 34(2A) was not available to the Ministry.

The bench concluded that the claim for “disgorgement” was not made under public law but was founded on the alleged breach by Reliance of the terms of the PSC. Rejecting the averment that the dispute was non-arbitrable, the court remarked, “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 subject matter of the disputes, viz. natural gas, is a natural resource which vests in the Union, would not make it any the less so.”

The bench further remarked that under the PSC, the limited role of Reliance was to explore and extract natural gas as a licensee, and the title to the natural gas never passed to Reliance. Therefore, the Public Trust Doctrine was not contravened. “In the opinion of this court the reference to abrogation of sovereignty over a natural resource, refers to 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, admittedly the title to the natural gas never passed to Reliance. The natural resource viz. natural gas was neither “bought” nor “sold” as between Reliance and the Ministry. For this additional reason, the public trust doctrine was not contravened,” the court said.

The Ministry argued that Reliance had committed a fraud by failing to disclose the 2003 D&M Report, despite the fact that it was under an obligation under the PSC to provide to the Government all data, including derivative and interpretative data, relating to petroleum operations.

To this, the court remarked that the Arbitral Tribunal had correctly held that though Reliance had an obligation to disclose the 2003 D&M Report, and had failed to comply with the said obligation, the contravention was, however, not material as the Ministry had multiple opportunities to direct joint-development, even in the absence of the said D&M Report.

While dealing with the issue of the “Public Trust Doctrine”, the court said, “The arbitral tribunal does not negate the existence of the public trust doctrine as enshrined in Article 297 of the Constitution and interpreted by courts of India; rather it states that Reliance has acted in furtherance of such doctrine by extracting petroleum in the most “…efficient and commercially sensible manner”. Furthermore, 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.”

Holding that the Arbitral Tribunal had taken a ‘possible view’ which cannot be interfered with, and that the factual conclusions arrived at were perfectly rational, coherent and logical, the court dismissed the challenge made by the Ministry.

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

Citation: 2023 LiveLaw (Del) 389

Dated: 09.05.2023

Counsel for the Plaintiff: Mr. K.K. Venugopal, the then 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.

Counsel for the Respondents: 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 R3

Click Here To Read/Download Order