Delhi High Court
Canoro Resources Ltd. vs Union Of India on 7 March, 2011
Author: Vipin Sanghi
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Judgment reserved on: 24.02.2011
% Judgment delivered on: 07.03.2011
+ O.M.P. 514/2010 & I.A. No.1371/2011
CANORO RESOURCES LTD. ..... Petitioner
Through: Mr. C.A. Sundaram, Senior Adv.
with Ms. Rohini Musa, Mr. Zafar
Inayat, Mr. Abhishek Gupta,
Mr.Anandh Kanna, Mr. Siddharth
Barua & Mr. Sharan Thakur,
Advocates
versus
UNION OF INDIA ..... Respondent
Through: Mr. Mohan Parasaran, ASG with
Mr.Neeraj Chaudhari, Mr. Akshay
Chandra, Mr. Zoheb Hossain and
Mr. Mohit Auluck, Advocates.
CORAM:
HON'BLE MR. JUSTICE VIPIN SANGHI
1. Whether the Reporters of local papers may
be allowed to see the judgment? : Yes
2. To be referred to Reporter or not? : Yes
3. Whether the judgment should be reported
in the Digest? : Yes
JUDGMENT
VIPIN SANGHI, J.
1. This petition is preferred by the petitioner under Section 9 of the
Arbitration and Conciliation Act, 1996 to seek the following reliefs:
(a) An ad interim injunction restraining the respondent
from directly or indirectly and in any manner whatsoever
acting under its letter of termination dated August 27,
2010 of the Production Sharing Contract (PSC), and taking
any other steps detrimental to the interests of the
petitioner till the matter is finally disposed off by an arbitral
tribunal.
(b) An ad-interim order of injunction restraining the
respondent from directly or indirectly and in any manner
whatsoever considering the termination of the PSC as
being effective on and from August 29, 2010.
(c) An order of status quo ante pending the award of the
Arbitral Tribunal.
The petitioner had sought the reliefs ex parte as well.
2. The petitioner claims that it is an oil and gas exploration and
production company incorporated under the laws of the Province of
Alberta, Canada. The respondent is the Union of India, represented by
the Joint Secretary, Ministry of Petroleum and Natural Gas.
3. The President of India entered into a Production Sharing Contract
(PSC) dated 23.02.2001 in respect of the Amguri oil field in the state of
Assam, with one Assam Company Limited (ACL) and one Joshi
Technologies International Inc. (JTI). The participating interest (P.I.) of
ACL was 75% and that of JTI was 25%. The petitioner acquired the
participating interest in the PSC to the extent of 60% i.e 25% of JTI‟s
P.I. and 35% of ACL‟s P.I. vide amendment agreement 26.07.2004.
The petitioner, apart from being a "contractor" under the PSC was also
appointed as the "operator". ACL remained the other contractor with
40% P.I.
4. The primary dispute which has arisen between the parties under
the PSC is whether the petitioner is in breach of Article 29 of the said
agreement which deals with the aspect of assignment of PI of any
party comprising the contractor. The said dispute would necessarily
have to be determined by the Arbitral Tribunal upon an interpretation
of the contractual terms and their application to the facts of this case.
As the respondent has sought to terminate the PSC vide letter dated
27.08.2010 on the premise that the petitioner is in breach of Article 29
of the PSC, the petitioner has preferred this petition to seek interim
measures of protection. I will, therefore, examine and evaluate, in the
course of this order, prima facie, the submissions made by the parties
to the extent it is necessary, and it is made clear that any observation
made by me in this order would not come in the way of the Arbitral
Tribunal in arriving at its own conclusions upon the interpretation of
the PSC.
5. I may, at this stage, take note of a few relevant provisions of the
PSC. The recitals contained in the PSC dated 23.02.2001 set out the
background in which that agreement was executed. The same read as
follows:
"WITNESSETH:
WHEREAS
(1) The Oil Fields (Regulation and Development) Act,
1948 (53 of 1948) (hereinafter referred to as "the
Act") and the Petroleum and Natural Gas Rules,
1959, made thereunder (hereinafter referred to as
"the Rules") make provision, inter alia, for the
regulation of Petroleum Operations and grant of
licenses and leases for exploration, development and
production of Petroleum in India;
(2) The Rules provide for the grant of licenses and leases
in respect of land vested in a State Government by
that State Government with the prior approval of the
Central Government and JTI and ACL will apply for a
Lease to carry out Exploration Operations,
Development Operation and Production Operations in
that area onshore identified as Field Amguri and
more particularly described in Appendix-A and
Appendix-B.
(3) Rule 5 of the Rules provides for an agreement
between the Central Government and the Lessee
containing additional terms and conditions with
respect to the lease;
(4) The Government desires that the Petroleum
resources which may exist in India be
discovered and exploited with the utmost
expedition in the overall interest of India in
accordance with Good International Petroleum
Industry Practices;
(5) JTI and ACL have committed that they have, or will
acquire and make available, the necessary financial
and technical resources and the technical and
industrial competence and experience necessary for
proper discharge and/or performance of all
obligations required to be performed under this
Contract in accordance with Good International
Petroleum Industry Practices and will provide
guarantees as required in Article 30 for the due
performance of its obligations hereunder;
(6) As a result of discussions between representatives
of the Government, and JTI and ACL on the proposal
of JTI and ACL, the Government had agreed to enter
into this Contract with JTI and ACL with respect to the
said area referred to in paragraph(2) above on the
terms and conditions herein set forth."
(emphasis supplied)
6. „Participating Interest‟ under Article 1.70 means in respect of
each party constituting the contract, the undivided share expressed as
a percentage of such party‟s participation in the rights and obligations
under this contract.
7. Article 2 defines the duration/term of the contract to be 25 years
from the effective date, unless the contract is terminated or expires
earlier in accordance with its terms. However, the term may be
extended upon mutual agreement of the parties. Article 3.2 provides
that each party comprising the Contractor shall contribute its
participating interest share of all contract costs with respect to the
contract area and assume its participating interest share of all rights
and obligations from the effective date. These rights and obligations
include the right to take cost petroleum and the share in profit
petroleum (Article 3.3). Under Article 8, the contractor, inter alia, has
the exclusive right to carry out the petroleum operations and to
recover costs and expenses as provided under the contract. Article 10
deals with the aspect of discoveries, development and production of
and from oil-wells. Article 15 deals with the recovery of cost
petroleum. Article 16 provides the mechanism of production sharing of
petroleum. Article 16.4 gives the option to the Government to take its
entitlement to profit petroleum either in cash or in kind in any year.
Article 19 deals with the aspect of „domestic supply, sale and disposal
and exports of crude oil and condensate‟. Article 19.1 provides that
until such time as the total availability to the Government of crude oil
and condensate from all petroleum production activities in India meets
the total national demand, each constituent of the contract shall be
required to sell to the Government or its nominee all of its entitlement
to crude oil and condensate from each field in order to assist in
satisfying the national demand and the Government shall have the
option to purchase the whole or any portion thereof at the price
determined pursuant to Article 20. Article 28.1 states that the
"Government is the sole owner of petroleum underlying the contract
area and shall remain the sole owner of petroleum produced pursuant
to the provisions of this contract except as regards that part of crude
oil, condensate or gas, the title whereof has passed to the contractor
or any other person in accordance with the provisions of this contract."
Article 29 deals with the aspect of assignment of interest. Since the
same is central to the dispute between the parties and the discussions
in this order, it is reproduced hereinbelow:
"ARTICLE 29
ASSIGNMENT OF PARTICIPATING INTEREST
29.1 Subject to the terms of this Article and other terms of
this Contract, any Party comprising the Contractor
may assign, or transfer, a part or all of its
Participating Interest, with the prior written consent
of the Government, which consent shall not be
unreasonably withheld, provided that the
Government is satisfied that:
(a) the prospective assignee or transferee is of
good standing, has the capacity and ability to
meet its obligations hereunder, and is willing to
provide an unconditional undertaking to the
Government to assume its Participating Interest
share of obligations and to provide guarantees in
respect thereof as provided in the Contract;
(b) the prospective assignee or transferee is not a
company incorporated in a country with which the
Government, for policy reasons, has restricted
trade or business;
(c) the prospective assignor or transferor and
assignee or transferee respectively are willing to
comply with any reasonable conditions of the
Government as may be necessary in the
circumstances with a view to ensuring
performance under the Contract; and
(d) the assignment or transfer will not adversely
affect the performance or obligations under this
Contract or be contrary to the interests of India.
29.2 In case of any material change in the status of
Companies or their shareholding or the relationship
with any guarantor of the Companies, the
Company(ies) shall seek the consent of the
Government for assigning the Participating Interest
under the changed circumstances.
29.3 An application for consent to assign or transfer shall
be accompanied by all relevant information
concerning the proposed assignment or transfer
including detailed information on the proposed
assignee or transferee and its shareholding and
corporate structure, as was earlier required from the
Companies constituting the Contractor, the terms of
the proposed assignment or transfer and the
unconditional undertaking referred to in Article.
29.4 The applicant shall also submit such information
relating to the prospective assignee or transferee of
the assignment or transfer as the Government may
reasonably require to enable proper consideration
and disposal of the application.
29.5 No assignment or transfer shall be effective until the
approval of the Government is received or deemed
to have been received. Approval may be given by the
Government on such terms and conditions as it may
deem fit. Provided that such terms and conditions
may not increase the obligations of the Parties
comprising the Contractor. Upon assignment or
transfer of its interest in this Contract, the assignor
or transferor shall be released and discharged from
its obligations hereunder only to the extent that such
obligations are assumed by the assignee or
transferee with the approval of the Government.
29.6 In the event that the Government does not give its
consent or does not respond to a request for
assignment or transfer by a Party comprising the
Contractor within one hundred and twenty (120)
days of such request and receipt of all information
referred to in Article 29.3 above, consent shall be
deemed to have been given by the Government.
29.7 An assignment or transfer shall not be made where
the Participating Interest to be retained by the
proposed assignor or the percentage interest of
assignee shall be less than ten per cent (10%) of the
total Participating Interest of all the constituents of
the Contractor, except where the Government, on
the recommendations of the Management
Committee may, in special circumstances, so permit.
29.8 Nothing contained in this Article 29, shall prevent a
Party comprising the Contractor from mortgaging,
pledging, charging or otherwise encumbering at its
own risk and cost all or part of its Participating
Interest for the purposes of security relating to
finance to the extent required for performing its
obligation under the Contract, provided that:
i) such Party shall remain solely liable for all its
obligations relating to its Participating Interest to
the exclusion of the other participants thereto;
ii) the encumbrance shall be expressly
subordinated to the rights of the other Parties
under this Contract. The obligations occurring
from the said encumbrance shall be the sole
responsibility of the original Party and shall in no
manner compromise the rights of other Parties
to the Contract;
iii) such Party has given reasonable notice of such
encumbrance and furnishes to all other Parties
(including, for the avoidance of doubt, the
Government) a certified copy of the executed
instrument(s) evidencing the encumbrances;
iv) keeping in view the national interest of India,
prior consent of the Government shall be
required (which consent shall not be
unreasonably withheld) of the list of potential
lenders with whom such Party can consider
hypothecation;
v) the Party creating the charge shall ensure that
such charge shall not in any way affect the
interest of other Parties or result in interference
with joint operations. In the event of any claims
or liabilities imposed on other Parties because of
the creation of such charges, the Party having
created charge on its Participating Interest shall
indemnify the other Parties; and
vi) in case of foreclosure or default by a borrowing
Party, the mortgagee shall not be deemed to
have acquired a right to carry on either by itself
or through an agent, the Petroleum Operation,
without the written consent of the Government
of India.
29.8.1 The Parties acknowledge that to obtain financing a
Party ("Borrower") will be required to secure for a
permitted chargee the right to receive a copy of any
notice served on the Borrower and the Parties agree
that they shall serve a copy of any such notice on
any such permitted chargee in accordance with the
provisions of Article 38 at the same time as such
notice is served on the Borrower. For the purposes
of Article 38 the address for service of notices of the
permitted chargee shall be that specified in the
instrument or instruments referred to in Article
29.8(iii).
29.8.2 The financing arrangement referred to above, shall
be subject to the rights of Government as contained
in Article 29.1 of Contract and the pre-emptive rights
of the Parties as may be contained in Operating
Agreement. Any Party which wishes to exercise the
said pre-emptive rights will explicitly assume the
obligation on the same terms and conditions as the
Borrower."
8. Article 31 deals with the term and termination of the PSC. In
particular, Article 31.3 entitles the Government to terminate the
contract "upon giving ninety (90) days written notice to the other
parties of its intention to do so in the following circumstances, namely,
that the contractor or a party comprising the contractor („the
defaulting party‟).
(a) x x x x x x x x x
(b) x x x x x x x x x
(c) x x x x x x x x x
(d) x x x x x x x x x
(e) has assigned any interest in the contract without the
prior consent of the Government as provided in Article 29 ;
or
(f) x x x x x x x x x
(g) has failed to comply with or has contravened the
provisions of this contract in a material particular; or
x x x x x x x x x"
9. Article 31.6 is a rather peculiar clause and is heavily relied upon
by the petitioner. The same reads as follows:
"31.6 If the circumstance or circumstances that would
otherwise result in termination are the subject matter or
proceedings under Article 34, then termination shall not
take place so long as such proceedings continue and
thereafter may only take place when and if consistent with
the arbitral award."
10. Article 34 contains inter alia the arbitration agreement between
the parties.
11. Article 35.1 provides that:
"35.1 The parties comprising the contractor shall notify
the Government of any material change in their status,
shareholding or relationship of that of any guarantor of the
companies, in particular, where such change would impact
on performance of obligations under this contract."
12. I may now take note of the background facts of the case which
have given rise to the dispute between the parties. The petitioner
entered into an investment agreement dated 16.04.2010 with one
MASS Financial Corporation (hereinafter to be referred as „MASS‟), a
Corporation organized under the laws of Barbados. Under this
investment agreement, MASS agreed to make a private placement for
24,798,000 common shares and also to apply against the rights
offering made by the petitioner company, equal to the total rights
offering commitment, less the number of common shares purchased
by the holders of rights pursuant to the exercise of rights under the
rights offering. The petitioner agreed with MASS that the funds infused
by MASS would be utilized at least to the extent of US$1,500,000/- to
meet the expenditures relating to the Amguri condensate recovery and
gas re-injection project. The balance of the proceeds from the equity
financing were agreed to be used for working capital and in
conjunction with the exploration and development of its oil and gas
projects, such projects including but not limited to inter alia: (i) the
Amguri condensate recovery and gas re-injection project; (ii) Amguri
LPG plant; (iii) Amguri gas-fired power plant. On the private placement
being made by MASS, the company agreed to appoint two nominee
directors of MASS on its Board of Directors. It was further agreed that
the Board of Directors shall be comprised of no more than five persons,
and the said Board shall reflect the percentage of shareholding of
MASS. After the private placement closing, the name of the petitioner
was agreed to be changed to one approved by MASS. The reason for
inviting investment from MASS is stated to be the failure of the other
partner, viz. ACL.
13. While the process of investment by MASS in the petitioner
company was underway, the petitioner issued a communication dated
29.04.2010 to the respondent. In this communication, the petitioner
stated that "While the private placement itself does not constitute a
material change in the status of the Company with respect to the
performance of Canoro‟s obligations under the Amguri PSC, we
nevertheless thought it appropriate to bring the matter to the attention
of the Ministry of Petroleum & Natural Gas". The petitioner also stated
that as a result of the private placement, MASS did not become a new
control person for Canoro, and there would not be any material effect
on the control of the petitioner company. The petitioner disclosed that
as a part of the transactions contemplated under the investment
agreement, the petitioner would carry out a rights offering and that
MASS had agreed to take up all the shares not subscribed by the
holders of rights.
14. Upon issuance of the said communication, the respondent issued
a show-cause notice dated 01.06.2010 to the petitioner alleging breach
of Article 29.2 of the PSC. In this show-cause notice, it was stated that
as per Article 29.2 of the PSC, the contractor had to seek the consent
of the Government in case of any material change in the status or
shareholding of the company. It was stated that the material change
in the shareholding of the company amounts to assignment of the P.I.,
for which the petitioner had not obtained prior consent of the
Government, thereby breaching the provisions of the PSC, and, in
particular, Article 29.2. It was stated that the contravention of the PSC
provisions had been viewed very seriously and the petitioner was
called upon to explain as to why the PSC in respect of the contract area
identified as Amguri field should not be terminated as per Article 31 of
the PSC.
15. The petitioner responded to the show-cause notice on
06.06.2010 and again on 09.06.2010. A further detailed response was
sent by the petitioner on 23.06.2010. While the matter was still
hanging fire, vide communication dated 01.07.2010, the petitioner
communicated that as a result of the rights offering made by the
petitioner and the subscriptions received there against the
shareholding of MASS had increased to nearly 53%. The summary of
changes in the share capital, ownership and directorship as
communicated in this letter reads as follows:
Item Particulars Pre-funding Post-funding
position position
1 Number of Common 138,771,162 277,542,324
Shares issued and
subscribed in the Canadian
Market
3 Details of new directors Mr. Ravin
joining Canoro‟s Board Prakash Mr.
post-transaction Nowroz Jal
Cama
4 Details of outgoing Mr. James N.
directors Smith Mr.
Harley Winger
5 Principal shareholders Trapeze Asset MASS Financial
Management (52.9%) Trapeze
(18%) MASS Asset
Financial (18%) Management
(8.6%)
6 Equity Capital in US$ $104.94 $118.02
millions
16. This communication also informed the respondent that in
addition, MASS had the right to purchase an additional 34,692,791
shares in terms of the "standby warrants" issued to it.
17. Finally, on 27.08.2010, the respondent by a 16-page order
terminated the PSC in relation to the petitioner by rejecting the various
explanations furnished by the petitioner. Consequently, the petitioner
has preferred this petition.
Petitioner's submissions:
18. The submission of Mr. Sundaram, learned senior counsel for the
petitioner firstly is that, prima facie, there is no breach of Article 29
committed by the petitioner by allocating about 53% shareholding in
the petitioner company to MASS without seeking the prior permission
or consent of the respondent. He submits that Article 29.1 and 29.2
contemplate two different situations. Article 29.1 is applicable, when a
party comprising the contractor assigns or transfers a part, or all its
participating interest to another entity. In this case, the petitioner has
not transferred or assigned any part of its participating interest in
favour of MASS. The participating interest of the petitioner prior to
entering into the investment agreement with MASS was 60% and it
continues to remain so.
19. He submits that Article 29.1 requires the party comprising the
contractor to obtain "prior written consent of the Government".
However, Article 29.2 is applicable when the twin conditions, namely,
that of a material change in the status of the companies or their
shareholding takes place, and the company seeks to assign its
participating interest under the changed circumstances. He submits
that even if the mere change in the status of the company or its
shareholding is taken to amount to assignment of participating
interest, all that is required is that the company has to seek the
consent of the Government which could be ex-post facto consent and
need not be a prior written consent. He submits that the words "prior
written consent of the Government" in Article 29.1 have deliberately
not been used in Article 29.2, which merely requires the seeking of
"the consent of the Government".
20. Mr. Sundaram further submits that the assignment of the
participating interest under Article 29.1, or the material change in the
shareholding pattern of the party comprising the contractor is not
unusual and is clearly permitted by the PSC. He submits that earlier
the participating interest was shared between ACL and JTI. The same
was changed, with the prior written consent of the respondent, and the
petitioner took over 60% of the participating interest from JTI and ACL.
21. He submits that even the direct assignment of the participating
interest under Article 29.1 cannot be unreasonably withheld. The
guidelines for the exercise of its discretion by the respondent to grant
or refuse the grant of consent are contained in clauses (a) to (d) of
Article 29.1. He submits that it is not even the case of the respondent
that MASS falls foul of any of the criteria contained in clauses (a) to (d)
of Article 29.1.
22. Article 35 is also referred to by Mr. Sundaram at this stage. He
submits that the obligation to notify the government of any material
change in the shareholding is cast on the contractor only "where such
change would impact on performance of obligations under this
contract". He submits that the induction of MASS as the majority
shareholder in the petitioner would in no way impact the performance
of its obligations by the petitioner. The said performance would only
improve with the infusion of funds for the specific purpose of
implementing the PSC. He submits that the language of Article 35
further establishes that the obligation to seek consent does not
necessarily precede the change of the shareholding in a party
comprising the contractor.
23. Mr. Sundaram further submits even if it were to be assumed that
the petitioner had not obtained the approval/consent of the
Government for the assignment or transfer of the shareholding in
favour of MASS, the only consequence thereof could be that the said
assignment or transfer shall not be effective. However, the PSC cannot
be terminated for this reason. In this regard, he places reliance on
Article 29.5 of the PSC.
24. Mr. Sundaram submits that the right to terminate the PSC vested
in the Government by virtue of Article 31.3(e) relates to the
assignment of the participating interest in the contract under Article
29.1. It does not relate to a case falling under Article 29.2.
25. Mr. Sundaram submits that even prior to the issuance of the
show cause notice by the respondent on 01.06.2010, the petitioner
had communicated to the respondent the factum of the petitioner
entering into an investment agreement with MASS. By then, the
petitioner had received the consideration for the private placement
which had resulted in 18% of the paid up equity of the petitioner being
allotted to MASS. The rights offering, and the offering by way of
convertible debentures had not been made by then. He submits that
only after the acceptance of the rights offering by MASS, the
shareholding of MASS in the petitioner company rose to about 53%
which was after the issuance of the communication dated 29.04.2010.
He submits that if the respondent had any genuine and legitimate
reasons to refuse or object to the induction of MASS as the
shareholder, the respondent should have objected to the same or
rejected the same by a reasoned order. However, no reasons were
furnished by the respondent as to why MASS could not be brought in
as a shareholder. It is not disclosed as to why the respondent considers
the induction of MASS as the majority shareholder in the petitioner
company, as not acceptable. It is not the respondents case that MASS
does not meet the criteria laid down in Article 29.1. During his
submissions, Mr. Sundaram repeatedly contended that the issuance of
the show cause notice was engineered by the other partner, viz. ACL.
It was submitted that ACL was interested in acquiring the PI of the
petitioner, and was behind the impugned action of the respondent.
26. Mr. Sundaram submits that upon issuance of the show cause
notice dated 01.06.2010, the petitioner invoked the arbitration
agreement on 14.08.2010. He submits that the controversy and
differences which have arisen between the parties with regard to
interpretation of Article 29, and in particular, Article 29.2 of the PSC
would need not to be resolved through arbitration. Even if it is
assumed that the circumstance of the petitioner permitting the
infusion of equity by MASS to the extent of nearly 53% or more
tantamounts to a breach of Article 29 of the PSC, which would
otherwise result in termination, the said termination "shall not take
place so long as such proceedings continue and thereafter may only
take place when and if consistent with the arbitral award" (see Article
31.6). He submits that with the invocation of the arbitration
agreement, the arbitration proceedings have commenced by virtue of
Section 21 of the Act. Reliance is placed on Milkfood Ltd. v. GMC
Ice Cream (P) Ltd, (2004) 7 SCC 288. Consequently, the termination
of the PSC, qua the petitioner, cannot be given effect to during the
pendency of the arbitral proceedings and the termination of the PSC by
the respondent vide its letter dated 27.08.2010 would eventually be
governed by the arbitral award.
27. Mr. Sundaram submits that in the light of the aforesaid
provisions in the PSC, the petitioner has made out a prima facie case.
He submits that the petitioner is entitled to the interim injunctions as
prayed for.
28. Mr. Sundaram submits that the PSC is a contract, the
performance of which can be specifically enforced, and consequently,
an injunction can be granted by the court to prevent its breach. He
submits that there does not exist any standard for ascertaining the
actual damages that the petitioner may suffer, if the respondent is
permitted to enforce the termination of the contract.
29. In this regard, he submits that if the respondent is permitted to
bring in another party in place of the petitioner, the quantum of profits
or losses that the said party may generate would depend entirely upon
the expertise and performance of that party. Therefore, even if a third
party is introduced as a constituent of the contractor in place of the
petitioner, and the petitioner is eventually held as being entitled to
damages for wrongful termination of the PSC, the petitioner would not
be adequately compensated, as there are no standards for
ascertaining actual damages. It would be highly dependent upon how
much oil and condensates are produced from the oil wells in question,
and at what cost. It would also depend on how much investment the
third party may make in the project.
30. Mr. Sundaram submits that the PSC is not a determinable
contract. By its very nature the contract postulates very high and
irretrievable investment by the contractor. He submits that Article
31.6 of the PSC provides that even if the contract is purported to be
terminated due to existence of circumstances which would entitle its
termination, termination shall not take effect so long as the arbitration
proceedings continue and even thereafter the termination shall take
place when and if consistent with the arbitral award. Consequently, if
the Arbitral Tribunal concludes that the termination is illegal, the same
would not take effect.
31. Mr. Sundaram submits that the PSC is a contract, for the non-
performance of which compensation in money can never be an
adequate relief. It is argued that this is not only because there exist no
standards for ascertaining actual damages that may be caused by the
non-performance of the PSC, but also because the termination of the
PSC would gravely affect the reputation and future business potential
of the petitioner worldwide, which is incalculable.
32. Petitioner submits the provisions of section 41(e) Specific Relief
Act, 1963 shall not be applicable in present case because as per
section 10, PSC is specifically enforceable, being a contract where
actual damages on non performance cannot be ascertained. Petitioner
further submits that the present contract does not fall under any of the
clauses of section 14 Specific Relief Act, 1963 ie. it is not a contract
where non performance can be compensated in money, nor is it a
determinable contract in its nature, nor it is a contract dependent on
personal volition.
33. He further submits that if injunction cannot be granted to enforce
the clauses of the contract, then by virtue of section 42, courts can
enforce the negative agreement i.e. not to terminate the contract
during the subsistence of arbitral proceedings.
34. Mr. Sundaram submits that the decision of the Supreme Court in
Indian Oil Corporation Ltd. v. Amritsar Gas Service & Others,
1991 (1) SCC 533 is largely misunderstood as the Supreme Court was
dealing with a case wherein the agreement could be terminated by
either party by giving thirty days notice to the other party "without
assigning any reason for such termination". This clause was
independent of the clause which permitted the Indian Oil Corporation
to terminate the agreement on the happening of any of the certain
specified events. He submits that it is for this reason that the Supreme
Court concluded that the agreement was determinable.
35. He submits that in the present case, the PSC cannot be
terminated by either of the parties by giving notice for specified period
without any cause. The right to terminate the PSC is based upon the
existence of one or more of the circumstance enumerated in Article
31.2 and 31.3. Few other decisions relied upon by Mr. Sundaram shall
be referred to in the course of my discussion of the submissions.
Respondent's Submissions:
36. Learned Additional Solicitor General, Mr.Mohan Parasaran, who
appears for the respondent submits that Article 29.2 of PSC is attracted
in the facts of the present case. It is settled law that what cannot be
done directly, cannot be done indirectly. Therefore, if prior consent is
required for direct assignment or transfer of Participating Interest as
contemplated in Article 29.1, then prior consent is also necessary for
indirect transfer of participating interest by resort to change in the
status of companies or their shareholding or the relationship with any
guarantor of the companies as envisaged in Article 29.2.
37. Respondent further submits that the petitioner‟s interpretation
of Article 29.2 based on the absence of the word "prior" in Article 29.2
will render the provision otiose and such an interpretation is not
permissible. Contract must be so interpreted to give effect to all
provisions as practically and reasonably as possible. Article 29.2 when
read in conjunction with the Article 29.3 and Article 29.4 makes it
amply clear that the contractor, in fact, requires prior consent of the
Government for indirect transfer of participating interest by virtue of
change in status/shareholding.
38. Article 29.3 requires the contractor to submit an application for
consent to assign or transfer accompanied by relevant information on
the "proposed" assignment or transfer including detailed information
on the "proposed" assignee or transferee and its shareholding and
corporate structure, as was earlier required from the companies
constituting the contractor, the terms of the "proposed" assignment or
transfer and the unconditional undertaking referred to in Article 29.4.
Article 29.4 requires that the applicant shall also submit such
information relating to the "prospective" assignee or transferee of the
assignment or transfer as the Government may reasonably require
enabling proper consideration and disposal of the application.
39. Article 29.5 of the PSC qualifies the aforesaid provisions and
further states that no assignment or transfer shall be effective until the
approval of the government is received or deemed to have been
received. It is, therefore, argued that the petitioner‟s argument that
prior consent is not required is wholly misplaced on a reading of Article
29 in its entirety.
40. Respondent further submits that Article 31.3(e) refers to
assignment of "any" interest in the contract, i.e. direct or indirect
assignment of Participating Interest without the prior consent of the
government as provided in Article 29. The petitioner cannot choose to
conveniently restrict the scope of Article 31.3(e) merely to a direct
transfer or assignment of Participating Interest, especially in light of
the well settled principle of law that what cannot be done directly,
cannot be done indirectly.
41. Respondent submits that there has been an indirect
assignment of Participating Interest in breach of Article 29.2 of the PSC
arising due to the material change in controlling interest in the
petitioner company by virtue of a transfer of a block of shares whereby
MASS now holds 52.9% shareholding in the petitioner company. It is
further submitted that contrary to the petitioner‟s submission, it is not
a mere trading of shares in the open market or a loan agreement
simplicitor. The Investment Agreement dated 16.4.2010 between the
petitioner and MASS involved a private placement of 24,798,000
common shares, rights offering and debenture placement.
42. Mr. Parasaran has referred to the various clauses of the
investment agreement dated 16.04.2010 between the petitioner and
MASS to submit that the said agreement is not merely an investment
agreement by a financial institution, but that, in fact, it is an
agreement whereunder MASS has taken complete control over the
petitioner. In particular, he refers to Article 3.2(a) which entitles MASS
to have a majority in the Board of Directors of the petitioner company.
Under clause (g) of the said Article, the petitioner has also agreed to
change its name to such name as approved by MASS. Respondent
drew attention to the following provisions of the Investment Agreement
between the petitioner and MASS, to point out the extent of
shareholding and controlling interest held by MASS over the Petitioner
Company.
"Purchaser‟s Interest" means the cumulative ownership
interests of the Purchaser and its Affiliates in Common
Shares, expressed as a percentage of the total issued and
outstanding Common Shares, at the time of calculation."
Article 3.1(x)(i) states that "The company or the Subsidaries
have good and marketable title to, or the irrevocable right
to produce and/or sell, their petroleum, natural gas and
related hydrocarbons (for the purposes of this clause, the
foregoing are referred to as the "Interest") and represents
and warrants that the Interests are free and clear of all
liens, charges, encumbrances, restrictions or adverse
claims;"
It is submitted that plain reading of the above provisions
show that Participating Interest is also being transferred,
and that oil and gas operations are also part of the
"interests".
Article 3.2(c) "Rights Offering. The company covenants and
agrees to offer the Rights Offering shares to Shareholders
pursuant to the Rights Offering and to conduct the Rights
offering in accordance with all applicable securities Laws
and the terms of this Agreement. The Purchaser will be
entitled to participate in the preparation of the Prospectus
and such other Rights Offering documents .....................
and the company will promptly provide drafts of such
documents to the purchaser for its review, and will provide
the purchaser with a reasonable time to review and provide
comments on such documents. The company will
........................ not amend the terms or the Rights offering
set forth in this Agreement and as described in the draft
Preliminary Prospectus provided to the Purchaser without
the prior written consent of the purchaser (such consent not
to be unreasonably withheld or delayed)."
MASS is entitled to participate in the preparation of the
Prospectus and such other Rights Offering documents.
The purchaser is given board representation through two
nominee directors, or such as are necessary to represent
its shareholding in the petitioner company.
43. Respondent submits that controlling interest is effective, if MASS
group owns 51% of the total shares. Respondent further submits that
management rights of the Petitioner having been transferred, the
same tantamounts to the transfer of control of the business itself.
44. Mr. Parasaran submits that this is a suitable case for lifting of
the corporate veil of the petitioner company, to determine the
economic realities behind the legal façade, in the interest of justice
and public interest. The doctrine of lifting of corporate veil postulates
the existence of a dualism between the corporation or company on the
one hand and its members or shareholders on the other. Reliance is
placed on New Horizons v. Union of India, (1995) 1 SCC 478 and
CIT v. Meenakshi Mills, (1967) 1 SCR 934. He submits that Mr. Ravi
Prakash who is the CEO of the petitioner is a nominee of MASS.
45. The submission of learned ASG is that the interpretation which
is sought to be given by the petitioner to Article 29 of the PSC is
different from its own understanding of the said Article as contained in
its communications to the respondent. In this regard, he submits that
in the communication dated 09.06.2010 issued in response to the show
cause notice, the petitioner had stated:
"It is abundantly clear that the material change in status or
shareholding should have indirectly resulted in a transfer
or assignment of Participating interest. As mentioned
above the Mass financing transaction does not have this
effect ............"
46. He refers to para 2 of the letter of the petitioner dated
23.06.2010 issued in response to the show cause notice, wherein the
petitioner stated as follows:
"2. It is reiterated at present Mass holds only 18% of the
shareholding of Canoro. Therefore, no material change in
shareholding of Canoro has occurred as on date. Under
the provisions of the Companies Act, 1956, voting rights at
shareholder meetings become somewhat meaningful only
when the voting block is at least 26%. Even then, a 51%
shareholding block is the bare minimum to afford any kind
of positive control."
47. He submits that this constitutes an admission on the part of the
petitioner that there was an indirect assignment of participating
interest in favour of MASS by the petitioner.
48. He further submits that the petitioner had itself filed a "material
change report" in Form 51-102 F3 dated 27.04.2010 with TSX Venture
Exchange, Canada upon entering into its agreement with MASS,
admitting that there is a material change in the shareholding of the
petitioner company. He submits that, therefore, even according to the
petitioner‟s understanding, there was a material change in the status
of the petitioner at the time when the petitioner entered into the
agreement with MASS.
49. Mr. Parasaran further submits that in larger public interest, this
Court should not grant any injunction in the present case. Oil is a
national resource of strategic importance. The PSC pertains to an oil
field in the State of Assam, which is a border State. He submits that if
the interpretation given to Article 31.6 by the petitioner were to be
accepted, it would mean that under no circumstance, the respondent
would be able to terminate the contract by giving a requisite notice,
even if there is clear and gross breach of Article 29.1 or 29.2 of the
PSC. For instance, if a party comprising the contractor were to assign
its participating interest to an enemy State, or a State which is not
having friendly relations with India, the respondent would remain
helpless till so long as the arbitration proceedings continue. Such an
interpretation, according to Mr. Parasaran, would be completely
opposed to Public Policy and would render Article 31.6 void, and
therefore such an interpretation should not be accepted by the Court.
It is submitted that the natural resource is owned by the Government
till it reaches the delivery point. The contractor is entitled only to get
cost petroleum and profit petroleum in proportion to his participating
interest. He also places reliance on Reliance Natural Resources
Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1. In this decision the
Supreme Court extended the public trust doctrine to apply to natural
resources and the governments rights over the same, which was also
fettered by constitutional necessity. Reliance is also placed on
M.P.Mathur v. DTC (2006) 13 SCC 706.
Reliance is also placed on Mahadeo Savlaram Shelke & Ors.
v. Pune Municipal Corporation & Anr. (1995) 3 SCC 33 wherein
court held that public interest is one of the material and relevant
considerations in either exercising or refusing to grant ad interim
injunction.
50. Mr. Parasaran further submits that Article 31.6, in any event,
does not contain any negative covenant which could be enforced by
resort to section 42 of the Specific Relief Act. He submits that the
present case squarely falls under section 41(e) as the performance of
the PSC cannot be specifically enforced.
51. Respondent submits that even assuming that the arbitral tribunal
returns a finding that the termination was invalid, the petitioner can
always be compensated for loss suffered i.e the cost petroleum and
profit petroleum they would have been entitled to under the PSC.
Under the PSC, the petitioner is not entitled to anything more than the
cost and profit petroleum and does not have any vested right in the
crude oil or natural gas in the Amguri field. The calculation of the cost
and profit petroleum being in accordance with the PSC, the petitioner
cannot claim that it is not possible to calculate the monetary loss
suffered as a result of the termination. He submits that under clause
10.1 of the PSC, the agreement provides that the Amguri Field contains
10 wells. The contract was valid for a fixed term of 25 years, unless
terminated earlier. Amguri is a small sized discovered field producing
gas and crude oil. The planned reserves are available and an estimate
of actual output can be easily made, at least on a conservative basis.
He submits that under the contract, all that the petitioner was entitled
to was, cost petroleum and its share in profit petroleum. Even these
shares are to be monitised at least till so long as India does not
become self sufficient in oil production. He submits that it is well
known that India is far from becoming self sufficient in oil production
and demands for oil are ever increasing. He, therefore, submits that
the contention of the petitioner that its damages cannot be quantified
and there are no standards for ascertaining actual damages is not
correct. He submits that the PSC is a commercial contract and the
objective thereof is that the contractor shall make an investment,
employ its expertise and generate profits by producing petroleum. He
submits that the respondent shall maintain full and complete accounts
of the investments made, costs incurred and petroleum produced from
the oil field in question, to enable quantification of the damages, if any,
awarded to the petitioner. The objective is eventually to earn profits in
monetary terms. Therefore, the contract cannot be specifically
enforced as compensation in money is an adequate relief.
52. In support of this submission, Mr. Parasaran relies on Hindustan
Petroleum Corporation Ltd. v. Sriman Narayan, 2002 (5) SCC 760
and submits that this case is similar to the one in hand on facts as well.
Respondent submits that "irreparable injury" means an injury which
cannot be adequately remedied by the payment of damages to the
aggrieved party.
53. Mr. Parasaran has also placed reliance in decision of the
Supreme Court in Amritsar Gas Company (supra). He submits that
as the agreement between the parties is determinable under Article 31
of the PSC, it makes no difference whether or not the same is
determinable for reasons, or upon merely giving a notice without
assignment of reasons. The sufficiency of reasons cannot be gone
into by this Court in these proceedings. As the contract is
determinable, the same cannot be specifically enforced by virtue of
section 14(c) of the Specific Relief Act, and consequently, no injunction
can be granted to prevent its breach.
54. In answer to the submission of the petitioner founded upon
Article 31.6, Mr. Parasaran submits that the invocation of the
arbitration agreement by the petitioner vide notice dated 14.08.2010
itself is invalid, and cannot constitute a notice for the purposes of
section 21 of the Act, as Article 34.3 obliges the parties to attempt an
amicable settlement within 90 days after disputes have arisen, before
resorting to arbitration. He submits that after the disputes arose, upon
issuance of the termination notice dated 27.08.2010, the period of 90
days had not expired when the petitioner sought to involve the
arbitration agreement. Consequently, the petitioner was not even
permitted to invoke the arbitration agreement.
55. Petitioner in rejoinder submits that the Union of India having
once granted the concession in the Amguri field, cannot, without
proper cause and reason, and in a high handed manner, withdraw such
concession since such concession, once made, is a valuable
commercial right. This is especially so when the petitioner has invested
more than US$ One Hundred Million to exploit this right. The
termination of such right can only be strictly in accordance with the
terms of the PSC and the question of whether such decision to
terminate was warranted under the terms of the PSC and made with
due application of mind in accordance with the terms of the PSC is a
matter which will be resolved by the arbitral tribunal, pending which,
the petitioner has prayed for the subject matter of the arbitration to be
protected and preserved.
Discussion:
56. Having heard and considered the arguments of the learned
counsel and upon giving my due consideration to the materials relied
upon by them, I am of the view that prima facie, Article 29.2 requires
the party constituting the contractor to obtain prior approval and
consent of the government. Mere omission to mention the word
"prior" before the word "consent" in Article 29.2 does not make any
difference. In this regard, reference may be made to Article 29.3
which states that the application for consent to assign or transfer shall
be accompanied, inter alia, with "detailed information on the proposed
assignee or transferee ... ... ..., the terms of the proposed assignment
or transfer ... ... ...". The use of the expression "proposed assignee"
and "proposed assignment" shows that the application for consent to
assign or transfer had to be made prior to the assignment or transfer,
and not ex post facto. It is not a mere intimation that the party
comprising the contractor is required to give to the government, but it
is an application to seek the consent and permission of the
government for the "proposed" assignment or transfer of shareholding.
Article 29.1 prohibits direct transfer or assignment of PI without prior
consent. The whole purpose of inserting Article 29.2, after Article 29.1,
appears to be to plug the transfer or assignment of the PI through an
indirect mode without prior permission. Article 29.4 also uses the
expression "prospective assignee or transferee". While making the
application, the party comprising the contractor is required to make
various disclosures about the proposed assignee or transferee, so that
the government is enabled to properly consider and dispose of the
application. The Government has to apply its mind at the time of
granting or refusing consent or approval. Such consent or approval
can also be conditional as provided in Article 29.5. The
consent/approval can also be denied in appropriate cases, and it is not
necessary for the government to grant the same in all cases. Prima
facie, there appears merit in the submission of the respondent that
what cannot be done directly, cannot be permitted to be done
indirectly. Direct transfer of PI without the prior consent of the
respondent is prohibited. So also, indirect transfer of the PI, by
adopting the modus operandi of transfer/vesting of majority stake in
the contractor/party constituting the contractor, without prior consent
of the respondent, cannot be permitted.
57. The use of the expression "for assigning the participating
interest under the changed circumstances" used in Article 29.2, prima
facie, refers to a material change in the shareholding of the party
comprising the contractor. The material change in the shareholding
itself constitutes an assignment of the participating interest. As
noticed above, this position also appears to be the petitioners
understanding of Article 29.2.
58. Breach of Article 29.2 is not capable of remedy. In this regard,
reference may be made to Article 31.5, which provides that if the
breaches mentioned in Article 31.3(f) or (g) or (i) or Article 34 are
remedied within 90 days of issuance of notice, or such extended period
as may be granted by the government, such termination shall not
become effective. However, the mention of Article 31.3(e) is
conspicuous by its absence in Article 31.5.
59. Prima facie, Article 35.1, which obliges the party comprising the
contractor to notify the government of any material change in their
status, shareholding or relationship of that of any guarantor of the
companies, in particular, where such change would impact on
performance of obligations under the PSC, does not whittle down the
requirement of Article 29. The two provisions have to be read
together. Whereas Article 35 merely talks about the government being
notified, Articles 29.1 and 29.2 oblige the party comprising the
contractor to obtain prior consent/approval of the government before
the assignment of the participating interest either directly or indirectly.
60. In the light of the prima facie interpretation given to Article 29.2
of the PSC, there is no need to go into the issue whether the corporate
veil of the petitioner should be lifted or not. However, I may note that,
prima facie, there appears to be merit in the submission of
Mr.Parasaran that this may be a fit case for lifting the corporate veil of
the petitioner to determine the real identity of the entity which is
hiding behind the facade of the petitioner. This is so because this
enquiry is necessary to determine whether the acts of the petitioner
fall within the mischief of article 29.2 of the PSC. In Meenakshi Mills
(supra) the Supreme Court has held that "But in certain exceptional
cases the court is entitled to lift the veil of corporate entity and to pay
regard to the economic realities behind the legal façade". In New
Horizons (supra) the Supreme Court noted its earlier decision in
State of U.P. V. Renusagar Power Co., (1988) 4 SCC 59, wherein it
has been observed:
"It is high time to reiterate that in the expanding of horizon
of modern jurisprudence, lifting of corporate veil is
permissible. Its frontiers are unlimited. It must, however,
depend primarily on the realities of the situation......... The
horizon of the doctrine of lifting of corporate veil is
expanding."
61. The petitioner‟s submission that the respondent has not given
the requisite 90 days notice, prima facie, appears to be fallacious.
Article 31.3 enables the government to terminate the PSC "upon giving
ninety (90) days written notice to the other party of its intention to do
so". The said notice was given by the government at the time of
issuance of the show cause notice dated 01.06.2010.
62. The submission of Mr. Sundaram that Amritsar Gas Service
(supra) has no application in the facts of the present case as, in that
case, the contract was terminable by giving a fixed time notice without
assigning reasons, and this not the position in the present case, is not
acceptable. The discussion in the judgment shows that the Supreme
Court held the contract to be determinable by virtue of both the
clauses, and not merely because the agreement was terminable
without cause, upon giving of a fixed time notice. Reference may be
made to para 12 of this decision which reads as follows:
"The arbitrator recorded finding on issue No. 1 that
termination of distributorship by the appellant-Corporation
was not validly made under Clause 27. Thereafter, he
proceeded to record the finding on issue No. 2 relating to
grant of relief and held that the plaintiff-respondent No. 1
was entitled to compensation flowing from the breach of
contract till the breach was remedied by restoration of
distributorship. Restoration of distributorship was granted
in view of the peculiar facts of the case on the basis of
which it was treated to be an exceptional case for the
reasons given. The reasons given slate that the
Distributorship Agreement was for an indefinite period till
terminated in accordance with the terms of the Agreement
and, therefore, the plaintiff-respondent No. 1 was entitled
to continuance of the distributorship till it was terminated
in accordance with the agreed terms. The award further
says as under:
"This award will, however, not fetter the right of
the defendant Corporation to terminate the
distributorship of the plaintiff in accordance with
the terms of the agreement dated April 1, 1976,
if and when an occasion arises."
This finding read along with the reasons given in the award
clearly accepts that the distributorship could be terminated
in accordance with the terms of the Agreement dated
1.4.1976, which contains the aforesaid Clauses 27 and 28.
Having said so in the award itself, it is obvious that the
arbitrator held the distributorship to be revokable in
accordance with Clauses 27 and 28 of the Agreement. It is
in this sense that the award describes the Distributorship
Agreement as one for an indefinite period, that is, till
terminated in accordance with Clauses 27 and 28. The
finding in the award being that the Distributorship
Agreement was revokable and the same being admittedly
for rendering personal service, the relevant provisions of
the Specific Relief Act were automatically attracted. Sub-
section (1) of Section 14 of the Specific Relief Act specifies
the contracts which cannot be specifically enforced, one of
which is 'a contract which is in its nature determinate'. In
the present case, it is not necessary to refer to the other
clauses of Sub-section (1) of Section 14, which also may be
attracted in the pres6nt case since Clause (c) clearly
applies on the finding read with the reasons given in the
award itself that the contract by its nature is determinable.
This being so granting the relief of restoration of the
distributorship even on the finding that the breach was
committed by the appellant-Corporation is contrary to the
mandate in Section 14(1) of the Specific Relief Act and
there is an error of law apparent on the face of the award
which is stated to be made according to 'the law governing
such cases'. The grant of this relief in the award cannot,
therefore, be sustained."
63. Reliance placed by Mr. Sundaram on para 14 of the aforesaid
decision appears to be misplaced, as the Supreme Court in that
paragraph was considering the aspect of quantification of damages,
and not the aspect whether the contract was determinable or not.
Para 14 of this decision reads as follows:
"The question now is of the relief which could be granted
by the arbitrator on its finding that termination of the
distributorship was not validly made under Clause 27 of the
Agreement. No doubt, the notice of termination of
distributorship dated 11.3.1983 specified the several acts
of the distributor on which the termination was based and
there were complaints to that effect made against the
distributor which had the effect of prejudicing the
reputation of the appellant-Corporation; and such acts
would permit exercise of the right of termination of
distributorship under Clause 27. However, the arbitrator
having held that Clause 27 was not available to the
appellant- Corporation, the question of grant of relief on
that finding has to proceed on that basis. In such a
situation, the Agreement being revokable by either party in
accordance with Clause 28 by giving thirty days' notice,
the only relief which could be granted was the award of
compensation for the period of notice, that is, 30 days. The
plaintiff-respondent No. 1 is, therefore, entitled to
compensation being the loss of earnings for the notice
period of thirty days instead of restoration of the
distributorship. The award has, therefore, to be modified
accordingly. The compensation for thirty days notice period
from 11.3.1983 is to be calculated on the basis of earnings
during that period disclosed from the records of the Indian
Oil Corporation Ltd."
64. I may refer to the Division Bench judgment in Rajasthan
Breweries Ltd. V. The Stroh Brewery Co., AIR 2000 Delhi 450. The
appellant had raised an identical argument in that case to say that
unless the contract can be terminated by giving a specified period
notice, without any cause, the same would not be considered to be a
determinable contract. Para 3 of the decision records the appellants
submission and, so far as it is relevant, it reads as follows:
"3. The appellant's case is that the contracts in question
are not determinable in nature as contemplated by Section
14(i)(c) of the Specific Relief Act since there is no clause in
the agreement, which permits the respondent to terminate
the agreements by giving a notice of a few days. The
contracts, which are determinable in nature have always
been understood to mean those contracts, which can be
put to an end to sending notice implicate of a few days. It
was contended that contracts in question do not contain
such a clause. To the contrary, the contracts in the present
case specifically state and recognise that the respondent
has granted to the appellant an exclusive license to
produce Stroh Beer for a term of seven years. Which term
was renewable successively for a period of three years at
each time. It has also been contended that if the decision
rendered by learned Single Judge is taken to be correct
law, then in almost all commercial contracts the remedy of
injunction would be barred. Another ground urged is that
the arbitration proceedings in the present case have to be
conducted in accordance with English law and since
procedural law is the English Arbitration Act, the same will
govern the rights of the parties. Section 48(5)(b) of the
English Arbitration Act, 1996 specifically empowers the
Arbitrator to order specific performance of a contract. This
aspect was not considered in its right prospective."
65. The submission of the appellant was again noticed in para 16,
which reads as follows:
"16. Learned counsel for the appellant contended that the
word "determinable" used in clause (c) to Sub-section (1)
of Section 14 means that which can be put an end to.
Determination is putting of a thing to an end. The clause
enacts that a contract cannot be specifically enforced if it
is, in its nature, determinable not by the parties but only by
the defendant. Although clause does not add the word "by
the parties or by the defendant" yet that is the sense in
which it ought to be understood. therefore, all revocable
deeds and voidable contracts may fall within
"determinable" contracts and the principle on which
specific performance of such an agreement would not be
granted is that the Court will not go through the idle
ceremony of ordering the execution of a deed or
instrument, which is revocable at the will of the executant.
Specific performance cannot be granted of a terminable
contract."
66. The Division Bench rejected the aforesaid submissions by placing
reliance on Amritsar Gas Service (supra) and also approved the
decision of this court in M/s Classic Mirrors Ltd. V. M/s Maruti
Udyog Ltd, 65 (1997) DLT 166. The relevant extract from the Division
Bench decision reads as follows:
"17. We are unable to persuade ourselves to accept the
submissions put forth on behalf of the appellant that when
a contract is determinable by the parties, the same cannot
be treated as such a contract as is referred to in clause (c)
to sub-section (1) of Section 14 id a contract, which in its
nature is determinable.
18. In Indian Oil Corporation Ltd. Vs. Amritsar Gas Service
and others, (1991) 1 SCC 533, the Supreme Court had an
occasion to consider the terms of agreement of
distributorship. The agreement could be terminated in
accordance with the terms of the agreement as per clauses
37 and 28 thereof. The Arbitrator had also held the
distributorship to be revocable in accordance with clauses
27 and 28 of the agreement. The distributorship
agreement was held for indefinite period, namely, till the
time it was terminated in accordance with the terms
contained therein. It was the case of the respondent
therein that since the contract had not been terminated in
accordance with clause 27 thereof, under which
termination had been made, the firm was entitled to
continuance of distributorship in the special circumstances
of the case, which contention was upheld by the Arbitrator.
Supreme Court set aside the award of the arbitrator on the
ground that there is error of law apparent on the face of
the record and grant of relief in the award cannot be
sustained. It was held:-
"The arbitrator recorded finding on issue No.1 that
termination of distributorship by the appellant Corporation
was not validly made under clause 27. Thereafter, he
proceeded to record the finding on issue No.2 relating to
grant of relief and held that the plaintiff-respondent 1 was
entitled to compensation flowing from the breach of
contract till the breach was remedied by restoration of
distributorship. Restoration of distributorship was granted
in view of the peculiar facts of the case on the basis of
which it was treated to be an exceptional case for the
reasons given. The reasons given state that the
Distributorship Agreement was for an indefinite period till
terminated in accordance with the terms of the agreement
and, therefore, the plain- tiff-respondent 1 was entitled to
continuance of the distributor- ship till it was terminated in
accordance with the agreed terms. The award further says
as under:-
"This award will, however, not fetter the right
of the defendant Corporation to terminate the
distributorship of the plaintiff in accordance
with the terms of the agreement dated April 1,
1976, if and when an occasion arises."
This finding read along with the reasons given in the award
clearly accepts that the distributorship could be terminated
in accordance with the terms of the agreement dated April
1, 1976, which contains the aforesaid clauses 27 and 28.
Having said so in the award itself, it is obvious that the
arbitrator held the distributorship to be revokable in
accordance with clauses 27 and 28 of the agreement. It is
in this sense that the award describes the Distributorship
Agreement as one for an indefinite period, that is, till
terminated in accordance with clauses 27 and 28. The
finding in the award being that the Distributorship
Agreement was revokable and the same being admittedly
for rendering person al service, the relevant provisions of
the Specific Relief Act were automatically attracted. Sub-
section (1) of Section 14 of the Specific Relief Act specifies
the contracts which cannot be specifically enforced, one of
which is a contract which is in its nature determinable. In
the present case, it is not necessary to refer to the other
clauses of sub-section (1) of Section 14, which also may be
attracted in the present case since clause (c) clearly
applies on the finding read with reasons given in the award
itself that the contract by its nature is determinable. This
being so granting the relief of restoration of the
distributorship even on the finding that the breach was
committed by the appellant-Corporation is contrary to the
mandate in Section 14(1) of the Specific Relief Act and
there is no error of law apparent on the face of the award
which is stated to be made according to the law governing
such cases. The grant of this relief in the award cannot,
therefore, be sustained.
The facts of the present case are identical to those in
aforementioned decision of the Supreme Court in as much
as the agreements in the instant case are also terminable
by the respondent on happening of certain events. In
Indian Oil Corporation's case (supra) also agreement was
terminable on happening of certain events. Question that
whether termination is wrongful or not; the events have
happened or not; the respondent is or is not justified in
terminating the agreements are yet to be decided. There is
no manner of doubt that the contracts by their nature
determinable.
In M/s. Classic Motors Ltd. Vs. M/s. Maruti Udyog Ltd.,
65(1997)DLT166 relying upon number of decisions, learned
Single Judge of this Court rightly observed:-
"In view of long catena of decisions and
consistent view of the Supreme Court, I hold
that in private commercial transaction the
parties could terminate a contract even without
assigning any reasons with a reasonable period
of notice in terms of such a Clause in the
agreement. The submission that there could be
no termination of an agreement even in the
realm of private law without there being a
cause or the said cause has to be valid strong
cause going to the root of the matter,
therefore, is apparently fallacious and is
accordingly, rejected."
67. Therefore, prima facie, the PSC is determinable in its nature.
But, in all fairness, I must take note of the line of decisions cited by Mr.
Sundaram, i.e. Koshika Telecom Ltd. v. Union of India, 2002 (3)
Arb. LR 141, Softline Media Ltd. v. Delhi Transport Corporation,
2002 Suppl. Arb. L.R. 632, Atlas Interactive (India) Pvt. Ltd. v.
BSNL & Anr., 2006 (126) DLT 504 and Newage Fincorp (India) Ltd.
v. Asia Corp Securities Ltd., 2000 (3) Arb. L.R. 687). These
decisions were rendered keeping in view the fact that the petitioner
had incurred substantial expense towards performance of the contract,
and the Court was of the view that prima facie, there was no breach of
the contract by the plaintiff/petitioner, or that it being a mere technical
breach, did not justify the termination of the contract. In Atlas
(supra), the learned Single Judge also observed that Rajasthan
Breweries (supra) was a decision rendered in the factual background
that both the parties were private parties, and that it did apply where
one of the contracting parties was a state instrumentality. Without
getting embroiled into this debate, I may only note that Amritsar Gas
Service (supra), on which the decision in Rajasthan Breweries
(supra) is based, was a case involving a state instrumentality.
Moreover, prima facie, there is breach of Article 29 by the petitioner,
which may render the PSC terminable.
68. No doubt, the quantum of investment made by the petitioner
would be a germane consideration while considering whether or not to
grant an injunction against the termination of the PSC. However,
prima facie, the termination of the PSC by the respondent cannot be
said to be illegal at this stage, in the facts of this case. The fact that
the petitioner has already made substantial expenditure under the
PSC, by itself, cannot insulate it from the consequences of its breach of
the PSC. Moreover, the level of investment has to be viewed in the
context of the transaction to which it pertains. It is not the petitioners
case that the investment made is a very high proportion of the returns
that the petitioner would derive if the PSC is allowed to be acted upon
by the petitioner as the operator. Consequently, the decision in
Koshika Telecom (supra), Softline Media (supra), Atlas
Interactive (supra) and Newage Fincorp (supra) are not attracted in
the facts of the present case.
69. In Sriman Narayan (supra), Hindustan Petroleum Corporation
had entered into a commercial contract with the respondent Sriman
Narayan for sale of petroleum products manufactured by the said
corporation. Under the terms of the agreement, it was stipulated that
the respondent shall not change the structure of the firm without the
permission of the appellant. Concededly, respondent No.1 had
changed the structure of the firm from a proprietary firm to a
partnership firm. Under the agreement, the said violation entitled the
termination of the license.
70. The Supreme Court in para 8 observed as under:
"8. The decision whether or not to grant an interlocutory
injunction has to be taken at a time when the exercise of
the legal right asserted by the plaintiff and its alleged
violation are both contested and remain uncertain till they
are established on evidence at the trial. The relief by way
of interlocutory injunction is granted to mitigate the risk of
injustice to the plaintiff during the period before which that
uncertainty could be resolved. The object of the
interlocutory injunction is to protect the plaintiff
against injury by violation of his right for which he
could not be adequately compensated in damages
recoverable in the action if the uncertainty were
resolved in his favour at the trial. The need for such
protection has, however, to be weighed against the
corresponding need of the defendant to be
protected against injury resulting from his having
been prevented from exercising his own legal rights
for which he could not be adequately compensated.
The court must weigh one need against another and
determine where the "balance of convenience" lies.
(See Gujarat Bottling Co. Ltd. v. Coca Cola Co.,
(1995) 5 SCC 545 at p. 574)" (Emphasis supplied)
71. The Court held that, prima facie, the appellant was entitled to
take action for revoking the agreement entered into with the
respondent. The validity or otherwise of the revocation of the license
could be considered at the stage of interim injunction only for the
limited purpose of ascertaining whether there is a prima facie case in
favour of the plaintiff. The Supreme Court placed reliance on the
earlier decision in Amritsar Gas Service (supra). While examining
the relief granted by the High Court to the respondent, the Supreme
Court observed:
"Most importantly, the High Court has not considered the
question whether on the facts and circumstances of the
case, if the prayer for interim injunction is refused the
plaintiff-petitioner will suffer irreparable loss which cannot
be adequately compensated by damages. As has been held
by this Court in Dorab Cawasji Warden case ordinarily the
relief to be granted to a plaintiff in such a matter is
awarding of damages and interim injunction or a mandatory
nature is not to be granted".
The Supreme Court vacated the injunction granted by the High
Court in favour of the respondent.
72. Mr. Sundaram has fairly conceded the position that
considerations of larger public interest will overrule the limitation
contained in Article 31.6 of the PSC on the right of the government to
terminate the PSC. He concedes that if there are genuine serious
objections to the transfer of participating interest by a party
constituting the contractor, to an undesirable entity, the government
would be entitled to step in and terminate the PSC.
73. I am, even otherwise, of the prima facie view that the State, as a
sovereign, cannot be understood to have irretrievably given up all its
rights while entering into a contract, such that it is rendered helpless in
a situation which threatens the national interest or security of State.
An interpretation, either of a law or a contract, which impinges on the
sovereign power of the State to safeguard its vital and strategic
interests (and not just commercial interests), would be eschewed by
the Court to save the law, or the contract, from voidity on the ground
of it being opposed to public policy. In Reliance Natural Resources
Ltd. (supra), the Supreme Court commented on the rights vested in
Reliance Industries Ltd (RIL) under the production sharing contract
entered into by the Government as follows:
"117. RIL‟s right of distribution is based on the PSC, which
itself is derived from the power of the Government under
the constitutional provisions. Thus, the very basis of RIL‟s
mandate is the constitutional concepts that have been
discussed by now, including Article 297, Articles 14 and
39(b) and the public trust doctrine. Therefore, it would be
beyond the power of RIL to do something which even the
Government is not allowed to do. The transactions
between RIL and RNRL are subject to the overriding role of
the Government."
In para 252, the Supreme Court observed:
"252. The PSC itself specifically recognises that the
interests of India are of paramount importance. Recital 6 of
the PSC states that the "Government desires that the
petroleum resources ... be discovered and exploited with
utmost expedition in the overall interests of India and in
accordance with good international petroleum industry
practices". Further, the PSC also places an affirmative
obligation on the contractor, in Article 8.3(k) to "be always
mindful of the rights and interests of India in the conduct of
petroleum operations". Article 32.2 specifically states that
nothing in the PSC shall "entitle the contractor to exercise
the rights, privileges and powers conferred upon it in a
manner which will contravene the laws of India". We fail to
appreciate, given such a clear linkage between the PSC
and the constitutional imperatives, Shri Jethmalani‟s
argument that the GoI‟s policy initiatives violate the terms
of the PSC and sanctity of contracts."
74. I may note that in the PSC in question similar recitals and
conditions are found, as contained in the PSC interpreted by the
Supreme Court in Reliance Natural Resources Ltd. (supra). (See
Recital 4 as quoted above, Article 8.3(k) and Article 33.2 of the PSC in
question). At the same time, I may note that the decision in M.P.
Mathur (supra) does not appear to be relevant because that case did
not deal with contractual rights, but the rights were founded upon
promissory estoppel.
75. So what would be the considerations that would go into making
of the decision of the respondent, whether or not to grant its consent
for the indirect assignment or transfer of participating interest by
resort to a material change in the shareholding of the party comprising
the contractor? Prima facie, it appears to me that the same guidelines
and considerations would be germane for the purpose of grant/refusal
of permission under Article 29.2, as are germane for consideration of a
request for transferring of participating interest under Article 29.1.
Consequently, the prospective assignee/transferee should be of good
standing, having capacity and ability to meet its obligation under the
PSC and should be willing to provide an unconditional undertaking to
the government to assume the participating interest share of
obligations and provide guarantees in respect thereof as provided
under the PSC. Moreover, the prospective assignee/transferee should
not be a company incorporated in a country with which the
government, for policy reasons, has restricted trade or business. The
prospective assignor or transferor, and assignee or transferee
respectively should be willing to comply with any reasonable
conditions of the government, as may be considered necessary in the
circumstance, with a view to ensure performance under the PSC.
Lastly, the assignment or transfer should not adversely affect the
performance or obligations under the PSC, or be contrary to the
interests of India.
76. A party comprising the contractor cannot be permitted to present
a fait-accompli to the government, by failing to take consent of the
government under Article 29.2, and assigning its participating interest,
through the indirect method of transfer of shareholding amounting to a
material change in the shareholding, and creating a situation which
falls foul of either one or more of clauses (a) to (d) of Article 29.1.
Clause 31.6 relied upon by the petitioner is very pertinent to the
petitioner‟s case for the sake of convenience, the same is reproduced
once again hereinbelow:
"31.6 If the circumstance or circumstances that would
otherwise result in termination are the subject matter or
proceedings under Article 34, then termination shall not
take place so long as such proceedings continue and
thereafter may only take place when and if consistent with
the arbitral award."
77. Prima facie, the circumstance of the petitioner having transferred
its participating interest without the prior consent of the respondent as
required in Article 29.2 exists. Prima facie, the said circumstance
would result in termination of the PSC under Article 31.3(e). Prima
facie, the breach of Article 29 cannot be remedied upon issuance of
notice and it is not even the petitioner‟s case that the said breach has
been remedied. On the contrary, after the issuance of the show cause
notice, the petitioner has permitted MASS to subscribe under the rights
issue which has raised the stake of MASS in the petitioner to nearly
53%. At the same time, the issue whether Article 29.2 has been
breached is the subject matter of proceedings under Article 34,
namely, of arbitration proceedings. The arbitration proceedings in
respect of the aforesaid dispute with regard to interpretation of Article
29.2 stood commenced on the date on which the petitioner gave its
request to the respondent for that dispute to be referred to arbitration,
i.e., 14.08.2010.
78. The submission of Mr. Parasaran that the invocation of
arbitration agreement was premature because the petitioner did not
attempt an amicable settlement within 90 days after the disputes had
arisen and before invoking the arbitration agreement, in my view, has
no merit. If it becomes eminent that a dispute has arisen between the
parties which cannot be amicably settled, a party is not obliged to wait
for the expiry of 90 days period before invoking arbitration. The
respondent had issued the show cause notice dated 01.06.2010. This
show cause notice recited that the termination of Article 29.2 of the
PSC had been viewed seriously by the respondent. The manner in
which the mind of the respondent was working was evident from the
fact that the show cause notice was given to enable the petitioner to
show cause as to why the PSC be not terminated. The petitioner sent
its responses on 06.06.2010, 09.06.2010 & 23.06.2010. It sent further
communication on 01.07.2010. From the communications of the
petitioner it appears that the petitioner also met the officers of the
respondent to discuss the issue. It, therefore, cannot be said that the
petitioner did not make an endeavour to arrive at an amicable
settlement. If it became eminent to the petitioner that a settlement
was not possible and that the respondent was intent upon terminating
the PSC, the petitioner cannot be accused of jumping the gun by
invoking the arbitration agreement without waiting for the expiry of 90
days period from the time that the dispute arose.
79. In the present case, the respondent in its reply has not pleaded
that MASS is an undesirable entity. The respondent had given no
reason whatsoever for objecting to the induction of MASS as the
majority shareholder in the petitioner. Therefore, I may have been
inclined to give effect to Article 31.6 in the absence of circumstances
giving rise to public and national interest considerations.
80. After the matter had been heard and judgment reserved on
06.12.2010, and while the present judgment was under preparation,
the matter was mentioned by the learned ASG Mr. Parasaran to move
an application for the purpose of brining on record subsequent facts
and events. According to the respondent, a team from Directorate
General of Hydrocarbon (DGH), which is a Technical Wing under the
Ministry of Petroleum & Natural Gas, had conducted a technical
audit/surveillance of Amguri field from 08.11.2010 to 11.11.2010.
After conducting the technical audit/surveillance, this team has
submitted a report dated 20.12.2010 to the Ministry of Petroleum &
Natural Gas. It is stated that the report had been received by the
respondent after 06.12.2010, i.e., the date on which judgment in this
case was reserved. Along with the application, the respondent has
filed an affidavit of Mr. Partha Das, working as Director (Exploration),
Ministry of Petroleum & Natural Gas, Government of India. Along with
this affidavit, the respondent has placed on record the report on
technical audit/surveillance on the basis of audit/surveillance
conducted between 08th & 11th November, 2010, prepared by DGH
along with the forwarding letter dated 20.12.2010. The conclusions
drawn in the said report on technical audit/surveillance read as follows:
"Conclusion
1. The delay in gas Compression & injection facilities
has caused damage to Reservoir Health affecting
productivity and ultimate condensate recovery from
Barail Main retrograde gas condensate reservoir.
2. The continued production from Barail Main reservoir
below dew point pressure has led to condensate drop
out of around 551,000 barrels in the reservoir during
last two years which has caused a significant
revenue loss to Government of India/ Government of
Assam.
3. The operator continued to produce the wells from
Main Barail (A-6, 10B & 11) till June 2010 resorting to
flogging of reservoir and hiding the facts to DGH/GOI.
The operator admitted the fact during the technical
audit that flogging of reservoir was resorted to
ensure minimum cash flow for smooth running of the
project.
4. Increase in water cut in A-6 (Main Barail) & A-11
(Middle Barail) will be constrained for required gas
production in absence of viable solution to water
disposal problem and also meeting the production
targets.
5. The infrastructure of A-6 EPS and the gas
compression plant is in quite bad shape and needs
immediate revamping. The petroleum measurement
facilities are also obsolete and needs to be upgraded.
6. The Operator has been advised to expedite the gas
compression and injection plant within the extended
schedule of completion by January 2011 and restrict
gas sales till dew point pressure is approached.
Concluding Remarks
During the process of finalization of the report, it was
brought to notice that Amguri-11, the only well producing
gas and condensate in Amguri field has been shut down
w.e.f. 3.12.10. It shows lack of Good International
Petroleum Industry Practice (GIPIP) and sound reservoir
management practice by M/s Canoro Resources Ltd as
elaborated in the Report. This further raises a doubt about
technical capability of M/s Canoro Resources Ltd to
effectively manage the Amguri field and PSC as an
Operator.
It is worth mentioning that during the meeting with
CRL and ACIL at DGH on 17.6.2009 (Annexure-V), the
performance of Amguri was discussed wherein DGH had
expressed its displeasure over the overall performance of
CRL as an Operator."
The DGH in its communication dated 20.12.2010 has observed
as follows:
"The Operator has not followed the Good International
Petroleum Practices which has caused the irreparable
damage to the Reservoir, leading to the loss of productivity
from the wells, condensate recovery from the field and
revenue to Govt. of India as well as to Govt. of Assam.
The time and cost over run for Gas compression project is
the result of Canoro‟s inability to provide Project
Management skills. The Statutory HSE requirements have
been neglected, kept on the back bench and not given due
priority & attention. DGMS has also served notice to
operator in Oct 2010, for serious violations of Oil Mines
Regulation, 1984, Mines Rules 1955 and Mines Vocational
Training Rules 1966"
81. When the matter was mentioned on 28.01.2011, the following
order came to be passed:
"The matter has been mentioned by Mr. Mohan Parasaran,
learned ASG, appearing on behalf of the respondent. On his
mentioning, the matter is taken up for consideration. He
submits that the respondent had attempted to move an
application. However, as the matter has been reserved for
judgment, the application has not been listed. Advance
copy has been served on the petitioner‟s counsel.
The application moved by the respondent, if in order,
should be listed before the Court on 31.01.2011. Learned
counsel for the respondent should inform the petitioner of
the listing of this application on 31.01.2011, by recorded
delivery.
A copy of this order be given dasti to the counsel for the
respondent, under the signature of the Court Master."
82. The matter was again taken up on 31.01.2011, and the following
order was passed:
"I.A. No. 1371/2011
This application has been moved by the respondent to place
on record the additional affidavit along with the technical
report relied upon by the respondent in relation to the Amguri
Oil Field.
Arguments in this case had been heard and judgment
reserved on 06.12.2010. The application has been moved
while the judgment is under preparation.
Mr. Sundaram, learned senior counsel for the petitioner, who
appears on advance notice, submits that the petitioner has
already sent a detailed response to the notice issued by the
respondent founded upon the technical report. The
respondent has not yet considered the response and taken an
informed decision, either accepting or rejecting the
explanation furnished by the petitioner.
Mr. Parasaran, learned Additional Solicitor General submits
that the competent authority of the respondent shall grant a
hearing to the petitioner, and after considering response of
the petitioner, the concerned officer shall communicate his
decision by a speaking order. The said decision be taken and
communicated, and also be placed on record along with an
additional affidavit, preferably before the next date.
List on 17.02.2011. Dasti."
83. The respondent has filed an affidavit dated 15.02.2011 of Mr.
Goutam Chakraborty, Chief Geologist and Nodal Officer for Amguri
Field PSC in Directorate General of Hydrocarbons, Ministry of
Petroleum and Natural Gas, Govt. of India. He states in this affidavit
that pursuant to the directions dated 31.01.2011 of this court, a
hearing was granted to the petitioner in the meeting held between the
petitioners representatives and DGH on 07.02.2011, and the decision
of the DGH was conveyed to the petitioner vide letter dated
14.02.2011. A copy of that decision has been enclosed with this
affidavit as Annexure R-1/A. It is stated in the affidavit that DGH is a
technical body under the Ministry of Petroleum and Natural Gas to
monitor and manage all the oil and gas natural resources in the
country. The letter dated 14.02.2011 has been issued by the
Directorate General of Hydrocarbons to the petitioner. This letter has
also been signed by Mr. G. Chakraborty, Chief Geologist. It makes
reference to the petitioner‟s letters dated 4th and 13th January, 2011 in
response to the technical audit/surveillance in relation to Amguri PSC,
conducted by DGH during 8th to 11th November, 2010 and oral
submissions made during the meeting with DGH on 07.02.2011. This
letter asserts that DGH‟s conclusions, as contained in its technical
audit/surveillance, are based on ground realities and facts. It is further
stated that continued neglect of the field by the operator with regard
to health of reservoir, meeting project schedule, production targets,
cost aspects, non compliance with statutory obligations and other
factors have led the DGH to resort to surveillance/audit as it is the
responsibility of DGH being a nominee of the Government. The letter
also refers to the earlier letter dated 22.12.2010, which, it is stated,
clearly brings out the undeniable facts on record. The letter further
states that the petitioner is only trying to explain reasons behind all
the lapses and one instance which is cited is, where the petitioner has
sought to explain 18 months delay in implementation of gas
compression project, and cost escalation has been explained due to
reasons like heavy monsoon, changes in scope of work, problems with
vendors and JV partners, lack of infrastructure and resources in Assam
etc. The letter states that conditions like heavy monsoon,
infrastructure set up in Assam etc. were all well known before entering
into the contract. The letter further states that the project had been
approved by the MC long back. It states that consequence of such
delay resulting in damage to reservoir health of Barail main sand of
Pool A have been brought out in detail in their letter dated 22.12.2010.
84. The respondent has sought to rely upon the petitioner‟s
communication dated 07.09.2010, wherein the petitioner had inter alia
stated:
""Not all the hydrocarbons that condense in the reservoir
will re-vaporize post gas injection and increase of reservoir
pressure above the dew point. Therefore, reservoir gas
effective permeability and the well productivity will not
fully recover to virgin state.
The percentage of condensate that will re-vaporize is not
certain because of lack of core data (capillary pressures &
interfacial tensions effect volume of re-vaporization".
85. The letter further states that the petitioner has sought to resort
to damage control by producing a report from an independent
consultant based on preliminary reservoir modeling, stating that the
damage was reversible and all of the condensate that has dropped out
in the reservoir will be revaporized. This is taken as an admission that
the reservoir has been damaged. It is stated that case histories have
not been presented in support of the report findings. The letter states
that lapses relating to reservoir damage are very serious and result in
permanent loss of nation‟s precious resources. Reference has also
been made to an earlier meeting held on 17.06.2009 between the
petitioner, ACL and DGH, wherein DGH had expressed its displeasure
over the overall performance by the petitioner as the operator.
86. The letter also makes a point about the petitioner not providing
monthly reports. I may note that the contents of the letter, particularly
under the heading "monthly reports" appear to be highly technical in
nature and their interpretation is not only beyond the scope of the
present proceedings, but also not required at this stage.
87. The petitioner has responded to the said affidavit of the
respondent by filing its own detailed affidavit dated 22.02.2011. Mr.
Sundaram submits that the oil field in question is dissimilar to oil fields
as generally found, inasmuch, as, it is a retrograde condensate
reservoir where production of gas below a particular dew point (3654
psi) results in reduced relative permeability of the rock formations.
The lower the permeability, the lesser the gas production, since the
gas is required to move to the well bore (i.e. surface) through
permeable layers. He submits that Amguri field is first of its kind in
India, and that the DGH has no experience of similar fields. It is
further stated that the petitioner discovered and declared the Amguri
oil field to be a retrograde condensate reservoir very early in its
production cycle. It is stated that ONGC, which previously owned and
operated the said oil field was unable to identify it as a retrograde
condensate reservoir in a span of around 25 years.
88. The affidavit states that on 07.02.2011, the relevant technical
personnel of the petitioner met with the DGH, furnished detailed
explanations and placed on record the report of M/s. Exploration
Technologies Inc. prepared by Mr. Greg Caswell, an international
expert on the subject of reservoir engineering. It stated that the report
is based on a scientifically prepared and validated simulation model.
89. It is further stated that in the meeting, the DGH sought from the
petitioner the international case studies on retrograde condensate
reservoir since it was not aware of any such similar reservoirs in India.
The case study in relation to Arun field Indonesia operated by Exxon
Mobil was submitted by the petitioner on 15.02.2011. The affidavit
further states that on 11.02.2011, the petitioner submitted a report
prepared by Mr. S.K. Khazanchi, a renowned expert on reservoir
engineering, who until recently, was the head reservoir engineering of
the DGH itself. Mr. Khazanchi was also the General Manager (reservoir
studies) at India‟s only reservoirs engineering institute, namely, the
institute of reservoir studies established by ONGC. According to this
report, no damage has been caused to the reservoir and it certifies
that the petitioner has consistently acted in conformity with good
international petroleum industry practices. The affidavit discloses that
to deal with the peculiar situation of the Amguri oil field, the petitioner
proposed that a gas compression project be established at Amguri.
However, that project has been delayed by the respondent as the
respondent has failed to accord its approval for the necessary budget
even after the operating committee has done so. It is stated that as
per Article 6.5 and 6.6 of the PSC, the gas compression project could
not be provided with unless the approval of the respondent was
obtained.
90. The petitioner disputes the respondents‟ statement that the
production had been approved by the MC long back, as the gas
compression project, according to the petitioner, has not been
approved by the MC. The further submission of the petitioner is that
the report prepared by Mr. Greg Caswill, Mr. S.K. Khazanchi and the
case studies of the Arun field Indonesia constituted scientific evidence
which has not been considered by the respondent while passing the
order dated 14.02.2011. According to the petitioner, the said order
merely talks of "ground realities", but does not deal with the scientific
evidence relied upon by the petitioner to establish that the petitioner
has not caused any irreversible damage to the oil field; the petitioner
has adopted good international petroleum industry practices in
operating the oil field in question, and; that the condensation in the
reservoir can be revaporised and the damage, though not caused by
the petitioner, is reversible.
91. Mr. Sundaram has further objected to the affidavit being filed by
Mr. Chakraborty, and not by a high ranking officer of the Directorate
General of Hydrocarbons. He submits that a senior and responsible
officer should take responsibility by filing an affidavit, as, according to
the petitioner, the technical audit/surveillance report, the
communication dated 22.12.2010 and the decision communicated vide
letter dated 14.02.2011 have all been arrived at malafide and are not
based on facts with a view to somehow oust the petitioner from the
PSC and to transfer the participating interest of the petitioner in the
PSC to another entity. Mr. Sundaram submits that the petitioner has
the technical knowhow and the resources to deal with the retrograde
condensate reservoir and the respondent should, in national interest,
use the expertise and resources of the petitioner, rather than dumping
the petitioner at this stage. He submits that even on considerations of
public/national interest, it would be desirable to allow the petitioner to
continue as the operator in the interregnum till the disputes are
resolved through arbitration.
92. Mr. Sundaram submits that the petitioner is ready and wiling to
the appointment of a sole expert to examine as to whether the
petitioner has caused any irreparable loss or damage to the oil field in
question by its acts or omissions in terms of Article 34.2 of the PSC,
and states that the petitioner would accept the decision of the sole
expert. He submits that the appointment of a sole expert would
resolve this controversy much faster, may be in a matter of few weeks,
and save the parties avoidable wastage of time and effort. He submits
that under section 26 of the Act, the arbitral tribunal is empowered to
appoint one or more experts to report to it on specific issues to be
determined by it.
93. The criticism of the order passed by DGH on 14.11.2011 by Mr.
Sundaram on the ground that the same only refers to "ground
realities" and does not deal with the scientific evidence produced by
the petitioner, prima facie, may not be entirely correct. I say this for
the reason that the said order has been passed in the context of the
report of technical audit/surveillance prepared by DGH. It is the
observations made in the said technical surveillance report which are
referred to as "ground realities" in the communication dated
14.11.2011 of the DGH. The letter dated 14.11.2011 refers to the
report from the independent consultant produced by the petitioner at
the time of hearing. The said report, it appears, did not find favour
with the respondent as no case history had been presented in support
of the report findings. Even according to the petitioner, the case study
pertaining to Arun filed in Indonesia was furnished on 15.02.2011, i.e.
after the issuance of the letter dated 14.02.2011.
94. The submission of Mr. Sundaram that the DGH is acting at the
behest of some third party, who is interested in taking over the
participating interest of the petitioner under the PSC, is not
substantiated in these proceedings. When senior government officials
take their decision in the discharge of their official duties, the
presumption is that they have acted bonafide, with honesty and in the
national interest. There is no reason for me, at this stage, not to draw
such a presumption or to act up on it.
95. At this stage, it is neither possible for me, nor required of me to
come to any conclusion whether, or not, the petitioner is guilty of
causing irretrievable or irreparable damage to the Amguri oil field, as
alleged by the respondent. However, I cannot lose sight of the fact
that the governmental decision has been taken after hearing the
petitioner‟s version by a senior high ranking and responsible
functionary. I would, therefore, not disregard the said decision/stand
taken by the respondent that the oil field in question has already been
irretrievably and irreparably damaged by the conduct of the petitioner.
No doubt, the petitioner has vehemently disputed the charge made by
the respondent against it. It would be for the tribunal to go deeper into
the technicalities and factual controversy to determine whether, or not,
the petitioner has indeed irretrievably and irreparably damaged the oil
field by its conduct, as alleged by the respondent. The arbitral tribunal
already stands constituted and its powers under section 27 do not
appear to have been curbed by the PSC. Therefore, the arbitral
tribunal may, if, it considers appropriate and permissible, appoint one
or more experts to satisfy itself, whether or not the petitioner is guilty
of causing irretrievable or irreparable damage to the oil field in
question, if an issue in that respect arises between the parties. The
question is, in these circumstances, where does the balance of
convenience lie?
96. In Mahadeo Savlaram Shelke (supra), the Supreme Court
quoted with approval, inter alia, the following extract from the Law
Quarterly Review, Volume 109 at page 432 (at p. 446), A.A.S.
Zuckerman under the title "Mareva Injunctions and Security for
Judgment in a Framework of Interlocutory Remedies" which reads:
"12. In "Modern Law Review", Vol 44, 1981 Edition, at page
214, R.A. Buckley stated that "a plaintiff may still be
deprived of an injunction in such a case on general
equitable principles under which factors such as the public
interest may, in an appropriate case, be relevant. It is of
interest to note, in this connection, that it has not always
been regarded as altogether beyond doubt whether a
plaintiff who does thus fail to substantiate a claim for
equitable relief could be awarded damages". In "The Law
Quarterly Review" Vol 109, at page 432 (at p. 446), A.A.S.
Zuckerman under Title "Mareva Injunctions and Security
for Judgment in a Framework of Interlocutory Remedies"
stated that "if the plaintiff is likely of suffer irreparable or
uncompensable damage, no interlocutory injunction will be
granted, then, provided that the plaintiff would be able to
compensate the defendant for any unwarranted restraint
on the defendant's right pending trial, the balance would
tilt in favour of restraining the defendant pending trial.
Where both sides are exposed to irreparable injury ending
trial, the courts have to strike a just balance". At page 447,
it is stated that the court considering an application
for an interlocutory injunction has four factors to
consider : first, whether the plaintiff would suffer
irreparable harm if the injunction is denied;
secondly, whether this harm outweighs any
irreparable harm that the defendant would suffer
from an injunction; thirdly, the parties' relative
prospects of success on the merits; fourthly, any
public interest involved in the decision. The central
objective of interlocutory injunctions should
therefore be seen as reducing the risk that rights
will be irreparably harmed during the inevitable
delay of litigation". (emphasis supplied)
97. If the respondents allegations are to be believed, it would mean
that the performance of the petitioners obligations under the PSC have
been breached, and that the continuation of the petitioner as a party
constituting the contractor and the operator is contrary to the interests
of India. If the said allegations are to be believed, the extent of
damage already suffered by the respondent, and the State of Assam
would be immeasurable.
98. I cannot lose sight of the fact that the petitioner is a foreign
company. On the other hand, the respondent is the Government of
India. If the injunction as prayed for is granted, and eventually the
petitioner were to fail in the arbitration proceedings, looking to the
nature and magnitude of the transaction, it would be extremely
difficult for the respondent to recover its losses and damages. There is
a possibility that the damage may be irretrievable and irreparable, in
case the petitioner is allowed by way of an interim measure to
continue to function as the operator or contractor under the PSC during
the pendency of the arbitration proceedings. On the other hand, if the
petitioner succeeds before the Arbitral Tribunal, the petitioner could be
compensated in terms of money.
99. I may also observe that in a case like the present, it is practically
impossible to quantify the amount of security that the party
constituting the contractor may be subjected to, even if a case for
grant of an interim order of injunction to stay the termination of the
PSC is made out. Pertinently, the petitioner has not even volunteered
to furnish any security to safeguard the interests of the respondent, in
case the injunction as prayed for is granted.
100. I, prima facie, agree with the respondent‟s submission that all
that the petitioner is, under the PSC, entitled to is the monetary value
of the cost petroleum and its share in the profit petroleum as,
admittedly, the country is nowhere close to meeting its petroleum
requirements. Reference may be made to Articles 19.1, 16.4 of the
PSC (referred to above) and to the following observations of the
Supreme Court in Reliance Natural Resources Ltd. (supra):
"253. As discussed earlier, it is clear that a wide variety of
instruments have come to be called Production Sharing
Contracts and there is no specific concordance between
that title and what is actually shared pursuant to a PSC. In
light of that discussion and the general acceptance that
revenues are also shared in the context of Production
Sharing Contracts, the insistence of RNRL that only
production i.e. physical volume of gas can be shared under
any Production Sharing Contract may have to be held to be
unsustainable.
254. One of the bigger sources of confusion has been the
manner in which the word petroleum has been used in the
specific PSC under consideration. The word petroleum,
referring to crude oil or natural gas as the case may be, is
used in two senses in different parts of the PSC: as a
physical product and also in terms of the monetised value.
However, when the word petroleum has been used
in conjunction with the words cost and profit, the
definitions in this PSC clearly indicate that reference
is to the monetised value of the physical product i.e.
the units of the physical quantity multiplied by the
sale price at which the physical quantity is sold at.
... .... ..... ....
258. Inasmuch as the words "volume" and "value" have
different connotations and meanings, though occasionally
they may have some overlap, the fact that one was
replaced by the other implies that the meaning ascribable
in the context of this PSC should eliminate the overlap.
Consequently, it can only be understood that the
word "value" is being used, in the PSC, to mean the
monetised value of the physical quantity that is a
resultant of multiplying the quantity of petroleum
(crude oil or natural gas) produced, saved and sold
in the market (as discussed below) at a "price".
259. The words "produced" and "saved" are first used in
the phrase "Petroleum operations" defined in Article 1.74
of the PSC, wherein it is stated that petroleum operations
mean, as "the context may require, exploration operations,
development operations or production operations or any
combination of two or more of such operations, including
construction, operation and maintenance of all necessary
facilities ... environmental protection, transportation,
storage, sale or disposition of petroleum to the delivery
point... and all other incidental operations or activities as
may be necessary".
260. Further, Article 21.6.1 specifically states that the
contractor "... shall endeavour to sell all natural gas
produced and saved...." This indicates that the entire set of
all petroleum operations are to end in a sale at the delivery
point; so it has to be concluded that the phrase "produced
and saved" in the PSC encompasses the activity of sale of
natural gas. Consequently, the phrases "total value",
"cost petroleum" and "profit petroleum" can only
be interpreted as having been used to denote the
monetary value realised after the sale of natural gas
at the delivery point." (emphasis supplied)
101. Therefore, prima facie, the PSC is a contract for the non
performance of which compensation in money would be an adequate
relief.
102. However, I am of the prima facie opinion that there exists no
standard for ascertaining actual damage that may be caused by the
non performance of the PSC, if, eventually the petitioner succeeds in
its challenge to the termination to the PSC before the Arbitral Tribunal.
As submitted by Mr. Sundaram, the recovery of petroleum would be
dependant on various factors such as investment, expertise and
efficiency of the operator and if any other operator is permitted to
substitute the petitioner, the profitability of the project would be
affected, making it impossible to adopt a standard for measurement of
damages that the petitioner may suffer. But that factor, by itself,
would not be sufficient for the Court to grant specific performance of a
contract. The contract should first, and foremost, be specifically
enforceable. This is clear from the opening words of section 10 of the
Specific Relief Act, which read "Except as otherwise provided in this
Chapter, the specific performance of any contract may, in the
discretion of the Court, be enforced ... ... ...". From the aforesaid, it
appears that, firstly, the mandate of section 10 is over shadowed by
that of section 14, which also falls in Chapter II of the Specific Relief
Act, and enlists cases in which the law prohibits the specific
enforcement of contracts. Secondly, the relief of specific performance
is itself a discretionary relief. The discretion of the Court can certainly
not be exercised in breach of the mandate contained in section 14.
103. The respondents have undertaken that they shall maintain full
and complete accounts of the operations carried out at the oil fields in
question. They shall remain bound by this undertaking and they are
accordingly directed to maintain the complete accounts and preserve
the same.
104. In the light of the above considerations, the balance of
convenience, in my view, lies in favour of the respondent, and against
the petitioner.
105. In the face of the allegations that the petitioner, post the indirect
assignment of participating interest has caused irreparable and
irretrievable damage to the oil field, leads me to prima facie conclude
that Article 31.6 of the PSC cannot come in the way of the government
to terminate the PSC qua the petitioner, when the valuable national
resource itself is in danger of being wasted and irretrievably lost by a
contractor or its assignee. This is clear from a perusal of recital 4,
Article 29.1(d) and Articles 8.3(k) and Article 33.2 of the PSC, and my
discussion above. Consequently, I am not inclined to confirm the
injunction granted by me initially. The same stands vacated. I dismiss
this petition leaving the parties to bear their respective costs.
(VIPIN SANGHI)
JUDGE
MARCH 07, 2011
BSR/SR
