"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.

Monday, March 21, 2011

What Cannot be Done Directly Cannot be Done Indirectly: Canoro Resources Case

In the last post, we had seen the facts of the case of Canoro Resources v. Union of India which deals with assignment of participating interests in a Production Sharing Contract. We analyse the decision in this post. The decision is summarized below:
  • Prima facie, a transfer of shares satisfying the conditions specified in Article 29.2 requires the consent of the Government.
  • The fact that Article 29.2 does not use the term “prior” is immaterial as Article 29.3 uses the expression “detailed information on the proposed assignee or transferee, the terms of the proposed assignment or transfer”.
  • The purpose of Article 29.2 is to cover situations where participating interests are transferred through an indirect method.
  • The contracting party is supposed to give detailed information of the proposed assignee so that government can consider and dispose of the application.
  • When direct transfer of participating interests without consent is prohibited, even an indirect transfer of participating interests is also prohibited.
  • As per Article 31, a breach of Article 29.2 cannot be remedied by the contractor party.
  • Article 35 which provides that the contractor party has to inform the government of any material change in the status of the company that affects the performance of PSC obligations does not “whittle down” Article 29.2.
  • This is a fit case for lifting the corporate veil to see the economic realities behind the veil.
  • Article 31.3 provides that government has to give a notice that it intends to terminate the PSC at least 90 days before the intended date of termination. The actual termination took place beyond 90 days after the show cause notice.
  • By its nature, the PSC is determinable.
  • There are a few decisions which hold that termination is not justified in view of the expenditure undertaken. However, the termination by the Government is not, prima facie, illegal.
  • A sovereign cannot be viewed as having given up its rights permanently when it enters into a contract, specifically when an action by the Contractor threatens the national security of the interests of the state.
  • As provided in the Reliance case, petroleum is a strategic resource to the nation and an interpretation of the contract or law which affects the power of the sovereign in respect of such strategic resource would be opposed to public policy.
  • The submission that attempts for amicable settlement is a condition precedent for invoking arbitration is not correct. If it is decisive that amicable settlement would fail, there is no need to initiate attempts to amicably settle the dispute. From the facts of the dispute, it appears that Canoro had made attempts for amicable settlement.
  • It was not pleaded by the Government that MASS was an undesirable entity.
  • The government submitted that the petroleum reservoir was affected due to improper operations. Therefore the court held:
 “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.”
 Thus, the court dismissed the petition for interim injunction under Section 9 of the Arbitration and Conciliation Act, 1996.

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