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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