Monthly Archives: December 2014

Krishna-Godavari Basin Gas Row – Why India needs Institutional Arbitration – Part II

Bharatendu Agarwal*

 

This post is a continuation of the previous Krishna-Godavari basin gas row post which talks about the dispute between the Union of India (the ‘Government’) and Reliance Industries Ltd (‘RIL’) (collectively referred to as the ‘Parties’) arising from the Production Sharing Contract (the ‘PSC’) entered into in April 2000. While the previous post detailed the timeline of the case, this post focuses on the players involved, their conduct and its implications. It concludes by highlighting what role an arbitral institution could have played in the case and its benefits.

Introduction

One of the many benefits of arbitration is that it is a mode of resolving disputes expeditiously. However, the sequence of events that have transpired in the Krishna-Godavari basin gas row do not merely challenge the previous statement’s veracity rather they laugh in its face! The preliminary aspect of constituting the tribunal took a total time of over three years (23 November 2011 to 11 December 2014). This means that a period of more than three years elapsed even before the beginning of the dispute resolution process. This calculation, moreover, is based on the assumption that there will not be further recusals, withdrawals, resignations or challenges to/by the arbitrators in the panel.

 

The case has witnessed significant mud-slinging by the Parties accusing each other of delaying the arbitration or obstructing the proceedings. However, a closer observation of the facts indicates that the delay can be attributed to both Parties, the arbitrators appointed and even the Supreme Court. The approach of the Parties, either due to incompetency or as a matter of strategy, evidences that rather than strictly focussing on dispute resolution strong emphasis was placed on making a mockery of the situation. The indecision of party appointed arbitrators made the situation worse. Adding salt to injury the Supreme Court dealt with the matter in an inefficient manner.

 

Below is a list of instances of how and where the Parties, the arbitrators and the Supreme Court have collectively contributed in delaying the matter.

 

Informal approach/Communication by improper channels

Any arbitration practitioner will advice that when arbitrating, all communication with the other party should be stopped after serving the arbitration notice. Then, immediately after the expiry of the timelines in the notice, the appropriate authority (either the court or the arbitral institution) should be approached to seek assistance in ensuring the tribunal’s constitution and continuation of the proceedings.

 

Here, however, despite having served the Government with an arbitration notice (the ‘Notice’) on 23 November 2011, RIL continued to indulge in communication with the Government constantly. RIL approached the Supreme Court only on 16 April 2012, approximately five months after serving the Notice.

 

Tactful postponement while appointing the arbitrator

The topmost priority of a party who is on the receiving end of an arbitration notice is ensuring the nomination and eventual appointment an arbitrator of its own choice. No party would, on account of delay, want to lose this right and leave this task in the hands of some other authority. In complex disputes, the choice of arbitrator may make a difference on winning or losing, if not the entire arbitration, the contentious issues involved.

 

Here, the Government very tactfully kept RIL engaged in communication and tried everything in its capacity to postpone the appointment of its arbitrator. The Government appointed Justice Khare as its arbitrator on 8 June 2012 (approximately seven months after receiving the Notice and one and a half months after RIL’s petition) only when they realised that the matter was soon to be heard in the Supreme Court. This was because the Government knew that if the matter is heard in the Supreme Court they would lose their right to appoint their arbitrator as the timeline prescribed in Article 33.5 of the PSC had expired.

 

Failure of party appointed arbitrators to reach consensus

Once parties appoint their arbitrators, in circumstances where party appointed arbitrators choose the presiding arbitrator, the decision as to who shall preside is fairly simple and less time consuming. Only rarely does it happen that party appointed arbitrators are unable to reach a consensus. This is primarily because inability to reach a common decision reflects poorly on the tribunal members:-

  1. First, it indicates incompatibility between the tribunal members even before the arbitration proceedings begin; and
  2. Second, it can be construed as situation where the appointed arbitrators are not acting impartially and are rather advocating for their respective parties.

 

Here, even one year subsequent to the appointment of respective arbitrators (17 July 2012 to 11 July 2013) no decision regarding the presiding arbitrator was made. In fact, no communication on the issue was received from Justice Khare and Bharucha. It was only when RIL wrote to them that a communication was received on 1 August 2013 which not only lacked the presiding arbitrator’s name but also clearly reflected poor communication between the two arbitrators. Moreover, the communication contained language which could be insinuated to be legal advice, something which the arbitrators are forbidden from.

 

Voluntary disregard of timelines in the arbitration agreement

National arbitration legislations, institutional rules and decently drafted arbitration agreements provide specific timelines for appointment of arbitrators. Inability to make the appointment within the timeline deprives the defaulting party of its rights and opens up an alternative route for appointment. The rationale behind providing specific timelines is to ensure that the arbitration process continues by the non-defaulting party’s timely pursuance of the matter.

 

Here, Article 33.6 of the PSC clearly provided that the appointment of the presiding arbitrator would be made as per the Arbitration & Conciliation Act, 1996 if, after appointment of the second arbitrator, party appointed arbitrators were unable to agree on the presiding arbitrator within a period of 30 days. This means that both Parties, after 8 July 2012 (as Justice Khare was appointed on 8 June 2012), were at liberty to approach the court to request appointment of the presiding arbitrator. Regardless, RIL filed an appointment petition in the Supreme Court only on 8 August 2013, i.e. 13 months after the opportunity first became available.

 

Full-fledged litigation before arbitration

When an appointing authority receives request for appointment of arbitrator, generally, the decision is simple and straight-forward. The appointing authority makes the appointment after considering the specifics mentioned in the arbitration agreement along with any guidelines mentioned in the rules/law governing the appointing authority. Also, it is accepted practice not to appoint arbitrator(s) belonging to the nationality of any party involved if the arbitrating parties belong to different nationalities.

 

Here, pursuant to Article 33.6 of the PSC the Supreme Court had the simple task of appointing the presiding arbitrator. However, the Parties motivation to fight tooth and nail converted this simple issue of appointment into a full-fledged litigation. The Supreme Court needed to issue an 83 paragraph judgement in which more than half the paragraphs discussed the internationally settled issue of arbitrator’s nationality.

 

Supreme Court goofs-up

Whenever any judgement is passed, it is expected to have been made after due consideration of the facts and circumstances involved. This particular expectation is stronger when the judgement is passed by the highest judicial body of the country.

 

Here, on one hand, Justice Nijjar had said that his understanding of the case warranted the appointment of an individual not suggested by the Parties while, on the other hand, he ended up appointing Mr Spigelman who was on top of RIL’s list of prospective arbitrators!

 

Supreme Court goofs-up again

When an arbitrator is chosen either by the party, its lawyers or by the appointing authority, it is common practice to establish communication with the said arbitrator so as to enquire of his/her availability. This is not only a practical requirement but is also fundamental in ensuring that the arbitrator has adequate time to devote to the arbitration and facilitate its timely resolution.

 

Here, Justice Nijjar appointed Mr McHugh without establishing any prior communication with him. This eventually led to a fiasco because Mr McHugh was already pre-occupied and was under the impression that an award was need soon, which he could not commit to.

 

Moreover, despite the past turn of events, Justice Khehar repeated the same thing by appointing Mr Kirby without establishing any communication. Rather than taking a pragmatic approach Justice Khehar in the judgement said that the consent of Mr Kirby was not obtained because the appointment was made under the belief that Mr Kirby would not disappoint the parties!

 

Analysisa

The instances noted above have cumulatively contributed to the delay in constitution of the tribunal. All of the above instances are classical examples of why arbitration gets a bad name and why arbitration in India has not gained the same level of popularity as in other countries. Interestingly, these issues are precisely the ones which arbitral institutions are designed to deal with and remedy.

 

As reflected in Article 33 of the PSC the Krishna-Godavari Basin arbitration is an ad-hoc arbitration, which means that there is no other body which facilitates the process of arbitration. There is no intermediary between the parties and the arbitrators/tribunal. The parties are themselves responsible for sending the notice, following up on timelines in the notice, appointing arbitrator(s), establishing the tribunal, organising hearing rooms, facilitating arbitrator’s travel, managing costs etc.

 

If the present case had been administered by an institution the situation would have been entirely different. Hypothetically speaking:-

 

  • At the outset, the information that RIL has started arbitration against the Government would not have even come in the public domain;
  • RIL would have sent the Notice to the institution which would have in-turn served it on the Government clearly indicating that if the Government did not appoint its arbitrator within 30 days, the institution would go ahead and appoint the arbitrator on its behalf;
  • in the event the Government did not respond or failed to make the appointment, the institution would have after the expiry of 30 days immediately appointed an arbitrator after performing the necessary conflict of interests check and ensuring his availability;
  • after confirmation of the second arbitrator, the institution would have indicated to the two arbitrators that they have to appoint the presiding arbitrator and in case they fail to reach a consensus within 30 days, the institution would take upon itself the responsibility of appointment; and
  • in the event consent could not be reached, the institution would have within a reasonable time (between 30 to 60 days depending on the institutional rules) appointed the presiding arbitrator, once again after performing a conflict of interests check and ensuring his availability, giving due regard to the nationality requirement.

 

The entire process rather than three years would have taken merely four to six months at the most. This is because there would have been no issues such as withdrawal of arbitrator due to busy schedule or recusal due to allegations of possible bias/conflict of interest or questions regarding rendering of legal advice by the arbitrator. The procedures and mechanisms adopted by institutions eliminate these risks.

 

Current Approach & Way Forward

For quite some time now there has been persistent talk about making India, like Singapore and Hong Kong, an arbitration hub. It is however pertinent to note that other than having arbitration friendly regimes both these countries have well reputed arbitral institutions (SIAC and HKIAC) which have been instrumental in attracting the arbitration business. Therefore, developing an Indian arbitral institution on similar lines can be a first step towards realizing the arbitration hub dream.

 

India in the past has seen strong resistance towards institutional arbitration. One major reason for this has been the culture of only preferring retired judges as arbitrators, who in turn do not like their fee to be regulated by an institution. The other reason has been the misconception that involving an arbitral institution in the scheme of things merely increases the costs involved and is not beneficial. (Practice indicates that institutional arbitration ensures resolution of disputes within a given timeframe, which as a consequence significantly reduces the legal fee involved, thereby drastically containing the total arbitration cost.)

 

That being said, of late, not only private parties but even courts have acknowledged the benefits of institutional arbitration. For example, the Delhi High Court came out in clear support of institutional arbitration by way of two recent cases (discussion on them can be found here). Also, the Law Commission out-rightly acknowledged the need for institutional arbitration in its 20 August 2014 report of proposed amendments to the Act (Chapter II, paragraphs 5 to 9). These positive developments indicate that a certain section has realized that India needs institutional arbitration and not situations akin to the Krishna-Godavari basin gas row. One can only hope that the trend catches on!

 

P.S. – On 22 December 2014 the Economic Times reported further developments in the case. A follow up post in the series can be expected when significant developments have transpired.

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* Bharatendu did his B.B.A. LL.B. (International Law Hons.) from NLU, Jodhpur and LL.M. (International Commercial Arbitration Law) from Stockholm University. He is currently interning at SIAC.

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Krishna-Godavari Basin Gas Row – Why India needs Institutional Arbitration – Part I

Bharatendu Agarwal*

The Petroleum and Natural Gas Ministry has been embroiled in a gas dispute with Reliance Industries Ltd (‘RIL’) concerning the Krishna-Godavari Basin for almost a period of four years. Over this period of time newspapers have, in bits and pieces, reported on its developments which are not only eventful but also involve several arbitration issues.

This post chronologically lists the case developments supported with, wherever possible, relevant links and information. The next post in this series will discuss the case in the context of institutional arbitration.

Timeline of the Case

12 April 2000 – A Production Sharing Contract (the ‘PSC’) was executed between the Union of India (the ‘Government’) and RIL (collectively referred to as the ‘Parties’). The PSC was executed in pursuance of RIL winning a joint bid for exploration, development and production in one block of hydrocarbon reserves located in the Krishna-Godavari Basin, i.e. Block KG-DWN-98/3 (‘KG-D6’). The PSC contained an arbitration agreement in Article 33, the relevant parts of the agreement are as follows:-

33.3 Subject to the provisions of this Contract, the Parties hereby agree that any controversy, difference, disagreement or claim for damages, compensation or otherwise (hereinafter in this Clause referred to as a “dispute”) arising between the Parties, which cannot be settled amicably within ninety (90) days after the dispute arises, may (except for those referred to in Article 33.2, which may be referred to a sole expert) be submitted to an arbitral tribunal for final decision as hereinafter provided.

33.4 The arbitral tribunal shall consist of three arbitrators. Each Party to the dispute shall appoint one arbitrator and the Party or Parties shall so advise the other Parties. The two arbitrators appointed by the Parties shall appoint the third arbitrator.

33.5 Any Party may, after appointing an arbitrator, request the other Party(ies) in writing to appoint the second arbitrator. If such other Party fails to appoint an arbitrator within thirty (30) days of receipt of the written request to do so, such arbitrator may, at the request of the first Party, be appointed by the Chief Justice of India or by a person authorised by him within thirty (30) days of the date of receipt of such request, from amongst persons who are not nationals of the country of any of the Parties to the arbitration proceedings.

33.6 If the two arbitrators appointed by or on behalf of the Parties fail to agree on the appointment of the third arbitrator within thirty (30) days of the appointment of the second arbitrator and if the Parties do not otherwise agree, at the request of either Party, the third arbitrator shall be appointed in accordance with Arbitration and Conciliation Act, 1996.

Additionally, in Article 33.9 the PSC adopted the UNCITRAL Rules (at the time of signing the PSC the UNCITRAL Rules, 1976 were in force).

2010 to 2011 – Differences of opinions arose regarding the interpretation and scope of the provisions of the PSC, particularly during the time when the Comptroller & Auditor General of India (the ‘CAG’) was conducting a special performance audit of the hydrocarbon blocks allocated in the year 2000. (Observations of this audit were published in Report No. 19 of 2011-12.) The fact that differences of opinions existed between the Parties could be evidenced by the fact that RIL, on 8 September and 9 September, issued press statements in anticipation and regarding the CAG’s findings. [The most recent report on Hydrocarbon Production Sharing Contracts (report No. 24 of the year 2014 covering period 2008-09 to 2011-12) was placed in the Parliament on 28 November 2014 (summary of its observations can be found here and here). RIL immediately issued a press release disputing the report’s observations.]

23 November 2011 – RIL, in accordance with Article 33 of the PSC, served the Government with an arbitration notice (the ‘Notice’). In its notice RIL nominated former Chief Justice of India, Justice S.P. Bharucha as its arbitrator and urged the Government to nominate its arbitrator. RIL soon issued a press release indicating the same on its website.

21 December 2011 – The Government, by way of a letter, wrote to RIL that the matter was under consideration and it would respond by 31 January 2012.

2 January 2012 – In response to the Government’s letter RIL wrote back, highlighting that the PSC, the UNCITRAL Rules and the Indian Arbitration and Conciliation Act, 1996 (the ‘Act’) fixed a maximum time limit for appointing an arbitrators as thirty days, nevertheless, as a matter of good faith, it was willing to grant extension until 31 January 2012.

25 January 2012 – The Government, backed with opinion from the Solicitor-General and the Law and Justice Ministry, asked RIL to withdraw its Notice stating that the Notice was premature as no dispute existed between the Parties.

2 February 2012 – Disregarding the Government’s position, RIL maintained that a dispute regarding the limiting of rights to recover contract costs existed and the Government’s response indicated that it failed to appoint an arbitrator.

17 February 2012 – The Government reiterated its position and again asked for withdrawal of the Notice.

9 March 2012 – RIL sent a non-exhaustive list of eleven issues to the Government, which according to RIL had already arisen between the Parties.

16 April 2012 – RIL, in accordance with Article 33.5 of the PSC, petitioned to the Supreme Court to nominate an arbitrator on the Government’s behalf. RIL also issued an official press release.

17 April to 7 June 2012 – A series of lengthy and heated correspondence was exchanged between the Parties.

8 June 2012 – Pursuant to the correspondence, Government nominated former Chief Justice of India, Justice V.N. Khare as its arbitrator.

16 July 2012 – RIL withdrew its petition dated 16 April 2012.

17 July 2012 to 11 July 2013 – No developments reported. It can be assumed that during this time period the two party appointed arbitrators, Justice Bharucha and Justice Khare, were deliberating as to who could be appointed as the third (and presiding) arbitrator.

12 July 2013 – RIL wrote to both arbitrators requesting them to nominate the third (and presiding) arbitrator at the earliest.

1 August 2013 – Justice Bharucha wrote a letter to RIL stating:-

Undoubtedly, there has been a delay in the appointment of a third arbitrator. I had made a suggestion to my fellow arbitrator, which was not acceptable to him. I asked him to make a counter suggestion which he said he would do. I have not heard any counter suggestion as yet.

In the circumstances, you must consider whether the court should be approached for the appointment of a third arbitrator.

8 August 2013 – RIL, this time in accordance with Article 33.6 of the PSC, petitioned to the Supreme Court to nominate the third (and presiding) arbitrator.

6 September, 30 September, 11 November 2013 and 7 January 2014 – Counsels for respective Parties presented arguments before the Supreme Court.

31 March 2014 – The Supreme Court, after requesting from Parties a list of individuals who could be appointed as the presiding arbitrator, stated that considering the peculiar facts of the case it was of the opinion that it would be appropriate to appoint an individual not named by the Parties. Justice Surinder Singh Nijjar went on to state that ‘I have discretely conducted a survey to find a suitable third arbitrator who is not a National of any of the parties involved in the dispute’ and appointed former Chief Justice and Lieutenant Governor of New South Wales, Australia, Honourable James Spigelman AC QC to act as the presiding arbitrator.

 

During the case’s hearing, besides appointment of the presiding arbitrator, questions regarding arbitrator’s nationality and operator’s right to invoke arbitrator were argued in detail. The decision of the Supreme Court can be accessed here and a succinct discussion on the issues can be found here.

2 April 2014 – The Supreme Court withdrew it decision appointing Mr Spigelman after the Government pointed out that his name was, in fact, in RIL’s list of prospective arbitrators. Reports indicate that not only was Mr Spigelman’s name in RIL’s list, it was, surprisingly, the first name on the list. This probably explains RIL’s press release celebrating Mr Spigelman’s appointment.

29 April 2014 – The Supreme Court appointed former Australian High Court Judge, Honourable Michael Hudson McHugh AC QC as Mr Spigelman’s replacement.

25 May 2014 – Mr McHugh emailed the Parties indicating that he cannot confirm his ability to preside the arbitration as he’s busy until 15 September and an award, according to the Supreme Court, was expected quickly.

29 May 2014 – Mr McHugh, after receiving clarification from RIL lawyers that the case was expected to take some time, indicated that he would be able to take up the position.

June 2014 – The Government objected and took the position that Mr McHugh, by way of email dated 25 May 2014, had withdrawn and he could not reappoint himself. The Government wrote to Mr McHugh asking him not to take any action until he hears further.

8 July 2014 – Mr McHugh sent an email to the Parties, Justice Bharucha and Justice Khare clarifying that his email of 25 May 2014 cannot be construed as a withdrawal because a withdrawal from an office pre-supposes a prior acceptance of the office, which did not exist in the present case.

20 July 2014 – Mr McHugh sent an email expressing his withdrawal from the arbitration and stating that his decision was irreversible.

21 July to 22 September 2014 – RIL accused the Government of violating the spirit of arbitration and provoking Mr McHugh not to accept the appointment. An interlocutory application was filed in the Supreme Court for appointment of someone else in place of Mr McHugh.

23 September 2014 – The Supreme Court appointed former Justice of the Australian High Court, Honourable Michael Kirby AC CMG to preside over the arbitration, who according to RIL lawyer Harish Salve is a ‘great friend of India’. Justice J.S. Khehar in the order also states that ‘Keeping in view the urgency of the matter, prior consent of the third arbitrator was not obtained. The nomination has been made under the belief that third arbitrator, nominated hereinabove, shall not disappoint the parties, by declining to accept the responsibility vested in him.

5 December 2014 – Justice S.P. Bharucha recued himself from the arbitration on account of the Government’s objection regarding inadequate disclosure of his previous links with RIL.

11 December 2014 – RIL nominated former UK judge, Sir Bernard Rix as their replacement arbitrator.

Closing Remarks

Other than providing disputants the right to choose the process and decision maker of their own choice (party autonomy), speedy resolution of disputes is a fundamental benefit of arbitration. The sequences of events here, however, indicate that significant time has passed between the issuing of the arbitration notice and the constitution of the tribunal. That being said, it can’t be guaranteed that there will not be further delay on account of challenges to the arbitrators or other reasons.

The next post in this series will go on to discuss who is accountable for the delay, reasons for such delay and how they could have been mitigated. The post will shed light on how institutional arbitration is the solution to the problem and its benefits.

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* Bharatendu did his B.B.A. LL.B. (International Law Hons.) from NLU, Jodhpur and LL.M. (International Commercial Arbitration Law) from Stockholm University. He is currently interning at SIAC

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