"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, December 10, 2012

Non-Operators as Parties to Arbitral Proceedings against Operator

Recently, a Single Judge of the Delhi High Court in HLS Asia Ltd. V. Geopetrol International Inc. & Ors., MANU/DE/5356/2012 held that it was necessary that each member of a consortium be made party to arbitral proceedings initiated by the Contractor Petitioner when the Operator to the Consortium had acted on behalf of the consortium. This decision is significant as there are two views concerning the question as to whether the Petitioner has to invoke arbitration against all members of the consortium or merely against the Operator when the contract was executed by the Operator and the Petitioner. One view is that the Petitioner should proceed against the Operator and the Operator can claim from other members of the consortium (hereinafter “Non-Operators”) in accordance with the participating interest of each member to the consortium. The second view is that the Petitioner should invoke arbitration against all members of the Consortium as the contract was executed by the Operator on behalf of the Consortium. The Delhi High Court has held that the Petitioner is entitled to invoke arbitration against all the members of the Consortium. This post analyses the said decision.
A consortium consisting of Geopetrol International Inc. (GII), National Thermal Power Corporation Ltd. (NTPC), Brownstone Ventures Ltd. And Canoro Resources Ltd. entered into a Production Sharing Contract (PSC) with the Government of India for exploration of petroleum block in Arunachal Pradesh. The said members of the consortium entered into a Joint Operating Agreement (JOA) to govern their inter se relationship. GII was nominated as the operator for conducting petroleum operations. The Operator was responsible as per the JOA to conduct the day-to-day petroleum operations in the Block and was authorized to enter into contracts on behalf of the consortium but in accordance with the JOA and the PSC. Pursuant thereto, GII entered into a contract with HLS Asia Ltd. (HLS) for wireline logging services to be provided by HLS. Preamble to the contract noted that GII, the Operator, was acting on behalf of the members of the Consortium and that each member of the consortium was jointly and severally liable and only to the extent of its participating interest.
Disputes arose between HLS and GII. Consequently, HLS invoked arbitration under the proceedings. Subsequent to the filing of statement of claim by HLS, GII stated to the tribunal that all the members of the consortium had to be impleaded. Consequently, notices were sent by the tribunal and all the Consortium members were impleaded by it.
NTPC objected to the same and stated that it could not be compelled to participate in the arbitral proceedings. GII countered and stated that the contract was entered into with HLS in its capacity as operator of the Block on behalf of the members of the Consortium.
The tribunal accepted the contentions of NTPC on the following grounds, against which appeal was filed by HLS under Section 37 of the Arbitration and Conciliation Act, 1996:
"(i) HAL had not produced any documents to establish that the members of the consortium had authorised GII to enter into the contract on behalf of the members of the consortium.
(ii) In the absence of such authority, the members of the consortium could not be held liable under a contract to which they were not a party and which contract had not been signed by them.
(iii) The decisions in Mohan Aluminium Orchards Pvt Ltd v. M.P.E.B. MANU/MP/0717/2002 : 2002 (5) MPHT 429 and Austbulk Shipping SDN BHD v. P.E.C. Limited 2005 (2) Arb. LR 6 (Delhi) relied upon by HAL were distinguishable on facts.
(iv) Since no arbitration agreement existed between HAL and NTPC, NTPC was liable to be deleted from the array of parties."
Against this GII stated to the tribunal that the tribunal did not have jurisdiction to adjudicate the dispute as the claim was against all the respondents, that each of the respondent was liable only to the extent of its participating interest, and that the prayer of the claimant went beyond the scope of the agreement and could be maintained only when all the respondents were made party to the arbitral proceedings. HLS, in the meanwhile, appealed to the court under Section 37. The decision of the court is summarized below:
  • The PSC and the JOA (especially Article 4.7(g) and (r), JOA) authorized the Operator to act on behalf of the members of the Consortium to enter into contracts, pursuant to which GII entered into a contract with GII.
  • Although NTPC did not sign the said contract, the contract was executed by GII on behalf of NTPC and other members of the consortium.
  • Each member to the Consortium was necessarily to be made party to the arbitral proceedings as such move would obviate a subsequent plea by any member to the consortium that it was not bound by the award as it was not a party.
  • Even in the recent case of Chloro Controls v. Severn Trent Water Purification Inc., the Supreme Court contemplated the possibility of reference to arbitration of non-signatories to the arbitration agreement. (Our comment on the Chloro Controls case can be accessed from here (Part I) and here (Part II)).
The High Court held:
Consequently, in the present case, although the individual members of the Consortium may not have been party to the contract between HAL and GII, which contains the arbitration clause, they would be necessary parties to the arbitral proceedings in light of the inter relationship between the Respondents as the members of the Consortium in terms of PSC and JOA.”

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