Canoro Resources Ltd. vs Union Of India on 7 March, 2011

Delhi High Court
Canoro Resources Ltd. vs Union Of India on 7 March, 2011
Author: Vipin Sanghi
*     IN THE HIGH COURT OF DELHI AT NEW DELHI

                   Judgment reserved on: 24.02.2011

%                  Judgment delivered on: 07.03.2011

+                  O.M.P. 514/2010 & I.A. No.1371/2011


      CANORO RESOURCES LTD.                          ..... Petitioner
                   Through:          Mr. C.A. Sundaram, Senior Adv.
                                     with Ms. Rohini Musa, Mr. Zafar
                                     Inayat,  Mr.   Abhishek     Gupta,
                                     Mr.Anandh Kanna, Mr. Siddharth
                                     Barua & Mr. Sharan Thakur,
                                     Advocates

                     versus

      UNION OF INDIA                                   ..... Respondent
                          Through:   Mr. Mohan Parasaran, ASG with
                                     Mr.Neeraj Chaudhari, Mr. Akshay
                                     Chandra, Mr. Zoheb Hossain and
                                     Mr. Mohit Auluck, Advocates.


CORAM:
HON'BLE MR. JUSTICE VIPIN SANGHI

1.    Whether the Reporters of local papers may
      be allowed to see the judgment?                  :      Yes

2.    To be referred to Reporter or not?               :      Yes

3.    Whether the judgment should be reported
      in the Digest?                                   :      Yes


                              JUDGMENT

VIPIN SANGHI, J.

1. This petition is preferred by the petitioner under Section 9 of the

Arbitration and Conciliation Act, 1996 to seek the following reliefs:

OMP No. 514/2010 Page 1 of 68

(a) An ad interim injunction restraining the respondent

from directly or indirectly and in any manner whatsoever

acting under its letter of termination dated August 27,

2010 of the Production Sharing Contract (PSC), and taking

any other steps detrimental to the interests of the

petitioner till the matter is finally disposed off by an arbitral

tribunal.

(b) An ad-interim order of injunction restraining the

respondent from directly or indirectly and in any manner

whatsoever considering the termination of the PSC as

being effective on and from August 29, 2010.

(c) An order of status quo ante pending the award of the

Arbitral Tribunal.

The petitioner had sought the reliefs ex parte as well.

2. The petitioner claims that it is an oil and gas exploration and

production company incorporated under the laws of the Province of

Alberta, Canada. The respondent is the Union of India, represented by

the Joint Secretary, Ministry of Petroleum and Natural Gas.

3. The President of India entered into a Production Sharing Contract

(PSC) dated 23.02.2001 in respect of the Amguri oil field in the state of

Assam, with one Assam Company Limited (ACL) and one Joshi

Technologies International Inc. (JTI). The participating interest (P.I.) of

OMP No. 514/2010 Page 2 of 68
ACL was 75% and that of JTI was 25%. The petitioner acquired the

participating interest in the PSC to the extent of 60% i.e 25% of JTI‟s

P.I. and 35% of ACL‟s P.I. vide amendment agreement 26.07.2004.

The petitioner, apart from being a “contractor” under the PSC was also

appointed as the “operator”. ACL remained the other contractor with

40% P.I.

4. The primary dispute which has arisen between the parties under

the PSC is whether the petitioner is in breach of Article 29 of the said

agreement which deals with the aspect of assignment of PI of any

party comprising the contractor. The said dispute would necessarily

have to be determined by the Arbitral Tribunal upon an interpretation

of the contractual terms and their application to the facts of this case.

As the respondent has sought to terminate the PSC vide letter dated

27.08.2010 on the premise that the petitioner is in breach of Article 29

of the PSC, the petitioner has preferred this petition to seek interim

measures of protection. I will, therefore, examine and evaluate, in the

course of this order, prima facie, the submissions made by the parties

to the extent it is necessary, and it is made clear that any observation

made by me in this order would not come in the way of the Arbitral

Tribunal in arriving at its own conclusions upon the interpretation of

the PSC.

5. I may, at this stage, take note of a few relevant provisions of the

PSC. The recitals contained in the PSC dated 23.02.2001 set out the

OMP No. 514/2010 Page 3 of 68
background in which that agreement was executed. The same read as

follows:

“WITNESSETH:

WHEREAS

(1) The Oil Fields (Regulation and Development) Act,
1948 (53 of 1948) (hereinafter referred to as “the
Act”) and the Petroleum and Natural Gas Rules,
1959, made thereunder (hereinafter referred to as
“the Rules”) make provision, inter alia, for the
regulation of Petroleum Operations and grant of
licenses and leases for exploration, development and
production of Petroleum in India;

(2) The Rules provide for the grant of licenses and leases
in respect of land vested in a State Government by
that State Government with the prior approval of the
Central Government and JTI and ACL will apply for a
Lease to carry out Exploration Operations,
Development Operation and Production Operations in
that area onshore identified as Field Amguri and
more particularly described in Appendix-A and
Appendix-B.

(3) Rule 5 of the Rules provides for an agreement
between the Central Government and the Lessee
containing additional terms and conditions with
respect to the lease;

(4) The Government desires that the Petroleum
resources which may exist in India be
discovered and exploited with the utmost
expedition in the overall interest of India in
accordance with Good International Petroleum
Industry Practices;

(5) JTI and ACL have committed that they have, or will
acquire and make available, the necessary financial
and technical resources and the technical and
industrial competence and experience necessary for
proper discharge and/or performance of all
obligations required to be performed under this
Contract in accordance with Good International
Petroleum Industry Practices and will provide

OMP No. 514/2010 Page 4 of 68
guarantees as required in Article 30 for the due
performance of its obligations hereunder;

(6) As a result of discussions between representatives
of the Government, and JTI and ACL on the proposal
of JTI and ACL, the Government had agreed to enter
into this Contract with JTI and ACL with respect to the
said area referred to in paragraph(2) above on the
terms and conditions herein set forth.”

(emphasis supplied)

6. „Participating Interest‟ under Article 1.70 means in respect of

each party constituting the contract, the undivided share expressed as

a percentage of such party‟s participation in the rights and obligations

under this contract.

7. Article 2 defines the duration/term of the contract to be 25 years

from the effective date, unless the contract is terminated or expires

earlier in accordance with its terms. However, the term may be

extended upon mutual agreement of the parties. Article 3.2 provides

that each party comprising the Contractor shall contribute its

participating interest share of all contract costs with respect to the

contract area and assume its participating interest share of all rights

and obligations from the effective date. These rights and obligations

include the right to take cost petroleum and the share in profit

petroleum (Article 3.3). Under Article 8, the contractor, inter alia, has

the exclusive right to carry out the petroleum operations and to

recover costs and expenses as provided under the contract. Article 10

deals with the aspect of discoveries, development and production of

and from oil-wells. Article 15 deals with the recovery of cost

petroleum. Article 16 provides the mechanism of production sharing of

OMP No. 514/2010 Page 5 of 68
petroleum. Article 16.4 gives the option to the Government to take its

entitlement to profit petroleum either in cash or in kind in any year.

Article 19 deals with the aspect of „domestic supply, sale and disposal

and exports of crude oil and condensate‟. Article 19.1 provides that

until such time as the total availability to the Government of crude oil

and condensate from all petroleum production activities in India meets

the total national demand, each constituent of the contract shall be

required to sell to the Government or its nominee all of its entitlement

to crude oil and condensate from each field in order to assist in

satisfying the national demand and the Government shall have the

option to purchase the whole or any portion thereof at the price

determined pursuant to Article 20. Article 28.1 states that the

“Government is the sole owner of petroleum underlying the contract

area and shall remain the sole owner of petroleum produced pursuant

to the provisions of this contract except as regards that part of crude

oil, condensate or gas, the title whereof has passed to the contractor

or any other person in accordance with the provisions of this contract.”

Article 29 deals with the aspect of assignment of interest. Since the

same is central to the dispute between the parties and the discussions

in this order, it is reproduced hereinbelow:

“ARTICLE 29

ASSIGNMENT OF PARTICIPATING INTEREST

29.1 Subject to the terms of this Article and other terms of
this Contract, any Party comprising the Contractor
may assign, or transfer, a part or all of its
Participating Interest, with the prior written consent

OMP No. 514/2010 Page 6 of 68
of the Government, which consent shall not be
unreasonably withheld, provided that the
Government is satisfied that:

(a) the prospective assignee or transferee is of
good standing, has the capacity and ability to
meet its obligations hereunder, and is willing to
provide an unconditional undertaking to the
Government to assume its Participating Interest
share of obligations and to provide guarantees in
respect thereof as provided in the Contract;

(b) the prospective assignee or transferee is not a
company incorporated in a country with which the
Government, for policy reasons, has restricted
trade or business;

(c) the prospective assignor or transferor and
assignee or transferee respectively are willing to
comply with any reasonable conditions of the
Government as may be necessary in the
circumstances with a view to ensuring
performance under the Contract; and

(d) the assignment or transfer will not adversely
affect the performance or obligations under this
Contract or be contrary to the interests of India.

29.2 In case of any material change in the status of
Companies or their shareholding or the relationship
with any guarantor of the Companies, the
Company(ies) shall seek the consent of the
Government for assigning the Participating Interest
under the changed circumstances.

29.3 An application for consent to assign or transfer shall
be accompanied by all relevant information
concerning the proposed assignment or transfer
including detailed information on the proposed
assignee or transferee and its shareholding and
corporate structure, as was earlier required from the
Companies constituting the Contractor, the terms of
the proposed assignment or transfer and the
unconditional undertaking referred to in Article.

29.4 The applicant shall also submit such information
relating to the prospective assignee or transferee of
the assignment or transfer as the Government may
reasonably require to enable proper consideration
and disposal of the application.

OMP No. 514/2010 Page 7 of 68

29.5 No assignment or transfer shall be effective until the
approval of the Government is received or deemed
to have been received. Approval may be given by the
Government on such terms and conditions as it may
deem fit. Provided that such terms and conditions
may not increase the obligations of the Parties
comprising the Contractor. Upon assignment or
transfer of its interest in this Contract, the assignor
or transferor shall be released and discharged from
its obligations hereunder only to the extent that such
obligations are assumed by the assignee or
transferee with the approval of the Government.

29.6 In the event that the Government does not give its
consent or does not respond to a request for
assignment or transfer by a Party comprising the
Contractor within one hundred and twenty (120)
days of such request and receipt of all information
referred to in Article 29.3 above, consent shall be
deemed to have been given by the Government.
29.7 An assignment or transfer shall not be made where
the Participating Interest to be retained by the
proposed assignor or the percentage interest of
assignee shall be less than ten per cent (10%) of the
total Participating Interest of all the constituents of
the Contractor, except where the Government, on
the recommendations of the Management
Committee may, in special circumstances, so permit.
29.8 Nothing contained in this Article 29, shall prevent a
Party comprising the Contractor from mortgaging,
pledging, charging or otherwise encumbering at its
own risk and cost all or part of its Participating
Interest for the purposes of security relating to
finance to the extent required for performing its
obligation under the Contract, provided that:

i) such Party shall remain solely liable for all its
obligations relating to its Participating Interest to
the exclusion of the other participants thereto;

ii) the encumbrance shall be expressly
subordinated to the rights of the other Parties
under this Contract. The obligations occurring
from the said encumbrance shall be the sole
responsibility of the original Party and shall in no
manner compromise the rights of other Parties
to the Contract;

OMP No. 514/2010 Page 8 of 68

iii) such Party has given reasonable notice of such
encumbrance and furnishes to all other Parties
(including, for the avoidance of doubt, the
Government) a certified copy of the executed
instrument(s) evidencing the encumbrances;

             iv) keeping in view the national interest       of India,
                 prior consent of the Government             shall be
                 required   (which  consent    shall         not    be
                 unreasonably withheld) of the list of       potential
                 lenders with whom such Party can             consider
                 hypothecation;

             v)     the Party creating the charge shall ensure that
                    such charge shall not in any way affect the

interest of other Parties or result in interference
with joint operations. In the event of any claims
or liabilities imposed on other Parties because of
the creation of such charges, the Party having
created charge on its Participating Interest shall
indemnify the other Parties; and

vi) in case of foreclosure or default by a borrowing
Party, the mortgagee shall not be deemed to
have acquired a right to carry on either by itself
or through an agent, the Petroleum Operation,
without the written consent of the Government
of India.

29.8.1 The Parties acknowledge that to obtain financing a
Party (“Borrower”) will be required to secure for a
permitted chargee the right to receive a copy of any
notice served on the Borrower and the Parties agree
that they shall serve a copy of any such notice on
any such permitted chargee in accordance with the
provisions of Article 38 at the same time as such
notice is served on the Borrower. For the purposes
of Article 38 the address for service of notices of the
permitted chargee shall be that specified in the
instrument or instruments referred to in Article
29.8(iii).

29.8.2 The financing arrangement referred to above, shall
be subject to the rights of Government as contained
in Article 29.1 of Contract and the pre-emptive rights
of the Parties as may be contained in Operating
Agreement. Any Party which wishes to exercise the
said pre-emptive rights will explicitly assume the
obligation on the same terms and conditions as the
Borrower.”

OMP No. 514/2010 Page 9 of 68

8. Article 31 deals with the term and termination of the PSC. In

particular, Article 31.3 entitles the Government to terminate the

contract “upon giving ninety (90) days written notice to the other

parties of its intention to do so in the following circumstances, namely,

that the contractor or a party comprising the contractor („the

defaulting party‟).

      (a)      x   x    x     x     x     x     x     x     x
      (b)      x   x    x     x     x     x     x     x     x
      (c)      x   x    x     x     x     x     x     x     x
      (d)      x   x    x     x     x     x     x     x     x

(e) has assigned any interest in the contract without the
prior consent of the Government as provided in Article 29 ;

      or

      (f)      x   x    x     x     x     x     x     x     x

(g) has failed to comply with or has contravened the
provisions of this contract in a material particular; or

x x x x x x x x x”

9. Article 31.6 is a rather peculiar clause and is heavily relied upon

by the petitioner. The same reads as follows:

“31.6 If the circumstance or circumstances that would
otherwise result in termination are the subject matter or
proceedings under Article 34, then termination shall not
take place so long as such proceedings continue and
thereafter may only take place when and if consistent with
the arbitral award.”

10. Article 34 contains inter alia the arbitration agreement between

the parties.

11. Article 35.1 provides that:

OMP No. 514/2010 Page 10 of 68

“35.1 The parties comprising the contractor shall notify
the Government of any material change in their status,
shareholding or relationship of that of any guarantor of the
companies, in particular, where such change would impact
on performance of obligations under this contract.”

12. I may now take note of the background facts of the case which

have given rise to the dispute between the parties. The petitioner

entered into an investment agreement dated 16.04.2010 with one

MASS Financial Corporation (hereinafter to be referred as „MASS‟), a

Corporation organized under the laws of Barbados. Under this

investment agreement, MASS agreed to make a private placement for

24,798,000 common shares and also to apply against the rights

offering made by the petitioner company, equal to the total rights

offering commitment, less the number of common shares purchased

by the holders of rights pursuant to the exercise of rights under the

rights offering. The petitioner agreed with MASS that the funds infused

by MASS would be utilized at least to the extent of US$1,500,000/- to

meet the expenditures relating to the Amguri condensate recovery and

gas re-injection project. The balance of the proceeds from the equity

financing were agreed to be used for working capital and in

conjunction with the exploration and development of its oil and gas

projects, such projects including but not limited to inter alia: (i) the

Amguri condensate recovery and gas re-injection project; (ii) Amguri

LPG plant; (iii) Amguri gas-fired power plant. On the private placement

being made by MASS, the company agreed to appoint two nominee

directors of MASS on its Board of Directors. It was further agreed that

OMP No. 514/2010 Page 11 of 68
the Board of Directors shall be comprised of no more than five persons,

and the said Board shall reflect the percentage of shareholding of

MASS. After the private placement closing, the name of the petitioner

was agreed to be changed to one approved by MASS. The reason for

inviting investment from MASS is stated to be the failure of the other

partner, viz. ACL.

13. While the process of investment by MASS in the petitioner

company was underway, the petitioner issued a communication dated

29.04.2010 to the respondent. In this communication, the petitioner

stated that “While the private placement itself does not constitute a

material change in the status of the Company with respect to the

performance of Canoro‟s obligations under the Amguri PSC, we

nevertheless thought it appropriate to bring the matter to the attention

of the Ministry of Petroleum & Natural Gas”. The petitioner also stated

that as a result of the private placement, MASS did not become a new

control person for Canoro, and there would not be any material effect

on the control of the petitioner company. The petitioner disclosed that

as a part of the transactions contemplated under the investment

agreement, the petitioner would carry out a rights offering and that

MASS had agreed to take up all the shares not subscribed by the

holders of rights.

14. Upon issuance of the said communication, the respondent issued

a show-cause notice dated 01.06.2010 to the petitioner alleging breach

of Article 29.2 of the PSC. In this show-cause notice, it was stated that

OMP No. 514/2010 Page 12 of 68
as per Article 29.2 of the PSC, the contractor had to seek the consent

of the Government in case of any material change in the status or

shareholding of the company. It was stated that the material change

in the shareholding of the company amounts to assignment of the P.I.,

for which the petitioner had not obtained prior consent of the

Government, thereby breaching the provisions of the PSC, and, in

particular, Article 29.2. It was stated that the contravention of the PSC

provisions had been viewed very seriously and the petitioner was

called upon to explain as to why the PSC in respect of the contract area

identified as Amguri field should not be terminated as per Article 31 of

the PSC.

15. The petitioner responded to the show-cause notice on

06.06.2010 and again on 09.06.2010. A further detailed response was

sent by the petitioner on 23.06.2010. While the matter was still

hanging fire, vide communication dated 01.07.2010, the petitioner

communicated that as a result of the rights offering made by the

petitioner and the subscriptions received there against the

shareholding of MASS had increased to nearly 53%. The summary of

changes in the share capital, ownership and directorship as

communicated in this letter reads as follows:

Item    Particulars                   Pre-funding         Post-funding
                                      position            position

1       Number      of    Common 138,771,162              277,542,324
        Shares      issued    and
        subscribed in the Canadian
        Market



OMP No. 514/2010                                                 Page 13 of 68
 2       Number of directors           5                   5

3       Details of new directors                          Mr.       Ravin
        joining Canoro‟s  Board                           Prakash     Mr.
        post-transaction                                  Nowroz       Jal
                                                          Cama

4       Details     of     outgoing                       Mr. James N.
        directors                                         Smith       Mr.
                                                          Harley Winger

5       Principal shareholders        Trapeze     Asset   MASS Financial
                                      Management          (52.9%) Trapeze
                                      (18%)       MASS    Asset
                                      Financial (18%)     Management
                                                          (8.6%)

6       Equity Capital     in    US$ $104.94              $118.02
        millions




16. This communication also informed the respondent that in

addition, MASS had the right to purchase an additional 34,692,791

shares in terms of the “standby warrants” issued to it.

17. Finally, on 27.08.2010, the respondent by a 16-page order

terminated the PSC in relation to the petitioner by rejecting the various

explanations furnished by the petitioner. Consequently, the petitioner

has preferred this petition.

Petitioner’s submissions:

18. The submission of Mr. Sundaram, learned senior counsel for the

petitioner firstly is that, prima facie, there is no breach of Article 29

committed by the petitioner by allocating about 53% shareholding in

the petitioner company to MASS without seeking the prior permission

or consent of the respondent. He submits that Article 29.1 and 29.2

OMP No. 514/2010 Page 14 of 68
contemplate two different situations. Article 29.1 is applicable, when a

party comprising the contractor assigns or transfers a part, or all its

participating interest to another entity. In this case, the petitioner has

not transferred or assigned any part of its participating interest in

favour of MASS. The participating interest of the petitioner prior to

entering into the investment agreement with MASS was 60% and it

continues to remain so.

19. He submits that Article 29.1 requires the party comprising the

contractor to obtain “prior written consent of the Government”.

However, Article 29.2 is applicable when the twin conditions, namely,

that of a material change in the status of the companies or their

shareholding takes place, and the company seeks to assign its

participating interest under the changed circumstances. He submits

that even if the mere change in the status of the company or its

shareholding is taken to amount to assignment of participating

interest, all that is required is that the company has to seek the

consent of the Government which could be ex-post facto consent and

need not be a prior written consent. He submits that the words “prior

written consent of the Government” in Article 29.1 have deliberately

not been used in Article 29.2, which merely requires the seeking of

“the consent of the Government”.

20. Mr. Sundaram further submits that the assignment of the

participating interest under Article 29.1, or the material change in the

shareholding pattern of the party comprising the contractor is not

OMP No. 514/2010 Page 15 of 68
unusual and is clearly permitted by the PSC. He submits that earlier

the participating interest was shared between ACL and JTI. The same

was changed, with the prior written consent of the respondent, and the

petitioner took over 60% of the participating interest from JTI and ACL.

21. He submits that even the direct assignment of the participating

interest under Article 29.1 cannot be unreasonably withheld. The

guidelines for the exercise of its discretion by the respondent to grant

or refuse the grant of consent are contained in clauses (a) to (d) of

Article 29.1. He submits that it is not even the case of the respondent

that MASS falls foul of any of the criteria contained in clauses (a) to (d)

of Article 29.1.

22. Article 35 is also referred to by Mr. Sundaram at this stage. He

submits that the obligation to notify the government of any material

change in the shareholding is cast on the contractor only “where such

change would impact on performance of obligations under this

contract”. He submits that the induction of MASS as the majority

shareholder in the petitioner would in no way impact the performance

of its obligations by the petitioner. The said performance would only

improve with the infusion of funds for the specific purpose of

implementing the PSC. He submits that the language of Article 35

further establishes that the obligation to seek consent does not

necessarily precede the change of the shareholding in a party

comprising the contractor.

OMP No. 514/2010 Page 16 of 68

23. Mr. Sundaram further submits even if it were to be assumed that

the petitioner had not obtained the approval/consent of the

Government for the assignment or transfer of the shareholding in

favour of MASS, the only consequence thereof could be that the said

assignment or transfer shall not be effective. However, the PSC cannot

be terminated for this reason. In this regard, he places reliance on

Article 29.5 of the PSC.

24. Mr. Sundaram submits that the right to terminate the PSC vested

in the Government by virtue of Article 31.3(e) relates to the

assignment of the participating interest in the contract under Article

29.1. It does not relate to a case falling under Article 29.2.

25. Mr. Sundaram submits that even prior to the issuance of the

show cause notice by the respondent on 01.06.2010, the petitioner

had communicated to the respondent the factum of the petitioner

entering into an investment agreement with MASS. By then, the

petitioner had received the consideration for the private placement

which had resulted in 18% of the paid up equity of the petitioner being

allotted to MASS. The rights offering, and the offering by way of

convertible debentures had not been made by then. He submits that

only after the acceptance of the rights offering by MASS, the

shareholding of MASS in the petitioner company rose to about 53%

which was after the issuance of the communication dated 29.04.2010.

He submits that if the respondent had any genuine and legitimate

reasons to refuse or object to the induction of MASS as the

OMP No. 514/2010 Page 17 of 68
shareholder, the respondent should have objected to the same or

rejected the same by a reasoned order. However, no reasons were

furnished by the respondent as to why MASS could not be brought in

as a shareholder. It is not disclosed as to why the respondent considers

the induction of MASS as the majority shareholder in the petitioner

company, as not acceptable. It is not the respondents case that MASS

does not meet the criteria laid down in Article 29.1. During his

submissions, Mr. Sundaram repeatedly contended that the issuance of

the show cause notice was engineered by the other partner, viz. ACL.

It was submitted that ACL was interested in acquiring the PI of the

petitioner, and was behind the impugned action of the respondent.

26. Mr. Sundaram submits that upon issuance of the show cause

notice dated 01.06.2010, the petitioner invoked the arbitration

agreement on 14.08.2010. He submits that the controversy and

differences which have arisen between the parties with regard to

interpretation of Article 29, and in particular, Article 29.2 of the PSC

would need not to be resolved through arbitration. Even if it is

assumed that the circumstance of the petitioner permitting the

infusion of equity by MASS to the extent of nearly 53% or more

tantamounts to a breach of Article 29 of the PSC, which would

otherwise result in termination, the said termination “shall not take

place so long as such proceedings continue and thereafter may only

take place when and if consistent with the arbitral award” (see Article

31.6). He submits that with the invocation of the arbitration

OMP No. 514/2010 Page 18 of 68
agreement, the arbitration proceedings have commenced by virtue of

Section 21 of the Act. Reliance is placed on Milkfood Ltd. v. GMC

Ice Cream (P) Ltd, (2004) 7 SCC 288. Consequently, the termination

of the PSC, qua the petitioner, cannot be given effect to during the

pendency of the arbitral proceedings and the termination of the PSC by

the respondent vide its letter dated 27.08.2010 would eventually be

governed by the arbitral award.

27. Mr. Sundaram submits that in the light of the aforesaid

provisions in the PSC, the petitioner has made out a prima facie case.

He submits that the petitioner is entitled to the interim injunctions as

prayed for.

28. Mr. Sundaram submits that the PSC is a contract, the

performance of which can be specifically enforced, and consequently,

an injunction can be granted by the court to prevent its breach. He

submits that there does not exist any standard for ascertaining the

actual damages that the petitioner may suffer, if the respondent is

permitted to enforce the termination of the contract.

29. In this regard, he submits that if the respondent is permitted to

bring in another party in place of the petitioner, the quantum of profits

or losses that the said party may generate would depend entirely upon

the expertise and performance of that party. Therefore, even if a third

party is introduced as a constituent of the contractor in place of the

petitioner, and the petitioner is eventually held as being entitled to

damages for wrongful termination of the PSC, the petitioner would not

OMP No. 514/2010 Page 19 of 68
be adequately compensated, as there are no standards for

ascertaining actual damages. It would be highly dependent upon how

much oil and condensates are produced from the oil wells in question,

and at what cost. It would also depend on how much investment the

third party may make in the project.

30. Mr. Sundaram submits that the PSC is not a determinable

contract. By its very nature the contract postulates very high and

irretrievable investment by the contractor. He submits that Article

31.6 of the PSC provides that even if the contract is purported to be

terminated due to existence of circumstances which would entitle its

termination, termination shall not take effect so long as the arbitration

proceedings continue and even thereafter the termination shall take

place when and if consistent with the arbitral award. Consequently, if

the Arbitral Tribunal concludes that the termination is illegal, the same

would not take effect.

31. Mr. Sundaram submits that the PSC is a contract, for the non-

performance of which compensation in money can never be an

adequate relief. It is argued that this is not only because there exist no

standards for ascertaining actual damages that may be caused by the

non-performance of the PSC, but also because the termination of the

PSC would gravely affect the reputation and future business potential

of the petitioner worldwide, which is incalculable.

32. Petitioner submits the provisions of section 41(e) Specific Relief

Act, 1963 shall not be applicable in present case because as per

OMP No. 514/2010 Page 20 of 68
section 10, PSC is specifically enforceable, being a contract where

actual damages on non performance cannot be ascertained. Petitioner

further submits that the present contract does not fall under any of the

clauses of section 14 Specific Relief Act, 1963 ie. it is not a contract

where non performance can be compensated in money, nor is it a

determinable contract in its nature, nor it is a contract dependent on

personal volition.

33. He further submits that if injunction cannot be granted to enforce

the clauses of the contract, then by virtue of section 42, courts can

enforce the negative agreement i.e. not to terminate the contract

during the subsistence of arbitral proceedings.

34. Mr. Sundaram submits that the decision of the Supreme Court in

Indian Oil Corporation Ltd. v. Amritsar Gas Service & Others,

1991 (1) SCC 533 is largely misunderstood as the Supreme Court was

dealing with a case wherein the agreement could be terminated by

either party by giving thirty days notice to the other party “without

assigning any reason for such termination”. This clause was

independent of the clause which permitted the Indian Oil Corporation

to terminate the agreement on the happening of any of the certain

specified events. He submits that it is for this reason that the Supreme

Court concluded that the agreement was determinable.

35. He submits that in the present case, the PSC cannot be

terminated by either of the parties by giving notice for specified period

OMP No. 514/2010 Page 21 of 68
without any cause. The right to terminate the PSC is based upon the

existence of one or more of the circumstance enumerated in Article

31.2 and 31.3. Few other decisions relied upon by Mr. Sundaram shall

be referred to in the course of my discussion of the submissions.

Respondent’s Submissions:

36. Learned Additional Solicitor General, Mr.Mohan Parasaran, who

appears for the respondent submits that Article 29.2 of PSC is attracted

in the facts of the present case. It is settled law that what cannot be

done directly, cannot be done indirectly. Therefore, if prior consent is

required for direct assignment or transfer of Participating Interest as

contemplated in Article 29.1, then prior consent is also necessary for

indirect transfer of participating interest by resort to change in the

status of companies or their shareholding or the relationship with any

guarantor of the companies as envisaged in Article 29.2.

37. Respondent further submits that the petitioner‟s interpretation

of Article 29.2 based on the absence of the word “prior” in Article 29.2

will render the provision otiose and such an interpretation is not

permissible. Contract must be so interpreted to give effect to all

provisions as practically and reasonably as possible. Article 29.2 when

read in conjunction with the Article 29.3 and Article 29.4 makes it

amply clear that the contractor, in fact, requires prior consent of the

Government for indirect transfer of participating interest by virtue of

change in status/shareholding.

OMP No. 514/2010 Page 22 of 68

38. Article 29.3 requires the contractor to submit an application for

consent to assign or transfer accompanied by relevant information on

the “proposed” assignment or transfer including detailed information

on the “proposed” assignee or transferee and its shareholding and

corporate structure, as was earlier required from the companies

constituting the contractor, the terms of the “proposed” assignment or

transfer and the unconditional undertaking referred to in Article 29.4.

Article 29.4 requires that the applicant shall also submit such

information relating to the “prospective” assignee or transferee of the

assignment or transfer as the Government may reasonably require

enabling proper consideration and disposal of the application.

39. Article 29.5 of the PSC qualifies the aforesaid provisions and

further states that no assignment or transfer shall be effective until the

approval of the government is received or deemed to have been

received. It is, therefore, argued that the petitioner‟s argument that

prior consent is not required is wholly misplaced on a reading of Article

29 in its entirety.

40. Respondent further submits that Article 31.3(e) refers to

assignment of “any” interest in the contract, i.e. direct or indirect

assignment of Participating Interest without the prior consent of the

government as provided in Article 29. The petitioner cannot choose to

conveniently restrict the scope of Article 31.3(e) merely to a direct

transfer or assignment of Participating Interest, especially in light of

OMP No. 514/2010 Page 23 of 68
the well settled principle of law that what cannot be done directly,

cannot be done indirectly.

41. Respondent submits that there has been an indirect

assignment of Participating Interest in breach of Article 29.2 of the PSC

arising due to the material change in controlling interest in the

petitioner company by virtue of a transfer of a block of shares whereby

MASS now holds 52.9% shareholding in the petitioner company. It is

further submitted that contrary to the petitioner‟s submission, it is not

a mere trading of shares in the open market or a loan agreement

simplicitor. The Investment Agreement dated 16.4.2010 between the

petitioner and MASS involved a private placement of 24,798,000

common shares, rights offering and debenture placement.

42. Mr. Parasaran has referred to the various clauses of the

investment agreement dated 16.04.2010 between the petitioner and

MASS to submit that the said agreement is not merely an investment

agreement by a financial institution, but that, in fact, it is an

agreement whereunder MASS has taken complete control over the

petitioner. In particular, he refers to Article 3.2(a) which entitles MASS

to have a majority in the Board of Directors of the petitioner company.

Under clause (g) of the said Article, the petitioner has also agreed to

change its name to such name as approved by MASS. Respondent

drew attention to the following provisions of the Investment Agreement

between the petitioner and MASS, to point out the extent of

shareholding and controlling interest held by MASS over the Petitioner

OMP No. 514/2010 Page 24 of 68
Company.

 “Purchaser‟s Interest” means the cumulative ownership

interests of the Purchaser and its Affiliates in Common

Shares, expressed as a percentage of the total issued and

outstanding Common Shares, at the time of calculation.”

 Article 3.1(x)(i) states that “The company or the Subsidaries

have good and marketable title to, or the irrevocable right

to produce and/or sell, their petroleum, natural gas and

related hydrocarbons (for the purposes of this clause, the

foregoing are referred to as the “Interest”) and represents

and warrants that the Interests are free and clear of all

liens, charges, encumbrances, restrictions or adverse

claims;”

It is submitted that plain reading of the above provisions

show that Participating Interest is also being transferred,

and that oil and gas operations are also part of the

“interests”.

 Article 3.2(c) “Rights Offering. The company covenants and

agrees to offer the Rights Offering shares to Shareholders

pursuant to the Rights Offering and to conduct the Rights

offering in accordance with all applicable securities Laws

and the terms of this Agreement. The Purchaser will be

entitled to participate in the preparation of the Prospectus

and such other Rights Offering documents …………………

and the company will promptly provide drafts of such

OMP No. 514/2010 Page 25 of 68
documents to the purchaser for its review, and will provide

the purchaser with a reasonable time to review and provide

comments on such documents. The company will

…………………… not amend the terms or the Rights offering

set forth in this Agreement and as described in the draft

Preliminary Prospectus provided to the Purchaser without

the prior written consent of the purchaser (such consent not

to be unreasonably withheld or delayed).”

 MASS is entitled to participate in the preparation of the

Prospectus and such other Rights Offering documents.

 The purchaser is given board representation through two

nominee directors, or such as are necessary to represent

its shareholding in the petitioner company.

43. Respondent submits that controlling interest is effective, if MASS

group owns 51% of the total shares. Respondent further submits that

management rights of the Petitioner having been transferred, the

same tantamounts to the transfer of control of the business itself.

44. Mr. Parasaran submits that this is a suitable case for lifting of

the corporate veil of the petitioner company, to determine the

economic realities behind the legal façade, in the interest of justice

and public interest. The doctrine of lifting of corporate veil postulates

the existence of a dualism between the corporation or company on the

one hand and its members or shareholders on the other. Reliance is

placed on New Horizons v. Union of India, (1995) 1 SCC 478 and

OMP No. 514/2010 Page 26 of 68
CIT v. Meenakshi Mills, (1967) 1 SCR 934. He submits that Mr. Ravi

Prakash who is the CEO of the petitioner is a nominee of MASS.

45. The submission of learned ASG is that the interpretation which

is sought to be given by the petitioner to Article 29 of the PSC is

different from its own understanding of the said Article as contained in

its communications to the respondent. In this regard, he submits that

in the communication dated 09.06.2010 issued in response to the show

cause notice, the petitioner had stated:

“It is abundantly clear that the material change in status or
shareholding should have indirectly resulted in a transfer
or assignment of Participating interest. As mentioned
above the Mass financing transaction does not have this
effect …………”

46. He refers to para 2 of the letter of the petitioner dated

23.06.2010 issued in response to the show cause notice, wherein the

petitioner stated as follows:

“2. It is reiterated at present Mass holds only 18% of the
shareholding of Canoro. Therefore, no material change in
shareholding of Canoro has occurred as on date. Under
the provisions of the Companies Act, 1956, voting rights at
shareholder meetings become somewhat meaningful only
when the voting block is at least 26%. Even then, a 51%
shareholding block is the bare minimum to afford any kind
of positive control.”

47. He submits that this constitutes an admission on the part of the

petitioner that there was an indirect assignment of participating

interest in favour of MASS by the petitioner.

48. He further submits that the petitioner had itself filed a “material

OMP No. 514/2010 Page 27 of 68
change report” in Form 51-102 F3 dated 27.04.2010 with TSX Venture

Exchange, Canada upon entering into its agreement with MASS,

admitting that there is a material change in the shareholding of the

petitioner company. He submits that, therefore, even according to the

petitioner‟s understanding, there was a material change in the status

of the petitioner at the time when the petitioner entered into the

agreement with MASS.

49. Mr. Parasaran further submits that in larger public interest, this

Court should not grant any injunction in the present case. Oil is a

national resource of strategic importance. The PSC pertains to an oil

field in the State of Assam, which is a border State. He submits that if

the interpretation given to Article 31.6 by the petitioner were to be

accepted, it would mean that under no circumstance, the respondent

would be able to terminate the contract by giving a requisite notice,

even if there is clear and gross breach of Article 29.1 or 29.2 of the

PSC. For instance, if a party comprising the contractor were to assign

its participating interest to an enemy State, or a State which is not

having friendly relations with India, the respondent would remain

helpless till so long as the arbitration proceedings continue. Such an

interpretation, according to Mr. Parasaran, would be completely

opposed to Public Policy and would render Article 31.6 void, and

therefore such an interpretation should not be accepted by the Court.

It is submitted that the natural resource is owned by the Government

till it reaches the delivery point. The contractor is entitled only to get

OMP No. 514/2010 Page 28 of 68
cost petroleum and profit petroleum in proportion to his participating

interest. He also places reliance on Reliance Natural Resources

Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1. In this decision the

Supreme Court extended the public trust doctrine to apply to natural

resources and the governments rights over the same, which was also

fettered by constitutional necessity. Reliance is also placed on

M.P.Mathur v. DTC (2006) 13 SCC 706.

Reliance is also placed on Mahadeo Savlaram Shelke & Ors.

v. Pune Municipal Corporation & Anr. (1995) 3 SCC 33 wherein

court held that public interest is one of the material and relevant

considerations in either exercising or refusing to grant ad interim

injunction.

50. Mr. Parasaran further submits that Article 31.6, in any event,

does not contain any negative covenant which could be enforced by

resort to section 42 of the Specific Relief Act. He submits that the

present case squarely falls under section 41(e) as the performance of

the PSC cannot be specifically enforced.

51. Respondent submits that even assuming that the arbitral tribunal

returns a finding that the termination was invalid, the petitioner can

always be compensated for loss suffered i.e the cost petroleum and

profit petroleum they would have been entitled to under the PSC.

Under the PSC, the petitioner is not entitled to anything more than the

cost and profit petroleum and does not have any vested right in the

OMP No. 514/2010 Page 29 of 68
crude oil or natural gas in the Amguri field. The calculation of the cost

and profit petroleum being in accordance with the PSC, the petitioner

cannot claim that it is not possible to calculate the monetary loss

suffered as a result of the termination. He submits that under clause

10.1 of the PSC, the agreement provides that the Amguri Field contains

10 wells. The contract was valid for a fixed term of 25 years, unless

terminated earlier. Amguri is a small sized discovered field producing

gas and crude oil. The planned reserves are available and an estimate

of actual output can be easily made, at least on a conservative basis.

He submits that under the contract, all that the petitioner was entitled

to was, cost petroleum and its share in profit petroleum. Even these

shares are to be monitised at least till so long as India does not

become self sufficient in oil production. He submits that it is well

known that India is far from becoming self sufficient in oil production

and demands for oil are ever increasing. He, therefore, submits that

the contention of the petitioner that its damages cannot be quantified

and there are no standards for ascertaining actual damages is not

correct. He submits that the PSC is a commercial contract and the

objective thereof is that the contractor shall make an investment,

employ its expertise and generate profits by producing petroleum. He

submits that the respondent shall maintain full and complete accounts

of the investments made, costs incurred and petroleum produced from

the oil field in question, to enable quantification of the damages, if any,

awarded to the petitioner. The objective is eventually to earn profits in

monetary terms. Therefore, the contract cannot be specifically

OMP No. 514/2010 Page 30 of 68
enforced as compensation in money is an adequate relief.

52. In support of this submission, Mr. Parasaran relies on Hindustan

Petroleum Corporation Ltd. v. Sriman Narayan, 2002 (5) SCC 760

and submits that this case is similar to the one in hand on facts as well.

Respondent submits that “irreparable injury” means an injury which

cannot be adequately remedied by the payment of damages to the

aggrieved party.

53. Mr. Parasaran has also placed reliance in decision of the

Supreme Court in Amritsar Gas Company (supra). He submits that

as the agreement between the parties is determinable under Article 31

of the PSC, it makes no difference whether or not the same is

determinable for reasons, or upon merely giving a notice without

assignment of reasons. The sufficiency of reasons cannot be gone

into by this Court in these proceedings. As the contract is

determinable, the same cannot be specifically enforced by virtue of

section 14(c) of the Specific Relief Act, and consequently, no injunction

can be granted to prevent its breach.

54. In answer to the submission of the petitioner founded upon

Article 31.6, Mr. Parasaran submits that the invocation of the

arbitration agreement by the petitioner vide notice dated 14.08.2010

itself is invalid, and cannot constitute a notice for the purposes of

section 21 of the Act, as Article 34.3 obliges the parties to attempt an

amicable settlement within 90 days after disputes have arisen, before

OMP No. 514/2010 Page 31 of 68
resorting to arbitration. He submits that after the disputes arose, upon

issuance of the termination notice dated 27.08.2010, the period of 90

days had not expired when the petitioner sought to involve the

arbitration agreement. Consequently, the petitioner was not even

permitted to invoke the arbitration agreement.

55. Petitioner in rejoinder submits that the Union of India having

once granted the concession in the Amguri field, cannot, without

proper cause and reason, and in a high handed manner, withdraw such

concession since such concession, once made, is a valuable

commercial right. This is especially so when the petitioner has invested

more than US$ One Hundred Million to exploit this right. The

termination of such right can only be strictly in accordance with the

terms of the PSC and the question of whether such decision to

terminate was warranted under the terms of the PSC and made with

due application of mind in accordance with the terms of the PSC is a

matter which will be resolved by the arbitral tribunal, pending which,

the petitioner has prayed for the subject matter of the arbitration to be

protected and preserved.

Discussion:

56. Having heard and considered the arguments of the learned

counsel and upon giving my due consideration to the materials relied

upon by them, I am of the view that prima facie, Article 29.2 requires

the party constituting the contractor to obtain prior approval and

consent of the government. Mere omission to mention the word

OMP No. 514/2010 Page 32 of 68
“prior” before the word “consent” in Article 29.2 does not make any

difference. In this regard, reference may be made to Article 29.3

which states that the application for consent to assign or transfer shall

be accompanied, inter alia, with “detailed information on the proposed

assignee or transferee … … …, the terms of the proposed assignment

or transfer … … …”. The use of the expression “proposed assignee”

and “proposed assignment” shows that the application for consent to

assign or transfer had to be made prior to the assignment or transfer,

and not ex post facto. It is not a mere intimation that the party

comprising the contractor is required to give to the government, but it

is an application to seek the consent and permission of the

government for the “proposed” assignment or transfer of shareholding.

Article 29.1 prohibits direct transfer or assignment of PI without prior

consent. The whole purpose of inserting Article 29.2, after Article 29.1,

appears to be to plug the transfer or assignment of the PI through an

indirect mode without prior permission. Article 29.4 also uses the

expression “prospective assignee or transferee”. While making the

application, the party comprising the contractor is required to make

various disclosures about the proposed assignee or transferee, so that

the government is enabled to properly consider and dispose of the

application. The Government has to apply its mind at the time of

granting or refusing consent or approval. Such consent or approval

can also be conditional as provided in Article 29.5. The

consent/approval can also be denied in appropriate cases, and it is not

necessary for the government to grant the same in all cases. Prima

OMP No. 514/2010 Page 33 of 68
facie, there appears merit in the submission of the respondent that

what cannot be done directly, cannot be permitted to be done

indirectly. Direct transfer of PI without the prior consent of the

respondent is prohibited. So also, indirect transfer of the PI, by

adopting the modus operandi of transfer/vesting of majority stake in

the contractor/party constituting the contractor, without prior consent

of the respondent, cannot be permitted.

57. The use of the expression “for assigning the participating

interest under the changed circumstances” used in Article 29.2, prima

facie, refers to a material change in the shareholding of the party

comprising the contractor. The material change in the shareholding

itself constitutes an assignment of the participating interest. As

noticed above, this position also appears to be the petitioners

understanding of Article 29.2.

58. Breach of Article 29.2 is not capable of remedy. In this regard,

reference may be made to Article 31.5, which provides that if the

breaches mentioned in Article 31.3(f) or (g) or (i) or Article 34 are

remedied within 90 days of issuance of notice, or such extended period

as may be granted by the government, such termination shall not

become effective. However, the mention of Article 31.3(e) is

conspicuous by its absence in Article 31.5.

59. Prima facie, Article 35.1, which obliges the party comprising the

contractor to notify the government of any material change in their

OMP No. 514/2010 Page 34 of 68
status, shareholding or relationship of that of any guarantor of the

companies, in particular, where such change would impact on

performance of obligations under the PSC, does not whittle down the

requirement of Article 29. The two provisions have to be read

together. Whereas Article 35 merely talks about the government being

notified, Articles 29.1 and 29.2 oblige the party comprising the

contractor to obtain prior consent/approval of the government before

the assignment of the participating interest either directly or indirectly.

60. In the light of the prima facie interpretation given to Article 29.2

of the PSC, there is no need to go into the issue whether the corporate

veil of the petitioner should be lifted or not. However, I may note that,

prima facie, there appears to be merit in the submission of

Mr.Parasaran that this may be a fit case for lifting the corporate veil of

the petitioner to determine the real identity of the entity which is

hiding behind the facade of the petitioner. This is so because this

enquiry is necessary to determine whether the acts of the petitioner

fall within the mischief of article 29.2 of the PSC. In Meenakshi Mills

(supra) the Supreme Court has held that “But in certain exceptional

cases the court is entitled to lift the veil of corporate entity and to pay

regard to the economic realities behind the legal façade”. In New

Horizons (supra) the Supreme Court noted its earlier decision in

State of U.P. V. Renusagar Power Co., (1988) 4 SCC 59, wherein it

has been observed:

OMP No. 514/2010 Page 35 of 68

“It is high time to reiterate that in the expanding of horizon
of modern jurisprudence, lifting of corporate veil is
permissible. Its frontiers are unlimited. It must, however,
depend primarily on the realities of the situation……… The
horizon of the doctrine of lifting of corporate veil is
expanding.”

61. The petitioner‟s submission that the respondent has not given

the requisite 90 days notice, prima facie, appears to be fallacious.

Article 31.3 enables the government to terminate the PSC “upon giving

ninety (90) days written notice to the other party of its intention to do

so”. The said notice was given by the government at the time of

issuance of the show cause notice dated 01.06.2010.

62. The submission of Mr. Sundaram that Amritsar Gas Service

(supra) has no application in the facts of the present case as, in that

case, the contract was terminable by giving a fixed time notice without

assigning reasons, and this not the position in the present case, is not

acceptable. The discussion in the judgment shows that the Supreme

Court held the contract to be determinable by virtue of both the

clauses, and not merely because the agreement was terminable

without cause, upon giving of a fixed time notice. Reference may be

made to para 12 of this decision which reads as follows:

“The arbitrator recorded finding on issue No. 1 that
termination of distributorship by the appellant-Corporation
was not validly made under Clause 27. Thereafter, he
proceeded to record the finding on issue No. 2 relating to
grant of relief and held that the plaintiff-respondent No. 1
was entitled to compensation flowing from the breach of
contract till the breach was remedied by restoration of
distributorship. Restoration of distributorship was granted

OMP No. 514/2010 Page 36 of 68
in view of the peculiar facts of the case on the basis of
which it was treated to be an exceptional case for the
reasons given. The reasons given slate that the
Distributorship Agreement was for an indefinite period till
terminated in accordance with the terms of the Agreement
and, therefore, the plaintiff-respondent No. 1 was entitled
to continuance of the distributorship till it was terminated
in accordance with the agreed terms. The award further
says as under:

“This award will, however, not fetter the right of
the defendant Corporation to terminate the
distributorship of the plaintiff in accordance with
the terms of the agreement dated April 1, 1976,
if and when an occasion arises.”

This finding read along with the reasons given in the award
clearly accepts that the distributorship could be terminated
in accordance with the terms of the Agreement dated
1.4.1976, which contains the aforesaid Clauses 27 and 28.
Having said so in the award itself, it is obvious that the
arbitrator held the distributorship to be revokable in
accordance with Clauses 27 and 28 of the Agreement. It is
in this sense that the award describes the Distributorship
Agreement as one for an indefinite period, that is, till
terminated in accordance with Clauses 27 and 28. The
finding in the award being that the Distributorship
Agreement was revokable and the same being admittedly
for rendering personal service, the relevant provisions of
the Specific Relief Act were automatically attracted. Sub-
section (1) of Section 14 of the Specific Relief Act specifies
the contracts which cannot be specifically enforced, one of
which is ‘a contract which is in its nature determinate’. In
the present case, it is not necessary to refer to the other
clauses of Sub-section (1) of Section 14, which also may be
attracted in the pres6nt case since Clause (c) clearly
applies on the finding read with the reasons given in the
award itself that the contract by its nature is determinable.
This being so granting the relief of restoration of the
distributorship even on the finding that the breach was
committed by the appellant-Corporation is contrary to the
mandate in Section 14(1) of the Specific Relief Act and
there is an error of law apparent on the face of the award
which is stated to be made according to ‘the law governing
such cases’. The grant of this relief in the award cannot,
therefore, be sustained.”

63. Reliance placed by Mr. Sundaram on para 14 of the aforesaid

OMP No. 514/2010 Page 37 of 68
decision appears to be misplaced, as the Supreme Court in that

paragraph was considering the aspect of quantification of damages,

and not the aspect whether the contract was determinable or not.

Para 14 of this decision reads as follows:

“The question now is of the relief which could be granted
by the arbitrator on its finding that termination of the
distributorship was not validly made under Clause 27 of the
Agreement. No doubt, the notice of termination of
distributorship dated 11.3.1983 specified the several acts
of the distributor on which the termination was based and
there were complaints to that effect made against the
distributor which had the effect of prejudicing the
reputation of the appellant-Corporation; and such acts
would permit exercise of the right of termination of
distributorship under Clause 27. However, the arbitrator
having held that Clause 27 was not available to the
appellant- Corporation, the question of grant of relief on
that finding has to proceed on that basis. In such a
situation, the Agreement being revokable by either party in
accordance with Clause 28 by giving thirty days’ notice,
the only relief which could be granted was the award of
compensation for the period of notice, that is, 30 days. The
plaintiff-respondent No. 1 is, therefore, entitled to
compensation being the loss of earnings for the notice
period of thirty days instead of restoration of the
distributorship. The award has, therefore, to be modified
accordingly. The compensation for thirty days notice period
from 11.3.1983 is to be calculated on the basis of earnings
during that period disclosed from the records of the Indian
Oil Corporation Ltd.”

64. I may refer to the Division Bench judgment in Rajasthan

Breweries Ltd. V. The Stroh Brewery Co., AIR 2000 Delhi 450. The

appellant had raised an identical argument in that case to say that

unless the contract can be terminated by giving a specified period

notice, without any cause, the same would not be considered to be a

determinable contract. Para 3 of the decision records the appellants

OMP No. 514/2010 Page 38 of 68
submission and, so far as it is relevant, it reads as follows:

“3. The appellant’s case is that the contracts in question
are not determinable in nature as contemplated by Section
14(i)(c) of the Specific Relief Act since there is no clause in
the agreement, which permits the respondent to terminate
the agreements by giving a notice of a few days. The
contracts, which are determinable in nature have always
been understood to mean those contracts, which can be
put to an end to sending notice implicate of a few days. It
was contended that contracts in question do not contain
such a clause. To the contrary, the contracts in the present
case specifically state and recognise that the respondent
has granted to the appellant an exclusive license to
produce Stroh Beer for a term of seven years. Which term
was renewable successively for a period of three years at
each time. It has also been contended that if the decision
rendered by learned Single Judge is taken to be correct
law, then in almost all commercial contracts the remedy of
injunction would be barred. Another ground urged is that
the arbitration proceedings in the present case have to be
conducted in accordance with English law and since
procedural law is the English Arbitration Act, the same will
govern the rights of the parties. Section 48(5)(b) of the
English Arbitration Act, 1996 specifically empowers the
Arbitrator to order specific performance of a contract. This
aspect was not considered in its right prospective.”

65. The submission of the appellant was again noticed in para 16,

which reads as follows:

“16. Learned counsel for the appellant contended that the
word “determinable” used in clause (c) to Sub-section (1)
of Section 14 means that which can be put an end to.
Determination is putting of a thing to an end. The clause
enacts that a contract cannot be specifically enforced if it
is, in its nature, determinable not by the parties but only by
the defendant. Although clause does not add the word “by
the parties or by the defendant” yet that is the sense in
which it ought to be understood. therefore, all revocable
deeds and voidable contracts may fall within
“determinable” contracts and the principle on which
specific performance of such an agreement would not be
granted is that the Court will not go through the idle
ceremony of ordering the execution of a deed or
instrument, which is revocable at the will of the executant.

OMP No. 514/2010 Page 39 of 68

Specific performance cannot be granted of a terminable
contract.”

66. The Division Bench rejected the aforesaid submissions by placing

reliance on Amritsar Gas Service (supra) and also approved the

decision of this court in M/s Classic Mirrors Ltd. V. M/s Maruti

Udyog Ltd, 65 (1997) DLT 166. The relevant extract from the Division

Bench decision reads as follows:

“17. We are unable to persuade ourselves to accept the
submissions put forth on behalf of the appellant that when
a contract is determinable by the parties, the same cannot
be treated as such a contract as is referred to in clause (c)
to sub-section (1) of Section 14 id a contract, which in its
nature is determinable.

18. In Indian Oil Corporation Ltd. Vs. Amritsar Gas Service
and others, (1991) 1 SCC 533, the Supreme Court had an
occasion to consider the terms of agreement of
distributorship. The agreement could be terminated in
accordance with the terms of the agreement as per clauses
37 and 28 thereof. The Arbitrator had also held the
distributorship to be revocable in accordance with clauses
27 and 28 of the agreement. The distributorship
agreement was held for indefinite period, namely, till the
time it was terminated in accordance with the terms
contained therein. It was the case of the respondent
therein that since the contract had not been terminated in
accordance with clause 27 thereof, under which
termination had been made, the firm was entitled to
continuance of distributorship in the special circumstances
of the case, which contention was upheld by the Arbitrator.
Supreme Court set aside the award of the arbitrator on the
ground that there is error of law apparent on the face of
the record and grant of relief in the award cannot be
sustained. It was held:-

“The arbitrator recorded finding on issue No.1 that
termination of distributorship by the appellant Corporation
was not validly made under clause 27. Thereafter, he
proceeded to record the finding on issue No.2 relating to
grant of relief and held that the plaintiff-respondent 1 was

OMP No. 514/2010 Page 40 of 68
entitled to compensation flowing from the breach of
contract till the breach was remedied by restoration of
distributorship. Restoration of distributorship was granted
in view of the peculiar facts of the case on the basis of
which it was treated to be an exceptional case for the
reasons given. The reasons given state that the
Distributorship Agreement was for an indefinite period till
terminated in accordance with the terms of the agreement
and, therefore, the plain- tiff-respondent 1 was entitled to
continuance of the distributor- ship till it was terminated in
accordance with the agreed terms. The award further says
as under:-

“This award will, however, not fetter the right
of the defendant Corporation to terminate the
distributorship of the plaintiff in accordance
with the terms of the agreement dated April 1,
1976, if and when an occasion arises.”

This finding read along with the reasons given in the award
clearly accepts that the distributorship could be terminated
in accordance with the terms of the agreement dated April
1, 1976, which contains the aforesaid clauses 27 and 28.
Having said so in the award itself, it is obvious that the
arbitrator held the distributorship to be revokable in
accordance with clauses 27 and 28 of the agreement. It is
in this sense that the award describes the Distributorship
Agreement as one for an indefinite period, that is, till
terminated in accordance with clauses 27 and 28. The
finding in the award being that the Distributorship
Agreement was revokable and the same being admittedly
for rendering person al service, the relevant provisions of
the Specific Relief Act were automatically attracted. Sub-
section (1) of Section 14 of the Specific Relief Act specifies
the contracts which cannot be specifically enforced, one of
which is a contract which is in its nature determinable. In
the present case, it is not necessary to refer to the other
clauses of sub-section (1) of Section 14, which also may be
attracted in the present case since clause (c) clearly
applies on the finding read with reasons given in the award
itself that the contract by its nature is determinable. This
being so granting the relief of restoration of the
distributorship even on the finding that the breach was
committed by the appellant-Corporation is contrary to the
mandate in Section 14(1) of the Specific Relief Act and
there is no error of law apparent on the face of the award
which is stated to be made according to the law governing
such cases. The grant of this relief in the award cannot,
therefore, be sustained.

OMP No. 514/2010 Page 41 of 68

The facts of the present case are identical to those in
aforementioned decision of the Supreme Court in as much
as the agreements in the instant case are also terminable
by the respondent on happening of certain events. In
Indian Oil Corporation’s case (supra) also agreement was
terminable on happening of certain events. Question that
whether termination is wrongful or not; the events have
happened or not; the respondent is or is not justified in
terminating the agreements are yet to be decided. There is
no manner of doubt that the contracts by their nature
determinable.

In M/s. Classic Motors Ltd. Vs. M/s. Maruti Udyog Ltd.,
65(1997)DLT166 relying upon number of decisions, learned
Single Judge of this Court rightly observed:-

“In view of long catena of decisions and
consistent view of the Supreme Court, I hold
that in private commercial transaction the
parties could terminate a contract even without
assigning any reasons with a reasonable period
of notice in terms of such a Clause in the
agreement. The submission that there could be
no termination of an agreement even in the
realm of private law without there being a
cause or the said cause has to be valid strong
cause going to the root of the matter,
therefore, is apparently fallacious and is
accordingly, rejected.”

67. Therefore, prima facie, the PSC is determinable in its nature.

But, in all fairness, I must take note of the line of decisions cited by Mr.

Sundaram, i.e. Koshika Telecom Ltd. v. Union of India, 2002 (3)

Arb. LR 141, Softline Media Ltd. v. Delhi Transport Corporation,

2002 Suppl. Arb. L.R. 632, Atlas Interactive (India) Pvt. Ltd. v.

BSNL & Anr., 2006 (126) DLT 504 and Newage Fincorp (India) Ltd.

v. Asia Corp Securities Ltd., 2000 (3) Arb. L.R. 687). These

decisions were rendered keeping in view the fact that the petitioner

had incurred substantial expense towards performance of the contract,

OMP No. 514/2010 Page 42 of 68
and the Court was of the view that prima facie, there was no breach of

the contract by the plaintiff/petitioner, or that it being a mere technical

breach, did not justify the termination of the contract. In Atlas

(supra), the learned Single Judge also observed that Rajasthan

Breweries (supra) was a decision rendered in the factual background

that both the parties were private parties, and that it did apply where

one of the contracting parties was a state instrumentality. Without

getting embroiled into this debate, I may only note that Amritsar Gas

Service (supra), on which the decision in Rajasthan Breweries

(supra) is based, was a case involving a state instrumentality.

Moreover, prima facie, there is breach of Article 29 by the petitioner,

which may render the PSC terminable.

68. No doubt, the quantum of investment made by the petitioner

would be a germane consideration while considering whether or not to

grant an injunction against the termination of the PSC. However,

prima facie, the termination of the PSC by the respondent cannot be

said to be illegal at this stage, in the facts of this case. The fact that

the petitioner has already made substantial expenditure under the

PSC, by itself, cannot insulate it from the consequences of its breach of

the PSC. Moreover, the level of investment has to be viewed in the

context of the transaction to which it pertains. It is not the petitioners

case that the investment made is a very high proportion of the returns

that the petitioner would derive if the PSC is allowed to be acted upon

by the petitioner as the operator. Consequently, the decision in

OMP No. 514/2010 Page 43 of 68
Koshika Telecom (supra), Softline Media (supra), Atlas

Interactive (supra) and Newage Fincorp (supra) are not attracted in

the facts of the present case.

69. In Sriman Narayan (supra), Hindustan Petroleum Corporation

had entered into a commercial contract with the respondent Sriman

Narayan for sale of petroleum products manufactured by the said

corporation. Under the terms of the agreement, it was stipulated that

the respondent shall not change the structure of the firm without the

permission of the appellant. Concededly, respondent No.1 had

changed the structure of the firm from a proprietary firm to a

partnership firm. Under the agreement, the said violation entitled the

termination of the license.

70. The Supreme Court in para 8 observed as under:

“8. The decision whether or not to grant an interlocutory
injunction has to be taken at a time when the exercise of
the legal right asserted by the plaintiff and its alleged
violation are both contested and remain uncertain till they
are established on evidence at the trial. The relief by way
of interlocutory injunction is granted to mitigate the risk of
injustice to the plaintiff during the period before which that
uncertainty could be resolved. The object of the
interlocutory injunction is to protect the plaintiff
against injury by violation of his right for which he
could not be adequately compensated in damages
recoverable in the action if the uncertainty were
resolved in his favour at the trial. The need for such
protection has, however, to be weighed against the
corresponding need of the defendant to be
protected against injury resulting from his having
been prevented from exercising his own legal rights
for which he could not be adequately compensated.
The court must weigh one need against another and
determine where the “balance of convenience” lies.
(See Gujarat Bottling Co. Ltd. v. Coca Cola Co.,

OMP No. 514/2010 Page 44 of 68
(1995) 5 SCC 545 at p. 574)” (Emphasis supplied)

71. The Court held that, prima facie, the appellant was entitled to

take action for revoking the agreement entered into with the

respondent. The validity or otherwise of the revocation of the license

could be considered at the stage of interim injunction only for the

limited purpose of ascertaining whether there is a prima facie case in

favour of the plaintiff. The Supreme Court placed reliance on the

earlier decision in Amritsar Gas Service (supra). While examining

the relief granted by the High Court to the respondent, the Supreme

Court observed:

“Most importantly, the High Court has not considered the
question whether on the facts and circumstances of the
case, if the prayer for interim injunction is refused the
plaintiff-petitioner will suffer irreparable loss which cannot
be adequately compensated by damages. As has been held
by this Court in Dorab Cawasji Warden case ordinarily the
relief to be granted to a plaintiff in such a matter is
awarding of damages and interim injunction or a mandatory
nature is not to be granted”.

The Supreme Court vacated the injunction granted by the High

Court in favour of the respondent.

72. Mr. Sundaram has fairly conceded the position that

considerations of larger public interest will overrule the limitation

contained in Article 31.6 of the PSC on the right of the government to

terminate the PSC. He concedes that if there are genuine serious

objections to the transfer of participating interest by a party

OMP No. 514/2010 Page 45 of 68
constituting the contractor, to an undesirable entity, the government

would be entitled to step in and terminate the PSC.

73. I am, even otherwise, of the prima facie view that the State, as a

sovereign, cannot be understood to have irretrievably given up all its

rights while entering into a contract, such that it is rendered helpless in

a situation which threatens the national interest or security of State.

An interpretation, either of a law or a contract, which impinges on the

sovereign power of the State to safeguard its vital and strategic

interests (and not just commercial interests), would be eschewed by

the Court to save the law, or the contract, from voidity on the ground

of it being opposed to public policy. In Reliance Natural Resources

Ltd. (supra), the Supreme Court commented on the rights vested in

Reliance Industries Ltd (RIL) under the production sharing contract

entered into by the Government as follows:

“117. RIL‟s right of distribution is based on the PSC, which
itself is derived from the power of the Government under
the constitutional provisions. Thus, the very basis of RIL‟s
mandate is the constitutional concepts that have been
discussed by now, including Article 297, Articles 14 and
39(b) and the public trust doctrine. Therefore, it would be
beyond the power of RIL to do something which even the
Government is not allowed to do. The transactions
between RIL and RNRL are subject to the overriding role of
the Government.”

In para 252, the Supreme Court observed:

“252. The PSC itself specifically recognises that the
interests of India are of paramount importance. Recital 6 of
the PSC states that the “Government desires that the
petroleum resources … be discovered and exploited with
utmost expedition in the overall interests of India and in
accordance with good international petroleum industry
practices”. Further, the PSC also places an affirmative

OMP No. 514/2010 Page 46 of 68
obligation on the contractor, in Article 8.3(k) to “be always
mindful of the rights and interests of India in the conduct of
petroleum operations”. Article 32.2 specifically states that
nothing in the PSC shall “entitle the contractor to exercise
the rights, privileges and powers conferred upon it in a
manner which will contravene the laws of India”. We fail to
appreciate, given such a clear linkage between the PSC
and the constitutional imperatives, Shri Jethmalani‟s
argument that the GoI‟s policy initiatives violate the terms
of the PSC and sanctity of contracts.”

74. I may note that in the PSC in question similar recitals and

conditions are found, as contained in the PSC interpreted by the

Supreme Court in Reliance Natural Resources Ltd. (supra). (See

Recital 4 as quoted above, Article 8.3(k) and Article 33.2 of the PSC in

question). At the same time, I may note that the decision in M.P.

Mathur (supra) does not appear to be relevant because that case did

not deal with contractual rights, but the rights were founded upon

promissory estoppel.

75. So what would be the considerations that would go into making

of the decision of the respondent, whether or not to grant its consent

for the indirect assignment or transfer of participating interest by

resort to a material change in the shareholding of the party comprising

the contractor? Prima facie, it appears to me that the same guidelines

and considerations would be germane for the purpose of grant/refusal

of permission under Article 29.2, as are germane for consideration of a

request for transferring of participating interest under Article 29.1.

Consequently, the prospective assignee/transferee should be of good

standing, having capacity and ability to meet its obligation under the

PSC and should be willing to provide an unconditional undertaking to

OMP No. 514/2010 Page 47 of 68
the government to assume the participating interest share of

obligations and provide guarantees in respect thereof as provided

under the PSC. Moreover, the prospective assignee/transferee should

not be a company incorporated in a country with which the

government, for policy reasons, has restricted trade or business. The

prospective assignor or transferor, and assignee or transferee

respectively should be willing to comply with any reasonable

conditions of the government, as may be considered necessary in the

circumstance, with a view to ensure performance under the PSC.

Lastly, the assignment or transfer should not adversely affect the

performance or obligations under the PSC, or be contrary to the

interests of India.

76. A party comprising the contractor cannot be permitted to present

a fait-accompli to the government, by failing to take consent of the

government under Article 29.2, and assigning its participating interest,

through the indirect method of transfer of shareholding amounting to a

material change in the shareholding, and creating a situation which

falls foul of either one or more of clauses (a) to (d) of Article 29.1.

Clause 31.6 relied upon by the petitioner is very pertinent to the

petitioner‟s case for the sake of convenience, the same is reproduced

once again hereinbelow:

“31.6 If the circumstance or circumstances that would
otherwise result in termination are the subject matter or
proceedings under Article 34, then termination shall not
take place so long as such proceedings continue and
thereafter may only take place when and if consistent with
the arbitral award.”

OMP No. 514/2010 Page 48 of 68

77. Prima facie, the circumstance of the petitioner having transferred

its participating interest without the prior consent of the respondent as

required in Article 29.2 exists. Prima facie, the said circumstance

would result in termination of the PSC under Article 31.3(e). Prima

facie, the breach of Article 29 cannot be remedied upon issuance of

notice and it is not even the petitioner‟s case that the said breach has

been remedied. On the contrary, after the issuance of the show cause

notice, the petitioner has permitted MASS to subscribe under the rights

issue which has raised the stake of MASS in the petitioner to nearly

53%. At the same time, the issue whether Article 29.2 has been

breached is the subject matter of proceedings under Article 34,

namely, of arbitration proceedings. The arbitration proceedings in

respect of the aforesaid dispute with regard to interpretation of Article

29.2 stood commenced on the date on which the petitioner gave its

request to the respondent for that dispute to be referred to arbitration,

i.e., 14.08.2010.

78. The submission of Mr. Parasaran that the invocation of

arbitration agreement was premature because the petitioner did not

attempt an amicable settlement within 90 days after the disputes had

arisen and before invoking the arbitration agreement, in my view, has

no merit. If it becomes eminent that a dispute has arisen between the

parties which cannot be amicably settled, a party is not obliged to wait

for the expiry of 90 days period before invoking arbitration. The

respondent had issued the show cause notice dated 01.06.2010. This

OMP No. 514/2010 Page 49 of 68
show cause notice recited that the termination of Article 29.2 of the

PSC had been viewed seriously by the respondent. The manner in

which the mind of the respondent was working was evident from the

fact that the show cause notice was given to enable the petitioner to

show cause as to why the PSC be not terminated. The petitioner sent

its responses on 06.06.2010, 09.06.2010 & 23.06.2010. It sent further

communication on 01.07.2010. From the communications of the

petitioner it appears that the petitioner also met the officers of the

respondent to discuss the issue. It, therefore, cannot be said that the

petitioner did not make an endeavour to arrive at an amicable

settlement. If it became eminent to the petitioner that a settlement

was not possible and that the respondent was intent upon terminating

the PSC, the petitioner cannot be accused of jumping the gun by

invoking the arbitration agreement without waiting for the expiry of 90

days period from the time that the dispute arose.

79. In the present case, the respondent in its reply has not pleaded

that MASS is an undesirable entity. The respondent had given no

reason whatsoever for objecting to the induction of MASS as the

majority shareholder in the petitioner. Therefore, I may have been

inclined to give effect to Article 31.6 in the absence of circumstances

giving rise to public and national interest considerations.

80. After the matter had been heard and judgment reserved on

06.12.2010, and while the present judgment was under preparation,

the matter was mentioned by the learned ASG Mr. Parasaran to move

OMP No. 514/2010 Page 50 of 68
an application for the purpose of brining on record subsequent facts

and events. According to the respondent, a team from Directorate

General of Hydrocarbon (DGH), which is a Technical Wing under the

Ministry of Petroleum & Natural Gas, had conducted a technical

audit/surveillance of Amguri field from 08.11.2010 to 11.11.2010.

After conducting the technical audit/surveillance, this team has

submitted a report dated 20.12.2010 to the Ministry of Petroleum &

Natural Gas. It is stated that the report had been received by the

respondent after 06.12.2010, i.e., the date on which judgment in this

case was reserved. Along with the application, the respondent has

filed an affidavit of Mr. Partha Das, working as Director (Exploration),

Ministry of Petroleum & Natural Gas, Government of India. Along with

this affidavit, the respondent has placed on record the report on

technical audit/surveillance on the basis of audit/surveillance

conducted between 08th & 11th November, 2010, prepared by DGH

along with the forwarding letter dated 20.12.2010. The conclusions

drawn in the said report on technical audit/surveillance read as follows:

“Conclusion

1. The delay in gas Compression & injection facilities
has caused damage to Reservoir Health affecting
productivity and ultimate condensate recovery from
Barail Main retrograde gas condensate reservoir.

2. The continued production from Barail Main reservoir
below dew point pressure has led to condensate drop
out of around 551,000 barrels in the reservoir during
last two years which has caused a significant
revenue loss to Government of India/ Government of
Assam.

OMP No. 514/2010 Page 51 of 68

3. The operator continued to produce the wells from
Main Barail (A-6, 10B & 11) till June 2010 resorting to
flogging of reservoir and hiding the facts to DGH/GOI.
The operator admitted the fact during the technical
audit that flogging of reservoir was resorted to
ensure minimum cash flow for smooth running of the
project.

4. Increase in water cut in A-6 (Main Barail) & A-11
(Middle Barail) will be constrained for required gas
production in absence of viable solution to water
disposal problem and also meeting the production
targets.

5. The infrastructure of A-6 EPS and the gas
compression plant is in quite bad shape and needs
immediate revamping. The petroleum measurement
facilities are also obsolete and needs to be upgraded.

6. The Operator has been advised to expedite the gas
compression and injection plant within the extended
schedule of completion by January 2011 and restrict
gas sales till dew point pressure is approached.

Concluding Remarks

During the process of finalization of the report, it was
brought to notice that Amguri-11, the only well producing
gas and condensate in Amguri field has been shut down
w.e.f. 3.12.10. It shows lack of Good International
Petroleum Industry Practice (GIPIP) and sound reservoir
management practice by M/s Canoro Resources Ltd as
elaborated in the Report. This further raises a doubt about
technical capability of M/s Canoro Resources Ltd to
effectively manage the Amguri field and PSC as an
Operator.

It is worth mentioning that during the meeting with
CRL and ACIL at DGH on 17.6.2009 (Annexure-V), the
performance of Amguri was discussed wherein DGH had
expressed its displeasure over the overall performance of
CRL as an Operator.”

OMP No. 514/2010 Page 52 of 68

The DGH in its communication dated 20.12.2010 has observed

as follows:

“The Operator has not followed the Good International
Petroleum Practices which has caused the irreparable
damage to the Reservoir, leading to the loss of productivity
from the wells, condensate recovery from the field and
revenue to Govt. of India as well as to Govt. of Assam.
The time and cost over run for Gas compression project is
the result of Canoro‟s inability to provide Project
Management skills. The Statutory HSE requirements have
been neglected, kept on the back bench and not given due
priority & attention. DGMS has also served notice to
operator in Oct 2010, for serious violations of Oil Mines
Regulation, 1984, Mines Rules 1955 and Mines Vocational
Training Rules 1966”

81. When the matter was mentioned on 28.01.2011, the following

order came to be passed:

“The matter has been mentioned by Mr. Mohan Parasaran,
learned ASG, appearing on behalf of the respondent. On his
mentioning, the matter is taken up for consideration. He
submits that the respondent had attempted to move an
application. However, as the matter has been reserved for
judgment, the application has not been listed. Advance
copy has been served on the petitioner‟s counsel.

The application moved by the respondent, if in order,
should be listed before the Court on 31.01.2011. Learned
counsel for the respondent should inform the petitioner of
the listing of this application on 31.01.2011, by recorded
delivery.

A copy of this order be given dasti to the counsel for the
respondent, under the signature of the Court Master.”

82. The matter was again taken up on 31.01.2011, and the following

order was passed:

“I.A. No. 1371/2011

OMP No. 514/2010 Page 53 of 68
This application has been moved by the respondent to place
on record the additional affidavit along with the technical
report relied upon by the respondent in relation to the Amguri
Oil Field.

Arguments in this case had been heard and judgment
reserved on 06.12.2010. The application has been moved
while the judgment is under preparation.

Mr. Sundaram, learned senior counsel for the petitioner, who
appears on advance notice, submits that the petitioner has
already sent a detailed response to the notice issued by the
respondent founded upon the technical report. The
respondent has not yet considered the response and taken an
informed decision, either accepting or rejecting the
explanation furnished by the petitioner.

Mr. Parasaran, learned Additional Solicitor General submits
that the competent authority of the respondent shall grant a
hearing to the petitioner, and after considering response of
the petitioner, the concerned officer shall communicate his
decision by a speaking order. The said decision be taken and
communicated, and also be placed on record along with an
additional affidavit, preferably before the next date.
List on 17.02.2011. Dasti.”

83. The respondent has filed an affidavit dated 15.02.2011 of Mr.

Goutam Chakraborty, Chief Geologist and Nodal Officer for Amguri

Field PSC in Directorate General of Hydrocarbons, Ministry of

Petroleum and Natural Gas, Govt. of India. He states in this affidavit

that pursuant to the directions dated 31.01.2011 of this court, a

hearing was granted to the petitioner in the meeting held between the

petitioners representatives and DGH on 07.02.2011, and the decision

of the DGH was conveyed to the petitioner vide letter dated

14.02.2011. A copy of that decision has been enclosed with this

affidavit as Annexure R-1/A. It is stated in the affidavit that DGH is a

technical body under the Ministry of Petroleum and Natural Gas to

OMP No. 514/2010 Page 54 of 68
monitor and manage all the oil and gas natural resources in the

country. The letter dated 14.02.2011 has been issued by the

Directorate General of Hydrocarbons to the petitioner. This letter has

also been signed by Mr. G. Chakraborty, Chief Geologist. It makes

reference to the petitioner‟s letters dated 4th and 13th January, 2011 in

response to the technical audit/surveillance in relation to Amguri PSC,

conducted by DGH during 8th to 11th November, 2010 and oral

submissions made during the meeting with DGH on 07.02.2011. This

letter asserts that DGH‟s conclusions, as contained in its technical

audit/surveillance, are based on ground realities and facts. It is further

stated that continued neglect of the field by the operator with regard

to health of reservoir, meeting project schedule, production targets,

cost aspects, non compliance with statutory obligations and other

factors have led the DGH to resort to surveillance/audit as it is the

responsibility of DGH being a nominee of the Government. The letter

also refers to the earlier letter dated 22.12.2010, which, it is stated,

clearly brings out the undeniable facts on record. The letter further

states that the petitioner is only trying to explain reasons behind all

the lapses and one instance which is cited is, where the petitioner has

sought to explain 18 months delay in implementation of gas

compression project, and cost escalation has been explained due to

reasons like heavy monsoon, changes in scope of work, problems with

vendors and JV partners, lack of infrastructure and resources in Assam

etc. The letter states that conditions like heavy monsoon,

infrastructure set up in Assam etc. were all well known before entering

OMP No. 514/2010 Page 55 of 68
into the contract. The letter further states that the project had been

approved by the MC long back. It states that consequence of such

delay resulting in damage to reservoir health of Barail main sand of

Pool A have been brought out in detail in their letter dated 22.12.2010.

84. The respondent has sought to rely upon the petitioner‟s

communication dated 07.09.2010, wherein the petitioner had inter alia

stated:

“”Not all the hydrocarbons that condense in the reservoir
will re-vaporize post gas injection and increase of reservoir
pressure above the dew point. Therefore, reservoir gas
effective permeability and the well productivity will not
fully recover to virgin state.

The percentage of condensate that will re-vaporize is not
certain because of lack of core data (capillary pressures &
interfacial tensions effect volume of re-vaporization”.

85. The letter further states that the petitioner has sought to resort

to damage control by producing a report from an independent

consultant based on preliminary reservoir modeling, stating that the

damage was reversible and all of the condensate that has dropped out

in the reservoir will be revaporized. This is taken as an admission that

the reservoir has been damaged. It is stated that case histories have

not been presented in support of the report findings. The letter states

that lapses relating to reservoir damage are very serious and result in

permanent loss of nation‟s precious resources. Reference has also

been made to an earlier meeting held on 17.06.2009 between the

petitioner, ACL and DGH, wherein DGH had expressed its displeasure

over the overall performance by the petitioner as the operator.

OMP No. 514/2010 Page 56 of 68

86. The letter also makes a point about the petitioner not providing

monthly reports. I may note that the contents of the letter, particularly

under the heading “monthly reports” appear to be highly technical in

nature and their interpretation is not only beyond the scope of the

present proceedings, but also not required at this stage.

87. The petitioner has responded to the said affidavit of the

respondent by filing its own detailed affidavit dated 22.02.2011. Mr.

Sundaram submits that the oil field in question is dissimilar to oil fields

as generally found, inasmuch, as, it is a retrograde condensate

reservoir where production of gas below a particular dew point (3654

psi) results in reduced relative permeability of the rock formations.

The lower the permeability, the lesser the gas production, since the

gas is required to move to the well bore (i.e. surface) through

permeable layers. He submits that Amguri field is first of its kind in

India, and that the DGH has no experience of similar fields. It is

further stated that the petitioner discovered and declared the Amguri

oil field to be a retrograde condensate reservoir very early in its

production cycle. It is stated that ONGC, which previously owned and

operated the said oil field was unable to identify it as a retrograde

condensate reservoir in a span of around 25 years.

88. The affidavit states that on 07.02.2011, the relevant technical

personnel of the petitioner met with the DGH, furnished detailed

explanations and placed on record the report of M/s. Exploration

OMP No. 514/2010 Page 57 of 68
Technologies Inc. prepared by Mr. Greg Caswell, an international

expert on the subject of reservoir engineering. It stated that the report

is based on a scientifically prepared and validated simulation model.

89. It is further stated that in the meeting, the DGH sought from the

petitioner the international case studies on retrograde condensate

reservoir since it was not aware of any such similar reservoirs in India.

The case study in relation to Arun field Indonesia operated by Exxon

Mobil was submitted by the petitioner on 15.02.2011. The affidavit

further states that on 11.02.2011, the petitioner submitted a report

prepared by Mr. S.K. Khazanchi, a renowned expert on reservoir

engineering, who until recently, was the head reservoir engineering of

the DGH itself. Mr. Khazanchi was also the General Manager (reservoir

studies) at India‟s only reservoirs engineering institute, namely, the

institute of reservoir studies established by ONGC. According to this

report, no damage has been caused to the reservoir and it certifies

that the petitioner has consistently acted in conformity with good

international petroleum industry practices. The affidavit discloses that

to deal with the peculiar situation of the Amguri oil field, the petitioner

proposed that a gas compression project be established at Amguri.

However, that project has been delayed by the respondent as the

respondent has failed to accord its approval for the necessary budget

even after the operating committee has done so. It is stated that as

per Article 6.5 and 6.6 of the PSC, the gas compression project could

not be provided with unless the approval of the respondent was

OMP No. 514/2010 Page 58 of 68
obtained.

90. The petitioner disputes the respondents‟ statement that the

production had been approved by the MC long back, as the gas

compression project, according to the petitioner, has not been

approved by the MC. The further submission of the petitioner is that

the report prepared by Mr. Greg Caswill, Mr. S.K. Khazanchi and the

case studies of the Arun field Indonesia constituted scientific evidence

which has not been considered by the respondent while passing the

order dated 14.02.2011. According to the petitioner, the said order

merely talks of “ground realities”, but does not deal with the scientific

evidence relied upon by the petitioner to establish that the petitioner

has not caused any irreversible damage to the oil field; the petitioner

has adopted good international petroleum industry practices in

operating the oil field in question, and; that the condensation in the

reservoir can be revaporised and the damage, though not caused by

the petitioner, is reversible.

91. Mr. Sundaram has further objected to the affidavit being filed by

Mr. Chakraborty, and not by a high ranking officer of the Directorate

General of Hydrocarbons. He submits that a senior and responsible

officer should take responsibility by filing an affidavit, as, according to

the petitioner, the technical audit/surveillance report, the

communication dated 22.12.2010 and the decision communicated vide

letter dated 14.02.2011 have all been arrived at malafide and are not

based on facts with a view to somehow oust the petitioner from the

OMP No. 514/2010 Page 59 of 68
PSC and to transfer the participating interest of the petitioner in the

PSC to another entity. Mr. Sundaram submits that the petitioner has

the technical knowhow and the resources to deal with the retrograde

condensate reservoir and the respondent should, in national interest,

use the expertise and resources of the petitioner, rather than dumping

the petitioner at this stage. He submits that even on considerations of

public/national interest, it would be desirable to allow the petitioner to

continue as the operator in the interregnum till the disputes are

resolved through arbitration.

92. Mr. Sundaram submits that the petitioner is ready and wiling to

the appointment of a sole expert to examine as to whether the

petitioner has caused any irreparable loss or damage to the oil field in

question by its acts or omissions in terms of Article 34.2 of the PSC,

and states that the petitioner would accept the decision of the sole

expert. He submits that the appointment of a sole expert would

resolve this controversy much faster, may be in a matter of few weeks,

and save the parties avoidable wastage of time and effort. He submits

that under section 26 of the Act, the arbitral tribunal is empowered to

appoint one or more experts to report to it on specific issues to be

determined by it.

93. The criticism of the order passed by DGH on 14.11.2011 by Mr.

Sundaram on the ground that the same only refers to “ground

realities” and does not deal with the scientific evidence produced by

the petitioner, prima facie, may not be entirely correct. I say this for

OMP No. 514/2010 Page 60 of 68
the reason that the said order has been passed in the context of the

report of technical audit/surveillance prepared by DGH. It is the

observations made in the said technical surveillance report which are

referred to as “ground realities” in the communication dated

14.11.2011 of the DGH. The letter dated 14.11.2011 refers to the

report from the independent consultant produced by the petitioner at

the time of hearing. The said report, it appears, did not find favour

with the respondent as no case history had been presented in support

of the report findings. Even according to the petitioner, the case study

pertaining to Arun filed in Indonesia was furnished on 15.02.2011, i.e.

after the issuance of the letter dated 14.02.2011.

94. The submission of Mr. Sundaram that the DGH is acting at the

behest of some third party, who is interested in taking over the

participating interest of the petitioner under the PSC, is not

substantiated in these proceedings. When senior government officials

take their decision in the discharge of their official duties, the

presumption is that they have acted bonafide, with honesty and in the

national interest. There is no reason for me, at this stage, not to draw

such a presumption or to act up on it.

95. At this stage, it is neither possible for me, nor required of me to

come to any conclusion whether, or not, the petitioner is guilty of

causing irretrievable or irreparable damage to the Amguri oil field, as

alleged by the respondent. However, I cannot lose sight of the fact

that the governmental decision has been taken after hearing the

OMP No. 514/2010 Page 61 of 68
petitioner‟s version by a senior high ranking and responsible

functionary. I would, therefore, not disregard the said decision/stand

taken by the respondent that the oil field in question has already been

irretrievably and irreparably damaged by the conduct of the petitioner.

No doubt, the petitioner has vehemently disputed the charge made by

the respondent against it. It would be for the tribunal to go deeper into

the technicalities and factual controversy to determine whether, or not,

the petitioner has indeed irretrievably and irreparably damaged the oil

field by its conduct, as alleged by the respondent. The arbitral tribunal

already stands constituted and its powers under section 27 do not

appear to have been curbed by the PSC. Therefore, the arbitral

tribunal may, if, it considers appropriate and permissible, appoint one

or more experts to satisfy itself, whether or not the petitioner is guilty

of causing irretrievable or irreparable damage to the oil field in

question, if an issue in that respect arises between the parties. The

question is, in these circumstances, where does the balance of

convenience lie?

96. In Mahadeo Savlaram Shelke (supra), the Supreme Court

quoted with approval, inter alia, the following extract from the Law

Quarterly Review, Volume 109 at page 432 (at p. 446), A.A.S.

Zuckerman under the title “Mareva Injunctions and Security for

Judgment in a Framework of Interlocutory Remedies” which reads:

“12. In “Modern Law Review”, Vol 44, 1981 Edition, at page
214, R.A. Buckley stated that “a plaintiff may still be
deprived of an injunction in such a case on general

OMP No. 514/2010 Page 62 of 68
equitable principles under which factors such as the public
interest may, in an appropriate case, be relevant. It is of
interest to note, in this connection, that it has not always
been regarded as altogether beyond doubt whether a
plaintiff who does thus fail to substantiate a claim for
equitable relief could be awarded damages”. In “The Law
Quarterly Review” Vol 109, at page 432 (at p. 446), A.A.S.
Zuckerman under Title “Mareva Injunctions and Security
for Judgment in a Framework of Interlocutory Remedies”
stated that “if the plaintiff is likely of suffer irreparable or
uncompensable damage, no interlocutory injunction will be
granted, then, provided that the plaintiff would be able to
compensate the defendant for any unwarranted restraint
on the defendant’s right pending trial, the balance would
tilt in favour of restraining the defendant pending trial.
Where both sides are exposed to irreparable injury ending
trial, the courts have to strike a just balance”. At page 447,
it is stated that the court considering an application
for an interlocutory injunction has four factors to
consider : first, whether the plaintiff would suffer
irreparable harm if the injunction is denied;
secondly, whether this harm outweighs any
irreparable harm that the defendant would suffer
from an injunction; thirdly, the parties’ relative
prospects of success on the merits; fourthly, any
public interest involved in the decision. The central
objective of interlocutory injunctions should
therefore be seen as reducing the risk that rights
will be irreparably harmed during the inevitable
delay of litigation”. (emphasis supplied)

97. If the respondents allegations are to be believed, it would mean

that the performance of the petitioners obligations under the PSC have

been breached, and that the continuation of the petitioner as a party

constituting the contractor and the operator is contrary to the interests

of India. If the said allegations are to be believed, the extent of

damage already suffered by the respondent, and the State of Assam

would be immeasurable.

OMP No. 514/2010 Page 63 of 68

98. I cannot lose sight of the fact that the petitioner is a foreign

company. On the other hand, the respondent is the Government of

India. If the injunction as prayed for is granted, and eventually the

petitioner were to fail in the arbitration proceedings, looking to the

nature and magnitude of the transaction, it would be extremely

difficult for the respondent to recover its losses and damages. There is

a possibility that the damage may be irretrievable and irreparable, in

case the petitioner is allowed by way of an interim measure to

continue to function as the operator or contractor under the PSC during

the pendency of the arbitration proceedings. On the other hand, if the

petitioner succeeds before the Arbitral Tribunal, the petitioner could be

compensated in terms of money.

99. I may also observe that in a case like the present, it is practically

impossible to quantify the amount of security that the party

constituting the contractor may be subjected to, even if a case for

grant of an interim order of injunction to stay the termination of the

PSC is made out. Pertinently, the petitioner has not even volunteered

to furnish any security to safeguard the interests of the respondent, in

case the injunction as prayed for is granted.

100. I, prima facie, agree with the respondent‟s submission that all

that the petitioner is, under the PSC, entitled to is the monetary value

of the cost petroleum and its share in the profit petroleum as,

admittedly, the country is nowhere close to meeting its petroleum

requirements. Reference may be made to Articles 19.1, 16.4 of the

OMP No. 514/2010 Page 64 of 68
PSC (referred to above) and to the following observations of the

Supreme Court in Reliance Natural Resources Ltd. (supra):

“253. As discussed earlier, it is clear that a wide variety of
instruments have come to be called Production Sharing
Contracts and there is no specific concordance between
that title and what is actually shared pursuant to a PSC. In
light of that discussion and the general acceptance that
revenues are also shared in the context of Production
Sharing Contracts, the insistence of RNRL that only
production i.e. physical volume of gas can be shared under
any Production Sharing Contract may have to be held to be
unsustainable.

254. One of the bigger sources of confusion has been the
manner in which the word petroleum has been used in the
specific PSC under consideration. The word petroleum,
referring to crude oil or natural gas as the case may be, is
used in two senses in different parts of the PSC: as a
physical product and also in terms of the monetised value.
However, when the word petroleum has been used
in conjunction with the words cost and profit, the
definitions in this PSC clearly indicate that reference
is to the monetised value of the physical product i.e.
the units of the physical quantity multiplied by the
sale price at which the physical quantity is sold at.
… …. ….. ….

258. Inasmuch as the words “volume” and “value” have
different connotations and meanings, though occasionally
they may have some overlap, the fact that one was
replaced by the other implies that the meaning ascribable
in the context of this PSC should eliminate the overlap.
Consequently, it can only be understood that the
word “value” is being used, in the PSC, to mean the
monetised value of the physical quantity that is a
resultant of multiplying the quantity of petroleum
(crude oil or natural gas) produced, saved and sold
in the market (as discussed below) at a “price”.

259. The words “produced” and “saved” are first used in
the phrase “Petroleum operations” defined in Article 1.74
of the PSC, wherein it is stated that petroleum operations
mean, as “the context may require, exploration operations,
development operations or production operations or any
combination of two or more of such operations, including
construction, operation and maintenance of all necessary
facilities … environmental protection, transportation,
storage, sale or disposition of petroleum to the delivery
point… and all other incidental operations or activities as
may be necessary”.

OMP No. 514/2010 Page 65 of 68

260. Further, Article 21.6.1 specifically states that the
contractor “… shall endeavour to sell all natural gas
produced and saved….” This indicates that the entire set of
all petroleum operations are to end in a sale at the delivery
point; so it has to be concluded that the phrase “produced
and saved” in the PSC encompasses the activity of sale of
natural gas. Consequently, the phrases “total value”,
“cost petroleum” and “profit petroleum” can only
be interpreted as having been used to denote the
monetary value realised after the sale of natural gas
at the delivery point.” (emphasis supplied)

101. Therefore, prima facie, the PSC is a contract for the non

performance of which compensation in money would be an adequate

relief.

102. However, I am of the prima facie opinion that there exists no

standard for ascertaining actual damage that may be caused by the

non performance of the PSC, if, eventually the petitioner succeeds in

its challenge to the termination to the PSC before the Arbitral Tribunal.

As submitted by Mr. Sundaram, the recovery of petroleum would be

dependant on various factors such as investment, expertise and

efficiency of the operator and if any other operator is permitted to

substitute the petitioner, the profitability of the project would be

affected, making it impossible to adopt a standard for measurement of

damages that the petitioner may suffer. But that factor, by itself,

would not be sufficient for the Court to grant specific performance of a

contract. The contract should first, and foremost, be specifically

enforceable. This is clear from the opening words of section 10 of the

Specific Relief Act, which read “Except as otherwise provided in this

Chapter, the specific performance of any contract may, in the

OMP No. 514/2010 Page 66 of 68
discretion of the Court, be enforced … … …”. From the aforesaid, it

appears that, firstly, the mandate of section 10 is over shadowed by

that of section 14, which also falls in Chapter II of the Specific Relief

Act, and enlists cases in which the law prohibits the specific

enforcement of contracts. Secondly, the relief of specific performance

is itself a discretionary relief. The discretion of the Court can certainly

not be exercised in breach of the mandate contained in section 14.

103. The respondents have undertaken that they shall maintain full

and complete accounts of the operations carried out at the oil fields in

question. They shall remain bound by this undertaking and they are

accordingly directed to maintain the complete accounts and preserve

the same.

104. In the light of the above considerations, the balance of

convenience, in my view, lies in favour of the respondent, and against

the petitioner.

105. In the face of the allegations that the petitioner, post the indirect

assignment of participating interest has caused irreparable and

irretrievable damage to the oil field, leads me to prima facie conclude

that Article 31.6 of the PSC cannot come in the way of the government

to terminate the PSC qua the petitioner, when the valuable national

resource itself is in danger of being wasted and irretrievably lost by a

contractor or its assignee. This is clear from a perusal of recital 4,

Article 29.1(d) and Articles 8.3(k) and Article 33.2 of the PSC, and my

OMP No. 514/2010 Page 67 of 68
discussion above. Consequently, I am not inclined to confirm the

injunction granted by me initially. The same stands vacated. I dismiss

this petition leaving the parties to bear their respective costs.

(VIPIN SANGHI)
JUDGE
MARCH 07, 2011
BSR/SR

OMP No. 514/2010 Page 68 of 68

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