By: Dhruv Kohli and Dharmvir Brahmbhatt
Introduction
The Delhi High Court recently in the case of Union of India v. Reliance Industries Limited & Ors. while upholding a 1.7 billion USD arbitral award classified an Indian seated arbitration between two Indian parties as an “International Commercial Arbitration” (“ICA”). The dispute finds it genesis between a contract that was signed between Ministry of Petroleum and Natural Gas and M/s. Reliance Industries Limited and Niko Limited. Reliance later transferred a portion of its participating interest to British Petroleum through a Supplementary Contract. Upon occurrence of a dispute, Reliance initiated arbitration proceedings wherein two members favored Reliance and one member favored the Ministry. It was in this situation, an appeal was made by the Ministry before the Delhi HC, which held that the award in the present situation is an ICA. The result of this decision is that it gives significant advantage to the party defending annulment proceedings, since once an arbitration is classified as an international commercial arbitration, there lies no scope of challenging the arbitral award on the ground of “patent illegality”. The authors in this article make an attempt to argue that the judgement of the Delhi High Court is flawed and suffers from non-application of mind.
Facts
The Ministry in 2000 to M/s. Reliance and Niko for exploration and extraction of natural gas in the state of Andhra Pradesh. In 2011, Reliance later transferred a portion of its participating interest to British Petroleum through a Supplementary Contract. The dispute arose when ONGC in 2013 informed the Directorate General of Hydrocarbons about potential connectivity between gas pools in the Reliance Block and ONGC Blocks. Following certain litigation, the Ministry raised a claim of USD 1.7 billion to which response Reliance invoked the arbitration clause of the contract. The tribunal trough 2:1 passed an award in favor of Reliance, which award was challenged before the Delhi HC.
Judgment
The Delhi High Court in its judgement coloured the nature of arbitration between Reliance and Union of India, i.e. two Indian entities, with the paintbrush of international commercial arbitration under Section 2(1)(f) of the A&C Act. The Delhi High Court reached this conclusion on the grounds that firstly, foreign entities (i.e. Niko and British Petroleum) are parties to the underlying contract, secondly, Reliance, the Indian party, was acting on behalf of the two foreign entities and thirdly, the award by the arbitral tribunal would have an impact on the foreign entities. The court held that the Supreme Court’s decision in Reliance Industries Ltd. and Ors. vs. Union of India (“2014 judgement”) which arose from the same PSC, involving the same parties, settled the matter. The apex court in its judgement held that the arbitration was an international commercial arbitration. The Delhi High Court, following the rationale of 2104 judgement, held that the disputes subject to arbitration in the present case also related to the primary contractual rights of all parties under the PSC. Consequently, the court held that the arbitral proceedings in the present case unequivocally constituted an “international commercial arbitration.” As a result, the scope of interference by the court under Section 34 of the A&C Act was further restricted, and the Ministry’s challenge to the arbitral award on grounds of disregarding evidence or drawing unfounded inferences was deemed untenable since such claims fell within the realm of “patent illegality.”
Analysis
The authors contend that the rationale of the court to term the arbitration as an international commercial arbitration is flawed. Firstly, there is non application of mind on the part of the court in the way it has applied the 2014 judgement of the apex court without considering the broader context in which the 2014 judgement was delivered. In the 2014 case the petitioner asked for the appointment of an arbitral tribunal, with British Petroleum, Niko, and Reliance involved in the arbitration proceedings. One of the key issues was whether the upcoming arbitration would be considered an “international commercial arbitration.” This depended on whether the Supreme Court had jurisdiction, as it’s the only one that can appoint an arbitral tribunal for international commercial arbitrations. In light of this, the Supreme Court noted that Reliance, acting as the “Operator,” could speak on behalf of the other two parties under the PSA’s scheme. The court also pointed out that the arbitration’s result would impact all three parties. What is to be noted here is that both British Petroleum as well as Niko were part of the arbitration and therefore the arbitration was of the nature of international commercial arbitration.
Section 2(1)(f) of the A&C Act does not say that “agreement” between the parties would make an arbitration an international commercial arbitration. Instead, the court must focus on whether the arbitration fits the criterias listed under Section 2(1)(f). Hence the Delhi HC, in the opinion of authors, instead of focusing on whether the arbitration fulfilled the criterias as listed in Section 2(1)(f), wrongly focused on the fact that both Niko and British Petroleum were parties to the agreement.
Secondly, in the case of M/s Larsen and Toubro v. MMRDA the parties involved were a consortium consisting of Larsen and Toubro (Indian entity) and Scomi Engineering BHD (Malaysian entity). As dispute arose, the consortium filed a joint application under Section 11 for initiation of arbitration and contended that by virtue of the dispute being within the realm of “international commercial arbitration” the jurisdiction would be with the apex court. The apex court while dismissing held that Section 2(1)(f)(iii) of the A&C Act, 1996, covers two sets of entities, an “association” and a “body of individuals”. It further went on to hold that since the “consortium” was unincorporated in nature, merely because one party to the agreement was a foreign entity wouldn’t transform it into an international arbitration. Further, L&T was in control of the consortium and therefore the central management was being exercised in India. A parallel can be drawn from this judgment to hold that even though there were three parties to the agreement with the Union of India, of which two were foreign entities, the three parties together were at best an unincorporated association. Since Reliance had 60% participating interest, was the operator as per the PSC and was also the sole party involved in arbitration it can be held that the central management and control of the association was from the headquarters of Reliance domiciled in India. And therefore, in the opinion of the authors, the arbitration is not an international commercial arbitration.
Conclusion
In the opinion of the authors the Delhi High Court grossly erred in concluding that the arbitration in question was an international commercial arbitration. It failed to appreciate the context in which the 2014 judgement was delivered by the apex court. The High Court has cherry picked parts of the Supreme Court’s judgement to reach its conclusion. Due to the decision rendered by the Hon’ble Court, it can be inferred that in the context of annulment proceedings within an otherwise domestic arbitration, the defending party will consistently face a disadvantageous position, as it will not be afforded the recourse provided under Section 34 of the A&C Act. This judgement significantly narrows the scope of Section 34 A&C Act and more importantly brings about a complete new interpretation to the definition of “International Commercial Arbitration” under Section 2(f) of the A&C Act. The Delhi HC also failed to follow the law laid down by the apex court in M/s Larsen and Toubro v. MMRDA, which ruled that a mere presence of a foreign entity will not turn an arbitration as an “international commercial arbitration” in terms of Section 2(1)(f) of the A&C Act. The judgement was referred to by the counsels of Union of India in their submissions but very conveniently ignored by the High Court. The Court did not analyse or take into cognisance the ratio of the L&T judgement. By virtue of its judgement, the High Court has virtually relegated the ratio of the apex court in Larsen and Toubro. The Union has the right of appeal and it would be interesting to see as to how the apex court will rule in the present dispute. Until the time the apex court rules upon this decision, the HC has carved out an unnecessary exception to the definition of “international commercial arbitration” which was never envisaged by the lawmakers and by doing so has given an undue advantage to parties defending in annulment proceedings.
Author’s Bio:
Dhruv Kohli, 4th year Law Student at Gujarat National Law University and Dharmvir Brahmbhatt is an incoming associate at Cyril Amarchand Mangaldas.
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