TMI Blog2014 (4) TMI 581X X X X Extracts X X X X X X X X Extracts X X X X ..... , again the award would have to be enforced against all the parties. In other words, each of the Contractors would have to perform the obligations cast upon them - arbitration in the present case is an international arbitration. A perusal of some of the provisions of PSC would make it clear that all three entities are parties to the PSC. All three entities have rights and obligations under the PSC [see Article 28.1(a)], including with respect to the Cost Petroleum, Profit Petroleum and Contract Costs (see Article 2.2), all of which are fundamental issues in the underlying dispute. Where RIL acts under the PSC, including by commencing arbitration, it does so not only on behalf of itself, but also “on behalf of all constituents of the contractors” including Niko and BP - In any event, the neutrality of an arbitrator is assured by Section 11(1) of the Arbitration Act, 1996, which provides that a person of any nationality may be an arbitrator, unless otherwise agreed by the parties. There is no agreement between the parties in this case that even a third arbitrator must necessarily be an Indian national. In fact, Section 11(9) of the Arbitration Act, 1996 specifically empowers the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sharing Contract. One of the said blocks was Block KG-DWN-98/3 ( Block KG-D6 ). The joint bid made by the Petitioners No.1 and 2 for the Block KG-D6 was accepted by the UOI. Thereafter on 12th April, 2000, Production Sharing Contract (hereinafter referred to as PSC ) was executed between the Petitioners No.1 and 2 as Contractor on one side and UOI on the other. The Arbitration Agreement in the PSC is contained in Article 33. Relevant facts thereof, is in the following words: ARTICLE 33 SOLE EXPERT, CONCILIATION AND ARBITRATION 33.1 * * * 33.2 * * * 33.3 Subject to the provisions of this Contract, the Parties hereby agree that any controversy, difference, disagreement or claim for damages, compensation or otherwise (hereinafter in this Clause referred to as a dispute ) arising between the Parties, which cannot be settled amicably within ninety (90) days after the dispute arises, may (except for those referred to in Article 33.2, which may be referred to a sole expert) be submitted to an arbitral tribunal for final decision as hereinafter provided. 33.4 The arbitral tribunal shall consist of three arbitrators. Each Party to the dispute shall appoint one arbitrator a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow cost recovery of the expenditures incurred by the Contractor since the productions levels from the gas fields had fallen drastically. According to the Petitioners, all the disagreements and differences that have arisen between them and UOI will inevitably lead to serious problems in the working of the PSC. To resolve this dispute, lengthy correspondence ensued between Petitioner No.1 and the officers/representatives of Respondent No.1. 7. On 16th September, 2011, RIL (Petitioner no.1) wrote to the Respondent and pointed out that any attempt to disallow or to restrict cost recovery of expenditures incurred by the Contractor since the production levels from gas fields had fallen, would be contrary to the provisions of the PSC and, requested that no such action should be taken. There was no response to the aforesaid letter from the Respondent. 8. On 23rd November, 2011, Petitioner No.1 (RIL), through its Advocates, served upon the Respondent a notice invoking arbitration, in accordance with the arbitration agreement contained in Article 33 of the PSC. In this letter, Petitioner no.1 also nominated Mr. Justice S.P. Bharucha, former Chief Justice of India, as its arbitrator and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arisen between the Government and the Contractor overlooks the previous correspondence that the ensured (sic: ensued) between the parties * * * The underlying reason for all this appears to be disputes that have arisen between the Contractor and the DGH * * * The DGH, on its part has disagreed with the contractor inter alia on whether the factual; assertion that drilling of more wells would not augment the rate of production Annexure-I to the aforesaid letter listed some of the issues that have already arisen between the parties; which are as under: (I) Whether the FDP implies a commitment of the contractor to produce particular or at a particular rate? (II) Whether the FDP implies a commitment of the contractor to do a series of development activities even if there is a difference of opinion between the Government and the Contractor as to the efficacy of these activities? (III) Whether the FDP is revised pro tanto by WP B s from time to time approved by MC? (IV) Whether the variation between the costs proposed in the FDP and the actual cost can be a basis for disallowing Capex? (V) Is the recovery of cost related in any manner to the estimates o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etail. Finally, it is recorded as under:- In this regard, we have been instructed to state that any such purported attempt to unilaterally adjust any amounts as threatened or otherwise would be completely illegal and constitute a serious breach of the provisions of the PSC and that our client reserves all its right under the PSC, the Arbitration Act, and the UNCITRAL Arbitration Rules if the Government attempts to proceed to implement the purported decision threatened or otherwise. 14. The Petitioners by an equally detailed letter denied the claims made by the Respondent on 8th June, 2012. In paragraph 31 of the aforesaid letter, the Petitioners again called upon the Respondent to appoint an arbitrator forthwith (without raising any other procedural issues designed to delay the dispute resolution process) so that the vital project undertaken by the parties is not put in jeopardy on account of the continuing uncertainty. 15. In its letter dated 5th July, 2012, the Respondent makes a reference to the letter dated 2nd May, 2012 addressed to Contractors of the block KG-DWN-98/3 and to the letter dated 8th June, 2012 written by the Solicitors on behalf of Petitioner No.1 and sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.3 being based in Canada. Substantiating this submission, it was pointed out by Mr. Salve that each of the Petitioners is a party to the PSC, as defined under Article 28.1 of PSC; and each of the Petitioners comprise a Contractor , under Article 2 of PSC. 21. It was also submitted that Petitioner No. 1, as Operator, performs each and every function of the Contractor under the PSC on behalf of all the constituents of the Contractor, as defined under Articles 7.1 and 7.3 of the PSC. Mr. Salve mentioned that the Appendix C to the PSC provides accounting procedure which is required to be followed by the Contractor and the Government. Learned senior counsel also brought to our attention the accounting procedure that is required to be followed by the contractor and the Government. Sections 1.4.2 and 1.4.4 of Appendix C to the PSC indicate that the accounts are to be maintained by the Operator on behalf of the Contractors. On the basis of the aforesaid it was submitted that for the purpose of cost recovery, only one set of accounts, as opposed to three sets of accounts, has to be maintained. Thus, according to the submission, the award will affect the cost recovery under the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party may request the Chief Justice to take the necessary measures. The expression Chief Justice has been defined under subsection (12)(a) of Section 11 as the Chief Justice of India, in the case of an international commercial arbitration. In other arbitrations under Section 11(12)(b), it would be the Chief Justice of the High Court. It was then submitted that a procedure agreed to by the parties for appointment of arbitrator(s) is subject to Sub-section (6); it cannot override sub-section (6) and provide that in respect of a domestic arbitration, not-withstanding subsection( 12), the parties would only move the Chief Justice of India, or vice versa in the case of an international arbitration. On the basis of the aforesaid, it was submitted that the contention of the UOI that this Court has no jurisdiction to entertain the petition under Section 11(6) is misconceived. III. Re: Notice : 25. Further, it was stated that the Joint Operating Agreement entitles the Operator to initiate litigation on behalf of all the parties. It was also submitted that it is significant to note that there is inconsistency in the stand taken by the Respondent. On the one hand, Respondent claims th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g arbitrator since the arbitration was to be in accordance with UNCITRAL Rules. In this context, learned senior counsel relied upon the law laid in Antrix Corporation Limited Vs. Devas Multimedia Private Ltd 2013 (7) SCALE 216 (Para 34) , wherein it was inter alia held that the reference to such rules (ICC in that case) would include the process of constitution of a tribunal. 28. Mr. Salve also referred to the submission of the Respondent that the PSC being governed by the Indian law or/and that it involves the issues of public policy for India as irrelevant. The fact that a party nominee had to be from a neutral country establishes that the parties did not consider the governing law of the contract to be of any relevance to the nationality of the arbitrator. It was also submitted that the trend of appointing presiding arbitrator from a neutral nationality is now universally accepted under various arbitration rules as well as under the Arbitration Act, 1996. 29. Mr. Salve also pointed out that Article 33 (9) of the PSC adopts the UNCITRAL Rules for the arbitration Agreement and that at the time of signing the Arbitration Agreement the UNCITRAL Rules, 1976 were in force. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it deals with the PSC in offshore areas; and it deals inter alia with License and Exploration, Discovery, Development and Production of the most valuable natural resources, viz. petroleum products, including crude oil and/or natural gas. Propounding further, it was submitted that these products are vital to the survival of the nation. UOI entered into the PSC with Petitioners No. 1 and 2, with avowed objective of exploiting the aforesaid natural resources(s) in the most efficient, productive manner and in a timely fashion. The PSC, therefore, has great significance for the nation. It was also submitted that the entire subject matter of the contract is situated in India and hence, the applicable law is the Indian law for both the substantive contract and the Arbitration Agreement. 35. Placing strong reliance on the factual situation, it was submitted that the PSC, its interpretation, and its execution involve intricate and complex questions of law and facts relating to Indian conditions and Indian laws. It was further submitted that since the parties were aware about the aforesaid nature of PSC, they consciously refrained from having the requirement that the third arbitrator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or counsel also relies upon the letter dated 12th July, 2013, sent on behalf of Petitioner No.1 by its Solicitors to the Arbitrators. This letter was sent after the order dated 7th August 2012 was passed by this Court in A.P. No. 8 of 2012. According to the Respondents this letter also shows that the dispute is only between RIL and the Respondent. 40. Mr. Divan also submitted that Petitioners No. 2 and 3 have not conformed to Article 33 of the PSC, for the purposes of invoking arbitration. Such noncompliance cannot be considered as merely an omission. In the light of the aforesaid, it was submitted that Petitioner No.1, an Indian Company, is the only party to the dispute with the Respondents and therefore, there is no need to appoint a foreign arbitrator. Further, it was submitted even if it is assumed that Petitioners No. 2 and 3 have raised the disputes in terms of Article 33.6, there is no question of appointment of a foreign arbitrator as the dispute raised is only between two Indian parties, viz. Petitioner No.1 and the Respondents. 41. The next submission of Mr. Divan is that Section 11(1) of the Arbitration Act, 1996 provides that an arbitrator can be of any nationalit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contrary, it was submitted, appointment of a former judge of this Court would be the most suitable arrangement. 44. In response, Mr. Salve submitted that: (i) The reliance placed by the Respondents upon the law laid in Malaysian Airlines Systems BHD II Vs. STIC Travels (P) Ltd. (supra) and MSA Nederland B.V. Vs. Larsen Toubro Ltd. (supra) is misplaced as these cases are inapplicable in the present case. (ii) The contention of the UOI that nationals of the 80 countries in which Petitioner No. 3 has operations would become ineligible to be appointed as arbitrators is misconceived. In this context, it was submitted that the Arbitration Act, 1996 and the related international practices takes into account nationality but not area of operation. This submission of the Respondent, according to Mr. Salve, is not tenable because it confuses the question of independence and impartiality with neutrality. The aspect of neutrality is dealt with in Section 11(8) and Section 12; whereas, nationality is considered in Sections 11(1) (9) of Arbitration Act, 1996. Further, it was submitted that these two provisions would be rendered otiose if the submission of the UOI is accepted. 45. Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) reality of the Parties commercial relationship; (iii) application of the Arbitration and Conciliation Act, 1996; and (iv) UNCITRAL Arbitration Rules and the practise of large scale arbitrations involving foreign parties. 52. It is also not possible to accept the submission of Mr. Anil Divan that Niko and BP are not operators under the PSC and, therefore, have forfeited any right to operations under the PSC. It is also not possible to accept the submission that Niko and BP are not the parties to the dispute with the Respondent. I am of the considered opinion that the provisions of the PSC clearly identified the parties to the PSC. The disputes that have arisen between the parties are also clearly identified in the correspondence exchanged between the parties. The three named contractors are, in fact, frequently mentioned in the correspondence between the parties. It has been correctly highlighted by Mr. Salve that the terms of the PSC have to be considered in the light of the fact that the Respondent expressly consented, after detailed inquiry, to the assignment of participation interests in the PSC to BP. It is a matter of record that Niko has been a party to the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional arbitration. 55. It is equally not possible to accept the contention of Mr. Divan that Niko and BP have not raised any arbitrable dispute with Union of India. A perusal of some of the provisions of PSC would make it clear that all three entities are parties to the PSC. All three entities have rights and obligations under the PSC [see Article 28.1(a)], including with respect to the Cost Petroleum, Profit Petroleum and Contract Costs (see Article 2.2), all of which are fundamental issues in the underlying dispute. Where RIL acts under the PSC, including by commencing arbitration, it does so not only on behalf of itself, but also on behalf of all constituents of the contractors including Niko and BP. I am inclined to accept the submission of Mr. Salve that there is a significant and broad ranging dispute between RIL, Niko and BP on the one hand and the UOI on the other hand, that goes to the heart of the main contractual rights and obligations under the PSC. Furthermore, it is a matter of record that in the correspondence leading to the filing of the earlier petition being A.P.No.8 of 2012, no such objection about Niko and BP not being a party to the dispute had been taken. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nationality other than India. According to him, appointment of an Indian Arbitrator under Article 33.6 would not be an option open to the CJI. On the other hand, Mr. Divan emphasised that there is no requirement in Article 33.6 for appointment of a foreign arbitrator, identical or similar to the provision in Article 33.5. His view is that the absence of such a requirement is deliberate and significant. According to him, it clearly signifies that only an Indian National can be appointed as the third arbitrator. I am of the opinion that both the learned senior counsel are only partially correct. Both sides have adopted extreme positions on the pendulum. I accept the interpretation of both the learned senior counsel with regard to Article 33.5 as the request will go to the Chief Justice of India for appointment of an arbitrator, from amongst persons who are not nationals of the country of any of the parties to the arbitration proceedings . In exercise of the jurisdiction under Section 11(6), the CJI would usually appoint the third arbitrator in accordance with the request. I have no hesitation in accepting the submission of Mr. Divan that even the third arbitrator is an Indian Nation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Model Law which, addressing this question, provides simply: No person shall be precluded by reason of his nationality from acting as an arbitrator, unless otherwise agreed by the parties. Nevertheless, as stated above, the usual practice in international commercial arbitration is to appoint a sole arbitrator (or a presiding arbitrator) of a different nationality from that of the parties to the dispute. 61. Gary B. Born in International Commercial Arbitration, Volume I (2009) has an elaborate discussion on the impact of the UNCITRAL Model Laws as well as UNCITRAL Rules on the appointment of the sole or the third arbitrator. He points out that some arbitration legislations contain different nationality provisions, similar to those applicable under leading institutional rules, which apply when a national court acts in its default capacity to select an arbitrator (in limited circumstances). 62. Article 11(5) of the UNCITRAL Model Law reads as under:- A decision on a matter entrusted by paragraph (3) or (4) of this Article to the court or other authority specified in Article 6 shall be subject to no appeal. The court or other authority, in appointing an arbitrator, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AL Model Law provides that in appointing an arbitrator, [the court] shall have due regard to any qualifications required of the arbitrator by the agreement of the parties and to such considerations as are likely to secure the appointment of an independent and impartial arbitrator, the same provision requires the court to take into account as well as the advisability of appointing an arbitrator of a nationality other than those of the parties. This language requires courts to have due regard to the parties contractually specified requirements for arbitrators-which very arguably accords such requirements inadequate weight, given the importance of party autonomy in the arbitrator selection process. Similarly, it is doubtful that it is sufficient for courts merely to take [the arbitrator s nationality] into account , rather it should generally be essential that the presiding arbitrator have a neutral nationality. 66. Redfern and Hunter on International Arbitration, Fifth Edition (2009) at Page 263, expresses a similar opinion, after taking into consideration the UNCITRAL Rules; ICC Rules; LCIA Rules and ICDR Rules, which is as follows :- The fact that the arbitrator is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nominate the third arbitrator. In such circumstances, the Chief Justice or the nominees of the Chief Justice is required to appoint the third arbitrator in accordance with the Arbitration and Conciliation Act, 1996. At that stage, Section 11(9) of the Arbitration Act, 1996 would become relevant. It would be necessary for the Chief Justice of India to take into consideration the will of the Indian Parliament expressed in Section 11(9). It appears to me that the submission made by the Petitioners cannot be said to be without any merit. I am unable to read into Article 33.6, an embargo on the appointment of a foreign national as the third arbitrator as submitted by Mr. Divan. It is not possible to accept the submission that the parties have specifically decided to exclude the appointment of a foreign arbitrator under Article 33.6, as no specific provision was made para materia to Article 33.5. Even in the absence of a specific provision, the appointment of the third arbitrator under Article 33.6 would have to be guided by the provisions contained under Section 11(9) of the Arbitration Act. 70. I am also unable to accept the submission of Mr. Divan that since the provision contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f either of the parties to the dispute. 71. The aforesaid ratio of law in Malaysian Airlines Systems BHD II (supra) has been reiterated by this Court in MSA Nederland B.V. (supra) in the following words:- 3. The learned counsel appearing for the petitioner drew my attention to the fact that the petitioner Company is a company incorporated in the Netherlands while the respondent Company is a company incorporated in India. He prayed that in view of the provisions of Sections 11(9) of the Arbitration and Conciliation Act, an arbitrator having a neutral nationality be appointed, meaning thereby that the sole arbitrator should neither be a Dutch national nor be an Indian national. Section 11(9) is reproduced as under: 11. (9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities. The key word in the above provision is may which leaves a discretion in the Chief Justice or his nominee in this behalf and it is not mand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly paraphrased in Section 11(9) of the Arbitration Act, 1996. Rule 4 of UNCITRAL states that in making the appointment, the appointing authority shall have regard to such consideration as are likely to secure appointment of an independent and impartial arbitrator. Superimposed on those two conditions is a provision that the appointing authority shall take into account, as well, the advisability of arbitrator of a nationality other than the nationalities of the parties. These rules in my opinion are almost parallel to Article 33(5) of the PSC. 76. Mr. Anil Divan had, however, raised serious doubts about the impartiality of the third arbitrator due to the omnipresence of British Petroleum all over the world. I am of the considered opinion that the apprehension expressed by the learned senior counsel is imaginary and illusory. Such a proposition cannot possibly be accepted as a general practice for the appointment of Chairman/Presiding Officer/Third Arbitrator guided by the principle consideration that there must not only be the neutrality, but appearance of neutrality of the third arbitrator. In that view of the matter, I have no hesitation in rejecting this submission of Mr. Diva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply equally to the Union of India, if the third arbitrator is an Indian national, within the Indian jurisdiction. 79. The apprehension expressed by Mr. Divan that if a foreign national is appointed as a third arbitrator, the Tribunal would be at a disadvantage as all applicable laws are Indian, in my opinion, overlooks the fact that the two arbitrators already appointed are Former Chief Justices of India and can be very safely relied upon to advise the third arbitrator of any legal position, which is peculiar to India. 80. At this stage, normally the matter ought to be remitted back to the two arbitrators appointed by the parties to choose the third arbitrator on the basis of the observations made in the judgment. However, given the sharp difference of opinion between the two arbitrators, I deem it appropriate to perform the task of appointing the third arbitrator in this Court itself. Therefore, I had requested the learned senior counsel for the parties to supply a list of eminent individuals one of whom could be appointed as the third arbitrator. Although two lists have been duly supplied by the learned counsel for the parties, I am of the opinion, in the peculiar facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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