In push for arbitration in India, one sector steps on the gas

The petroleum and natural gas ministry has told public sector companies to write in their contracts that arbitration will be according to Indian law, insisting on a provision that for long has been difficult to implement. The change begins in oil and gas, a sector more likely to be drawn into arbitration, and where companies are proving more amenable to the nudge.

 

This week, the central government sought from the Supreme Court time till November to file an expert committee’s report recommending reforms in the Indian Arbitration and Conciliation Act of 1996.

 

Arbitration happens when parties to a contract seek to avoid a court case and instead seek reconciliation mediated by an independent agency. It is a huge business with arbitration seats in the world’s financial capitals. Where arbitration is quick, investments follow.

Also Read: Process on amendment in Arbitration, Conciliation Act underway: Govt to SC

 

The ministry, in 2019, set up a three-member alternative dispute resolution committee under G C Chaturvedi, a former petroleum and natural gas secretary, to arbitrate disputes in the sector. The committee’s initial term of three years has been extended. The assumption is that till India’s arbitration system matures, the Chaturvedi committee will fill in. It will have 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 a notification from the ministry.

 

The ministry is pushing for arbitration in India as large disputes are settled outside. ONGC Videsh, in April, won a $190 million award against North Sudan in a dispute decided by a UK-based tribunal.

 

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

 

Sahai said domestic disputes routinely come for arbitration in India but international ones are hard to relocate.

 

Some cases in which Indian arbitrators are engaged concern oil transport from Russia and Iran, the two countries under international sanctions. If the two countries have disputes over payment terms with Indian oil refineries, there are few places for resolution.

 

“With Russian cargoes, it helps Moscow too…arbitration in many global locations could actually be non-starter legally, because of the current crisis and related sanctions,” said Suhaan Mukherji, partner at PLR Chambers, a law firm specialising in public policy and regulatory affairs. (Quote edited slightly)

 

The risk is that the case itself could be considered illegal or the sum realised from the award could be seized by a government. While these are supposed to be less significant cases for arbitration, they help volumes rise.

 

Madhukeshwar Desai, chief executive officer (CEO) of Mumbai Centre for International Arbitration (MCIA), has said: “2022 has been another good year of growth at the MCIA. Our caseload has increased by 20 percent over the previous year, and the total value of disputes under administration has crossed a billion USD.”

 

Energy sector accounts for 8 per cent of the total cases at MCIA.

 

The big test for Indian arbitration would be in disputes about revenue sharing arrangements in the energy sector. Previous cases, like those involving Reliance Industries Limited, Cairn and others, have been adjudicated abroad.

 

That happened because even though the Petroleum and Natural Gas Regulatory Board (PNGRB), which was set up in 2006, has the powers of a civil court but arbitration is not its remit. Arbitration cases are exceptions to the jurisdiction of the PNGRB, where the parties to the contract will be required to initiate arbitration proceedings. Section 24(1) of the PNGRB Act protects the rights of parties to opt for arbitration.

 

This is where problems have emerged. Once the parties choose arbitration as the mode of dispute resolution, the Arbitration and Conciliation Act, 1996 has to become applicable for such proceedings. But due to the perceived weakness of India’s arbitration system and civil courts interfering with awards, cases have moved abroad.

 

Challenges also emerge as India has not renewed bilateral investment treaties (BIT) with most key economies. As a result, when Cairn alleged breach of its investment rights as part of an older BIT between India and UK signed in 1994, the dispute lingered on.

 

A seven-member committee chaired by former law secretary T K Vishwanathan is expected to address some of these issues. It is expected to recommend ways in which arbitration centres in India can add volumes. A key requirement for that is those arbitration awards or the right to give awards should not be challenged all the way. Among other things the committee is expected to suggest changes in the law in order to enhance the arbitration process by reducing court intervention, improving cost-effectiveness, and ensuring timely resolution.

 

But the committee’s remit exempts the oil and gas sector. The ministry hopes its own committee for quick arbitration and nudging state-owned oil companies to opt for it will be like a carrot and stick. The favourable geo-economic business climate of the oil and gas sector for India is an added advantage to drive home to bring more arbitration cases onshore.