L OGO

3rd Dr. PARAS DIWAN MEMORIAL ENERGY LAW NATIONAL MOOT COURT COMPETITION, 2013
Organized by: College of Legal studies University of Petroleum & Energy Studies Bidholi Campus, Dehradun (Uttrakhand) On 4th, 5th & 6th April, 2013

BEFORE THE HONOURABLE SUPREME COURT OF INDIA

SPECIAL LEAVE PETITION NO. OF 2013

British Petro Technologies Ltd. V. INDOPET Ltd.

..Appellant

Respondent

AND

SPECIAL LEAVE PETITION NO.

OF 2013

INDOPET Ltd. V. State of Zeechen

.. Appellant

.. Respondent
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3rd Dr. PARAS DIWAN MEMORIAL ENERGY LAW NATIONAL MOOT COURT COMPETITION, 2013

BACKGROUND

1.

The sovereign State of Zeechen, which was being ruled for the last three decades by Stola, the erstwhile dynastic ruler, is a poor country having lowest per capita income in the world. All efforts to raise its GDP through various development schemes brought little relief to its people. In 1990, the Government of Zeechen, conducted a comprehensive geological survey which revealed that in the extreme southern region of the country there exists a sedimentary basin which probably has a potential for huge hydrocarbon resources (hereinafter referred as oil & gas). However that part of the country was located in a geologically challenged region and the exploration and production of crude natural oil and gas required enormous investment, highly qualified manpower and technical expertise which were unavailable in Zeechen. In 1991, the Government of Zeechen floated an International Invitation to Bid soliciting bids for the exploration and production of oil & gas in the said basin. Anticipating that not many foreign players would be willing to invest in a venture of this kind for various reasons including political instability looming over the State in view of the general public unrest, supported by the military, against Stolas regime, the then Government of Zeechen, in a desperate endeavour to woo foreign investors, even offered to grant controlling interest in the joint venture to be formed in
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collaboration with any foreign investor willing to make investment and take upon the exploration and production of oil & gas from the said basin. Furthermore, as an inducement to the foreign investor, the Government of Zeechen offered a substantial price reduction to the extent of 10% less than the prevailing international market prices of oil & gas to be produced from the basin through joint venture. 4. Despite the above largesse offered by the State of Zeechen, the response to the said Invitation to Bid was lukewarm. The solitary acceptable bid was one made by a Consortium comprising Oil America Inc., a major American oil company duly incorporated in Delaware, under the Delaware General Corporation Law of USA, (hereinafter referred as OAI) and one British Petro Technologies Ltd., a U.K. based company incorporated under the English Companies Act, 1985, (hereinafter referred as BPTL), as its associate. BPTL has substantial assets located in India and an extensive network of business operations through offices set up in all major cities of the World including Mumbai and New Delhi in India. OAI was a subsidiary of a big real estate and investment company namely Nationwide Investments Inc., also incorporated in Delawere, under the Delaware General Corporation Law, USA (hereinafter referred as NII). The shareholding of both these American companies is diversified and widely scattered across the Globe. OAI had 80% whereas BPTL had 20% stake in the Consortium. BPTL had agreed to provide the technical expertise and management knowhow, for the overall petroleum operations in the said sedimentary basin. Both these companies have entered into Joint Operating Agreement, hereinafter referred as JOA. One of the clauses of the JOA provided that neither of the Parties shall engage themselves, directly or indirectly, in any act or omission which would adversely affect the interest of the other Party and in case any of them, either individually or jointly in concert with any other person engages in any such act or omission, it shall be bound to compensate the aggrieved Party for all such losses suffered on account of such act or omission. After sustained negotiations, the Government of Zeechen decided to enter into a joint venture with the Consortium. A Production Sharing Contract
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(hereinafter referred as PSC), was executed between the State of Zeechen and the Consortium (hereinafter referred as the Contracting Parties) for the purpose of exploration & production of oil & gas from the said sedimentary base. The name and style of the said joint venture is ZEPTON. 7. PSC is a relatively very short and simple agreement unlike most of the international agreements of a similar nature and magnitude. The life span of PSC is for 25 years and it contained the usual stabilization clause as well which ensured that the provisions of the PSC shall not be affected by change, if any, in the political government/regime in the State of Zeechen during the tenure of the PSC. The relevant clauses of the JOA for the purposes of the present controversy, read as under: 7.I Final Production Sharing of oil & gas between the State of Zeechen and the Consortium shall be in the ratio of 40:60 (Forty: Sixty) after deducting the actual cost PLUS royalty @ 15 percent and taxes @10%, payable to the State of Zeechen which are to be ascertained as per the mode detailed in Schedule appended to the PSC. The expenses incurred on account of prospecting and development of and production from the said sedimentary basin shall be borne by the Consortium which shall be amortized in fifteen succeeding years on the basis mutually agreed between the Contracting Parties. Any dispute between the Contracting Parties which is not settled amicably shall be finally settled by arbitration at London as the seat of Arbitration. The Governing Law shall be of the country of origin of the Contracting Party having major stake in the Joint Venture.

7.II

7.III

7.IV None of the Contracting Parties shall engage themselves, directly or indirectly, in any act or omission which would adversely affect the interest of any other Contracting Party and in case any of them, either individually or jointly in concert with any other Contracting Party engages in any such act or omission, it shall be liable to

compensate the aggrieved Party for all losses suffered on account of such act or omission. 7.V OAI and BPTL are entitled to transfer their shares to any person and in such an event, the transferee shall have the same rights and liabilities as the transferor.

ZEPTON was given wide publicity by the Government of Zeechen and PSC was also published in its Official Gazette. 8. During, 1995, the real estate business of NII got adversely hit and it filed Bankruptcy Petition under Chapter 11 of USA Bankruptcy Laws. To liquidate its huge liability and raise funds, NII decided to offload its oil & gas exploration arm i.e. OAI. INDOPET Ltd., a major Indian Petrochemical company incorporated under the Companies Act, 1956, having registered office in New Delhi (hereinafter referred as INDOPET), eventually acquired OAI by paying off its shareholders nearly five times the investment made by them.

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10. The acquisition of OAI by INDOPET changed the control and management scenario of ZEPTON. INDOPET now exercised majority control on all major operations of ZEPTON and it also appointed an Indian CEO to manage the affairs of ZEPTON which started functioning in 1994. 11. Quite unexpectedly, huge deposit of crude oil was discovered in the said sedimentary basin resulting in copious production of high quality oil & gas which required minimal refining costs to sell the product in the market, thus creating competing national/commercial interest for the direction of the supplies of the much low priced yet high quality oil & gas. In July 1996, there was a fierce bloody military coup in Zeechen. Stola was dethroned and assassinated and military Junta under the command of General Prexoh took over the reign of Zeechen, who announced general election within six months after assuming power and became the elected President of Zeechen. His main agenda in the election manifesto to lure the
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electorate was to oust the foreigners from Zeechen whom, he alleged, Stola had allowed to plunder the natural resources of the country. Many countries of the world including India accorded recognition to President Prexohs Government. 13. The assumption of majority control and management of ZEPTON by INDOPET was strongly opposed by the Government of Zeechen and it resented to have an Indian CEO at the helm of the affairs of the said joint venture. President Prexoh did not grant permission to the said Indian CEO to continue stay in Zeechen. However, BPTL connived and colluded with the Zeechen Government officials to oppose and embarrass INDOPET even in trivial matters relating to the management of ZEPTON. As a matter of fact, BPTL had been given an assurance of a lucrative business alliance with the Government in the neighbouring sedimentary basin in Zeechen. In their concerted endeavour to oust INDOPET, the Government of Zeechen came out with a notification which, inter alia, provided that until such time that the availability of oil & gas from the said basin meet the total domestic demands of Zeechen, INDOPET and BPTL, the two other Contracting Parties to the PSC shall sell their entitlements of oil & gas under the PSC exclusively in the domestic market of Zeechen without reference to the provision in the PSC regarding production sharing between the Contracting Parties. INDOPET objected as it intended to take the benefit of rising price of oil and gas in the international market as the PSC contemplated huge price concession in the oil & gas produced from the basin in Zeechen vis a vis international market prices enabling INDOPET to make immense profit by selling the products elsewhere. In various meetings between the Contracting Parties, INDOPET maintained that in terms of the PSC it retains the ownership of its share of oil & gas from the sedimentary basin after fulfilling its obligations regarding royalty, taxes and domestic obligations and, accordingly, it is legally entitled to sell these products at its own prices in the international market. But, the Govt. of Zeechen afforded cold shoulder to the objections by INDOPET. BPTL continued to take side with
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the Govt. of Zeechen, despite INDOPET reminding BPTL of its obligations in terms of the PSC and the said Consortium Agreement. 15. By the year 1997, as the differences between the Contracting Parties reached a point of no return, INDOPET invoked arbitration clause in the PSC. INDOPET raised three claims before the Arbitrator. Firstly, that the State of Zeechen and BPTL are defying the terms of the PSC as regards the sharing of production of oil & gas produced from the said sedimentary basin and accordingly they should be directed to comply with the express terms of the PSC. Secondly, as the State of Zeechen has diverted almost the entire production of oil & gas produced from the said sedimentary basin to its domestic market, it should be directed to render accounts for the same and the amount due to INOPET as per the terms of the said PSC calculated at the agreed prices be paid to INDOPET and, thirdly, BPTL who had connived and colluded with the State of Zeechen in causing diversion of the oil & gas produced from the sedimentary basin for domestic use contrary to the terms of PSC, be directed to pay compensation to INDOPET. The State of Zeechen raised preliminary objection that the Arbitrator has no jurisdiction to arbitrate in the matter in view of U.N. General Assembly Resolution No. 1803 (XVII) on Permanent Sovereignty over Natural Resources (PSNA). It contended that as the dispute related to appropriation of natural resources of a sovereign country and no forum in the world can pronounce judgement on such issues despite the relevant arbitration clause in the said PSC for applicability of Governing law. The State of Zeechen preferred not to take further part in the arbitration proceedings before the Arbitrator. BPTL pleaded that it has no control over the action of the State of Zeechen in the matter relating to appropriation, utilization or conservation of its natural resources and hence it is not liable for paying any compensation to INDOPET. 17. The Arbitrator gave award in favour of INDOPET by observing that ZEPTON was a commercial joint venture and PSC was executed by the State of
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Zeechen to collaborate with INDOPET for exploration and production of oil & gas. INDOPET had invested huge amount of money and resources for exploration and production of oil & gas in the said sedimentary basin and the joint venture is for a period of 25 years. Under these circumstances, the Arbitrator held that the State of Zeechen is bound to either adhere to the production sharing ratio as envisaged in the PSC, or, in the alternative, to compensate INDOPET for the losses it has suffered for not getting the agreed share of oil & gas at concessional pricing as agreed between the Contracting Parties. As regards BPTL, the Arbitrator held, that by openly siding with the State of Zeechen, it has acted contrary to the terms of the PSC and hence BPTL is liable to compensate for the loss as claimed by INDOPET. The Arbitrator applied the Governing Law as contemplated in the arbitration clause. 18. Zeechen, India & U.K. are signatories to the New York Convention on the Recognition & Enforcement of Foreign Arbitral Awards, 1958. INDOPET approached the High Court of Delhi, at New Delhi, seeking enforcement of the said Award. The High Court agreed substantially with the Arbitrator. However, it directed execution in terms of the award against BPTL only and not against the State of Zeechen on the ground that it has no jurisdiction to order execution against a sovereign State. Aggrieved by the decision of the High Court, BPTL moved the Honble Supreme Court of India under Article 136 of the Constitution of India and prayed for quashing the impugned order. BPTL has also filed an application seeking interim injunction regarding the execution proceedings. INDOPET also moved the Honble Supreme Court of India against the impugned order and submitted a Special Leave Petition alleging that the matter involved substantial question of law. Honble Supreme Court of India has admitted both the petitions and granted ex-parte stay to BPTL. In view of the peculiar facts and circumstances of the case involving multi-jurisdictional angle, the Honble
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Supreme Court directed the respective counsel to address arguments on the following questions: i. Whether the Arbitrator had the jurisdiction to pass the said Award against the State of Zeechen and BPTL? Whether the impugned order passed by the High Court of Delhi is tenable in law ? iii. Whether INDOPET is entitled to the relief claimed?

ii.

Honble Supreme Court further gave liberty to the counsel for the parties to address arguments on any other aspect of the case for its just, complete and effectual disposal.

References

Companies Act, 1956 UK Companies Act, 1985/2006 U.N. General Assembly Resolution No. 1803 (XVII) of 14 December 1962 on Permanent Sovereignty Over Natural Resources Constitution of India, 1950 UN Charter, 1945 New York Convention on the Recognition & Enforcement of Foreign Arbitral Award, 1985. J.G. Collier, CONFLICT OF LAWS, Cambridge University Press Trevor C Hartley, INTERNATIONAL COMMERCIAL ARBITRATION: TEXT,CASES AND MATERIALS ON PRIVATE INTERNATIONAL LAW, 1st Edn (2009) Malcolm N Shaw, INTERNATIONAL LAW, Cambridge University Press; 6th Edn. (2008). Margaret L. Moses, THE PRINCIPLES AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION, Cambridge University Press; 2nd Edn. (2012) Gary B. Born, INTERNATIONAL COMMERCIAL ARBITRATION: COMMENTARY AND MATERIALS, Kluwer Law International; 3rd Edn. (2009)

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