KG Basin arbitral award in favour of Reliance was patently illegal: Delhi High Court

The arbitral award passed in favour of Reliance Industries Limited (RIL) in the Krishna-Godavari basin (KG basin) dispute with the Central government suffered from "patent illegality, and was violative of India's public policy and the public trust doctrine, the Delhi High Court held on Friday..A Division Bench comprising Justices Rekha Palli and Saurabh Banerjee also held that the arbitration was a domestic arbitration and not an international commercial arbitration as was held by a single-judge. "Therefore, in our considered opinion since the lead member, like RIL in the present case, in an arbitration proceeding is an Indian entity, the arbitration has to be treated as a domestic arbitration and not an International Commercial Arbitration," the Court saidBesides, since the Court found patent illegality in the arbitral award, the Court said that it warranted interference and consequently, set aside the same. "In any event, as elaborately discussed hereinabove, we have found ‘patent illegality’ on the face of the Arbitral Award worthy of interference by us in the present appeal under Section 37 of the Act,” the judgment said..The dispute arose from a Production Sharing Contract (PSC) signed on April 12, 2000, between the Union of India, RIL, and Niko Limited for the exploration and extraction of natural gas in the KG-DWN-98/3 block in the KG Basin. RIL held a 90 percent participating interest while Niko held 10 pecent. Later, RIL transferred a portion of its interest to British Petroleum Exploration Limited (BPEL).In 2013, the Oil and Natural Gas Corporation (ONGC) alleged that gas from its adjacent block (KG-DWN-98/2) had migrated into RIL’s block, leading to RIL extracting and selling gas that rightfully belonged to ONGC. ONGC filed a writ petition in 2014, claiming that RIL had been unjustly enriched itself by producing and selling the migrated gas.Following an independent study by DeGolyer and MacNaughton (D&M) in 2015 which confirmed connectivity between the two blocks, the Central government constituted a committee under Justice AP Shah to examine the matter. Based on the committee's findings, the Central government issued a demand notice to RIL for approximately $1.55 billion for the value of the migrated gas..RIL disputed the claim and initiated arbitration under the PSC. The arbitral tribunal, in a 2:1 majority decision, ruled in favour of RIL on key issues. It found that RIL was entitled to extract and retain profits from the migrated gas as there was no explicit prohibition in the production sharing contract (PSC). While the tribunal acknowledged that RIL should have disclosed a 2003 report by DeGolyer and MacNaughton (D&M) regarding potential connectivity between the gas reservoirs, it deemed this non-disclosure immaterial.However, one arbitrator dissented, arguing that RIL required explicit permission to extract migrated gas and that the non-disclosure constituted a material breach of the PSC. The dissenting opinion also emphasized the principle of unjust enrichment.The UOI challenged the arbintral award under Section 34 of the Arbitration and Conciliation Act, 1996, but the single-judge bench upheld the arbitral award. The UOI then appealed to the Division Bench of the Delhi High Court under Section 37 of the Arbitration and Conciliation Act, 1996. .In its judgment, the Division Bench set aside the award on four grounds - patent illegality, nature of arbitration, unjust enrichment and public policy..Domestic Arbitration, Not International Commercial ArbitrationThe Court held that the arbitration proceedings between RIL and the UOI were not an "international commercial arbitration" as defined under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996. The Court noted that RIL, an Indian entity, was the sole claimant in the arbitration, and the participation of foreign entities like BPEL and Niko did not convert the arbitration into an international one. This finding was crucial because it allowed the court to apply the "patent illegality" test under Section 34(2A) of the Act, which is not available in international commercial arbitrations.“In our considered opinion, as also in view of the aforesaid findings by the learned AT in the Arbitral Award that, admittedly, RIL, the sole claimant, was an Indian entity, the issue of the arbitration proceedings inter se UOI and RIL being an International Commercial Arbitration stood settled and the learned single-judge could not have taken a divergent view therefrom, and that too whence dealing with an application under Section 34 of the Act,” the Court held..Patent Illegality in the Arbitral AwardThe Court found that the arbitral tribunal had committed "patent illegality" by allowing RIL to extract and sell migrated gas without explicit permission from the Union of India. The court emphasised that natural resources, such as natural gas, are held by the Union in trust for the people of India under Article 297 of the Constitution. The extraction of such resources without proper authorisation violates the public trust doctrine and the fundamental policy of Indian law.The Court also noted that RIL had failed to disclose the 2003 D&M Report, which suggested connectivity between the reservoirs in RIL’s block and ONGC’s block. This non-disclosure was a material breach of the PSC and prevented the UOI from exercising its right to order joint development of the reservoirs under Article 12 of the PSC.“In view thereof, particularly in light of the said failure to disclose the 2003 D&M Report, there was concealment and suppression, which was material and not of a trivial nature, upon which the change in profit ratio set out in the PSC depended. This, indeed, was a vital factor which was ignored and not considered by the learned AT, which was also open to correction by the learned Single Judge in the proceedings under Section 34 of the Act as well. Alas! the same went amiss on two stages, which call upon for interference by us in these proceedings under Section 37 of the Act.”.Public Policy and Public Trust DoctrineThe Court reiterated that the extraction of natural resources must be done in accordance with the public interest and the principles of the public trust doctrine. The Court found that the arbitral award, by allowing RIL to profit from migrated gas without proper authorization, was in conflict with the "public policy of India" and the fundamental principles of justice and morality..Unjust EnrichmentThe Division Bench held that RIL had been "unjustly enriched" by extracting and selling gas that did not belong to it. It rejected RIL’s argument that the Union of India’s silence amounted to implicit permission, stating that mere silence by the government cannot be construed as approval, especially in matters involving public resources..Thus, the court set aside both the arbitral award and the order of the single-judge in Section 34 proceedings. .Union of India was represented by Attorney General R Venkatramani and Senior Advocates KK Venugopal and Gopal Jain instructed by a team from Dua Associates comprising Partners Amit Dhingra and Rohit Mahajan, Principal Associate Siddharth Agrawal and Associates Kesang Tenzin Doma and Sayanti Chatterjee and advocates Abhishek Kr. Pandey and Raman Yadav..RIL was represented by Senior Advocate Harish N Salve with advocates Sameer Parekh, Ishan Nagar, Abhishek Thakral, Sonali Basu Parekh, Ruchi Chauhan, Aditi and Chetna Kai..BPEL was represented by advocates Niyati Kohli, Nilay Gupta and Tarini Khurana..Niko Limited was represented by advocates KR Sasiprabhu, Parth Rishik, Vishnu Sharma AS and Mohammed Ilyas..[Read Judgment]