Hardy Exploration & Prod. (India), Inc. v. Gov't of India

• Decision Date: 07 June 2018
• Docket Number: Civil Action No.: 16–140 (RC)
• Parties: HARDY EXPLORATION & PRODUCTION (INDIA), INC., Petitioner, v. GOVERNMENT OF INDIA, MINISTRY OF PETROLEUM & NATURAL GAS, Respondent.
• Court: U.S. District Court — District of Columbia

314 F.Supp.3d 95

HARDY EXPLORATION & PRODUCTION (INDIA), INC., Petitioner,

v.GOVERNMENT OF INDIA, MINISTRY OF PETROLEUM & NATURAL GAS, Respondent.

Civil Action No.: 16–140 (RC)

United States District Court, District of Columbia.

Signed June 7, 2018

Alexander A. Yanos, Alston & Bird LLP, John Fellas, Malik Havalic, Hughes, Hubbard & Reed LLP, New York, NY, James H. Boykin, III, Hughes Hubbard & Reed LLP, Washington, DC, for Petitioner.

Mark Neil Bravin, Alexandra Meise, Mitchell Silberberg & Knupp LLP, Washington, DC, for Respondent.

MEMORANDUM OPINION

DENYING PETITION TO CONFIRM ARBITRATION AWARD; DENYING AS MOOT PETITIONER'S MOTION FOR LEAVE TO FILE SUR–REPLY; DENYING AS MOOT RESPONDENT'S CROSS–MOTION FOR LEAVE TO FILE RESPONSE

RUDOLPH CONTRERAS, United States District Judge

I. INTRODUCTION

In 1997, Hardy Exploration and Production (India), Inc. ("HEPI") entered into a contract with the Government of India that would allow HEPI to search for and potentially extract hydrocarbons from an area off of India's southeastern coast. The contract provided that if HEPI found crude oil, it would have two years to ascertain if that oil was commercially viable, but that if it found natural gas, that assessment period would last for five years. HEPI discovered a reserve of hydrocarbons in 2006 and claimed that it was natural gas, entitling it to a five-year appraisal period. India disagreed, and after two years, it informed HEPI that its rights to the Block had been relinquished. When the Indian Government refused to change its position on the type of hydrocarbons that had been discovered, HEPI initiated arbitration proceedings pursuant to the contract. The Tribunal ultimately found in HEPI's favor and ordered India to allow HEPI back onto the Block for another three years to continue its assessment of whether the natural gas it had discovered was commercially viable. The Tribunal also awarded HEPI interest on its original investment in the Block, as well as certain costs. India immediately appealed the award to the Delhi High Court, and HEPI filed a separate suit in the Delhi High Court to enforce the award. As far as the Court is aware, those cases remain pending. Three years after it had won the arbitral award, HEPI had still not been allowed back onto the Block, and therefore filed a petition for confirmation of its arbitral award in this court under the Federal Arbitration Act. India opposed the confirmation, claiming that the enforcement of the award's specific performance order would violate U.S. public policy, as would confirmation of the interest portion of the award, which India claimed is punitive and coercive, rather than compensatory. For the reasons set forth below, the Court finds that confirmation and enforcement of the specific performance portion of the award would violate U.S. public policy, and therefore, the Court declines to confirm that portion of the award. Additionally, the Court finds that granting the award of interest, which is predicated on India complying with an order that this Court cannot issued, would also violate U.S. public policy, and therefore declines to confirm that portion of the award as well.

II. FACTUAL AND PROCEDURAL BACKGROUND

This case stems from HEPI's participation in a Production Sharing Contract ("PSC") with the Government of India for the extraction, development, and production of hydrocarbons in a geographic block found off the southeastern coast of India called CY–OS/2 (the "Block"). See Decl. of Ian MacKenzie ("MacKenzie Decl.") ¶ 3, ECF No. 1–2; see generally MacKenzie Decl. Ex. 2 ("PSC"), ECF No. 1–4. The PSC was originally entered into in November 1996 by three private companies; India's state-owned oil company, the Oil and Natural Gas Corporation Limited ("ONGC"); and "[t]he President of India, acting through the Joint Secretary, Ministry of Petroleum and Natural Gas." PSC at 1. The PSC permitted the three private companies to explore the Block and, if they found commercially viable hydrocarbon reserves, to extract those resources under a production sharing arrangement. See Pet'r's Mem. Law Supp. Pet. to Confirm Arbitration Award ("Pet'r's Mem.") at 2–3, ECF No. 1–1; PSC arts. 14–15. While HEPI was not an original participant in the PSC, it acquired a 25% participation share from one of the original participants in 1997, and by August 2001, HEPI had acquired a 100% participation share in the PSC. See Pet'r's Mem. at 3; see also MacKenzie Decl. Ex. 1 ("Award") at 3, ECF No. 1–3; MacKenzie Decl. Ex. 4 at 1–2, ECF No. 1–6. HEPI then transferred 25% of its interest in the PSC to GAIL (India) Ltd, a state-owned retail gas processing and distribution company in India. MacKenzie Decl. Ex. 5 at 2, ECF No. 1–7. HEPI maintained a 75% interest in the PSC at all times relevant to this dispute. See Pet'r's Mem. at 4.

Each participant in the PSC entered the agreement at their own risk. If a participant discovered a reserve of hydrocarbons that was capable of being extracted and produced commercially, then it would be entitled to extract and produce the hydrocarbons, and would be entitled to keep a percentage of the hydrocarbons for itself, with the rest going to the Government of India. See PSC arts. 14–15. If participants' work on the Block yielded no commercially viable discovery, the participants would be entitled to no compensation for the investment they had put into the Block. See PSC art. 7.4 (providing that the contractor shall "conduct all Petroleum Operations at its sole risk, cost and expense and provide all funds necessary for the conduct of Petroleum Operations ..." unless otherwise provided in the PSC); see also Award at 41 (observing that "[t]here is no dispute" that a contractor "is not entitled to any compensation if it is unable to get commercial discovery of the product within the period specified in the contract").

The PSC outlined the procedures the parties would follow in the event of a hydrocarbon discovery. See PSC art. 9. Under the PSC, after the discovery of hydrocarbons, the participants would enter into an appraisal period to determine whether the production of the hydrocarbons in the newly discovered reserve would be commercially feasible. See Pet'r's Mem. at 4; PSC arts. 9.5, 21.4.4. The PSC provided for appraisal periods of different lengths depending on the type of hydrocarbons discovered. If the discovery was crude oil, the appraisal period would be two years, see PSC art. 9.5; if it was natural gas, the appraisal period would be five years, see PSC art. 21.4.4.

In late 2006, HEPI and GAIL discovered a reserve of hydrocarbons and promptly informed the Ministry of Petroleum and Natural Gas of their discovery. Pet'r's Mem. at 4; Award at 7–8. HEPI believed that the hydrocarbons it had discovered was natural gas, and more particularly, Non–Associated Natural Gas ("NANG"), and therefore that its declaration of commerciality would not be due until January 7, 2012. Id. at 6–7, 9–11. However, the Ministry insisted that the discovery was in fact crude oil, and accordingly that HEPI's declaration of commerciality was due on January 7, 2009. Id. at 9–11. Therefore, the Ministry informed HEPI via letters dated February 20 and March 23, 2009, that HEPI's rights to the Block were relinquished due to its failure to submit its declaration of commerciality on time. Id. Despite HEPI's efforts to convince the Ministry over the next year that its discovery was natural gas and therefore that it had not missed its deadline to file a declaration of commerciality, India would not yield. Id. at 5. Therefore, HEPI initiated arbitration proceedings pursuant to Article 33 of the PSC to resolve the question of which assessment period applied to the discovery of relevant hydrocarbons in the Block. Id. at 4. A tribunal of three former Chief Justices of the Supreme Court of India was empaneled to preside over these proceedings. Id. at 5.

Article 33 of the PSC provides that "any unresolved dispute, difference or claim which cannot be settled amicably within a reasonable time may ... be submitted to an arbitral tribunal for final decision," PSC art. 33.3; sets forth the procedures for any arbitration; and selects Kuala Lumpur, Malaysia as the venue for the proceedings, PSC art. 33.12. Article 33 further provided that "[t]he decision of the arbitral tribunal, and, in the case of difference among the arbitrators, the decision of the majority, shall be final and binding upon the Parties." PSC art. 33.8.

The Tribunal first turned to preliminary issues, and issued an order on May 28, 2011 finding that the dispute between the parties was subject to arbitration and within the Tribunal's jurisdiction. See MacKenzie Decl. Ex. 7, ECF No. 1–9; see also Award at 5. The Tribunal heard argument on the merits of the dispute on August 20–22, 2012, in Kuala Lampur, Malaysia. Award at 5. During the course of these proceedings, HEPI presented the testimony of two expert witnesses to support its contention that the discovery was of natural gas, and India produced no expert testimony to the contrary. Id. at 26–29. On February 2, 2013, the Tribunal, still sitting in Kuala Lampur, issued a unanimous 43–page Award to HEPI, finding that "the nature of the discovery in the Block ... would unequivocally qualify under the term of the [PSC] as Non Associated Natural Gas." Id. at 29. Because the discovery was natural gas, not crude oil, the Tribunal decided that HEPI was "denied the time provided for in the contract for appraisal and to come to [a] conclusion about the commerciality of the discovery." Id. at 36. The Tribunal concluded that severing HEPI's interest in the Block was "illegal, being on the erroneous impression that the discovery was Oil." Id. at 43.

To remedy what it found to be a breach of the PSC, the Tribunal ruled that India's "order of relinquishment is declared to be null and void." Id. Because India had ordered the relinquishment of the Block before HEPI was able to determine the commercial...