Introduction:
In a significant ruling on the regulation of subsidised natural gas and the scope of arbitral review, the Delhi High Court dismissed a Section 34 petition filed by Gujarat State Fertilisers & Chemicals Ltd. (“GSFCL”) against an arbitral award in favour of Gas Authority of India Limited (“GAIL”). The matter revolved around the supply and use of Administered Price Mechanism (“APM”) gas, which is provided at subsidised rates by the Government of India to specific industries such as fertiliser and power plants. The Court, presided by Justice Subramonium Prasad, held that contracts executed between the parties were subject to the restrictions imposed by the Ministry of Petroleum and Natural Gas (“MoPNG”), which had consistently directed that APM gas be used strictly for fertiliser production and not diverted for other industrial purposes. The Court upheld the arbitral tribunal’s finding that the subsidised gas could not be diverted for non-fertiliser use and emphasised that by providing gas at a subsidised price, the Government retains the authority to regulate its utilisation. The judgment highlights the paramountcy of government directives in contracts involving subsidised natural resources and the limited scope of judicial interference under Section 34 of the Arbitration and Conciliation Act, 1996.
Factual Background and Genesis of the Dispute:
The dispute arose from five contracts entered into between GSFCL and GAIL concerning the supply of natural gas from various oil fields. Being a fertiliser producer, GSFCL relied heavily on natural gas supplied under the APM regime. The MoPNG, through several policy directives, restricted the use of APM gas exclusively to the fertiliser and power sectors. On 10 July 2006, MoPNG issued a directive asking GAIL to procure details regarding quantities of APM gas used by fertiliser units for non-fertiliser purposes. Based on observations by the Comptroller and Auditor General of India (“CAG”), MoPNG took the view that mechanisms were required to prevent diversion of subsidised gas. Consequently, on 2 July 2014, MoPNG directed that GAIL and other suppliers should obtain quarterly certificates from the Fertiliser Industry Coordination Committee (“FICC”), certifying that the gas had indeed been used for fertiliser production. Failure to produce the certificate entitled GAIL to charge non-APM (market) rates for the entire supply. This directive altered the monitoring and invoicing mechanism between GAIL and fertiliser units.
When GSFCL allegedly failed to furnish FICC certificates, GAIL raised demand notes on 15 January 2015 and later issued claim letters for unpaid amounts. In 2018, GAIL raised a substantial claim of ₹35.95 crore based on the MoPNG directive and FICC certification mechanism. This led to arbitral proceedings before Justice K.S.P. Radhakrishnan (Retd.), who, after detailed hearings, rejected GSFCL’s contentions and ruled in favour of GAIL. The arbitral tribunal held that APM gas could not be used for unrestricted industrial applications and that fertiliser units diverting such gas were liable to pay market rates. Aggrieved, GSFCL challenged the arbitral award under Section 34 of the Arbitration Act before the Delhi High Court.
Petitioner’s Arguments:
On behalf of GSFCL, senior advocate Dayan Krishnan advanced several arguments. First, he contended that two of the five contracts executed on 5 July 2008 contained no explicit clause restricting the usage of gas for a particular purpose. According to him, the MoPNG directives issued in 2014 and 2015 amounted to unilateral variations of the contract, which could not bind GSFCL without its consent. The petitioner asserted that contractual obligations cannot be retrospectively altered by executive instructions.
Second, GSFCL argued that the letter dated 16 December 2015 from MoPNG pertained to diversion of gas and not to price fixation. Since the pricing clause in the contracts required GAIL to raise invoices strictly in accordance with FICC certification, any demand raised without such certificates was contrary to the contract terms. It was submitted that GAIL issued provisional bills without waiting for FICC certificates, which was arbitrary and unenforceable.
Third, the petitioner emphasised that from March 2017 onwards, FICC had not issued any monthly certificates. In the absence of such certification, GAIL’s claims were provisional and not supported by the mechanism prescribed by MoPNG itself. According to GSFCL, it was incumbent upon MoPNG and FICC, as central government agencies, to coordinate and ensure the issuance of certificates. GSFCL, being a consumer, could not be penalised for delays or failures on the part of FICC.
Fourth, it was argued that the arbitral award was contrary to the fundamental policy of Indian law as it permitted GAIL to raise claims without adhering to MoPNG’s certification process. The petitioner submitted that the arbitrator had ignored key contractual provisions and MoPNG directives, rendering the award perverse and liable to be set aside. Lastly, GSFCL questioned the applicability of limitation principles, contending that GAIL’s claims were barred by time since the demand notes dated back to 2015.
Respondent’s Arguments:
Senior advocate Vivek Kohli, appearing for GAIL, defended the arbitral award. He submitted that the contracts themselves expressly subjected pricing and usage to government directives. Clause 16.1 of the 2008 contracts stipulated that usage of gas required approval of the Government of India, while Clause 17.1 provided that rights and obligations were governed by applicable Indian laws. Thus, MoPNG directives were integral to the contractual framework, and GSFCL could not claim unfettered rights over subsidised gas.
It was further argued that the pricing of gas under APM is a sovereign function and lies within the prerogative of the Government. MoPNG, as the administrator, fixes both price and usage conditions. The petitioner had itself admitted in the Statement of Claim that pricing was subject to government orders. Hence, the arbitrator was correct in holding that the petitioner was bound by MoPNG directives.
Regarding the absence of FICC certificates, GAIL argued that it was the petitioner’s responsibility to furnish necessary details to FICC to facilitate certification. The failure or delay was attributable to GSFCL, not GAIL or MoPNG. Consequently, GSFCL could not escape liability by blaming administrative bottlenecks. The provisional bills were in accordance with MoPNG’s directive that failure to produce FICC certificates would entitle GAIL to charge non-APM rates.
On the issue of limitation, GAIL maintained that the arbitral tribunal had carefully considered the timeline and correctly held that the claims were within limitation. The Section 34 court cannot reappreciate evidence or second-guess findings of fact unless the award suffers from patent illegality, which was not the case here. The arbitral award, according to GAIL, was reasoned, balanced, and consistent with public policy.
Court’s Analysis and Judgment:
Justice Subramonium Prasad began by reiterating the limited scope of interference under Section 34. An arbitral award can be set aside only if it is patently illegal, perverse, or in contravention of public policy. Courts are not to reappreciate evidence or act as appellate bodies. Against this backdrop, the Court examined the impugned award.
The Court noted that the contracts clearly incorporated MoPNG directives through Clauses 16.1 and 17.1, which subjected both pricing and usage to government approval and applicable law. It was implicit that subsidised gas supplied under the APM regime could not be diverted for other uses. The CAG report had flagged large-scale misuse of APM gas by fertiliser units for producing non-urea products, resulting in losses to the exchequer. Responding to this, MoPNG since 2005 had consistently restricted usage to fertiliser and power production. The 2014 directive introducing FICC certification was part of this regulatory framework.
The Court rejected the petitioner’s contention that absence of specific restrictive clauses in two contracts entitled it to unrestricted usage. The contracts had to be read in light of government policy, which was binding on both parties. Executive instructions issued in exercise of statutory and sovereign functions override individual contractual terms where subsidies and public resources are involved. Thus, the arbitrator was correct in holding that APM gas must be used only for fertiliser production.
On the issue of FICC certification, the Court held that failure to provide certificates was attributable to GSFCL, which did not furnish timely details to FICC. MoPNG’s directives made it clear that non-production of certificates would result in non-APM rates being applied. Hence, GAIL’s claims were justified.
The Court also dealt with the limitation plea. It noted that the arbitrator had held claims to be within time and explained reasons for doing so. Even if part of the award on limitation was vulnerable, the Section 34 Court could sever invalid portions from valid findings, as held in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025). Therefore, the award was not vitiated on this ground.
The Court concluded that the arbitrator’s findings were neither perverse nor contrary to public policy. By subsidising gas, the government is entitled to regulate its use. Fertiliser units were well aware of the restrictions, and diversion of gas for non-urea purposes attracted market pricing. GSFCL’s petition was accordingly dismissed, and the arbitral award dated 29 July 2023 was upheld.
The ruling underscores the supremacy of government policy in contracts involving subsidised natural resources and affirms the autonomy of arbitral awards unless they are patently illegal.