"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, May 11, 2010

RNRL v. RIL- A Doctrinal Prelude

We hope to do a series on posts on the Supreme Court judgement (Reliance Judgment) in RNRL v. RIL natural gas dispute and our focus will be chiefly on Production Sharing Contracts and natural gas policy of the Government. 

This post is a doctrinal prelude to the analysis of the judgements, the main purpose being to place the Reliance Dispute in the context of the prevailing constitutional regime entitling the Union to regulate petroleum resources. Here, we seek to analyse the following concepts that have been the bases for both the judgements (Justice Sudarshan Reddy formed the minority and Justice Sadasivam and CJI KG Balakrishnan constituted the majority):
  1. Ownership of Petroleum Resources
  2. Association of Natural Gas & Ors. v. Union of India & Ors.
  3. Public Trust Doctrine
Ownership of Petroleum Resources:
If you go to the website of the Directorate General of Hydrocarbons and download the latest Model Production Sharing Contract, you will notice that the legal structure of PSCs for onshore  (Exploration Blocks on land) and offshore Blocks (located in sea/ ocean) are a bit different. This is mainly because of the federal structure of the Indian polity as envisaged by the Constitution of India. Article 297 provides that :

(1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union.
(2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union. 

(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.

Thus, the ownership of all natural resources, including hydrocarbons, in the territorial waters and exclusive econonomic zones would vest in the Union and shall be used for the purposes of the Union. But what about ownership of natural resources in onshore areas? There is no express provision of the Constitution vesting ownership on States of minerals found under lands within their boundaries. However, it may be noted that the right to minerals (including hydrocarbons in any form) in the States vest with the States. Many States have enacted laws vesting rights over minerals found within their territory with the State Government. For example, see S. 41 of the Punjab Land Revenue Act, 1887; S. 70 of the Karnataka Land Revenue Act; S. 69A of the Bombay Land Revenue Code, 1879 (as applicable to the State of Gujarat).Notwithstanding the same, the power to enter into contracts with regard to the exploration and exploitation of minerals is with the Union, probably because of the fact that Petroleum and related substances are resources that may be found only in specific geographical regions in India  (like Mumbai High, Gujarat, KG Offshore etc) but are resources of national importance and no single State or a group of States should claim monopoly overt them. Just imagine a situation where the Union has no right over oil produced in, say Gujarat, or say KG region. Such a situation would result in few states enjoying access to fuel while many parts of India would be denied effective access to fuel. In order to overcome such a situation, Petroleum resources were placed within the domain of the Union. This, it may be noted, was not an innovation attributable to the makers of our Constitution. Section 100 r/w Entry 36 of Schedule VII to the Government of India Act, 1935 placed regulation of mines and oilfields within the Federal domain. Entry 36 read:

"Regulation of mines and oilfields and mineral development to the extent to which such regulation and development under Federal control is declared by Federal Law to be expedient in the public interest."

Association of Natural Gas & Ors. v. Union of India & Ors.

In 2000, Gujarat enacted the Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act, 2000 to regulate transmission, supply and distribution of natural gas in the interests of the general public and to promote gas industry in Gujarat, and for that purpose, to establish a gas regulatory authority. In 2001, a reference was made by the President of India under Article 143(1) of the Constitution of India, asking the Supreme Court to answer the following questions:
  1. Whether natural gas in whatever physical form including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas. (sic ?)
  2. Whether States have legislative competence to make laws on the subject of natural gas and Liquefied Natural Gas under Entry 25 of List II of the Seventh Schedule to the Constitution.(sic ?)
  3. Whether the State of Gujarat had legislative competence to enact Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act 2001.(sic ?)
Entry 53 List I read:

"Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable."

Entry 25 List II read:

"Gas and gas works"

Though a literal reading of the above entries to Schedule VII of the Constitution led to a conclusion that natural gas would be covered under Entry 25 of List II, the Constitution Bench of the Supreme Court, after going through various definitions of petroleum and the nature of natural gas, held:
  • Natural Gas including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas.
  • The States have no legislative competence to make Saws on the subject of natural gas and liquefied natural gas under Entry 25 of List II of the Seventh Schedule to the Constitution.
  • The Gujarat Gas (Regulation of Transmission, Supply & Distribution) Act, 2001, so far as the provisions contained therein relating to the natural gas or liquefied natural gas (LNG) are concerned, is without any legislative competence and the Act is to that extent ultra vires of the Constitution.
 Notably, the Constitution Bench, of which the CJI KG Balakrishnan formed a part, held:

"For free and smooth flow of trade, commerce and industry throughout the length and breadth of the country, natural gas and other petroleum products play a vital role". 

Thus, the Supreme Court, even in 2004, was in favour of exclusive control of natural gas by the Union. The Reliance Judgement on ownership of natural gas is an unequivocal reiteration of the said position of the Supreme Court: that no other entity other than the Union has control over natural gas.

The Association of Natural Gas judgement was a landmark judgement not because it laid down something novel  but because it reiterated the Union's unequivocal, absolute jurisdiction to regulate petroleum and natural gas. If we look at the existing laws regulating the petroleum sector, they are heavily in favour of the Union. This has led to many federalism related issues, especially relating to determination of royalty that the states would be entitled to.   

Public Trust Doctrine:
The doctrine of public trust was first introduced into the Indian jurisprudence in MC Mehta v Kamal Nath where it was held that certain natural resources are held by the state in trust for the public and it would be unjust to let them to be harnessed for private gain. State merely holds these resources on behalf of public.

The doctrine was borrowed from the American jurisprudence, which borrowed it from the English common law, which in turn borrowed it from Roman law. While the Supreme Court (and the lawyers who argued for its introduction) must be appreciated in introducing the doctrine, we need not have had to draw the doctrine from American and the Roman Law for inspiration on state restrictions in dealing with natural resources. The history of the Indian sub-continent provides ample support that the doctrine of public trust existed even in ancient India. For example, Arahat Mahinda, son of King Ashoka, and founder of Buddhism in Sri Lanka, had admonished the King of Sri Lanka for hunting:

I am sure that considering the fact that the tribal king in ancient India was regarded as the protector of cattle, the public trust doctine would have prevailed atleast in some points of history in the Indian Sub-continent. I leave it to legal historians in India (by the way, are there any?) to find out if public trust doctrine prevailed in India. The point about studying Indian legal history (or histories?) is that it would provide rich conceptions and other tools in dealing with several problems that we face today. We should also look into Indian legal history and also the legal history of other Civilisations to find how these people constructed law and society to provide answers to various problems. 

Getting back to the public trust doctrine in present day India, in Intellectuals Forum, Tirupathi v. State of A.P. and Ors., the Supreme Court cast doubts on the inalienability aspect of the public trust doctrine. It held that:

...[T]he doctrine does not exactly prohibit the alienation of the property held as a public trust. However, when the state holds a resource that is freely available for the use of the public, it provides for a high degree of judicial scrutiny upon any action of the Government, no matter how consistent with the existing legislations, that attempts to restrict such free use. To properly scrutinize such actions of the Government, the Courts must make a distinction between the government's general obligation to act for the public benefit, and the special, more demanding obligation which it may have as a trustee of certain public resources.”  (Emphasis mine)

The Supreme Court, quoting, Joseph L. Sax, The public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention, 68 Mich. L. Rev. 471-566 (1970) laid down the following restrictions on the state regarding resources held in public trust:
  1. the property subject to the trust must not only be used for a public purpose, but it must be held available for use by the general public;
  2. the property may not be sold, even for fair cash equivalent 
  3. the property must be maintained for particular types of use. (i) either traditional uses, or (ii) some uses particular to that form of resources.
This is the legal background in which the Reliance dispute will be analysed.

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