The arbitrator found in favour of Reliance, ruling that the PSC did not prohibit extracting migrated gas and finding the non-disclosure of the 2003 report immaterial. The UoI challenged the award. The challenge was unsuccessful, partly because the single judge held the arbitration to be an international commercial arbitration. This finding resulted from the involvement of international entity Niko and rendered section 34(2A) inapplicable. The section allows the court, in arbitrations other than international commercial arbitrations, to set aside the award if there is patent illegality on its face. Section 34(2)(b)(ii) of the act gives the same power if the award is in conflict with the public policy of India.
On appeal by the UoI to the appellate bench of Delhi High Court, the decisions of the single judge and the arbitral tribunal were overturned. The court ruled that because Reliance, an Indian entity, was the sole claimant and Niko was not a party to the proceedings, the arbitration was domestic. The court could therefore consider whether to exercise its powers under section 34(2A). The appellate bench found that the dispute involved vital natural resources, triggering the public trust doctrine under article 297 of the constitution. The UoI holds national resources as a trustee for the people. The PSC followed the government’s 1997 New Exploration Licensing Policy.
The court found that Reliance’s ability to extract gas, even migrated gas, while technically and commercially enabled by its commercial agreement, resulted from a constitutional delegation. The PSC imposed clear obligations of full data disclosure and updated reports to the UoI. Reliance’s failure to share the 2003 report breached the PSC in a material way, deprived the UoI of revenue and violated its fiduciary duty. The argument that the UoI could have inferred connectivity from earlier reports was dismissed as disingenuous, particularly because of Reliance’s categorical denials of such connectivity during previous litigation.
The appellate bench found that the arbitral tribunal failed to examine the UoI’s allegation of fraud and wrongly downplayed the gravity of non-disclosure by Reliance. As a result, Reliance had benefited unjustly from a state resource by choosing silence over accountability.
The decision widens the scope of judicial intervention in arbitral awards arising from commercial contracts involving state entities on the grounds of public policy. Either directly or indirectly, such contracts concern the execution of the state’s constitutional duties. Consequently, public policy may be invoked as a defence by state entities for alleged breaches, a shift from the well-established principle that such contracts should be treated at arm’s length.
While the tribunal decided the suppression of information by Reliance was immaterial, the court found that it was a material breach of the PSC.
To mitigate such risks, parties may incorporate contractual clauses explicitly stating that bad faith conduct will constitute a material breach. This will provide greater clarity and protection in commercial agreements.
