RIL's KG-D6 basin arbitration case highlights gaps in government's approach

The final outcome of all arbitral cases have gone in favour of the government; ironically, the finance ministry itself advised departments to exercise caution when challenging awards for larger cases

The  renewal of a dispute between the ministry of petroleum and natural gas and refining behemoth Reliance Industries Ltd (RIL) is yet another reminder that arbitration with the government is fraught territory in India, be it with state-owned enterprises, or the government itself. 

The dispute comes days after Vice President Jagdeep Dhankar said "Arbitral process in our country is just an additional burden to the normal hierarchical mechanism of adjudication." He added that "(while) I have seen in ten years, growth of arbitral centres with credibility in Dubai and Singapore ... We are not in the mind of people who are having commercial relationships with us if it is international commercial arbitration." He made the comments in his keynote address at a colloquium organised by India International Arbitration Centre in New Delhi. 

Arbitration happens when parties to a contract seek to avoid a court case, seeking instead a reconciliation mediated by an informed agency. It is a huge business globally with the seats usually located in the financial capitals of the world. Not a surprise that where arbitration works fast, investments follow suit. 

Countrywise data maintained by Unctad on arbitration cases show there have been 29 cases since 2003 (the year India’s amended Arbitration and Conciliation Act, 1996, came into force) where the Centre has been a respondent with companies in commercial disputes. In only one case - against White Industries - has the India government paid any damages. 

Arbitration issues ballooned in India following the Dabhol case, when nine arbitration cases were filed. Since then, there have been at least 20 more where the government of India has been the respondent (see list). These too happened as it was only in 1994 that the India government for the first time accepted that there had to be a clause for investment protection. A bilateral investment protection treaty was signed with the UK and Russia. 

The RIL case does not attract any of those provisions, as it is a dispute between two domestic entities — the other party to the case is ONGC, a government-run entity. But the seat of the arbitration was abroad, in Singapore. There is no list of cases where state-owned companies have engaged in arbitration with a private sector company. There is a third category of arbitration cases where state-owned companies have challenged government departments. A list from April 2017, and which hasn't been updated since, shows there were 45 such cases. 

From the data for all categories, it is clear that India Inc has never won any arbitration cases against either the government or a state-run entity, except the White Industries case against Coal India. The companies have not won even if they have got a favourable award from an arbitration panel as in the case of Vodafone or Vedanta where the government was directly involved. Companies like RIL in their dispute with the public sector have also been ineffectual. 

The RIL claim was triggered when the Indian government accused the KG-D6 Consortium, where RIL is the major partner, of being responsible for gas migration from ONGC’s adjacent blocks. An arbitration ruled in favour of RIL against the claim of approximately $1.55 billion. In May 2023, a single-judge bench of the Delhi High Court dismissed the Centre's challenge against the arbitral award. The government appealed to a division bench against the single judge bench award, successfully overturning the decision. In an exchange filing, RIL has noted that the ministry of petroleum and natural gas has now bumped up the demand to $2.81 billion. 

"There is no disincentive to not litigate," said a partner in one of India’s leading law firms. "Since there could be questions if a case is let go of, the mindset is to push the case along." 

Iornically, it ws the ministry of petroleum and natural gas that was one of the first to insist that public sector companies should mention in their contracts that arbitrations will be as per Indian laws. The idea was to promote India as a preferred destination for arbitration involving Indian interests. 

As early as in 2019, the same ministry had set up a three member alternative dispute resolution committee under GC Chaturvedi, former petroleum and natural gas secretary to arbitrate on disputes in the sector. But reflecting the differences, the term of committee, which had an initial term of three years, has been repeatedly extended. The committee was supposed to exercise the “powers and discharge all functions necessary for carrying out conciliation and mediation proceedings for resolution of the disputes between the parties as per the provisions of the Arbitration and Conciliation Act, 1996”, said the notification from the ministry.   

The difference between stated intent and actual implementation is the reason for the dismal score card on arbitration. The government has amended the (Indian) Arbitration and Conciliation Act, 1996, brought in Mediation Act, 2023 and in a landmark order of July 2024, the finance ministry has issued two landmark circulars in 2023 and 2024. In both of those it has advised departments to shut shop on small value arbitrations and exercise utmost caution when challenging awards for larger cases. Though it referred only to domestic arbitration cases it said that statistics show "in cases where the arbitration award is challenged, a large majority of cases are decided in favour of the contractor". Moreover, "in such cases the amount becomes payable with interest, at a rate which is often far higher than the government’s cost of funds". 

In the second circular the ministry has suggested that “Government or any Government entity or agency to frame schemes or guidelines for resolution of disputes through mediation or conciliation, and in such cases, a mediation or conciliation may be conducted in accordance with such schemes or guidelines”. 

Yet, “The ecosystem around moving arbitrations to India is yet to develop”, said Hemant Sahai, founder of law firm, HSA Advocates, which deals with several of these high profile arbitration cases involving Indian parties and those abroad.

Consequently, even though plenty of regulatory changes are apparently happening in the field of arbitration in India, old habits are yet to change. 

A way out could be to impose costs. "Section 31A of the Arbitration Act empowers tribunals to impose costs, yet its application remains inconsistent. Some arbitrators enforce it, others don’t—but almost none impose costs for misconduct or frivolous claims, perhaps wary of deterring future business," said Prashant Narang, researcher at the TrustBridge Rule of Law Foundation. 

He explains why courts are reluctant to apply this provision. “Ideally, judges should actively seek documentation of legal fees and expenses before awarding costs. Yet, in practice, cost imposition remains an exception, almost as rare as the death penalty. While discretion exists, consistent enforcement of cost provisions is crucial to deterring frivolous litigation. It’s time for a more uniform approach”. 

It is a position that the finance ministry too endorses, and could strongly impact the environment of arbitration against government entities in India.