BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
Rolls Building, Fetter Lane, London, EC4A 1NL
B e f o r e :
| 1. RELIANCE INDUSTRIES LIMITED
2. BG EXPLORATION AND PRODUCTION INDIA LIMITED
|- and -
|THE UNION OF INDIA
Mr Vernon Flynn QC, Mr David Wolfson QC and Mr Damien Walker (instructed by Dentons UKMEA LLP) for the Defendant
Hearing dates: 5, 6 & 7 February 2018
Crown Copyright ©
Mr Justice Popplewell:
The PSC terms in outline
The arbitration proceedings in outline
(a) A "Final Partial Consent Award" dated 29 July 2011 (the "Consent Award"). This recorded in particular the ad hoc agreement of the parties that London was to be the seat of the arbitration.
(b) A "Final Partial Award on Arbitrability" dated 12 September 2012 (the "Arbitrability Award"). In this award the Tribunal determined that certain specific matters whose arbitrability had been challenged were arbitrable. The Claimants contend that this award was more wide-ranging in a respect which is relevant to Challenge 6.
(c) A "Final Partial Award on Issues B, C and D of the May 2012 Issues" dated 10 December 2012 (the "CRL Award"). The CRL Award concerned, among other things, how the CRL cap was to operate on recovery of Development Costs by the Claimants as a matter of the true construction of Article 13.1 of the PSCs. It is important in relation to some of the challenges raised in these proceedings and is accordingly described in more detail below. The CRL Award was made by a majority of the Tribunal; Justice BP Jeevan Reddy also published a Dissenting Final Partial Award on Issues B, C and D.
(d) A "Final Partial Award" dated 12 October 2016 (the Award). This is the award being challenged in these proceedings. The Award was issued after four hearings, in November 2013, September 2014, November 2014 and October 2015. In some respects it is a majority award, with dissenting awards being written by Mr Leaver or Justice B. Sudershan Reddy respectively on certain issues. The dissents were contained in a Dissenting Opinion of Mr Leaver dated 29 September 2016 (the "Leaver Dissent") – which was itself accompanied by an Addendum dated 3 October 2016 – and the Dissenting Opinion of Justice Reddy dated 3 October 2016 (the "Reddy Dissent"). The dissents do not relate to the same issues, which is why the findings in the Award are always those of at least the majority.
(e) A "Final Partial Award" dated 11 January 2018, disposing of disputes relating to certain audit exceptions.
Challenge 1: the meaning of "Development Costs" in the Investment Multiple
The legal framework
(1) "A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award.
A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).
(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant—
(a) failure by the tribunal to comply with section 33 (general duty of tribunal);
(b) the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction: see section 67);
(c) failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties;
(d) failure by the tribunal to deal with all the issues that were put to it;
(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may—
(a) remit the award to the tribunal, in whole or in part, for reconsideration,
(b) set the award aside in whole or in part, or
(c) declare the award to be of no effect, in whole or in part.
The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration.
(1) "The tribunal shall—
(a) act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting his case and dealing with that of his opponent, and
(b) adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay or expense, so as to provide a fair means for the resolution of the matters falling to be determined.
(2) The tribunal shall comply with that general duty in conducting the arbitral proceedings, in its decisions on matters of procedure and evidence and in the exercise of all other powers conferred on it."
(1) "In order to make out a case for the Court's intervention under s. 68(2)(a), the applicant must show:
(a) a breach of s. 33 of the Act; i.e. that the tribunal has failed to act fairly and impartially between the parties, giving each a reasonable opportunity of putting his case and dealing with that of his opponent, adopting procedures so as to provide a fair means for the resolution of the matters falling to be determined;
(b) amounting to a serious irregularity;
(c) giving rise to substantial injustice.
(2) The test of a serious irregularity giving rise to substantial injustice involves a high threshold. The threshold is deliberately high because a major purpose of the 1996 Act was to reduce drastically the extent of intervention by the courts in the arbitral process.
(3) A balance has to be drawn between the need for finality of the award and the need to protect parties against the unfair conduct of the arbitration. In striking this balance, only an extreme case will justify the Court's intervention. Relief under s. 68 will only be appropriate where the tribunal has gone so wrong in its conduct of the arbitration, and where its conduct is so far removed from what could be reasonably be expected from the arbitral process, that justice calls out for it to be corrected.
(4) There will generally be a breach of s. 33 where a tribunal decides the case on the basis of a point which one party has not had a fair opportunity to deal with. If the tribunal thinks that the parties have missed the real point, which has not been raised as an issue, it must warn the parties and give them an opportunity to address the point.
(5) There is, however, an important distinction between, on the one hand, a party having no opportunity to address a point, or his opponent's case, and, on the other hand, a party failing to recognise or take the opportunity which exists. The latter will not involve a breach of s. 33 or a serious irregularity.
(6) The requirement of substantial injustice is additional to that of a serious irregularity, and the applicant must establish both.
(7) In determining whether there has been substantial injustice, the court is not required to decide for itself what would have happened in the arbitration had there been no irregularity. The applicant does not need to show that the result would necessarily or even probably have been different. What the applicant is required to show is that had he had an opportunity to address the point, the tribunal might well have reached a different view and produced a significantly different outcome."
"Whilst the wording of paragraph 3(ii) of Appendix D appears to accord with the purpose of the IM [Investment Multiple] as submitted by the Claimants, there is a fundamental difficulty in construing the wording in such manner. That difficulty is the actual outcome (i.e. the 'net effect') were the IM to be calculated by taking into account the entire Development Costs (i.e. uncapped by the CRL) as opposed to taking into account only that part of the Development Costs which is recoverable under Article 13 of the PSCs (i.e. capped by the CRL)."
(a) The definition of Profit Petroleum in Article 1.69, from which it was said to follow that "all Petroleum which is not Cost Petroleum is Profit Petroleum (i.e. profit) available for sharing" and that "[a]ccordingly, Petroleum that is not Cost Petroleum cannot be used to recover costs. It cannot because it is profit".
(b) Article 13.1 of the PSCs, by which the Contractor agreed it was "entitled to recover Contract Costs out of the total volume of Petroleum produced and saved from the Contract Area in each Financial Year in accordance with the provisions of this Article, and, in respect of sole risk or exclusive operations, Article VII of the Operating Agreement". The majority considered this to show that recovery under Article 13 was the only means for the Contractor to recover its costs, which meant that Profit Petroleum "cannot be used to recover costs".
(c) Article 7.3(a) of the PSCs states that "[t]he Contractor shall: …except as otherwise expressly provided in this Contract, conduct all Petroleum Operations at its sole risk, cost and expense and provide all funds necessary for the conduct of Petroleum Operations…". The Tribunal reasoned that it followed that the Contractor was only entitled to recover such expenses under the provisions in the PSCs; the PSCs provided at Article 13 for the recovery of Development Costs only to the extent that they fell beneath the CRL cap; therefore the Contractor could not put Profit Petroleum towards otherwise unrecoverable Development Costs.
(a) the Tribunal reached its conclusion because it perceived a "fundamental difficulty" with the "actual outcome (i.e. the 'net effect')" which would be created if the Claimants' interpretation were adopted;
(b) the concept of the "net effect" was a new point introduced by the Tribunal, as Mr Leaver pointed out at paragraph 30 of his dissenting award;
(c) what the Tribunal has done is seriously unfair to the Claimants because they had no opportunity to address in argument the reasoning which was fundamental to the conclusion; the essential part of the majority's reasoning which underlay each of the "three factors" was that Profit Petroleum could not be used to recover Development Costs, which was not an argument advanced at any stage: the Government had never suggested that the Contractor could not use its share of Profit Petroleum towards the recovery of Development Costs; although the Tribunal asked questions after the closings which led to a further hearing, it did not do so on this point; Mr Leaver drew attention to the reasoning being new in his dissenting award, which was provided to the Tribunal before the Award was published, but that did not prompt the Tribunal to give the parties any opportunity to make further submissions on the point;
(d) this represented a failure by the majority (a) to act fairly, giving each party a reasonable opportunity of putting its case and (b) to act in accordance with the procedure agreed between the parties, on the basis that Article 15(1) of the UNCITRAL Rules obliged the Tribunal to give the Claimants a "full opportunity" to present their case;
(e) accordingly, the Claimants say, there was a serious irregularity causing substantial injustice to the Claimants within section 68(2)(a) or (c) of the 1996 Act, and they seek to set aside the passages in the Award expressing this reasoning, and the conclusion based on it, under s. 68(3)(b), or to have them declared to be of no effect under s. 68(3)(c) or remitted for reconsideration under s. 68(3)(a).
"On balance, I reject the suggestion that the Tribunal reached that conclusion as a result of a serious irregularity. It cannot be irregular for a Tribunal to consider the pleaded contractual basis of a claim and reject it as a matter of construction. True it is that the defendant did not expressly plead the construction point, but since the claimant was relying on clause 27.3, it always retained the responsibility to ensure that its claim did indeed arise under that clause."
(a) The Vimeira  2 Lloyd's Rep 66, 76) in which Ackner LJ (as he then was) said:
"The essential function of an arbitrator … is to resolve the issues raised by the parties. The pleadings record what those issues are thought to be and, at the conclusion of the evidence, it should be apparent what issues still remain live issues. If an arbitrator considers that the parties or their experts have missed the real point … then it is not only a matter of obvious prudence, but the arbitrator is obliged, in common fairness or, as it is sometimes described, as a matter of natural justice, to put the point to them so that they have an opportunity of dealing with it.
…the adequacy of the turning area was not at the conclusion of the evidence - even though it was a possible issue at the commencement of the arbitration - any longer a live issue. The arbitrators clearly thought otherwise. They should have so informed the parties.…"
(b) Zermalt Holdings SA v Nu-Life Upholstery Repairs Ltd  2 EGLR 14, 15, in which Bingham J (as he then was) said:
"If an arbitrator is impressed by a point that has never been raised by either side, then it is his duty to put it to them so that they have an opportunity to comment. If he feels that the proper approach is one that has not been explored or advanced in evidence or submission, then again it is his duty to give the parties a chance to comment. If he is to any extent relying on his own personal experience in a specific way then that again is something that he should mention so that it can be explored. It is not right that his decision should be based on specific matters which the parties have never had the chance to deal with. Nor is it right that a party should first learn of adverse points in a decision against him. That is contrary both to the substance of justice and to its appearance."
"These principles apply to unargued points of law or construction as they do to unargued questions of fact. In such cases, whilst it is not necessary for the tribunal to refer back to the parties each and every legal inference which it intends to draw from the primary facts on the issues placed before it, the tribunal must give the parties "a fair opportunity to address its arguments on all of the essential building blocks in the tribunal's conclusion" (ABB AG v Hochtief Airport  2 Lloyd's Rep 1, paragraph 72)."
(a) The references by the Tribunal to the concepts of "actual outcome" and "net effect" were not, on a fair reading of the Award, references to the commercial consequences of the Claimants' construction, but to the "fundamental difficulty" in adopting that interpretation because it was incompatible with the other terms of the PSCs; what the Tribunal was doing was part of the iterative process of contractual interpretation which involved taking into account other provisions of the PSCs. That is a normal and legitimate process of construction which was part and parcel of the architecture of the rival submissions and of which the experienced advocates on both sides must have been fully aware.
(b) The other terms of the PSC upon which the Tribunal relied were all in play on this issue and had been addressed in argument:
(i) Article 1.69 was referred to by both parties in relation to Issue 1, as is recorded in paragraphs 5.1(a), 5.3 and 5.6(e) of the Award. It was the subject of submissions by Mr Ganguli SC for the Government in support of his argument about the construction of "Development Costs". The Claimants submit that the Government did not specifically argue that Profit Petroleum could not be used to recover Development Costs exceeding the CRL because it was profit, but that is not sufficient to give rise to a serious irregularity. What must be "in play" is not the specific analysis adopted by the Tribunal, but the building blocks of that analysis, i.e., here, the definition of Profit Petroleum in Article 1.69. Plainly both parties had the opportunity to address the Tribunal on what effect, if any, Article 1.69 should have on the meaning of "Development Costs".
(ii) Article 13.1 was obviously central to the issue of construction in Issue 1, and was recorded by the Tribunal as being relied upon in both sides' submissions on the issue. Again the Claimants had a fair opportunity to address the effect of Article 13.1 on the rival constructions on this issue.
(iii) As to Article 7.3(a), Mr Flynn took me to a number of references to this Article (in particular at paragraphs 3.3, 5.6 and 10.6) in sections of the Government's Defence of 31 January 2012 which were concerned with the overall scheme of the PSCs. Those sections are entitled "PSCs are subservient to the Constitutional mandate", "Salient Features and Workings of the Tapti PSC" and "Salient Features and Workings of the Panna-Mukta PSC". It was also referred to in a section of the Defence headed "Accounting of Development Cost in excess of CRL", in which it was pleaded that expenditure incurred above the cap would be borne by the Claimants by virtue of Article 7.3(a). Mr Milligan objected that Article 7.3(a) had not been referred to as relevant to Issue 1 and that in the context of long and multi-faceted arbitral proceedings it would be difficult for the Claimants to have in mind every reference to a particular provision of the PSCs that had been made, however minor and in whatever context. However Article 7.3(a) had been relied upon as part of the essential contractual scheme of the PSCs as a whole, not merely en passant in relation to a discrete and isolated issue. According to paragraph 24.3(a) of the Award, Article 7.3 was referred to as the "backbone of the contract" in submissions on 20 November 2014. It is important to keep in mind that although the Tribunal separated the issues into 69 numbered issues, the parties did not address their submissions on this basis. Issue 1 was not isolated as an issue on which the parties made specific discrete submissions in a way which would have entitled them to assume that no other aspects of the parties' submissions might have a bearing on it. Each side must necessarily have been required to be alert to the consequences of arguments addressed in one context applying in another, and the intellectual ability to do so was not beyond the means of the Claimants' experienced legal team. Article 7.3(a) can therefore properly be described as in play.
(iv) Article 34.5 was referred to by the Government in relation to this issue and was plainly "in play" before the Tribunal.
Challenge 2: Notional Income Tax rate
"In determining the amount of notional income tax to be deducted in the applicable cash flows specified in paragraph 2 of this Appendix, a notional income tax liability in respect of the Contract Area shall be determined for each Company, as if the conduct of Petroleum Operations by the Company in the Contract Area constituted the sole business of the Company and as if the provisions of the Income Tax Act, 1961, with respect to the computation of income tax at a fifty percent (50%) rate applicable to Petroleum Operations on the basis of the income and deductions provided for in Article 15 of this Contract were accordingly applicable separately to the Contract Area, disregarding any income, allowances, deductions, losses or set-off of losses from any other Contract Area or business of the Company."
"9.6. In the Tribunal's view, when calculating the Investment Multiple, the income tax rates actually applicable to the Companies are to be applied. It has been the Claimants' submissions – albeit in the context of determining the scope of Development Costs to be used when calculating the IM – that "[t]he purpose of the [Investment Multiple] is to increase the Government's share of Profit Petroleum as the Contractor's profitability increases (i.e. as the returns on investment from the Fields grow beyond the costs required to develop them)" and that "[i]n simple terms, the more profitable the production becomes, the greater the Government's share of the profits". The Respondent has also submitted that the IM is a post-tax profitability rate similar to the post-tax Rate of Return which is used to evaluate the actual profitability of one project on a standalone basis. The Tribunal in light of the aforesaid submissions from Parties accepts therefore that the purpose of the Investment Multiple is to reflect the profitability of each of the PSCs. It follows, in the Tribunal's view, that the Investment Multiple must necessarily reflect how profitable each of the PSCs is in actual terms. Otherwise, the IM would not be able to serve as an indicator of each of the PSCs' profitability and the IM could not fulfil its "purpose [namely] to increase the Government's share of Profit Petroleum as the Contractor's profitability increases". It necessarily follows that in the event "the Contractor's profitability increases" because of an actual income tax rate which is lower than 50%, this must result in an "increase [of] the Government's share of Profit Petroleum".
9.7. As regards the reference to "50%" in paragraph 7 of Appendix D, the Tribunal considers that the wording of paragraph 7 of Appendix is not clear. Paragraph 7 of Appendix D provides as follows:
"In determining the amount of notional income tax to be deducted in the applicable cash flows specified in paragraph 2 of this Appendix, a notional income tax liability in respect of the Contract Area shall be determined for each Company, as if the conduct of Petroleum Operations by the Company in the Contract Area constituted the sole business of the Company and as if the provisions of the Income Tax Act, 1961, with respect to the computation of income tax at a fifty percent (50%) rate applicable to Petroleum Operations on the basis of the income and deductions provided for in Article 15 of this Contract were accordingly applicable separately to the Contract Area, disregarding any income, allowances, deductions, losses or set-off losses from any other Contract Area or business of the Company" (emphases added by the Claimants in their December 2012 Submissions).
In the Tribunal's view, the above provision does not refer to a notional income tax rate of 50% as contended for by the Claimants. This provision only refers to a "notional income tax liability" (emphases added by the Tribunal). Whether this however also reflects an agreement between the parties to the PSCs on a notional income tax rate is open and as a matter of construction, needs to be determined.
9.8 The Tribunal is of the view that, as a matter of construction and as the provisions of the PSCs provide no further clarity or guidance as to whether the parties to the PSCs agreed a notional income tax rate of "50%", it is appropriate to consider the pre-contractual negotiations and documents exchanged between the Parties prior to their entering into the PSCs. In this regard, the Tribunal notes it is now agreed that the income tax rate actually applicable at the time the PSCs had been entered into, was 50%. This appears to suggest that the reference to "50%" in paragraph 7 of Appendix D was a reference to the income tax rate actually applicable and was not meant to notionally fix the rate. If the Parties had intended to agree on such a notionally fixed rate, there would have been some documents on the record showing the Parties actually negotiated a notionally fixed rate. However, there is none and the Claimants have not referred the Tribunal to any documents which support their assertion that the Parties negotiated and agreed a notionally fixed rate. In fact, the Claimants in their "Final Fiscal Proposal: Tapti" stated clearly that:
(l) In the event the income tax rate reduces below 50%, then the lower rate shall be applicable.
There is nothing on the record showing that the Claimants, after they had made the above Final Fiscal Proposal in respect of Tapti, amended the basis of the above offer by instead proposing a notionally fixed rate of 50%. In these circumstances and absent any evidence to the contrary, the Tribunal accepts the Respondent's submission that the Claimants did offer in their Final Fiscal Proposal that "in the event the income tax rate reduces below 50%, then the lower rate shall be applicable", an offer which the Respondent accepted.
9.9. Against this background, the Tribunal is satisfied that the reference in paragraph 7 of Appendix D is merely an illustration of the actually applicable income tax rate which, at the time the PSCs had been entered into, was 50%.
(Emphasis and use of italics for quotations in original; citations omitted)
"3.7 The Respondent in its submission that the CRL requires the completion by the Claimants of all the works set out in Appendix G of the PSC relied to a large extent in support of this submission on the pre-contractual correspondence and documentation.
3.8. Although the pre-contractual correspondence and documentation provides part of the factual background to the conclusion of the PSC, the Tribunal cannot accept the Respondent's submission that it is permissible to construe the PSC by reference to the earlier correspondence and documentation. The PSC is the agreement between the parties and its true construction must be found within the four corners of the document. That is the case in both Indian and English law, and, the case is a fortiori where, as in the PSC, there is in Article 34 an Entire Agreement provision. Article 34.1 provides:
"This Contract supersedes and replaces any previous agreement or understanding between the Parties, whether oral or written, on the subject matter hereof, prior to the Effective Date of this Contract.""
(Italics in original)
"…subject to limited exceptions, the tribunal no longer has power to review or reconsider the subject matter of the award. There is a longstanding rule of common law that when an arbitrator makes a valid award, his authority as an arbitrator comes to an end, and, with it, his powers and duties in the reference: he is then said to be functus officio…".
(a) it exceeded its powers under s. 68(2)(b), for the same reasons as relied on for the lack of substantive jurisdiction challenge: in light of the CRL Award the Tribunal no longer had a power to rely on pre-contractual negotiations;
(b) alternatively, even if the Tribunal's recourse to pre-contractual negotiations did not constitute an excess of powers, the Tribunal should at the very least have warned the Claimants that it proposed to depart from the terms of paragraph 3.8 of the CRL Award, particularly given that the Claimants' case in this context was founded squarely on paragraph 3.8. Its failure to give the Claimants such a warning is said to be an irregularity under s. 68(2)(a) or (c) on the basis that it deprived the Claimants of a reasonable and/or a full opportunity to present their case.
(a) S. 68(2)(b) is only engaged when the tribunal has purported to exercise a power that it did not have, rather than making an error of law, arriving at the wrong conclusion as a matter of fact, or erroneously exercising a power which it did have: Lesotho Highlands Development Authority v Impreglio SpA  UKHL 43 per Lord Steyn at , ,  and . In B v A  EWHC 1626, Tomlinson J confirmed at  that s. 68(2)(b) is likewise not engaged by an alleged misapplication of foreign law. In order to decide whether s. 68(2)(b) is engaged, it is necessary to focus intensely on the particular power which is involved: Lesotho per Lord Steyn (with whom Lords Hoffmann, Scott and Rodger agreed) at  and . The Tribunal plainly had the power to determine the notional tax issue and, for that purpose, to determine whether particular pieces of evidence were admissible. In particular:
(i) Article 25(6) of the UNCITRAL Rules provides that "[t]he arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence offered".
(ii) Section 34(1) of the 1996 Act provides that "[i]t shall be for the tribunal to decide all procedural and evidential matters, subject to the right of the parties to agree any matter".
(b) Paragraph 3.8 of the CRL did not purport to and did not curtail that power in relation to the notional tax issue.
(c) Alternatively paragraph 3.8 of the CRL Award left the Tribunal with the power to admit factual matrix evidence.
(d) The Claimants can at most contend that the Tribunal made an error of law or exercised erroneously a power that it did have in deciding whether certain pre-contractual material was admissible; as such there can be no challenge under s. 68(2)(b).
Challenge 3: Estoppel
The alleged errors of law
(a) It identified the wrong test as to common understanding, in particular failing to identify and apply a requirement that the understanding must have been communicated by the Government to the Claimants in accordance with the principles stated in The August Leonhardt  2 Lloyd's Rep 28 and The Vistafjord  2 Lloyd's Rep 343: it is not enough that each of the two parties acts on an assumption not communicated to the other; there must be some words or conduct crossing the line between them which communicates the sharing of the assumption.
(b) It failed to identify the right facts to be taken into account to determine whether or not there had been reliance.
(c) It failed to identify the right facts to be taken into account to determine whether or not there had been inequity.
"…however, the Claimants' witness Mr Nigel Shaw, who had not filed any witness statement and had not given evidence prior to the release of the CRL Award, confirmed, in particular in cross-examination at the November 2014 Hearing, that there was in fact a consistent common understanding regarding the basis on which the parties to the Tapti PSC decided to which Development Costs the CRL applies, namely that the CRL applies to Development Costs incurred on works listed in either the IPOD or Appendix G."
Just and proper to determine the question
Conclusion on section 69 challenge
Section 68 challenge
Challenge 4: the Agreements Case
"In light of the Tribunal's decision in respect of [the Estoppel Case], the Tribunal considers that this issue no longer falls for determination".
(a) The Tribunal set out the rival arguments at some length in these sections of the Award, including the specific factual basis for the Claimants' Agreements case. This would have been unnecessary had it intended to hold that the issues did not need to be considered. The recitation of each party's case by the Tribunal strongly suggests that it had considered each party's submissions on the issue on their merits and on the facts.
(b) Further support for the Government's construction was to be derived from other sections of the Award where the Tribunal had also disposed of issues by using the wording: "In light of the Tribunal's decision in respect of Issue [x] above, the Tribunal considers that this issue no longer falls for determination". That formulation was also used for Issue 21 (paragraph 25.11); Issue 22 (paragraph 26.3); Issue 23 (paragraph 27.8); and Issue 28 (paragraph 32.7).
(c) In relation to at least some aspects of the Agreements Case it can be seen from the detail of what the Tribunal said, when dealing with the estoppel case, that its findings do necessarily preclude there having been any agreement of the nature contended for by the Claimants in their Agreements Case. That is so, for example, in relation to the "NRPOD" work programme, which formed the largest constituent part of the Agreements Case claim in respect of Tapti (US$670.85m out of a total expenditure of US$698.10m). The interpretation of the words "no longer falls for determination" contended for by the Government is therefore justified by at least some of the detailed findings of fact set out in the Award. Whilst this exercise cannot be performed for every element of the Agreements Case, all the reasons on the face of the Award are consistent with the Tribunal determining that its factual conclusions on the estoppel case, based as they were on what happened at the Management Committee meetings, meant that the Claimants' Agreements Case, similarly so based, could not as a matter of fact be made out.
(a) Issue 21 asked whether the Tapti PSC provided for a 15-year plateau period, being a period during which gas production would be at the plateau level of 4.2 mmcmd, after which, the Claimants contended, all Development Costs incurred would be fully cost recoverable (see paragraphs 25.1 and 25.2 of the Award). This debate was premised on the relevance of the production rate criterion in respect of the recoverability of Development Costs. It follows that a finding for the Government on the estoppel issue simply prevented Issue 21 from arising: if the Claimants were estopped from relying on the stipulated production rate in determining the application of the CRL, it would be pointless to ask whether there was a period in respect of which gas production at that level would last.
(b) Issues 22 and 23 both related to eight specific categories of works in respect of which the Claimants said that the Development Costs incurred were fully recoverable because the work had been done to enable gas production above the 4.2 mmcmd production rate, and therefore fell outside the scope of the CRL on the basis of the production rate criterion. That was the Claimants' "Upside Case". Again, that Upside Case would simply not arise should the estoppel issue be decided in the Government's favour, because the production rate criterion would no longer be the one being applied in determining the recoverability of Development Costs. Further, Issue 22 asked whether that claim was time-barred. When the Tribunal determined that this issue "no longer [fell] for determination" in light of the estoppel issue determination, it was plainly not finding that anything in its findings of fact on the estoppel issue also disposed of a limitation point relating to a separate issue: rather the position was that Issue 22 simply did not arise because of the conclusion on estoppel.
(c) Issue 28, which related to Panna Mukta, also concerned the Claimants' Upside Case: it concerned Development Costs said to have been incurred in achieving a production rate above the specified 38,300 barrels of oil per day (by reference to an apparent distinction between works done to achieve a "peak" production rate, and all works done thereafter). Again, that case would not arise if the Government succeeded in its Estoppel Case such that the production rate criterion did not apply.
Challenge 5: The Panna Mukta Appendix G Case
"If [the Claimants are not precluded from advancing their alternative claim for Development Costs in respect of Panna Mukta on the basis of Appendix G], are the Claimants entitled to Development Costs in respect of Panna Mukta on the basis of Appendix G?"
(a) The first complaint is that the Tribunal "went off on a frolic of its own", determining that Development Costs which fell within the IPOD as well as Appendix G fell within the scope of the CRL even though the Government had not made that submission in relation to Issue 31. Applying this criterion led to the conclusion that the Panna Mukta Development Costs falling within the scope of the CRL amounted to US$1,195,035,528 (later corrected to US$1,206,409,130), which far exceeded the Panna Mukta CRL of US$577.5 million and therefore led to a very substantial sum being irrecoverable. The Claimants say at paragraph 157 of their skeleton argument that the Tribunal took this course "notwithstanding that the Government had not relied on the IPOD in this context and that the material on which the Tribunal purported to rely (primarily Management Committee minutes) had not been canvassed by either party in this context". The legal consequence, the Claimants submit, is that the Tribunal lacked substantive jurisdiction (under s. 67 of the 1996 Act) to determine that the CRL applied to works falling outside Appendix G but within the IPOD, because no such dispute had ever been submitted to the Tribunal. Alternatively the Tribunal committed a serious irregularity under s. 68 giving rise to substantial injustice by exceeding their powers and/or by acting unfairly in determining a question which it did not give the parties any opportunity to address.
(b) The second complaint is that the Tribunal made certain material mistakes in calculating the figures which it concluded represented the Development Costs incurred in respect of works falling within Appendix G and/or the IPOD and which were therefore subject to the CRL. The Claimants' complaint is again as to the approach adopted by the Tribunal; the argument is that it was unfair not to warn the Claimants of the approach that would be taken or to allow the Claimants an opportunity to address the Tribunal accordingly. This is again said to be a serious irregularity causing the Claimants substantial injustice.
The inclusion of the IPOD in the criterion applied
Errors in the figures
Challenge 6: The Withholdings Claim
"Keeping in view the public interest and to protect the interests of the Government, it has been decided by the Government that in case statutory or contractual amounts due to the Government as calculated by contractors in terms of provisions of respective PSCs or relevant laws are not deposited in a timely manner as specified in the respective PSCs or agreed between the parties, the Government of India or its nominee shall withhold payments until such time as the default is remedied by contractors."
(a) Do the issues engage the foreign act of state doctrine such that they would be non-justiciable in court?
(b) If so, are they non-arbitrable in arbitration?
(c) If so, has the Government lost the right so to contend as a result of waiver or submission to the jurisdiction of the Tribunal?
The procedural history
(a) The Government responded to the Claimants' withholding claim in its Statement of Defence of 31 January 2012. It asserted that the withheld sums were not due to the Claimants. Paragraph 19.2.2 referred to the OM but the pleading does not make clear what, if any, significance it was said to have as a legal basis for resisting the withholding claim.
(b) The Arbitrability Award was made on 12 September 2012, dealing specifically with the Government's contentions that the Claimants' claims relating to royalties, cess, service tax and audit were not arbitrable. Although the Tribunal recorded the existence of a dispute about the withholdings, it did not address the question of whether the withholdings dispute was arbitrable, and the OM and notices were not mentioned.
(c) In their "Submissions of 20 December 2013", the Claimants noted at paragraph 4.12 that the Government's contention was that the OM entitled it to withhold the payments, and made two points in response. First, they argued that the OM was "not applicable to" the particular withholdings in question, because the document stated that its purpose was to ensure timely payment by contractors to the Government of sums due "as calculated by contractors", whereas in the present case the Government had unilaterally asserted that the sums were due, which the Contractor disputed, rather than being sums calculated as due by the Contractor. This has been termed the applicability argument, and was reiterated, with some development/variation, throughout the subsequent submissions. Secondly, the Claimants "denied that [a Ministry] inter-office memorandum could unilaterally amend the terms of the PSCs" and hence that this particular OM could have that effect. This was said to be because Article 34.2 of the PSCs provides that the agreements are not to be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all parties.
(d) The Government responded on 5 May 2014 in its "Pleadings and Reply to the Claimants' Submissions dated 20 December 2013". It asserted at paragraph 7.9 that the OM entitled it to withhold the relevant sums, and briefly addressed the two arguments advanced by the Claimants. As to the applicability argument, the Government submitted that it could not be the Claimants' case that they "would either not pay such amounts or make deliberate wrongful calculations". As to the Article 34.2 argument, it denied that the OM operated by amending the PSCs.
(e) The Claimants did not address the OM in their "Reply Submissions of 1 August 2014", and the document was not mentioned further until 17 October 2014 when the parties exchanged written opening submissions ahead of the November 2014 hearing. The Claimants submitted at paragraphs 5.24 to 5.26 that even if the Government had a "constitutional obligation" to collect debts due to it, it did not follow that it was entitled to collect them "other than in a manner permitted by law", and that it would require an arbitral award in its favour to allow it to garnish the debts due from GAIL and IOC. The OM "did not give the Government the power under Indian law" to do that because there was "no statutory power or term of the PSCs to that effect". The OM as an "executive order" was contrasted to a "statutory power". The Claimants also made the applicability argument.
(f) The Government (without knowledge of what the Claimants had said because these submissions were exchanged) submitted at paragraph 6.5 of its written opening submissions that "[t]he Claimants did not challenge the Memorandum. In fact, there is no challenge to the Memorandum even in this arbitration. In any event, even if such a challenge were made, the Tribunal would obviously have no jurisdiction".
(g) Various submissions were made orally and in writing in the course of the November 2014 hearing:
(i) On 14 November Mr Ganguli SC for the Government submitted that the OM was issued by the Government in its sovereign capacity; it was an executive order which had the force of law pursuant to Article 162 of the Constitution; and in the event of conflict with a contract, the OM would prevail: Transcript Day 2, pp. 80-88.
(ii) In their written closing dated 18 November 2014 the Claimants argued at paragraphs 5.24-5.29 that the OM did not have the force of law; Article 162 of the Constitution did not relate to the executive power of the Central Government, but rather to the scope of the executive power of the States within the Union of India. The applicability argument was repeated.
(iii) In oral closing for the Claimants on 19 November 2014 (Transcript Day 13, pages 161-164) Mr Milligan suggested that Mr Ganguli had intended to refer to Article 73, which is the provision relevant to central government, Article 162 being the equivalent provision relevant to the State governments (which Mr Ganguli accepted in his submissions the following day). Mr Milligan submitted that those Articles were concerned only with defining the scope of the areas which could be dealt with by the executive of the Union of India on one hand and the executive of the States on the other. Article 73 did not confer power on the executive to make law, which is conferred on the Parliament of the Union or the legislature of the States.
(iv) In his oral closing submissions on 20 November 2014 on behalf of the Government, Mr Ganguli submitted that the Claimants' primary submission on the power of the executive to make law was misconceived as a matter of Indian law. In the absence of a legislative measure the executive had co-extensive powers to make law under "[A]rticle 309". He cited case law in support of the submission. (Transcript Day 14, pages 171-176).
(h) The parties exchanged further closing submissions on 22 December 2014. Before repeating the applicability argument the Claimants submitted as follows:
"5.27 The Office Memorandum could not have deprived the Contractor of its substantive right to payment nor did it purport to do so; it is irrelevant in the present circumstances.
5.28 Although gaps in the law could be filled by an Office Memorandum issued pursuant to article 73, on no view could substantive rights be expropriated by an Office Memorandum. If the Office Memorandum on which the Government relies had purported to deprive the Contractor of its substantive right to payment of the price for the gas or oil (as the case may be), it would not have been effective."
(i) In its written closing submissions of 22 December 2014 the Government reiterated at paragraphs 7.6-7.9 that the OM has the force of law and said that because it had not been challenged in the Indian courts, it bound both the Government and the Claimants. The Government also addressed the applicability argument, submitting at paragraph 7.11(c) that even if the basis for the withholdings was not made out because they related to amounts inconsistent with 'amounts calculated by the Contractor', that point was irrelevant because the notices had not been challenged; and even if they had been, the Tribunal could not quash them. Therefore the Tribunal had "no option but to apply the notices, which, being issued in accordance with extant law – the Memorandum cannot be ignored".
(j) In the Claimants' "Response to the Government's Closing" served on 30 January 2015, they submitted as follows at paragraph 5:
(i) They did not dispute that the OM was a valid legislative act (paragraph 5.4).
(ii) The OM gave rise to two questions: (1) "Did it purport to deprive the Claimants of their contractual right to payment of the price from whomever it was due, whether from the Government, GAIL or IOC?" (i.e. the applicability argument), and (2) "If it did, would it have been effective to do so?" (paragraph 5.5).
(iii) In relation to (2), they submitted that although it was common ground that the Government had power to fill gaps in regulation under Article 73 of the Constitution, the Government "does not have power under Article 73 to expropriate substantive rights nor has any authority been cited by the Government to the effect that it does" (paragraph 5.7).
(iv) As to the applicability argument, they submitted that "[t]he Contractor has never calculated the sums which the Government claimed were due to the Government. Consequently the directions [i.e. the notices] given to GAIL and IOC were not permitted by the Office Memorandum" (paragraph 5.8). They further submitted that "the Government says that, even if the Office Memorandum does only apply to amounts as calculated by the Contractor (as the Claimants say), the two withholding notices cannot be quashed by the Tribunal and, because they were issued in accordance with the Office Memorandum, they cannot be ignored. That contention, however, is untenable for the simple reason that, on that hypothesis the withholding notices were not issued in accordance with the Office Memorandum, because they did not reflect amounts due to the Government as calculated by the Contractor" (paragraph 5.9(3)).
Non-justiciability in court
"What the Kirkpatrick case is ultimately about, however, is the distinction between referring to acts of state (or proving them if their occurrence is disputed) as an existential matter, and on the other hand asking the court to inquire into them for the purpose of adjudicating upon their legal effectiveness, including for these purposes their legal effectiveness as recognised in the country of the forum. It is the difference between citing a foreign statute (an act of state) for what it says (or even for what it is disputed as saying) on the one hand, something which of course happens all the time, and on the other hand challenging the effectiveness of that statute on the ground, for instance, that it was not properly enacted…"
"150. Having discussed the four possible rules which may be said to fall under the umbrella of the Doctrine, it is appropriate briefly to identify the characterisation of the various rules. I agree with Lord Mance that the first rule is a general principle of private international law. The rule was characterised by Upjohn J in In re Helbert Wagg & Co Ltd's Claim  Ch 323, 344-345 as:
"the elementary proposition that it is part of the law of England, and of most nations, that in general every civilized state must be recognized as having power to legislate in respect of movables situate within that state and in respect of contracts governed by the law of that state, and that such legislation must be recognized by other states as valid and effectual to alter title to such movables."
To the extent that it exists, the second rule also seems to me to be a general principle, and, at least to some extent, it may be close to being a general principle of private international law.
151. The third rule is based on judicial self-restraint, in that it applies to issues which judges decide that they should abstain from resolving…It is purely based on common law and therefore has no international law basis….."
"111. Serbia's position is that the "continuator"/"successor" issue is non-justiciable because (a) it trespasses on the ambit of the Crown's prerogative in matters of foreign affairs, and the recognition of a foreign state; (b) there is no settled principle of customary international law which is part of English law on the point, so that it involves making a decision solely by reference to public international law, and (c) there are no judicial or manageable standards by which a court or arbitrator can reach a decision.
115. In Ecuador v Occidental [Ecuador v Occidental Exploration & Production Co  EWCA Civ 1116;  QB 432] the Court of Appeal (Lord Phillips of Worth Matravers MR, Clarke and Mance LJJ) considered jurisdictional issues that arose under an agreement to arbitrate under UNCITRAL Rules that both parties agreed was validly made by them. Provision for the arbitration had been made in a bilateral investment treaty between Ecuador and the United States. The treaty provided that nationals and entities of one state would have direct dispute resolution rights against the other state in respect of investment disputes, by inter alia UNCITRAL arbitration.
116. The arbitrators considered and rejected an objection by Ecuador that the dispute fell outside the categories of claim specified in the treaty. Ecuador then applied to the Court under section 67 to set aside the Award. The issue was whether the Court had jurisdiction to determine this application. It was argued on behalf of Occidental that the Court did not have jurisdiction because determining the section 67 application would involve interpreting the provisions of the investment treaty which were…non-justiciable in an English court. Before dealing with the decision of the Court of Appeal on that point, I observe that there is no suggestion in the judgment that the arbitrators could not deal with Ecuador's objection or should not have dealt with it because the interpretation of the treaty was non-justiciable or non-arbitrable. Indeed the approach of the Court of Appeal is inconsistent with such a suggestion.
117. I turn to the decision of the Court of Appeal. The Court stated that determining the application would involve interpreting the provisions of the investment treaty and, in other contexts, this would be non-justiciable and impermissible. However, it also stated (at ) that the context is always important in deciding whether a principle of non-justiciability applies. It held that the court has jurisdiction to determine an application which involves interpreting the provisions of an international treaty where this is necessary to determine a person's rights and duties under domestic law.
118. In the Ecuador case, this was so because the investment treaty provided for arbitration and was intended to facilitate the parties' agreement to arbitrate: see  QB 432 at , ,  and . …
119. The Court in the Ecuador case rejected the argument that a matter that was justiciable in an arbitration should be treated as non-justiciable by the Court when it arises in the context of a section 67 application. It stated (at ):
"If issues regarding jurisdiction are justiciable before the arbitrators, we do not find it easy to see why they should be regarded as non-justiciable before the English court."
120. In doing so the Court of Appeal appears to have accepted that "justiciability" in a Court differs from "justiciability" or "arbitrability" before an arbitral tribunal. Given the importance of arbitral tribunals as dispute resolution mechanisms in relation to the commercial transactions of sovereign states, and the unavailability of sovereign immunity or act of state defences to a state which has agreed to submit a dispute to arbitration, this is not surprising.
124. If, after the arbitrator has dealt with the matter, the court cannot exercise its powers under section 67 because to do so involves a question which in other contexts would be non-justiciable, there would be a significant gap in the court's supervisory powers. The non-justiciability of the issue would mean the court would not be in a position either to uphold the challenge and set aside the Award or to conclude that the challenge is not well founded. The arbitrator's provisional determination would thus be deprived of substance and rendered illusory. But under the 1996 Act the Court is given the power to decide whether the Award, as a provisional determination pursuant to section 30, should stand.
126. Serbia's position on non-justiciability also involves both the arbitrator and the court having to accept its assertion that it was not a party to the underlying contract and the arbitration agreement. There is also force in the response…that it would be wrong to "allow a State to escape liability under a commercial contract merely by pronouncing that it was not an original party to the contract, and then sheltering behind a cloak of non-justiciability in order to prevent an arbitration or adjudication based on the true legal position". The approach taken by the Court of Appeal in Ecuador v Occidental suggests that ImageSat's submissions are to be preferred.
135….The key is whether there are clear standards of international law from which a domestic court can conclude that there is a principle of customary international law on the matter. The material before me…however, suggests that there are not. Despite the factual indications in this case that Serbia is the continuator of the State Union, had the context in this case not been an arbitration concerning a commercial contract, I do not consider the material before me enables me to conclude that the question would have been justiciable."
Waiver/ submission to arbitration
(a) By agreeing to arbitration in a commercial contract, the Government waived any objection that it might otherwise have had as a sovereign state; it thereby voluntarily submitted to the determination by an arbitral tribunal of any dispute which falls within terms of the arbitration agreement, including any dispute which entails the determination of the validity of an act of state.
(b) The Government had lost the right to object to the Tribunal having jurisdiction by failing to state its objection timeously.
(c) The Tribunal had already determined that it had jurisdiction by its conclusions in the Arbitrability Award.
Submission by the arbitration clause
Failure to object
"(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection—
(a) that the tribunal lacks substantive jurisdiction,
he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection."
"21(3) A plea that the arbitral tribunal does not have jurisdiction shall be raised not later than in the statement of defence or, with respect to a counter-claim, in the reply to the counterclaim."
"30 A party who knows that any provision of, or requirement under, these Rules has not been complied with and yet proceeds with the arbitration without promptly stating his objection to such non-compliance, shall be deemed to have waived his right to object."
The Arbitrability Award
The Government's alternative submission
"whereas sovereign immunity is capable of being waived, the principle of act of state or non-justiciability is not. If the court lacks jurisdiction to determine an issue, such jurisdiction cannot be conferred upon it by the parties, and the court is in principle obliged to investigate the question itself even if the parties do not wish to do so, or even if it would otherwise be an abuse of process for a party to ask the court to do so."
Challenge 7: GAIL Withholding Counterclaim
"In the event the Respondent succeeds in respect of the GAIL Withholding Counterclaim, then the Petroleum produced and saved would need to be increased by the sum of…USD 15,086,684 for Financial Year 2004/05. The figure referred to by the Respondent [of US$30,089,799] is incorrect: only the sum of USD 15,086,684 is attributable to this issue with the remaining sum of USD 15,003,115 being attributable to the Price Ratchet Dispute…"
Challenge 8: Marketing Margin Counterclaim
(a) The Government knew that marketing margin had been received in 2007/08 but not in any years subsequent to that, because: (i) the Government had received regular monthly copies of the Contractor's invoices to third party customers which showed marketing margin being charged; (ii) the Government had been informed by the Contractor in the Profit Petroleum Statements for the year 2007/08 dated 26 June 2008 that the Contractor had not given credit for marketing margin received in that year; and (iii) Mr Kulkarni's witness evidence made the position clear.
(b) The Tribunal's Procedural Order dated 13 January 2014 required that the entire Marketing Margin Counterclaim should be determined at the November 2014 hearing. The Government never asked the Tribunal to modify its order in that respect.
(c) The Government did not advance a counterclaim for marketing margin charged by the Contractor in 2007/08. It stated in its Statement of Defence in January 2012 that it was reviewing the practice of the Claimants for years subsequent to 2006/07. Subsequently the Government sought to reserve its rights in respect of marketing margin charged in those years. It did ask for the production of records in May 2014 but did not pursue any proper application to that effect, and did not make such an application at the November 2014 hearing. Nor did it challenge the evidence given by Mr Kulkarni at paragraph 113 of his seventh witness statement dated 1 August 2014 to the effect that the Government already had the relevant documents about the marketing margin. Indeed far from making any claim or other application relating to years other than 2005/06 and 2006/07, the Government in its written closing for the November 2014 hearing stated under the heading "Marketing Margin Counterclaim" that "[t]he period in question is 2005/07". Subsequently the Claimants stated at paragraph 6.24 of their January 2015 Response that the parties "agree that the Marketing Margin Counterclaim relates to Financial Years 2005/06 and 2006/07 only"; the Government did not comment on this in its January 2015 Response.
"Consequently, the Tribunal finds that the Respondent is entitled to an order "direct[ing] the Claimants to […] recompute the Profit Petroleum by accounting all the components of sales"
and to produce records showing whether the Claimants have charged marketing margin in those years it had sold Petroleum to third party customers. In this regard, the Tribunal is not persuaded by the Claimants' submission that the parties are agreed the Marketing Margin Counterclaim only concerns Financial Years 2005/06 and 2006/07 as it is unclear on the evidence that marketing margin was only charged in respect of Financial Years 2005/06 and 2006/07."
(a) in respect of the Marketing Margin Counterclaim, the Claimants to recompute the Profit Petroleum by accounting for all the components of sales including the marketing margin with consequential adjustments to the Parties' corresponding share of Profit Petroleum to follow."
Challenge 9: Tapti Production Loss Counterclaim
".. the Tribunal is, however, unable to come to a conclusion at this juncture on the merits of the Respondent's Tapti Production Loss Counterclaim so far as South Tapti is concerned. That is because such determination turns on whether the Claimants were justified in insisting on there being an agreement on an increase in the CRL as a pre-condition for drilling the two infill wells in South Tapti. The Tribunal will determine whether the Claimants were so justified, in the context of any application the Claimants may make for an increase in the CRL. In the event no such application is made, the Tribunal will determine whether the Claimants were so justified on the basis of the submissions filed and the evidence to date. Accordingly, the Tribunal reserves for further consideration its decision in respect of this aspect of the Respondent's Tapti Production Loss Counterclaim."
"74.61 Reserves for determination whether the Claimants were justified in insisting on there being an agreement on an increase in the CRL as a pre-condition for drilling the two infill wells in South Tapti either in the context of any application the Claimants may make for an increase in the CRL or in the event no such application is made, on the basis of the submissions filed and the evidence adduced to date.
74.63 Dismisses all other claims and counterclaims"
(a) The Tribunal failed to follow its Procedural Order which required it to decide all issues in relation to the Production Loss Counterclaim at the November 2014 hearing.
(b) The Tribunal, in determining that the Claimants would be liable on the counterclaim subject only to the question whether the insistence on a CRL increase was justified, failed to deal with other issues which it should have dealt with first and which would have doomed the counterclaim to failure. They were that there had not been a failure to drill the Two Infill Wells, but merely a delay in doing so; and that the Government had never sought to articulate or quantify its losses said to arise out of such delay, nor to address the causation questions inherent in establishing any such loss.