Arbiter decides but is the verdict out?

Judgement day

When I began this column as a conversation about legal issues that would be of interest to the general public, I realised that the public discourse on law in India bears mostly on weighty issues of constitutional law. The law of a country is, however, not confined only to the workings of its public institutions. A less sensationalist but an equally important part of law is the resolution of commercial disputes. An illustration of this domain is the arbitration dispute between Reliance Industries Ltd (RIL) and the Union Government over the extraction of natural gas, in which the Delhi High Court intervened a few months ago.

Arbitration in India is big business. Its birth is in tragedy, the abject failure of ordinary litigation in India. With civil disputes taking years to be decided, commercial arbitration took the place ceded to it by the judiciary. In commercial arbitration, parties refer their disputes to an independent third party who is less encumbered with the procedures and formalities of the traditional judicial system. In a manner of speaking, commercial arbitration is privatisation of justice. But there’s a catch; the courts can continue to intervene in arbitration awards on limited grounds allowed under the law. One can get through arbitration and emerge victorious but can still be defeated if the courts invalidate the arbitration award.

This is the reason the government is keen on ensuring that, as far as possible, arbitration awards should be tamper-proof, that once the award is out there, its judicial enforcement is mere formality. But around this idea has accreted complexity that has confounded many lawyers. The basic problem is that the law allows arbitration awards to be challenged on the basis of amorphous factors such as ‘public policy’, ‘justice’, ‘morality’, and ‘patent illegality’. Consider the case of public policy. I suppose public policy roughly equates to the public interest. But the concept of public interest is a category into which almost anything can be fitted.

In the RIL case, the legal issues were an interesting mix of commercial law and the law relating to exploitation of public resources. The Indian government has been trying to extract natural gas in the Krishna Godavari basin for some time but has had to rely on private investment to augment its efforts. The government leased out different parcels of land, some to private players like RIL, and some to public entities like ONGC. These private and public entities were extracting natural gas from parcels in one area. Nature does not follow artificial maps. Natural gas migrated from one parcel to another, in this case from the ONGC parcel to the RIL parcel. The question then was who had the right to the migrated gas.

The contract RIL signed with the government also had a provision on sharing of data on the gas flows in parcels. RIL did not share data appropriately. The government was of the opinion that RIL enriched itself unjustly by extracting the migrated gas and asked RIL to disgorge its enrichment. RIL disagreed and when the dispute went to arbitration, the Arbitral Tribunal was of the opinion that the non-sharing of data was not a deal-breaker and made an arbitration award in favour of RIL. The Union government challenged this award in the Delhi High Court. The court invalidated the award on the basis that it was patently illegal as, among other factors, RIL had not shared the data.

On what basis did the court decide that the arbitration award was patently illegal? It took recourse to the public trust doctrine to arrive at this conclusion. Under the Constitution, natural resources are held by the government in public trust. That it’s a public trust means the government must always be kept in the know and its permission sought when natural resources are being extracted by private parties. This public trust principle was enshrined both in the government hydrocarbon rules as well as in the government’s contract with RIL in the form of data-sharing obligations, the seriousness of which was denied by the Arbitral Tribunal. Hence, what the Tribunal denied was not merely illegal but patently so in light of the public trust doctrine.

I’m sure there will be an appeal to the Supreme Court. The tricky issue with such cases is that the patent illegality argument can become a gateway to the courts revisiting the arbitration award on its merits, which is exactly the kind of thing that results in delays of years and decades. We must be wary of being waylaid by the same kind of problems and complexity that besets litigation. If arbitration starts looking like litigation, the tragedy of litigation will end with the farce of arbitration.