Reliance Industries Ltd v The Union of India

Hearing dates: 5, 6 & 7 February 2018

Judgment Approved

Introduction

In these proceedings the Claimants make nine challenges to parts of an arbitration award dated 12 October 2016 (“the Award”). The challenges are made variously under the provisions of sections 67, 68 and 69 of the Arbitration Act 1996 (“the 1996 Act”).

The dispute between the parties arises under two Production Sharing Contracts (“PSCs”) entered into on 22 December 1994 by which the Union of India (the Defendant to these proceedings, referred to as “the Government”) granted to “the Contractor” the exclusive right to exploit petroleum resources discovered in two areas off the west coast of India for a period of 25 years. One area comprises fields known as “Mid Tapti” and “South Tapti”; the other, fields known as “Panna” and “Mukta”. For that reason the PSCs have been referred to as the “Tapti PSC” and the “Panna Mukta PSC”. The PSCs are in similar, but not identical, terms. Tapti is a gas field, and Panna Mukta is principally an oil field albeit producing some associated natural gas. The “Contractor” comprises the two Claimants and a third entity, Oil & Natural Gas Corporation Ltd (“ONGC”), for their participating interests of 30%, 30% and 40% respectively. ONGC is controlled by the Government and on the direction of the Government has taken no part in the arbitration.

The PSC terms in outline

Article 7.3 of the PSCs obliges the Contractor to carry out the exploitation of the fields at its sole risk, cost and expense, expeditiously and in accordance with good international petroleum industry practice. The work programmes to be carried out under the PSCs are to be approved by the Management Committee (Article 5.6(a)), a body consisting of representatives of each of the four parties (Article 5.2) with the Government representative having an effective power of veto (Articles 5.7 and 5.13). The initial programme for development (as opposed to exploration or production) was to follow the indicative plan annexed as Appendix G. Appendix G sets out a non-exclusive list of matters which were to be included in the development plan.Article 13.1.2 provides that those plans for development would be revised, subject to Management Committee approval, by the Contractor in a “Development Plan first submitted pursuant to this Contract”. That initial development plan is also referred to as the “Initial Plan of Development”, or “IPOD”. Subsequent plans, including variations to previous plans, might then be approved by the Management Committee.

Article 13 of the PSCs entitles the Contractor to recover its costs from the total volume of petroleum produced and saved from the fields in each financial year.Article 13.1.2 limits the extent to which development costs may be recovered in this way. It provides that the recovery of “Development Costs” is to be capped by the Cost Recovery Limit, or “CRL”. The CRL is US$545 million for Tapti and US$577.5 million for Panna Mukta. Development Costs incurred by the Contractor in excess of these limits fall to be borne by the Contractor. If, in certain specified circumstances, the CRL is exceeded, it can be increased to reflect those circumstances, either by the Management Committee or, in default of agreement by the Management Committee, by an arbitral tribunal (Articles 13.1.4(c) and 13.1.5).

The petroleum available to the Contractor for cost recovery is defined as “Cost Petroleum” (Article 1.24). The petroleum produced and saved in excess of that available to the Contractor for cost recovery is defined as “Profit Petroleum” (Article 1.69). Profit Petroleum is to be shared between the Contractor and the Government (Article 14.1). The proportion in which it is shared between the Contractor and the Government is determined by the “Investment Multiple” from one year to another (Articles 1.49, 14.1 and 14.2). The Investment Multiple is worked out by reference to a formula in Appendix D which addresses how profitable the production is, that is to say the extent to which income exceeds costs. In slightly oversimplified terms, the formula has the effect that the more profitable the production, the greater the Government share, by way of step changes rather than a sliding scale.

Cost Petroleum or Profit Petroleum was not taken in kind by the Claimants: save in one respect which is relevant to one of the present challenges, in practice all petroleum produced and saved has been sold to Government nominees – gas to GAIL India Ltd (“GAIL”) and oil to Indian Oil Corporation (“IOC”), both controlled by the Government – pursuant to provisions in the PSCs in respect of the Contractor's share and a request by the Government in respect of its share. Accounting between the parties is regulated primarily by Article 25 and the Accounting Procedure set out in Appendix C to the PSCs.

The PSCs are governed by Indian law (Article 32.1), save that the arbitration agreement in each of them, found in Article 33, is governed by English law (Article 33.12). The PSCs also state at Article 33.9 that arbitration proceedings are to be conducted in accordance with “the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) of 1985”; it is common ground that the date was a mistake and the reference was intended to be to the 1976 UNCITRAL Arbitration Rules. In the event of any conflict between the UNCITRAL Rules and the provisions of Article 33, the provisions of Article 33 are to prevail (Article 33.9). The seat of arbitration was agreed to be London: Article 33.12 originally provided as much, and although the seat was changed to Paris when the Second Claimant became part of the BG Group, it was then changed back to London on an ad hoc basis for the purposes of the present arbitral proceedings.

The arbitration proceedings in outline

The Claimants commenced arbitration on 16 December 2010. The arbitration is concerned with many disputes between the parties. It has taken a long time and is not yet complete. It is sufficient for the purposes of an introduction to identify the following procedural aspects of the reference, although I shall have to address some aspects in a little more detail in relation to particular challenges.

The original Tribunal consisted of Christopher Lau SC (Chairman), Peter Leaver QC (appointed by the Claimants) and Justice BP Jeevan Reddy (appointed by the Government). Justice BP Jeevan Reddy resigned on 4 February 2014 and was replaced by Justice B Sudershan Reddy on 21 March 2014. The Tribunal divided proceedings into a number of phases as a result of the quantity and complexity of the issues arising between the parties. It has made five awards:

(a) A “Final Partial Consent Award” dated 29 July 2011 (the “Consent Award”). This recorded in particular the ad hoc agreement of the parties that London was to be the seat of the arbitration.

(b) A “Final Partial Award on Arbitrability” dated 12 September 2012 (the “Arbitrability Award”). In this award the Tribunal determined that certain specific matters whose arbitrability had been challenged were arbitrable. The Claimants contend that this award was more wide-ranging in a respect which is relevant to Challenge 6.

(c) A “Final Partial Award on Issues B, C and D of the May 2012 Issues” dated 10 December 2012 (the “CRL Award”). The CRL Award concerned, among other things, how the CRL cap was to operate on recovery of Development Costs by the Claimants as a matter of the true construction of Article 13.1 of the PSCs. It is important in relation to some of the challenges raised in these proceedings and is accordingly described in more detail below. The CRL Award was made by a majority of the Tribunal; Justice BP Jeevan Reddy also published a Dissenting Final Partial Award on Issues B, C and D.

(d) A “Final Partial Award” dated 12 October 2016 (the Award). This is the award being challenged in these proceedings. The Award was issued after four hearings, in November 2013, September 2014, November 2014 and October 2015. In some respects it is a majority award, with dissenting awards being written by Mr Leaver or Justice B. Sudershan Reddy respectively on certain issues. The dissents were contained in a Dissenting Opinion of Mr Leaver dated 29 September 2016 (the “Leaver Dissent”) – which was itself accompanied by an Addendum dated 3 October 2016 – and the Dissenting Opinion of Justice Reddy dated 3 October 2016 (the “Reddy Dissent”). The dissents do not relate to the same issues, which is why the findings in the Award are always those of at least the majority.

(e) A “Final Partial Award” dated 11 January 2018, disposing of disputes relating to certain audit exceptions.

The Award runs to 703 pages. It identifies 69 issues and addresses the disputes under the heading of each of those issues in turn. It is important to bear in mind that the definition of these issues, and the arrangement of the Award in this way, was of the Tribunal's making. The argument of the parties was not addressed or compartmentalised under the headings which the Tribunal used to structure its reasons in relation to the many disputes between the parties.

With that introduction I turn to the nine challenges raised by the Claimants in these proceedings and address them...