KG Basin arbitral award a sham, says Delhi High Court

The Delhi High Court has held the arbitral award passed in favour of Reliance Industries Ltd in the Krishna-Godavary Basin dispute as patently wrong and illegal, and violative of India’s public policy and the public trust doctrine.

A division bench of the high court comprising Justices Rekha Palli and Saurabh Banerjee also faulted the international commercial arbitration of the dispute, which, according to the court, was a case for domestic arbitration. The division bench also held that the earlier single-judge ruling on the dispute was also wrong.

The judges said that since Reliance Industries Ltd (RIL) is an Indian entity and the respondent party is the Government of India, the arbitration has to be treated as a domestic matter.

The high court decided to set aside the case as it found illegality in the arbitral award that warranted interference.

The judges said they found ‘patent illegality’ in the arbitration process and found it needed judicial interference under Section 37 of the Act.

The dispute stemmed from a Production Sharing Contract (PSC) signed between RIL-Niko combine and the Union of India on 12 April 2000 for exploration and extraction of natural gas in the KG-DWN-98/3 block in the KG Basin.

State-owned oil and gas explorer ONGC which operated an adjacent block (KG-DWN-98/2) had found gas from its block seeping into RIL’s block adjacent to it, depriving it of its rightful share of gas from the block allotted to it.

ONGC moved court in 2014, claiming that RIL had been producing and selling migrated gas over which it had no claim.

A study by DeGolyer and MacNaughton (D&M), an independent group, in 2015, confirmed the interconnectivity of the two blocks. The government then constituted a committee under Justice AP Shah to examine the matter to suggest remedies. Based on the committee's findings, the government issued a demand notice to RIL for $1.55 billion as value of the migrated gas.

RIL then initiated arbitration under the PSC and secured an award in its favour. The arbitral tribunal gave the award in a 2:1 majority decision.

RIL then had a 90 per cent participating interest in the gas block while Niko held 10 per cent interest. RIL since transferred a part of its holding to British Petroleum Exploration Limited (BPEL).