Introduction:

The Delhi High Court, in the case of Union of India v. Reliance Industries Limited & Ors., FAO(OS) (COMM) 201/2023, set aside an arbitral award in favour of Reliance Industries Limited (RIL) while adjudicating an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (A&C Act). A Division Bench comprising Justice Rekha Palli and Justice Saurabh Banerjee invoked the principles of ‘public policy in India,’ ‘public law,’ and the ‘Public Trust Doctrine’ while holding that the Arbitral Tribunal’s (AT) findings—stating that RIL’s breach of the Production Sharing Contract (PSC) was not material—violated fundamental Indian law and were patently erroneous.

Factual Background:

The Union of India (UOI) entered into a PSC with RIL and Niko Limited, granting them a 90%-10% participating interest, respectively. RIL later transferred its participation interest to British Petroleum Exploration Limited (BPEL). Another PSC was executed between UOI and Cairn Energy Limited, subsequently acquired by Oil and Natural Gas Corporation Limited (ONGC). The discovery of inter-connected reservoirs between ONGC and RIL blocks led to disputes over gas migration.

ONGC filed W.P.(C) 3054/2014 against UOI and RIL, alleging that RIL had unjustly enriched itself by producing and selling migrated gas. The dispute led to an independent study, the Shah Committee Report, and a demand notice from UOI to RIL for USD 1.74 billion. In response, RIL invoked arbitration under Article 33 of the PSC.

Arbitral Tribunal Findings and Section 34 Challenge

The AT, by a 2:1 majority, ruled that RIL was in breach of Article 26.1 of the PSC but held that it was not a material breach. UOI challenged the award under Section 34 of the A&C Act, arguing that it suffered from patent illegality. The single judge dismissed the challenge, holding that the arbitration was an International Commercial Arbitration, where patent illegality was not a valid ground for interference.

Delhi High Court’s Analysis Under Section 37:

• Nature of the Arbitral Proceedings – Domestic Arbitration:

The Court held that the arbitration was domestic as RIL, an Indian entity, was the sole claimant.

The single judge failed to consider the AT’s findings that RIL alone was the claimant, leading to an incorrect classification as International Commercial Arbitration.

The Court cited L&T-SCOMI v. MMRDA, emphasising that if both parties are Indian entities, the arbitration cannot be classified as international.

• Patent Illegality and Public Policy Concerns:

The Court emphasised Article 297 of the Constitution, which vests natural resources in the UOI as a trustee of the people.

It held that the AT erred in assuming that UOI’s silence equated to permission for extracting migrated gas.

The failure of RIL to disclose crucial D&M reports constituted concealment of material facts, violating public policy and the Public Trust Doctrine.

The Supreme Court’s judgment in RNRL v. RIL was cited, reinforcing that PSC profits belong to the State for public welfare.

• The materiality of Breach by RIL:

The AT’s finding that RIL’s breach of PSC was not material was deemed patently erroneous.

The Court held that such suppression of material facts could not be ignored and warranted judicial interference.

The Tribunal’s observation that RIL could continue Petroleum Operations despite reservoir connectivity was against fundamental legal principles.