Introduction
Minimum Judicial intervention in an arbitration proceeding ensures that disputes are resolved in an efficacious, speedy, and cost-effective manner. 'The Arbitration and Conciliation Act, 1996', (hereinafter, 'the 1996 Act'), is the cardinal law for Indian arbitration, follows the 'UNCITRAL Model Law on International Commercial Arbitration, 1985', and replaced 'the Indian Arbitration Act, 1940'. The 1996 Act follows the policy of minimum judicial intervention and does not have any provisions like sections 15 and 16 of the 1940 Act, which empowered the court to modify, correct or remit an arbitral award. Section 34 of the 1996 Act, in consonance with Article 34 of the Model Law, does not empower the court to modify the award while hearing a challenge to an award1 and limits the court's power to set aside arbitral awards, strictly in terms of the specific grounds enshrined therein.
It has been settled law that the scope of judicial interference by an appellate court is even more restricted under Section 37 of the 1996 Act than Section 34 of the 1996 Act and the Court cannot assess the evidence while exercising appellate power under Section 37 of the Act2. However, on 30.04.2025, the Constitution bench of the Hon'ble Supreme Court in the case of Gayatri Blasamy vs. M/s ISG Novasoft Technologies Ltd.3, expanded the scope of Court' Power under Section 34 and 37 of the 1996 Act and upheld that while exercising power under Section 34 and 37 of the 1996 Act, apart from setting aside the court can also partially modify the arbitral award.
On 27.01.2025, the Division Bench of the Hon'ble Delhi High Court (DHC), in Union of India (UOI) v. Reliance Industries Ltd. (RIL)4, the court while dealing an appeal against arbitral award under Section 37 of the 1996 Act, set aside the arbitral award and upheld the illegality of gas extraction from an adjacent block owned by the Oil and Natural Gas Corporation (ONGC) as unjust enrichment and against the 'Public Trust Doctrine'. This article analyses the judgment of the Hon'ble DHC in UOI vs. RIL5, limited to the scope of the court's power to set aside the arbitral award under Section 37 of the 1996 Act. The Power of the Court to partially modify the award is not the subject of analysis of this Article.
Brief Facts of the Case
A Production Sharing Contract (PSC) dated 12.04.2000 was executed between the UOI and a consortium led by RIL (90%) and Niko Limited (10%), for the exploration and extraction of petroleum from Block KG-DWN-98/3 (the "RIL's Block") in the Krishna-Godavari Basin. Later, RIL transferred its partial interest in the PSC to British Petroleum Exploration Limited (BPEL). There were other blocks adjacent to the Reliance Block, which was operated by ONGC (KG-OS-IG) and Kairn Energy India Limited (KG-DWN-98/2).
In 2013, ONGC alleged that gas reservoirs in ONGC's block and the RIL's Block were interconnected, and gas migrates from ONGC's block to RIL's block, leading to alleged unjust enrichment by RIL. The DeGolyer & MacNaughton (D&M), a third party, vide its report dated 19.11.2015 confirmed the connectivity and continuity of the reservoirs across the blocks operated by ONGC and RIL. D&M also submitted a report confirming the connectivity of reservoirs in 2003, which was not informed by RIL to UOI.
UOI constituted a single member committee of the Hon'ble Mr. Justice A.P Shah for future action considering the D&M report dated 19.11.2015. The Shah Committee submitted its report on 29.08.2016. The UOI, based on the D&M and Shah Committee reports, issued a demand notice of USD 1.552 billion to RIL for additional cumulative Profit Petroleum without their consent till 31.03.2016 as unjust enrichment.
Subsequently, RIL invoked arbitration under Article 33 of the PSC, seeking declarations that it had lawfully produced all hydrocarbons from its contract area, including any migrated gas, and that it had complied with all PSC obligations. UOI counterclaimed, alleging breach of contract, suppression of material reports, and unjust enrichment.
The Arbitral tribunal passed an award dated 24.07.2018 declaring that there was connectivity of reservoirs, however there was no express prohibition against RIL from extracting the migrated gas within the contract area/development area and therefore RIL was not unjustly enriched. Arbitral Tribunal also upheld that suppression of D&M report 2003 by RIL was not a material breach.
UOI filed a Section 34 application challenging the award, which was dismissed by the single bench of the Hon'ble DHC vide order dated 09.05.2023 on the ground that the arbitration was an 'International Commercial Arbitration' and therefore the ground of 'patent illegality' is not available to interfere with the arbitral award. The decision of the Single bench dated 09.05.2023 was further challenged by the UOI under Section 37 of the 1996 Act.
Arguments by parties
UOI argued that RIL failed to disclose the D&M 2003 report as required under Article 26.1 of the PSC, which was a material breach and prevented UOI from exercising its rights, including ordering joint development of blocks. The arbitral award recorded the obligation of the RIL to disclose but failed to treat it as a material breach. Therefore, the arbitral award suffers from patent illegality. UOI claimed RIL was unjustly enriched by extracting and selling gas that migrated from ONGC's block. UOI further contended that natural gas is a vital national resource held in trust by the State under Article 297 of the Constitution and therefore extraction and sale of migrated gas without explicit permission violated the Public Trust Doctrine and against the public policy of India. UOI argued that the dispute involved public law and public policy issues, therefore the same is non-arbitrable.
RIL submitted that the dispute arose out of PSC therefore the same is arbitrable. However, as the arbitration was an international commercial arbitration, there is no scope for judicial interference. RIL argued that the PSC permitted extraction of all hydrocarbons within the contract area, regardless of migration, unless the government expressly ordered joint development or otherwise restricted operations. Neither PSC nor UOI prohibits producing migrated gas from other blocks. RIL argued that UOI had sufficient data to infer connectivity between reservoirs and therefore suppression of the D&M 2003 report was immaterial. Notwithstanding the earlier argument, all profits were shared with UOI and therefore there was no unjust enrichment on the part of RIL.
Findings of the Court
The Hon'ble Division Bench of DHC before interfering with the Arbitral award and the decision of the Single Judge determined what would be the scope of judicial interference under Section 37 of the 1996 Act. The Hon'ble Division Bench of DHC after discussing multiple cases upheld that Arbitral Award is not liable to be interfered with unless the same is patently illegal and contrary to the substantive provision of law or contrary to any provision of the Act or contrary to the terms of the Contract/Agreement6.
The Hon'ble Division Bench of DHC held that the arbitration was a domestic arbitration because RIL is an Indian entity and was the sole claimant. Niko Limited was not the party to the arbitration proceeding. Therefore, the ground of "patent illegality" could be invoked. The Hon'ble Division Bench of DHC judgment draws upon several Supreme Court decisions to clarify the Scope of patent illegality. In ONGC Ltd. v. Saw Pipes Ltd.7, the Hon'ble Supreme Court held that an error of law apparent on the face of the award or a finding of fact that is patent and easily demonstrable can amount to patent illegality. In Associate Builders v. DDA8, the Hon'ble Supreme Court held that patent illegality could be divided into three sub-heads: (a) contravention of substantive law, (b) contravention of the 1996 Act, and (c) contravention of the contract. In Ssangyong Engg. & Construction Co. Ltd. v. NHAI9, the Hon'ble Supreme Court, held that patent illegality must go to the root of the matter and not be a mere erroneous application of law and reappreciation of evidence is not permitted under this ground.
The question before the Hon'ble Court was whether the arbitral award was patently illegal. The dispute involves a natural resource; therefore, it attracts the applicability of the provisions of Article 297 of the Constitution of India, 'public policy in India', 'public law' and 'Public Trust Doctrine'.
The Court in the case of M.C. Mehta v. Kamal Nath10 defines 'Public Trust Doctrine' as "25. The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature, they should be made freely available to everyone irrespective of the status in life. The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit their use for private ownership or commercial purposes...Thus, the public trust is more than an affirmation of State power to use public property for public purposes. It is an affirmation of the duty of the State to protect the people's common heritage of streams, lakes, marshlands and tidelands, surrendering that right of protection only in rare cases when the abandonment of that right is consistent with the purposes of the trust...."
'Public Trust Doctrine' is a public doctrine and holds UOI as fiduciary and a trustee of natural resources and is under a legal duty to protect the natural resources. Therefore, Article 297(5) of the Constitution of India prohibits the use of natural resources without express permission of the UOI. Therefore, Court held that the RIL' act to produce migrated gas without explicit permission of UOI is in violation of Article 297 and therefore against the 'Public Trust Doctrine' and the fundamental policy of Indian law. The Court held that RIL's actions resulted in unjust enrichment at the expense of the public exchequer, as the gas belonged to the UOI as trustee for the people of India. Further, silence or inaction by UOI could not be construed as permission and the arbitral tribunal's view that RIL could continue operations in the absence of a government order was not a possible view in law, given the statutory and constitutional framework.
Court Further upheld that RIL was in breach of Article 26.1 of the PSC by failing to disclose the D&M 2003 report, which amounts to material breach. The finding of the arbitral tribunal that breach was not material went to the root of the matter and constituted patent illegality.
Conclusion
The aforesaid DHC's judgment harmonizes the principle of minimum judicial interference with the principle of judicial discretion, if justice requires so. The Hon'ble DHC judgment made a balance between commercial disputes and sovereign rights over natural resources. It reemphasizes that the 'Public Trust Doctrine' is also applicable to commercial disputes pertaining to use of natural resources as the doctrine creates the trust of natural resources in the State and bound a constitutional duty on State to use those natural resources as enshrined in Article 297 of the Constitution of India. Therefore, the State's fiduciary responsibility as custodian of natural resources is a part of the broader public policy of India, basis which the arbitral award could be set aside.
The Judgment had given additional limb to the scope of 'patent illegality' to set aside the arbitral award. Recently, the Hon'ble Supreme Court expanded the scope of Court' Power under Section 34 and 37 of the 1996 Act and allowed court to partially modify the arbitral award11, therefore it would be interesting to see how Judiciary extends its interference in commercial disputes involving natural resources extraction, contractual autonomy, and sovereign rights of the State.
I believe that the Hon'ble DHC judgment should not be applied universally to all disputes involving natural resources. Rather, the same should be scrutinized in the context of Agreement signed between parties and other breach of the Agreement. In this Judgment also the Court found that the arbitral award was patently illegal and liable to be set aside not solely on the ground of utilization of migrated gas without express consent but also considered the material breach by RIL in not disclosing the D&M report 2003 to UOI. Therefore, future cases involving disputes pertaining to natural resources should be decided on their own merit.
Footnotes
1. NHAI vs. M. Hakeem, 2021 SCC OnLine SC 473
2. ADTV Communication Pvt. Ltd. v. Vibha Goel, 2018 SCC OnLine Del 8843
3. Gayatri Blasamy vs. M/s ISG Novasoft Technologies Ltd. 2005 INSC 605
4. Union of India v. Reliance Industries Ltd., 2025 SCC OnLine Del 841
5. Union of India v. Reliance Industries Ltd., 2025 SCC OnLine Del 841
6. Delhi Metro Rail Corporation v. Delhi Airport Metro Express Pvt. Ltd., (2024) 6 SCC 357; Punjab State Civil Supplies Corporation Limited v. Sanman Rice Mills, 2024 SCC OnLine SC 2632; and MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163
7. ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705
8. Associate Builders v. DDA, (2015) 3 SCC 49
9. Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131
10. M.C. Mehta v. Kamal Nath, (1997) 1 SCC 388
11. Gayatri Blasamy vs. M/s ISG Novasoft Technologies Ltd. 2005 INSC 605
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