Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

ARBITRATION PETITION NO. 27 OF 2013

Reliance Industries Ltd. & Ors. …

Petitioners

Versus

Union of India

….Respondent

J U D G M E N T

SURINDER SINGH NIJJAR,J.

1.This petition has been filed under Section 11(6) of

the Arbitration Act, 1996, with a prayer for

appointment of the third and the presiding

arbitrator, as the two arbitrators nominated by the

parties have failed to reach a consensus on the

appointment of the third arbitrator.

2.Petitioner No.1 is a company incorporated and

1

Page 2 registered under the provisions of the Companies

Act, 1956; Petitioner No.2 is a company

incorporated in Cayman Islands, British Virgin

Islands; Petitioner No.3 is a company incorporated

according to the laws of England & Wales. The

Respondent herein is Union of India (hereinafter

referred to as “UOI”), represented by the Joint

Secretary, Ministry of Petroleum and Natural Gas.

3.Briefly stated, the relevant facts are as under:

4.In 1999, UOI announced a policy-New Exploration

and Licensing Policy (hereinafter referred to as

“NELP”). Under NELP, certain blocks of hydrocarbon

reserves were offered for exploration, development

and production to private contractors under the

agreements which were in the nature of Production

Sharing Contract. One of the said blocks was Block

KG-DWN-98/3 (“Block KG-D6”). The joint bid made

by the Petitioners No.1 and 2 for the Block KG-D6

was accepted by the UOI. Thereafter on 12

th

April,

2

Page 3 2000, Production Sharing Contract (hereinafter

referred to as ‘PSC’) was executed between the

Petitioners No.1 and 2 as Contractor on one side

and UOI on the other. The Arbitration Agreement in

the PSC is contained in Article 33. Relevant facts

thereof, is in the following words:

“ARTICLE 33

SOLE EXPERT, CONCILIATION AND ARBITRATION

33.1 * * *

33.2 * * *

33.3 Subject to the provisions of this Contract,

the Parties hereby agree that any controversy,

difference, disagreement or claim for damages,

compensation or otherwise (hereinafter in this

Clause referred to as a "dispute") arising

between the Parties, which cannot be settled

amicably within ninety (90) days after the

dispute arises, may (except for those referred

to in Article 33.2, which may be referred to a

sole expert) be submitted to an arbitral tribunal

for final decision as hereinafter provided.

33.4 The arbitral tribunal shall consist of three

arbitrators. Each Party to the dispute shall

appoint one arbitrator and the Party or Parties

shall so advise the other Parties. The two

arbitrators appointed by the Parties shall

appoint the third arbitrator.

33.5 Any Party may, after appointing an

arbitrator, request the other Party(ies) in

writing to appoint the second arbitrator. If such

3

Page 4 other Party fails to appoint an arbitrator within

thirty (30) days of receipt of the written request

to do so, such arbitrator may, at the request of

the first Party, be appointed by the Chief Justice

of India or by a person authorised by him within

thirty (30) days of the date of receipt of such

request, from amongst persons who are not

nationals of the country of any of the Parties to

the arbitration proceedings.

33.6 If the two arbitrators appointed by or on

behalf of the Parties fail to agree on the

appointment of the third arbitrator within thirty

(30) days of the appointment of the second

arbitrator and if the Parties do not otherwise

agree, at the request of either Party, the third

arbitrator shall be appointed in accordance with

Arbitration and Conciliation Act, 1996.

x --------------- x ---------------x ------------x -----------x

33.12 The venue of the sole expert, conciliation

or arbitration proceedings pursuant to this

Article, unless the Parties agree otherwise, shall

be New Delhi, India and shall be conducted in

the English language. Insofar as practicable,

the Parties shall continue to implement the

terms of this Contract notwithstanding the

initiation of arbitral proceedings before a sole

expert, conciliator or arbitral tribunal and any

pending claim or dispute.

33.13 * * *”

5.On 8

th

August, 2011, UOI granted its approval to the

Petitioner No.1 to assign 30% of its participating

interest in the Block KG-D6, under the PSC to

4

Page 5 Petitioner No.3. On the same date, i.e. 8

th

August,

2011, Petitioner No. 3 also entered into PSC as a

party. Further, Petitioner No.1 was appointed as the

‘Operator’ for Block KG-D6, both under the terms of

the PSC, and the Joint Operating Agreement that

was executed between Petitioner No. 1 and

Petitioners No. 2 & 3.

6.It appears that in the financial year 2010-2011,

differences relating to the scope and interpretation

of the provisions of the PSC arose between the

Petitioners and Respondent after the publication of

some media reports. These reports, according to the

Petitioners, suggested that the Respondent was

planning to disallow cost recovery of the

expenditures incurred by the Contractor since the

productions levels from the gas fields had fallen

drastically. According to the Petitioners, all the

disagreements and differences that have arisen

between them and UOI will inevitably lead to serious

5

Page 6 problems in the working of the PSC. To resolve this

dispute, lengthy correspondence ensued between

Petitioner No.1 and the officers/representatives of

Respondent No.1.

7.On 16

th

September, 2011, RIL (Petitioner no.1) wrote

to the Respondent and pointed out that any attempt

to disallow or to restrict cost recovery of

expenditures incurred by the Contractor since the

production levels from gas fields had fallen, would

be contrary to the provisions of the PSC and,

requested that no such action should be taken.

There was no response to the aforesaid letter from

the Respondent.

8.On 23

rd

November, 2011, Petitioner No.1 (RIL),

through its Advocates, served upon the Respondent

a notice invoking arbitration, in accordance with the

arbitration agreement contained in Article 33 of the

PSC. In this letter, Petitioner no.1 also nominated

Mr. Justice S.P. Bharucha, former Chief Justice of

6

Page 7 India, as its arbitrator and called upon the

Respondent to nominate its arbitrator within 30

days of the receipt of this letter. Respondent replied

to this letter on 21

st

December, 2011, and

intimated Petitioner No.1 that the matter is under

consideration and that “the Ministry needs more

time to respond and would do so by 31

st

January,

2012.” In its letter dated 2

nd

January, 2012, the

Petitioners pointed out to the Respondent that, “the

PSC, the UNCITRAL Rules and the Indian Arbitration

and Conciliation Act, 1996 – set a period of thirty

days for your making appointment of an Arbitrator.”

Nevertheless, as a matter of good faith, time for

nomination of an arbitrator by the Respondent was

extended until 31

st

January, 2012.

9.The Respondent, however, by a letter dated 25

th

January, 2012 addressed to Petitioner No.1 called

upon the Petitioner to withdraw the Notice of

Arbitration on the ground that the same was

7

Page 8 premature, “for the reason that no ‘dispute’ has

arisen between the parties to the Production

Sharing Contract.” It is noteworthy that no objection

was taken with regard to Petitioner No.1 being the

only party under the PSC that seems to be raising

the disputes.

10.Thereafter on 2

nd

February, 2012, Petitioner No.1

replied to the Respondent, by a letter through its

advocates, wherein it was reiterated that there have

been a long standing controversy, differences

and/or disagreement as to whether the contractor’s

right to recover its contract cost is capable of being

limited by the Government, in the manner and on

the grounds as is sought to be done under the PSC.

It was also stated that: “Our client treats and

construes your letter under reply as your refusal

and failure to appoint an arbitrator.”

11.On 17

th

February, 2012, Respondent wrote a

8

Page 9 letter to Petitioner No.1, wherein it was reiterated

that no dispute concerning the cost recovery under

the PSC has arisen between the parties to the PSC.

The Respondent once again called upon the

Petitioners to withdraw the notice of arbitration

dated 23

rd

November, 2011.

12.In response to the aforesaid letter, Petitioner

No.1, through its Advocates, addressed a letter

dated 9

th

March, 2012 to the Respondent, wherein

the demand made in the notice of arbitration dated

23

rd

November, 2011 was reiterated. The letter inter

alia stated as under:

“We are instructed to state that the assertion

that disputes and differences have not arisen

between the Government and the Contractor

overlooks the previous correspondence that the

ensured (sic: ensued) between the parties”

* * *

“The underlying reason for all this appears to

be disputes that have arisen between the

Contractor and the DGH…”

* * *

“The DGH, on its part has disagreed with the

contractor inter alia on whether the factual;

assertion that drilling of more wells would not

augment the rate of production”

9

Page 10 Annexure-I to the aforesaid letter listed some of the

issues that have already arisen between the parties; which

are as under:

(I) Whether the FDP implies a commitment of the

contractor to produce particular or at a particular rate?

(II) Whether the FDP implies a commitment of the

contractor to do a series of development activities

even if there is a difference of opinion between the

Government and the Contractor as to the efficacy of

these activities?

(III) Whether the FDP is revised pro tanto by WP & B’s

from time to time approved by MC?

(IV) Whether the variation between the costs

proposed in the FDP and the actual cost can be a basis

for disallowing Capex?

(V) Is the recovery of cost related in any manner to

the estimates of production even if the costs are within

the sanctioned budgets?

(VI) Is the recovery of costs of facilities in any manner

10

Page 11 related to the attainment of production estimates of

the FDP or the estimates of deposits or reservoir

characteristics?

(VII) Whether the FDP was a representation by the

contractor to produce at a particular rate or to produce

a particular quantity for a defined period, which by

conduct became a binding contract between the

parties?

(VIII) Would the drilling of additional wells result in

increased production rates/volumes.

(IX) Did the approval of the WP & B’s [FY 2009-10 (RE)

and 2010-11 (BE)] result in a modification of FDP?

(X) Were the reasons given by the MoPNG/DGH for

declining approval to the WP & B’s for FY 2010-11(RE)

and 2011-12 valid?

(XI)If the answer to (IX) and (X) is in the negative,

what is the consequence?”

13.On 16

th

April, 2012, Petitioners No.1 & 2 filed

Arbitration Petition No. 8 of 2012 under Section

11

Page 12 11(6) of the Arbitration Act, 1996 before this Court

(hereinafter referred to as “A.P. No. 8”),

seeking constitution of Arbitral Tribunal in terms of

Article 33.5 of the PSC. After filing of this petition,

correspondence ensued between the Petitioners

and the Respondent, wherein the subject matter

related to cost recovery of expenditure incurred by

the Contractor for the years 2010-2011 was

discussed. This was done through letters/notice

dated 2

nd

May, 2012; 4

th

May, 2012 and 8

th

June, 2012. In the letter dated 2

nd

May, 2012, the

Respondent makes a reference to the PSC dated

12

th

April, 2000 in the following terms:

“We write with reference to the Production

Sharing Contract (“PSC”) dated April 12, 2000

between Ministry of Petroleum and Natural Gas

(“Government”), Reliance Industries Limited

(being the operator) and Niko Resources

Limited (collectively “Contractor”), in relation

to block KG-DWN-98-3. The expressions used

and not defined herein and defined in the PSC,

shall have the meaning ascribed thereto in the

PSC.”

The letter claims that the Petitioners have failed:

12

Page 13 “to fulfil your obligations and to adhere to the terms of

the PSC and are in deliberate and wilful breach of PSC

and have thereby caused immense loss and prejudice

to the Government. You have also repeatedly failed to

meet your targets under the PSC.” Thereafter the

specific instances of the breach have been highlighted

in detail. Finally, it is recorded as under:-

“In this regard, we have been instructed to

state that any such purported attempt to

unilaterally adjust any amounts as threatened

or otherwise would be completely illegal and

constitute a serious breach of the provisions of

the PSC and that our client reserves all its right

under the PSC, the Arbitration Act, and the

UNCITRAL Arbitration Rules if the Government

attempts to proceed to implement the

purported decision threatened or otherwise.”

14.The Petitioners by an equally detailed letter

denied the claims made by the Respondent on 8

th

June, 2012. In paragraph 31 of the aforesaid letter,

the Petitioners again called upon the Respondent to

appoint an arbitrator forthwith (without raising any

other procedural issues designed to delay the

dispute resolution process) so that the vital project

13

Page 14 undertaken by the parties is not put in jeopardy on

account of the continuing uncertainty.

15.In its letter dated 5

th

July, 2012, the Respondent

makes a reference to the letter dated 2

nd

May, 2012

addressed to Contractors of the block KG-DWN-98/3

and to the letter dated 8

th

June, 2012 written by the

Solicitors on behalf of Petitioner No.1 and stated

that the Ministry had nominated Mr. Justice

V.N.Khare, former Chief Justice of India as the

arbitrator on behalf of the Government of India. The

letter also called upon the Petitioners to withdraw

the A.P. No. 8. On 16

th

July, 2012, the Petitioners,

through its advocates, addressed a letter to the

Registrar of this Court, wherein it was requested

that the A.P. No. 8 may be disposed of. Accordingly,

the A.P. No. 8 was disposed of by this Court by an

order dated 7

th

August, 2012. It would be

appropriate to notice here the relevant extract of

the order:

14

Page 15 “Both the parties have no objection to the

Arbitrators nominated by each other. Under the

arbitration clause, the two nominated

Arbitrators are to nominate the third Arbitrator.

In view of the above, in my opinion, no

further orders are required to be passed in

this Arbitration Petition. The Arbitration Petition

is disposed of as such.”

16.On 12

th

July, 2013, Petitioner No.1 addressed a

letter to Mr. Justice S.P. Bharucha and Mr. Justice

V.N. Khare, requesting them to nominate the third

arbitrator. On 1

st

August, 2013, Mr. Justice

Bharucha wrote a letter to Petitioner No.1, inter

alia, as follows :

“Undoubtedly, there has been a delay in the

appointment of a third arbitrator. I had made a

suggestion to my fellow arbitrator, which was

not acceptable to him. I asked him to make a

counter suggestion which he said he would do.

I have not heard any counter suggestion as yet.

In the circumstances, you must consider

whether the court should be approached for the

appointment of a third arbitrator.”

17.It was in these circumstances that the present

arbitration petition came to be filed under Section

11(6) of the Arbitration Act, 1996.

15

Page 16 Submissions:

18.I have heard elaborate arguments, and perused

the written submissions submitted by the learned

senior counsel appearing for the parties.

19.Mr. Harish N. Salve, learned senior counsel,

appearing for the Petitioners has made the following

submissions:

I. Re: International Commercial Arbitration

20.It was submitted that the present arbitral

proceedings relate to an International Commercial

Arbitration, as defined under Section 2 (1) (f) of the

Arbitration Act, 1996. Ld. senior counsel pointed out

that two out of the four parties to the arbitration

agreement are based outside India; Petitioner No. 2

being a U.K. based company and Petitioner No.3

being based in Canada. Substantiating this

submission, it was pointed out by Mr. Salve that

each of the Petitioners is a party to the PSC, as

16

Page 17 defined under Article 28.1 of PSC; and each of the

Petitioners comprise a “Contractor”, under Article 2

of PSC.

21.It was also submitted that Petitioner No. 1, as

“Operator,” performs each and every function of the

Contractor under the PSC on behalf of all the

constituents of the Contractor, as defined under

Articles 7.1 and 7.3 of the PSC. Mr. Salve mentioned

that the Appendix ‘C’ to the PSC provides

accounting procedure which is required to be

followed by the Contractor and the Government.

Learned senior counsel also brought to our

attention the accounting procedure that is required

to be followed by the contractor and the

Government. Sections 1.4.2 and 1.4.4 of Appendix

‘C’ to the PSC indicate that the accounts are to be

maintained by the Operator on behalf of the

Contractors. On the basis of the aforesaid it was

submitted that for the purpose of cost recovery,

17

Page 18 only one set of accounts, as opposed to three sets

of accounts, has to be maintained. Thus, according

to the submission, the award will affect the cost

recovery under the PSC and impact all the parties,

particularly Petitioners, equally. In the light of the

aforesaid, it was submitted that the Operator was,

therefore, obliged to raise a dispute on behalf of all

the parties/Petitioners. This was also made clear in

the A.P. No. 8

22.Lastly it is submitted by Mr. Salve that the

Respondent itself has always understood and

accepted that the substance of the dispute is

related to and has implications for all the parties to

PSC. It was also pointed out that the Notice dated

2

nd

May, 2012 was addressed by the UOI to all the

three Petitioners and that the nomination of the

Arbitrator by the UOI was with reference to notice

dated 2

nd

May, 2012.

18

Page 19 II. Re: Jurisdiction of the Supreme Court:

23.Mr. Salve submitted that the parties cannot

confer jurisdiction on the Supreme Court, it flows

from the fact that there is an international

arbitration. He submits that the stand of the UOI is

inconsistent. On the one hand it has accepted that

this court has the jurisdiction to entertain the

petition, and on the other hand it questions the

assertion that this petition concerns an international

arbitration. It is further submitted by him that A.P.

No. 8 was filed in 2012 on the premise that the

arbitration between the Petitioner and the UOI was

an international arbitration on account of the fact

that Petitioner No.2 is a company incorporated

outside India. It was pointed out that no dispute, as

to the maintainability of the petition, was raised at

that time. A.P. No. 8 was disposed of by this Court

on merits and not for the want of jurisdiction. No

dispute was raised to the effect that this Court has

no jurisdiction to entertain the petition, which was

19

Page 20 filed under Section 11(6) of the Arbitration Act,

1996. On the basis of the above, he submits that

the objection was raised by the Respondents that

Petitioner No.1 is the only party raising disputes in

relation to PSC, and claiming reference to

arbitration is an afterthought.

24.Mr. Salve further submits that the contention of

the UOI that this Court has no jurisdiction to

entertain the present petition in view of Section

11(2) of the Arbitration Act, 1996, is misconceived.

It is also submitted that Sub-section (2) of Section

11 is subject, expressly, to subsection (6) thereof.

Section 11(6) provides that in case the appointment

procedure agreed upon by the parties is not

complied with, a party may request the Chief Justice

to take the necessary measures. The expression

“Chief Justice” has been defined under sub-

section (12)(a) of Section 11 as the Chief Justice of

India, in the case of an international commercial

arbitration. In other arbitrations under Section

20

Page 21 11(12)(b), it would be the Chief Justice of the High

Court. It was then submitted that a procedure

agreed to by the parties for appointment of

arbitrator(s) is subject to Sub-section (6); it cannot

override sub-section (6) and provide that in respect

of a domestic arbitration, not-withstanding sub-

section(12), the parties would only move the Chief

Justice of India, or vice versa in the case of an

international arbitration. On the basis of the

aforesaid, it was submitted that the contention of

the UOI that this Court has no jurisdiction to

entertain the petition under Section 11(6) is

misconceived.

III. Re: Notice :

25.Further, it was stated that the Joint Operating

Agreement entitles the Operator to initiate litigation

on behalf of all the parties. It was also submitted

that it is significant to note that there is

inconsistency in the stand taken by the Respondent.

21

Page 22 On the one hand, Respondent claims that the

arbitral award would bind not merely Petitioner No.1

but also Petitioners No. 2 and 3; however on the

other hand, the Respondent insists that the

arbitration proceedings are only between Petitioner

No. 1 and UOI. This stand of the Respondents has

been submitted to be contrary to the established

jurisprudence that an arbitral award is binding only

on the parties to the arbitration.

IV. Re: Arbitrator of Neutral Nationality

26.Mr. Salve submitted that since the arbitration is

an international one, this court, in accordance with

the established international practise, should

consider appointing an arbitrator of a nationality

other than the nationalities of the parties. In this

context, it was pointed out that the statute

expressly obligates the Court to examine the issue

of nationality of the arbitrator vis-à-vis the

nationality of the parties. It was asserted that Article

22

Page 23 33(5) of the PSC is conclusive on this issue. It

provides that if one of the parties fails to appoint its

arbitrator, the Court would appoint an arbitrator of a

nationality other than that of the defaulting party. It

was submitted that this clause indicates the

significance that the parties have attached to the

neutrality of the arbitrators. A fortiori, the

chairman/presiding arbitrator should be of a

nationality other than Indian. The contention of the

UOI that absence of a provision similar to Article

33(5) of the Arbitration Agreement in relation to the

appointment of the third arbitrator suggests that

the presiding arbitrator could be Indian has been

submitted by Mr. Salve to be misconceived.

27.It was also brought to our notice that the

UNCITRAL Rules, in force at the time when the PSC

was drafted and entered into, recognised that while

the appointing authority could appoint an arbitrator

of the same nationality as that of the defaulting

23

Page 24 party (in the event where a party fails to nominate

its arbitrator), but the presiding arbitrator that has

to be appointed would be of the nationality other

than that of the parties. The Petitioners states that

the PSC provides for even a greater degree of

neutrality than the UNCITRAL by provisioning that in

case one of the parties makes a default in

nominating its arbitrator then the arbitrator has to

be appointed from a neutral nationality. It was then

submitted that there was no need of a similar

provision in relation to the presiding arbitrator since

the arbitration was to be in accordance with

UNCITRAL Rules. In this context, learned senior

counsel relied upon the law laid in Antrix

Corporation Limited Vs. Devas Multimedia

Private Ltd

1

, wherein it was inter alia held that the

reference to such rules (ICC in that case) would

include the process of constitution of a tribunal.

28.Mr. Salve also referred to the submission of the

Respondent that the PSC being governed by the

1 2013 (7) SCALE 216 (Para 34)

24

Page 25 Indian law or/and that it involves the issues of public

policy for India as irrelevant. The fact that a party

nominee had to be from a neutral country

establishes that the parties did not consider the

governing law of the contract to be of any relevance

to the nationality of the arbitrator. It was also

submitted that the trend of appointing presiding

arbitrator from a “neutral nationality” is now

universally accepted under various arbitration rules

as well as under the Arbitration Act, 1996.

29.Mr. Salve also pointed out that Article 33 (9) of

the PSC adopts the UNCITRAL Rules for the

arbitration Agreement and that at the time of

signing the Arbitration Agreement the UNCITRAL

Rules, 1976 were in force. Mr. Salve also referred to

Article 6 of UNCITRAL Rules, 1976. He laid particular

stress on Article 6 (4).

30.It was further mentioned that the UNCITRAL Rules

25

Page 26 of 2010 are now at par with the procedure under

Article 33.5, even with respect to appointment of

second arbitrator.

31.Relying upon the judgment of this Court in

Northern Railway Administration, Ministry of

Railway, New Delhi Vs. Patel Engineering

Company Limited

2

, it was submitted that the

scheme of Section 11 emphasises that the terms of

an Arbitration Agreement should be given effect as

closely as possible.

32.Lastly, it was submitted that the Respondents had

lost their right to nominate the second arbitrator in

the earlier round of litigation, i.e. A.P. No. 8 and

hence, the Petitioners could have insisted under

Article 33.5 that the Tribunal must be constituted of

two non-Indian Arbitrators in addition to the

arbitrator appointed by the Petitioner. It is,

therefore, imperative that the third arbitrator should

have a neutral nationality.

2 (2008) 10 SCC 240 

26

Page 27 Respondent’s Submissions

33.Mr. Anil B. Divan and Mr. Dushyant A. Dave,

learned senior counsel, appeared for the

Respondents. At the outset, it was pointed out that

the present arbitration petition has been filed under

Sections 11(6) and 11(9) of the Arbitration Act,

1996, read with Article 33.6 of the PSC. It was then

submitted that the Article 33.6 of the PSC, unlike

Article 33.5, does not require that the arbitrator to

be appointed should be a foreign national. The

learned senior counsel suggested that the aforesaid

omission is both deliberate and significant. It was

further submitted that the Petitioners, by choosing

not to object to the appointment of Mr. Justice V.N.

Khare, have waived of the requirement that a

foreign national be appointed as an arbitrator by the

parties, under Article 33.5 of the PSC. It was further

submitted that this waiver also becomes clear from

the letter dated 16

th

July, 2012, which was sent on

27

Page 28 behalf of the Petitioners to the Respondent, wherein

the nomination of Mr. Justice Khare was accepted

without any reservation. The Petitioners are,

therefore, as stated by the learned senior counsel,

estopped from insisting upon appointment of a

foreign arbitrator.

34.Next, learned senior counsel submitted that that

the PSC is one of the most valued, crucial and

sensitive contracts for the nation, in as much as it

deals with the PSC in offshore areas; and it deals

inter alia with License and Exploration, Discovery,

Development and Production of the most valuable

natural resources, viz. petroleum products,

including crude oil and/or natural gas. Propounding

further, it was submitted that these products are

vital to the survival of the nation. UOI

entered into the PSC with Petitioners No. 1 and 2,

with avowed objective of exploiting the aforesaid

natural resources(s) in the most efficient,

28

Page 29 productive manner and in a timely fashion. The PSC,

therefore, has great significance for the nation. It

was also submitted that the entire subject matter of

the contract is situated in India and hence, the

applicable law is the Indian law for both the

substantive contract and the Arbitration Agreement.

35.Placing strong reliance on the factual situation, it

was submitted that the PSC, its interpretation, and

its execution involve intricate and complex

questions of law and facts relating to Indian

conditions and Indian laws. It was further submitted

that since the parties were aware about the

aforesaid nature of PSC, they consciously refrained

from having the requirement that the third

arbitrator should be a foreign national. Thus, it was

submitted by the learned senior counsel, that the

issue relating to the appointment of the third

arbitrator has been left squarely to the two

nominated arbitrators, and that the two arbitrators

29

Page 30 are not to be influenced by any requirement that

the third arbitrator should be a foreign national.

36.In the support of the aforesaid submission,

learned counsel relied upon the letter dated 12

th

July, 2013 written by the Petitioner to the two

arbitrators, wherein a request was made to

complete the constitution of the arbitral tribunal.

The following excerpt has been relied upon:

“While it is understood that it is sometimes

a time consuming exercise, Your Honour will

appreciate that the issues which are subject

matter of the arbitration proceedings are of

significant importance to the Claimants.

Accordingly, on behalf of our clients we

humbly request Your Honour to

complete the constitution of the Arbitral

Tribunal at your earliest convenience.”

37.Learned senior counsel also relied upon the letter

dated 1

st

August, 2013 written by Mr. Justice

Bharucha to submit that there is not even a

suggestion that the third arbitrator has to be a

foreign national.

30

Page 31 38.The next submission of the Respondent is that

Petitioners No 2 and 3 have not raised any dispute

under the PSC at any stage. It is only the Petitioner

alone that has raised the dispute and come forward

as the Claimant. To substantiate the submissions,

Respondents rely upon the following documents:

(i)Letter dated 23.11.2011;

(ii)Notice of Arbitration dated 23.11.2011;

(iii)Letter dated 02.01.2011 on behalf of

Petitioner No. 1 by its solicitors.

(iv)Letter dated 02.02.2011, on behalf of

Petitioner No. 1 by its solicitors.

(v)Letter dated 05.07.2012 of the Respondent

to the Solicitors of RIL.

(vi)Letter dated 1

st

August, 2013 of Mr. Justice

Bharucha, as per the Respondent shows that

the arbitration was between Reliance

Industries Limited and the Government of

India.

39.It was also emphasised that all the

communications annexed with the present petition

identify the claimant to be Petitioner

31

Page 32 No. 1. It was also highlighted that the contents of

the letter dated 2

nd

May, 2012 written by the

Respondents, which inter-alia deals with

inadmissibility of recovery of costs has not been

disputed by Petitioners No. 2 and 3. Learned senior

counsel also relies upon the letter dated 12

th

July,

2013, sent on behalf of Petitioner No.1 by its

Solicitors to the Arbitrators. This letter was sent

after the order dated 7

th

August 2012

was passed by this Court in A.P. No. 8 of 2012.

According to the Respondents this letter also shows

that the dispute is only between RIL and the

Respondent.

40.Mr. Divan also submitted that Petitioners No. 2

and 3 have not conformed to Article 33 of the PSC,

for the purposes of invoking arbitration. Such non-

compliance cannot be considered as merely an

omission. In the light of the aforesaid, it was

submitted that Petitioner No.1, an Indian Company,

32

Page 33 is the only party to the dispute with the

Respondents and therefore, there is no need to

appoint a foreign arbitrator. Further, it was

submitted even if it is assumed that Petitioners No.

2 and 3 have raised the disputes in terms of Article

33.6, there is no question of appointment of a

foreign arbitrator as the dispute raised is only

between two Indian parties, viz. Petitioner No.1 and

the Respondents.

41.The next submission of Mr. Divan is that Section

11(1) of the Arbitration Act, 1996 provides that an

arbitrator can be of any nationality, unless

otherwise agreed by the parties. It was submitted

that since the parties did not choose to have a

foreign national to be appointed as the third

arbitrator in Article 33.6, the parties did not choose

to make Section 11(1) applicable to them. Learned

senior counsel also pointed out that the parties

instead agreed to proceed under Section 11(2) as

33

Page 34 they agreed to appoint an arbitrator without

requiring him to be of any foreign nationality.

42.Mr. Divan then points out that Section 11(9) has

been authoritatively interpreted in Malaysian

Airlines Systems BHD II Vs. STIC Travels (P)

Ltd.

3

and MSA Nederland B.V. Vs. Larsen &

Toubro Ltd.

4

According to the learned senior

counsel, UNCITRAL Rules cannot override Sections

11(1) & (2), read with Article 33.6, nor can these

Rules aid in interpreting Section 11(9). It was

further submitted that the appointment of the third

arbitrator under Article 33.6 of PSC has to be made

under Arbitration and Conciliation Act, 1996. The

UNCITRAL Rules will come into play only after the

Arbitral Tribunal has been constituted. According to

learned senior counsel, following factors negate the

application of UNCITRAL Rules in making the

appointment of the arbitrators:

(a) The law governing the arbitration

3 (2001) 1 SCC 509

4 (2005) 13 SCC 719

34

Page 35 agreement is Indian Law;

(b) The seat of the arbitration is in India which

makes the curial law of the arbitration as

Indian law.

(c) The governing law of the contract is the

Indian law.

(d) All these factors would show that UNCITRAL

Rules would become relevant only after the

Arbitral Tribunal has been constituted.

43.Lastly, it was submitted that the appointment of a

foreign national as the third arbitrator is not only

legally untenable, but also undesirable, in the facts

and circumstances of the present case. To

substantiate this, it was submitted that both

Petitioners No. 2 and 3 are multi-national

companies, with Petitioner No. 3 having

presence/business connections in about 80

countries. These countries include the countries

whose nationals are sought to be nominated by the

Petitioners. It was further submitted that unravelling

all the countries in which Petitioner No. 3 may have

a connection would be difficult, if not impossible.

35

Page 36 Thus, the very object of neutrality, impartiality and

independence will be defeated by appointing a

foreign national as the third arbitrator. On the

contrary, it was submitted, appointment of a former

judge of this Court would be the most suitable

arrangement.

44.In response, Mr. Salve submitted that: (i) The

reliance placed by the Respondents upon the law

laid in Malaysian Airlines Systems BHD II Vs.

STIC Travels (P) Ltd. (supra) and MSA

Nederland B.V. Vs. Larsen & Toubro Ltd.

(supra) is misplaced as these cases are

inapplicable in the present case. (ii) The contention

of the UOI that nationals of the 80 countries in

which Petitioner No. 3 has operations would become

ineligible to be appointed as arbitrators is

misconceived. In this context, it was submitted that

the Arbitration Act, 1996 and the related

international practices takes into account

36

Page 37 nationality but not area of operation. This

submission of the Respondent, according to Mr.

Salve, is not tenable because it confuses the

question of independence and impartiality with

neutrality. The aspect of neutrality is dealt with in

Section 11(8) and Section 12; whereas, nationality

is considered in Sections 11(1) & (9) of Arbitration

Act, 1996. Further, it was submitted that these two

provisions would be rendered otiose if the

submission of the UOI is accepted.

45.Before parting with submissions made on behalf

of the parties, it must also be noticed that the

learned senior counsel for the parties have

submitted a list each of proposed/suggested

arbitrators; which according to them would satisfy

the requirements of the arbitration agreement

contained in PSC.

46.I have considered the submissions made by the

37

Page 38 learned senior counsel for the parties.

47.I am not inclined to accept the submissions made

by Mr. Anil B. Divan, learned senior counsel

appearing on behalf of the UOI. Initially, Arbitration

Petition No.8 was filed by Reliance Industries

Limited– RIL (Petitioner No.1) and Niko (Petitioner

No.2). In paragraph 6 of the arbitration petition, it

was specifically averred as follows:-

“The Respondent by its letter dated 8

th

August,

2011, granted its approval to Petitioner No.1 to

assign 30% of its Participating Interest under

the PSC to BP, thereby also making BP a

partner in the Block KG-D6. …….”

Therefore, it is apparent that reference to

arbitration was sought on behalf of the three partners

to the PSC.

48.The Arbitration Petition was disposed of as both

the parties had no objection to the arbitrator

nominated by each other. Therefore, the matter was

left to the two arbitrators to nominate the third

38

Page 39 arbitrator who shall be the Chairman of the Arbitral

Tribunal. However, by letter dated 1

st

August, 2013,

Mr. Justice Bharucha pointed out that the two

arbitrators have not been able to agree on the third

arbitrator. Therefore, the Petitioners had to

approach this court for appointment of a third

arbitrator. In these circumstances, the present

Petition came to be filed under Section 11(6).

49.There is an additional reason for not accepting

the submission made by Mr. Anil Divan, learned

senior counsel, that the Petitioner is not acting on

behalf of all the three Contractors. The notice was

served by RIL in the capacity of Operator, which

included all the three Contractors, i.e., RIL, Niko and

British Petroleum (BP).

50.A perusal of some of the correspondence

reproduced earlier clearly indicates that the

Respondent recognised that the Petitioner No.1 is

39

Page 40 the Operator on behalf of all the Contractors,

namely, Reliance, Niko and BP.

51.I find much substance in the submission of Mr.

Salve that the contentions raised in the counter

affidavit reflect a misunderstanding of:-

(i) the terms of the PSC;

(ii) reality of the Parties’ commercial

relationship;

(iii) application of the Arbitration and

Conciliation Act, 1996; and

(iv) UNCITRAL Arbitration Rules and the practise

of large scale arbitrations involving foreign

parties.

52.It is also not possible to accept the submission of

Mr. Anil Divan that Niko and BP are not operators

under the PSC and, therefore, have forfeited any

right to operations under the PSC. It is also not

possible to accept the submission that Niko and BP

are not the parties to the dispute with the

Respondent. I am of the considered opinion that

the provisions of the PSC clearly identified the

40

Page 41 parties to the PSC. The disputes that have arisen

between the parties are also clearly identified in the

correspondence exchanged between the parties.

The three named contractors are, in fact, frequently

mentioned in the correspondence between the

parties. It has been correctly highlighted by Mr.

Salve that the terms of the PSC have to be

considered in the light of the fact that the

Respondent expressly consented, after detailed

inquiry, to the assignment of participation interests

in the PSC to BP. It is a matter of record that Niko

has been a party to the PSC from the beginning.

Therefore, at-least at this stage, it would not be

possible to accept the submission of Mr. Divan that

BP and Niko are not “operating” under the PSC.

53.I am also unable to accept the submission of Mr.

Divan that given the nature of operations under the

PSC, the issues involved thereunder are of public

law and public policy. Mr. Divan, on the basis of

41

Page 42 the aforesaid submission, has insisted that the third

arbitrator ought to be from India. It was pointed out

by Mr. Divan that even if it is accepted that the

disputes raised by the Petitioner would also include

the disputes of Petitioner Nos. 2 and 3, the

arbitration still essentially remains an Indian

arbitration. Such a submission cannot be accepted

as the Respondents have not at any stage earlier

raised an objection that the disputes had been

raised by Petitioner No.1 only on its own behalf and

did not relate to the disputes of Petitioner No.2 and

3 also.

54.In my opinion, the submission is misconceived

and proceeds on a misunderstanding of the PSC,

RIL, Niko and BP are all parties to the PSC. They are

all contractors under the PSC. The PSC recognizes

that the operator would act on behalf of the

contractor. All investments are funded by not just

the Petitioner No.1 but also by the other parties,

42

Page 43 and they are equally entitled to the costs recovered

and the profits earned. For the sake of operational

efficiency, the Operator acts for and on behalf of the

other parties. Therefore, I find substance in the

submission of Mr. Salve that the disputes have been

raised in the correspondence addressed by

Petitioner No.1 not just on its own behalf but on

behalf of all the parties. During the course of his

submissions, Mr. Anil Divan had, in fact, submitted

that Niko and BP will be affected by the arbitral

award and it would be binding upon them too.

Therefore, if the Petitioner No.1 was to succeed in

the arbitration, the award would enure not only to

the benefit of Petitioner No.1 but to all the parties to

the PSC. Conversely, if the Government of India

were to succeed before the tribunal, again the

award would have to be enforced against all the

parties. In other words, each of the Contractors

would have to perform the obligations cast upon

them. In that view of the matter, it is not possible to

43

Page 44 accept the submission of Mr. Divan that the

arbitration in the present case is not an

international arbitration.

55.It is equally not possible to accept the contention

of Mr. Divan that Niko and BP have not raised

any arbitrable dispute with Union of India. A perusal

of some of the provisions of PSC would make it clear

that all three entities are parties to the PSC. All

three entities have rights and obligations under the

PSC [see Article 28.1(a)], including with respect to

the Cost Petroleum, Profit Petroleum and Contract

Costs (see Article 2.2), all of which are fundamental

issues in the underlying dispute. Where RIL acts

under the PSC, including by commencing

arbitration, it does so not only on behalf of itself, but

also “on behalf of all constituents of the

contractors” including Niko and BP. I am inclined to

accept the submission of Mr. Salve that there is a

significant and broad ranging dispute between RIL,

44

Page 45 Niko and BP on the one hand and the UOI on the

other hand, that goes to the heart of the main

contractual rights and obligations under the PSC.

Furthermore, it is a matter of record that in the

correspondence leading to the filing of the earlier

petition being A.P.No.8 of 2012, no such objection

about Niko and BP not being a party to the dispute

had been taken. In fact, the petition was disposed of

on a joint request made by the parties that two

arbitrators having been nominated, no further

orders were required. Therefore, there seems to be

substance in the submission of Mr. Salve that all

these objections about Niko and BP not being the

parties are an afterthought. Such objections, at this

stage, can not be countenanced as the

commencement of arbitration has already been

much delayed.

56.Both the parties had brought to the attention of

the Court the correspondence from their own

45

Page 46 perspective. Having considered the aforesaid

correspondence, relevant extract of which have

been noticed earlier, it is not possible to hold that

the correspondence is only on behalf of the RIL. I,

therefore, do not accept the submission of Mr. Anil

Divan that this is an arbitration between the two

Indian parties only.

57.Further more the accounting procedure

(Appendix C to PSC) clearly provides that RIL shall

keep the accounts for the purposes of cost recovery

statement. Therefore, it cannot be said that the

claims made by the Petitioner are only on behalf of

RIL. The joint operating agreement expressly

provides that the operator “to initiate litigation on

behalf of all the parties.” The fallacy of the stand

taken by UOI is patent. On the one hand, the

Respondent claims that the arbitral award would

bind not only Petitioner No.1 but also Petitioner Nos.

2 and 3, but on the other hand, is insisting that the

46

Page 47 arbitration proceedings are only between Petitioner

No.1 and UOI.

58.This now brings me to the major divergence of

views between Mr. Salve and Mr. Divan on the

interpretation to be placed on Articles 33.5 and 33.6

of the PSC. Both the learned senior counsel accept

that when exercising power under Section 11(6) of

the Arbitration Act, the ‘Chief Justice of India or the

person or the institution designated by him’

(hereinafter referred to as “CJI” for convenience) is

required to appoint the 2

nd

Arbitrator from amongst

persons who are not nationals of the country of any

of the parties to the arbitration proceedings.

Thereafter, both the learned senior counsel have

expressed divergent views. According to Mr. Salve,

the provisions contained in Article 33.5 indicates the

significance that the parties have attached to the

neutrality of the arbitrators. Therefore, necessarily

the Chairman/Presiding Arbitrator would have to be

47

Page 48 of a nationality other than India. According to him,

appointment of an Indian Arbitrator under Article

33.6 would not be an option open to the CJI. On the

other hand, Mr. Divan emphasised that there is no

requirement in Article 33.6 for appointment of a

foreign arbitrator, identical or similar to the

provision in Article 33.5. His view is that the

absence of such a requirement is deliberate and

significant. According to him, it clearly signifies that

only an Indian National can be appointed as the

third arbitrator. I am of the opinion that both the

learned senior counsel are only partially correct.

Both sides have adopted extreme positions on the

pendulum. I accept the interpretation of both the

learned senior counsel with regard to Article 33.5 as

the request will go to the Chief Justice of India for

appointment of an arbitrator, “from amongst

persons who are not nationals of the country of any

of the parties to the arbitration proceedings”. In

exercise of the jurisdiction under Section 11(6), the

48

Page 49 CJI would usually appoint the third arbitrator in

accordance with the request. I have no hesitation in

accepting the submission of Mr. Divan that even the

third arbitrator is an Indian National, it would not be

contrary to Article 33.6. But it would not be possible

for me to accept the extreme views expressed by

Mr. Divan that only an Indian National can be

appointed, as there is an absence of a requirement

of appointing a foreign national as the third

arbitrator. In my opinion, Article 33.6 virtually

leaves it to the Chief Justice of India to appoint the

third arbitrator who would be neutral, impartial and

independent from anywhere in the world including

India. Just as India cannot be excluded, similarly,

the countries where British Petroleum and Niko are

domiciled, as an option from where the third

arbitrator could be appointed, cannot be ruled out.

Having said this, it must be pointed out that this is

the purely legal position. This would be a very

pedantic view to take whereas international

49

Page 50 arbitration problems necessarily have to be viewed

pragmatically. Fortunately, Arbitration Act, 1996 has

made express provision for adopting a pragmatic

approach. When the CJI exercises his jurisdiction

under Section 11(6) he is to be guided by the

provisions contained in the Arbitration Act, 1996

and generally accepted practices in the other

international jurisdictions. CJI would also be anxious

to ensure that no doubts are cast on the neutrality,

impartially and independence of the Arbitral

Tribunal. In international arbitration, the surest

method of ensuring atleast the appearance of

neutrality would be to appoint the sole or the third

arbitrator from nationality other than the parties to

the arbitration. This view of mine will find support

from numerous internationally renowned

commentators on the practice of international

arbitration as well as judicial precedents.

59.At this stage, it would be appropriate to take

50

Page 51 notice of the observations made by two such

commentators.

60.Redfern and Hunter on International Arbitration,

Fifth Edition (2009) Para 4.59 expresses similar

views with regard to the importance of the

nationality of the sole or the third arbitrator being

from a country different from that of the parties to

the arbitration. The opinion of the learned authors is

as follows:-

“In an ideal world, the country in which the

arbitrator was born, or the passport carried,

should be irrelevant. The qualifications,

experience, and integrity of the arbitrator

should be the essential criteria. It ought to be

possible to proceed in the spirit of the Model

Law which, addressing this question, provides

simply: ‘No person shall be precluded by

reason of his nationality from acting as an

arbitrator, unless otherwise agreed by the

parties.’ Nevertheless, as stated above, the

usual practice in international commercial

arbitration is to appoint a sole arbitrator (or a

presiding arbitrator) of a different nationality

from that of the parties to the dispute.”

61.Gary B. Born in International Commercial

Arbitration, Volume I (2009) has an elaborate

51

Page 52 discussion on the impact of the UNCITRAL Model

Laws as well as UNCITRAL Rules on the appointment

of the sole or the third arbitrator. He points out that

some arbitration legislations contain different

nationality provisions, similar to those applicable

under leading institutional rules, which apply when

a national court acts in its default capacity to select

an arbitrator (in limited circumstances).

62.Article 11(5) of the UNCITRAL Model Law reads as

under:-

“A decision on a matter entrusted by paragraph

(3) or (4) of this Article to the court or other

authority specified in Article 6 shall be subject

to no appeal. The court or other authority, in

appointing an arbitrator, shall have due regard

to any qualifications required of the arbitrator

by the agreement of the parties and to such

considerations as are likely to secure the

appointment of an independent and impartial

arbitrator and, in the case of a sole or third

arbitrator, shall take into account as well the

advisability of appointing an arbitrator of a

nationality other than those of the parties.”

63.Article 6(4) of UNCITRAL Rules, 1976 in almost

identical terms reads as under :-

52

Page 53 “In making the appointment, the appointing

authority shall have regard to such

considerations as are likely to secure the

appointment of an independent and impartial

arbitrator and shall take into account as well

advisability of appointing an arbitrator of a

nationality other than the nationalities of the

parties.”

64.Taking note of the aforesaid two Articles, it is

observed by the learned author as follows :

“Article 11(5) does not restrict the parties’

autonomy to select arbitrators of whatever

nationality they wish. It merely affects the

actions of national courts, when acting in their

default roles of appointing arbitrators after the

parties’ efforts to do so have failed. Article

11(5) does not forbid the appointment of

foreign nationals as arbitrators, but on the

contrary encourages the selection of an

internationally-neutral tribunal.

Far from resembling national law prohibitions

against foreign arbitrators, Article 11(5) aims at

exactly the opposite result. Indeed, Article

11(1) of the UNCITRAL Model Law also

provides, like the European and Inter-American

Conventions, that “no person shall be

precluded by reason of his nationality from

acting as an arbitrator, unless otherwise agreed

by the parties. That properly reflects the

international consensus, embraced by the

European, Inter-American and New York

Conventions, that mandatory nationality

prohibitions are incompatible with the basic

premises of international arbitration.”

53

Page 54 65.Earlier in the same volume at page 1431, while

discussing the “Criteria for Judicial Selection of the

Arbitrator”, he re-states the general practice

adopted in appointment of an independent and

impartial arbitrator. The opinion of the learned

author is as follows :

“National arbitration legislation provides only

limited guidance for courts actually to make

the selection of arbitrators in international

arbitrations. Article 11(5) of the UNCITRAL

Model Law provides that “in appointing an

arbitrator, [the court] shall have due regard to

any qualifications required of the arbitrator by

the agreement of the parties and to such

considerations as are likely to secure the

appointment of an independent and impartial

arbitrator,” the same provision requires the

court to “take into account as well as the

advisability of appointing an arbitrator of a

nationality other than those of the parties.”

This language requires courts to have “due

regard” to the parties’ contractually specified

requirements for arbitrators-which very

arguably accords such requirements

inadequate weight, given the importance of

party autonomy in the arbitrator selection

process. Similarly, it is doubtful that it is

sufficient for courts merely to “take [the

arbitrator’s nationality] into account”, rather it

should generally be essential that the presiding

arbitrator have a neutral nationality.”

66.Redfern and Hunter on International Arbitration,

54

Page 55 Fifth Edition (2009) at Page 263, expresses a similar

opinion, after taking into consideration the

UNCITRAL Rules; ICC Rules; LCIA Rules and ICDR

Rules, which is as follows :-

“The fact that the arbitrator is of a neutral

nationality is no guarantee of independence or

impartiality. However, the appearance is better

and thus it is a practice that is generally

followed”.

67.Section 11 of the Arbitration Act, 1996 uses

similar phraseology as Article 11 of the UNCITRAL

Model Law. Therefore, it would not be possible to

accept the submission of Mr. Divan that the Court

cannot look to Model Laws or the UNCITRAL Laws as

legitimate aids in giving the appropriate

interpretation to the provisions of Section 11,

including Section 11(6).

68.In any event, the neutrality of an arbitrator is

assured by Section 11(1) of the Arbitration Act,

1996, which provides that a person of any

nationality may be an arbitrator, unless otherwise

55

Page 56 agreed by the parties. There is no agreement

between the parties in this case that even a third

arbitrator must necessarily be an Indian national. In

fact, Section 11(9) of the Arbitration Act, 1996

specifically empowers the CJI to appoint an

arbitrator of a nationality other than the nationality

of the parties involved in the litigation. Therefore, I

am unable to accept the submission of Mr. Anil

Divan that it would not be permissible under the

Arbitration Act, 1996 to appoint the third arbitrator

of any nationality other than Indian. Merely because

the two arbitrators nominated by the parties are

Indian would not ipso facto lead to the conclusion

that the parties had ruled out the appointment of

the third arbitrator from a neutral nationality. In

this case, both the arbitrators had been appointed

by the parties, therefore, the condition precedent

for appointing an arbitrator, from amongst persons,

who are not nationals of the country of any of the

parties to the arbitration proceedings, had not even

56

Page 57 arisen.

69.I also do not find merit in the submission made by

Mr. Anil Divan on the basis of Articles 33.5 of the

PSC. A bare perusal of Article 33.5, PSC would show

that it deals only with the situation where the other

party fails to appoint an arbitrator and a request is

made to the Chief Justice of India or a person

authorised by him to appoint the second arbitrator.

In such a situation, the Chief Justice is required to

choose the second arbitrator from amongst the

persons who are not nationals of a country of any of

the parties to the arbitrator proceedings. Article

33.6 is invoked when the two arbitrators appointed

by the parties fail to nominate the third arbitrator.

In such circumstances, the Chief Justice or the

nominees of the Chief Justice is required to appoint

the third arbitrator in accordance with the

Arbitration and Conciliation Act, 1996. At that stage,

Section 11(9) of the Arbitration Act, 1996 would

57

Page 58 become relevant. It would be necessary for the

Chief Justice of India to take into consideration the

will of the Indian Parliament expressed in Section

11(9). It appears to me that the submission made

by the Petitioners cannot be said to be without any

merit. I am unable to read into Article 33.6, an

embargo on the appointment of a foreign national

as the third arbitrator as submitted by Mr. Divan. It

is not possible to accept the submission that the

parties have specifically decided to exclude the

appointment of a foreign arbitrator under Article

33.6, as no specific provision was made para

materia to Article 33.5. Even in the absence of a

specific provision, the appointment of the third

arbitrator under Article 33.6 would have to be

guided by the provisions contained under Section

11(9) of the Arbitration Act.

70.I am also unable to accept the submission of Mr.

Divan that since the provision contained in Section

58

Page 59 11(9) of the Arbitration Act, 1996 is not mandatory;

the Court ought to appoint the third arbitrator, who

is an Indian National. This Court, in the case of

Malaysian Airlines Systems BHD II (supra) ,

interpreting Section 11(9) after taking into

consideration the position in some other countries

where the UNCITRAL Model Law is adopted, has

come to the following conclusions:-

“25. It is, therefore, clear that in several

countries where the UNCITRAL Model is

adopted, it has been held that it is not

impermissible to appoint an arbitrator of a

nationality of one of the parties to arbitration.

26. In the light of the above rules in various

countries and rulings of the court and also in

view of the fact that the 1996 Act is based on

UNCITRAL Model Law which in Article 6(4) only

speaks of “taking into account” the nationality

as one of the factors, I am of the view that the

word “may” in Section 11(9) of the Act is not

intended to be read as “must” or “shall”.

27. I am, therefore, of the view that while

nationality of the arbitrator is a matter to be

kept in view, it does not follow from Section

11(9) that the proposed arbitrator is necessarily

disqualified because he belongs to the

nationality of one of the parties. The word

“may” is not used in the sense of “shall”. The

provision is not mandatory. In case the party

who belongs to a nationality other than that of

59

Page 60 the proposed arbitrator, has no objection, the

Chief Justice of India (or his nominee) can

appoint an arbitrator belonging to a nationality

of one of the parties. In case, there is objection

by one party to the appointment of an

arbitrator belonging to the nationality of the

opposite party, the Chief Justice of India (or his

nominee) can certainly consider the objection

and see if an arbitrator not belonging to the

nationality of either parties can be appointed.

While taking that decision, the Chief Justice of

India (or his nominee) can also keep in mind, in

cases where the parties have agreed that the

law applicable to the case is the law of a

country to which one of the parties belong,

whether there will be an overriding advantage

to both the parties if an arbitrator having

knowledge of the applicable law is appointed.

28. In the result, I am of the view that under

Section 11(9) of the Act it is not mandatory for

the court to appoint an arbitrator not belonging

to the nationality of either of the parties to the

dispute.”

71.The aforesaid ratio of law in Malaysian Airlines

Systems BHD II (supra) has been reiterated by

this Court in MSA Nederland B.V. (supra) in the

following words:-

“3. The learned counsel appearing for the

petitioner drew my attention to the fact that

the petitioner Company is a company

incorporated in the Netherlands while the

respondent Company is a company

incorporated in India. He prayed that in view of

60

Page 61 the provisions of Sections 11(9) of the

Arbitration and Conciliation Act, an arbitrator

having a neutral nationality be appointed,

meaning thereby that the sole arbitrator should

neither be a Dutch national nor be an Indian

national. Section 11(9) is reproduced as under:

“11. (9) In the case of appointment of

sole or third arbitrator in an

international commercial arbitration, the

Chief Justice of India or the person or

institution designated by him may

appoint an arbitrator of a nationality

other than the nationalities of the

parties where the parties belong to

different nationalities.”

The key word in the above provision is “may”

which leaves a discretion in the Chief Justice or

his nominee in this behalf and it is not

mandatory that the sole arbitrator should be of a

nationality other than the nationalities of the

parties to the agreement.”

72.But the ratio in the aforesaid cases can not be

read to mean that in all circumstances, it is not

possible to appoint an arbitrator of a nationality

other than the parties involved in the litigation. It is

a matter of record that Clause 33.5 of the PSC

provides that on failure of the second party to

nominate its arbitrator, the Chief Justice of India

may be requested to appoint the second arbitrator

61

Page 62 from amongst persons who are not nationals of the

country of any of the parties to the arbitration

proceedings. Therefore, in principle, it becomes

apparent that the Respondents have accepted the

appointment of the second arbitrator from a neutral

country. Merely because, the seat of arbitration is

in India, the applicable law is Indian Law; it does not

become incumbent on the Court to appoint the third

arbitrator, who is an Indian national. The concern of

the Court is to ensure neutrality, impartiality and

independence of the third arbitrator. Choice of the

parties has little, if anything, to do with the choice

of the Chief Justice of India or his nominee in

appointing the third arbitrator. It is true that even

at the stage of exercising its jurisdiction under

Section 11(6) at the final stage, the Chief Justice of

India or his nominee can informally enquire about

the preference of the parties. But it is entirely upto

the Chief Justice of India, whether to accept any of

the preferences or to appoint the third arbitrator not

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Page 63 mentioned by any of the parties. In making such a

choice, the Chief Justice of India will be guided by

the relevant provisions contained in the Arbitration

Act, UNCITRAL Model Laws and the UNCITRAL Rules,

where the parties have included the applicability of

the UNCITRAL Model Laws/UNCITRAL Rules by

choice.

73.I must emphasise here that the trend of the third

arbitrator/presiding officer of a neutral nationality

being appointed is now more or less universally

accepted under the Arbitration Acts and Arbitration

Rules in different jurisdictions.

74.In the present case, Article 33(9) of the PSC

adopts the UNCITRAL Rules for the arbitration

agreement under Article 39. The applicable

UNCITRAL Rules at the time when the arbitration

agreement was signed were the 1976 Rules.

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Page 64 75.The aforesaid Rules have been literally

paraphrased in Section 11(9) of the Arbitration Act,

1996. Rule 4 of UNCITRAL states that in making the

appointment, the appointing authority shall have

regard to such consideration as are likely to secure

appointment of an independent and impartial

arbitrator. Superimposed on those two conditions is

a provision that the appointing authority shall take

into account, as well, the advisability of arbitrator of

a nationality other than the nationalities of the

parties. These rules in my opinion are almost

parallel to Article 33(5) of the PSC.

76.Mr. Anil Divan had, however, raised serious

doubts about the impartiality of the third arbitrator

due to the omnipresence of British Petroleum all

over the world. I am of the considered opinion that

the apprehension expressed by the learned senior

counsel is imaginary and illusory. Such a proposition

cannot possibly be accepted as a general practice

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Page 65 for the appointment of Chairman/Presiding

Officer/Third Arbitrator guided by the principle

consideration that there must not only be the

neutrality, but appearance of neutrality of the third

arbitrator. In that view of the matter, I have no

hesitation in rejecting this submission of Mr. Divan

that only an Indian National can be appointed as the

third arbitrator.

77.This apart, I must notice here the judgment of

this Court in the case of Northern Railway

Administration, Ministry of Railway, New Delhi

(supra), whilst considering the contingencies under

which a party may request the Chief Justice or any

person or institution designated by him under

Section 11 to take necessary measures held as

follows:-

“11. The crucial expression in sub-section (6) is

“a party may request the Chief Justice or any

person or institution designated by him to take

the necessary measure ” (underlined for

emphasis*). This expression has to be read

along with requirement in sub-section (8) that

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Page 66 the Chief Justice or the person or an institution

designated by him in appointing an arbitrator

shall have “due regard” to the two cumulative

conditions relating to qualifications and other

considerations as are likely to secure the

appointment of an independent and impartial

arbitrator.

12. A bare reading of the scheme of Section 11

shows that the emphasis is on the terms of the

agreement being adhered to and/or given

effect as closely as possible. In other words, the

Court may ask to do what has not been done.

The Court must first ensure that the remedies

provided for are exhausted. It is true as

contended by Mr Desai, that it is not mandatory

for the Chief Justice or any person or institution

designated by him to appoint the named

arbitrator or arbitrators. But at the same time,

due regard has to be given to the qualifications

required by the agreement and other

considerations.

13. The expression “due regard” means that

proper attention to several circumstances have

been focused. The expression “necessary” as a

general rule can be broadly stated to be those

things which are reasonably required to be

done or legally ancillary to the accomplishment

of the intended act. Necessary measures can

be stated to be the reasonable steps required

to be taken.”

78.Keeping in view the aforesaid principles, I have

examined the submissions of Mr. Divan and Mr.

Salve on the issue with regard to the neutrality,

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Page 67 impartiality and independence of the third

arbitrator. As held earlier, the apprehension

expressed by the Respondent Union of India seems

to be imaginary and illusory. Whatever is being said

about the influence/presence of British Petroleum in

other jurisdictions would apply equally to the Union

of India, if the third arbitrator is an Indian national,

within the Indian jurisdiction.

79.The apprehension expressed by Mr. Divan that if

a foreign national is appointed as a third arbitrator,

the Tribunal would be at a disadvantage as all

applicable laws are Indian, in my opinion, overlooks

the fact that the two arbitrators already appointed

are Former Chief Justices of India and can be very

safely relied upon to advise the third arbitrator of

any legal position, which is peculiar to India.

80.At this stage, normally the matter ought to be

remitted back to the two arbitrators appointed by

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Page 68 the parties to choose the third arbitrator on the

basis of the observations made in the judgment.

However, given the sharp difference of opinion

between the two arbitrators, I deem it appropriate

to perform the task of appointing the third arbitrator

in this Court itself. Therefore, I had requested the

learned senior counsel for the parties to supply a list

of eminent individuals one of whom could be

appointed as the third arbitrator. Although two lists

have been duly supplied by the learned counsel for

the parties, I am of the opinion, in the peculiar facts

and circumstances of this case, it would be

appropriate if an individual not named by any of the

parties is appointed as the third arbitrator. I have

discretely conducted a survey to find a suitable

third arbitrator who is not a National of any of the

parties involved in the dispute.

81.Upon due consideration, I hereby appoint

Honourable James Spigelman AC QC, former Chief

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Page 69 Justice and Lieutenant Governor of New South

Wales, Australia as the third Arbitrator who shall act

as the Chairman of the Arbitral Tribunal. The E-

mail address which has been supplied to this Court

is as follows :

spigel@bigpond.net.au

82.In view of the considerable delay, the Arbitral

Tribunal is requested to enter upon the reference at

the earliest and to render the award as

expeditiously as possible.

83.The Arbitration Petition is allowed in the aforesaid

terms. No costs.

…………………………… J.

[Surinder Singh

Nijjar]

New Delhi;

March 31, 2014.

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Page 70

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Page 71 ITEM NO.1A COURT NO.6 SECTION XVIA

S U P R E M E C O U R T O F I N D I A

RECORD OF PROCEEDINGS

ARBITRATION PETITION NO. 27 OF 2013

RELIANCE INDUSTRIES LTD. & ORS. Petitioner(s)

VERSUS

U.O.I. Respondent(s)

Date: 31/03/2014 This Petition was called on for

pronouncement of judgment today.

For Petitioner(s)

M/S. Parekh & Co., Advs.

For Respondent(s)

Mr. Shailendra Swarup, Adv.

Hon'ble Mr. Justice Surinder Singh Nijjar pronounced

the judgment.

The petition is allowed in terms of the signed

reportable judgment.

[Nidhi Ahuja] [Indu Bala Kapur]

Court Master Court Master

[Signed reportable judgment is placed on the file.]

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