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Hardy Exploration & Production (India), Inc. v. Government of India

United States District Court, District of Columbia

June 7, 2018

HARDY EXPLORATION & PRODUCTION INDIA, INC., Petitioner,
v.
GOVERNMENT OF INDIA, MINISTRY OF PETROLEUM & NATURAL GAS, 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 viability of the hydrocarbons it had discovered, the full extent of the monetary damage to HEPI due to India's breach of the PCS remained unclear. Id. at 41. Therefore, the Tribunal ordered that “the parties shall be immediately relegated to the position in which they stood prior to the order of the relinquishment and the block shall be restored to [HEPI].” Id. at 43. Additionally, it ordered India to pay interest on HEPI's Rs. 500 crores investment in the Block, at a rate of 9% per year up to the date of the award, and 18% per year thereafter until the fulfillment of the award. Id. The Tribunal also awarded certain costs to HEPI. Id.

         To date, the Government of India has only complied with the latter portion of the Award, the payment of Rs. 51 lakhs for India's share of the arbitration costs. See 4th MacKenzie Decl. ¶ 8, ECF No. 29-1. However, in order to challenge the other two portions of the award, India filed a petition with the Delhi High Court to invalidate the award in July 2013. Id. ¶ 9. In November 2013, HEPI filed a petition to enforce the award with the same court. Id. ¶ 10. After two years of delays, “counsel for GOI ultimately withdrew the [invalidation] petition on the grounds that it was not properly under the jurisdiction of the Delhi High Court, ” but rather that of the Madras High Court in Chennai, the high court geographically closest to the Block. Id. ¶ 14. However, less than a month later India filed a review petition seeking to reverse the order dismissing its action to invalidate the award. Id. ¶ 15. After the Delhi High Court dismissed this review petition in January 2016, India filed an appeal of the dismissal of the review petition. Id. ¶ 19-21. Following several adjournments at the request of India's counsel, the matter was heard in May 2016 and dismissed by the Delhi High Court, again on jurisdictional grounds, in July 2016. Id. ¶ 22. This time, however, the jurisdictional basis of the dismissal was not the fact that the high court in Chennai was the proper court to hear the case. Rather, it was because the Delhi High Court had found that the seat of arbitration had been Malaysia, rather than India, and therefore, that Indian courts did not have the power to set aside the arbitral award pursuant to Section 34 of the Arbitration and Conciliation Act, 1996, India's statute governing arbitration. See 4th MacKenzie Decl. Ex. 5 (“Judgment”) at 17-22, ECF No. 29-6.

         In October 2016, India filed for leave to appeal the dismissal with the Supreme Court of India. 4th MacKenzie Decl. ¶ 23. It also moved for the Supreme Court to stay the arbitration award, which the court denied. Id. Arguments on the appeal were delayed for almost a year due to the unavailability of India's counsel and the Supreme Court, and the docket in this case does not indicate whether the appeal has yet been fully heard, nor does it indicate whether the Supreme Court has ruled on the appeal. Id. ¶ 27. In the meantime, HEPI's petition for execution of the Award before the Delhi High Court has been repeatedly adjourned pending the disposition of India's appeal. Id. ¶ 28.

         Due to this delay, HEPI decided to avail itself of the enforcement powers of this Court as well, and in January 2016 filed the instant petition for enforcement of the arbitral award. See Pet'r's Pet. to Confirm Arbitration Award (“Pet'r's Pet.”), ECF No. 1. Following briefing and an order from this Court regarding proper service of India, India filed its response to HEPI's petition, arguing that the Court should decline to enforce the arbitral award because confirming both the specific performance and interest aspects of the Award would violate U.S. public policy. See Resp't's Resp. Pet'r's Pet. (“Resp.”), ECF No. 28. It further moved for the Court to stay these proceedings while its petition to set aside the arbitral award remains pending in India. Id. HEPI's petition, and India's request that the Court stay these proceedings, are now ripe for decision.

         III. LEGAL STANDARD

         “The Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, also known as the ‘New York Convention, ' [21 U.S.T. 2517, ] is enforced through the Federal Arbitration Act, 9 U.S.C. § 201 (2012).” Matter of Arbitration of Certain Controversies Between Getma Int'l & Republic of Guinea, 142 F.Supp.3d 110, 112-13 (D.D.C. 2015). Under the New York Convention and the Federal Arbitration Act, a recipient of a foreign arbitral award may seek confirmation and enforcement of the award in U.S. federal courts. See 9 U.S.C. §§ 202, 207.

         “Consistent with the ‘emphatic federal policy in favor of arbitral dispute resolution' recognized by the Supreme Court[, ] . . . the FAA affords the district court little discretion in refusing or deferring enforcement of foreign arbitral awards.” Belize Social Development Ltd. v. Government of Belize, 668 F.3d 724, 727 (D.C. Cir. 2012) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 631 (1985)). Courts “may refuse to enforce the award [brought under the New York Convention] only on the grounds explicitly set forth in Article V of the Convention.” TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 935 (D.C. Cir. 2007) (citation omitted); see also Int'l Trading & Indus. Inv. Co. v. DynCorp Aerospace Tech., 763 F.Supp.2d 12, 19 (D.D.C. 2011) (collecting cases). Because “the New York Convention provides only several narrow circumstances when a court may deny confirmation of an arbitral award, confirmation proceedings are generally summary in nature.” DynCorp Aerospace Tech., 763 F.Supp.2d at 20 (citing Zeiler v. Deitsch, 500 F.3d 157, 169 (2d Cir. 2007)). “[T]he burden of establishing the requisite factual predicate to deny confirmation of an arbitral award rests with the party resisting confirmation, and the showing required to avoid summary confirmation is high.” BCB Holdings Ltd. v. Gov't of Belize, 110 F.Supp.3d 233, 247 (D.D.C. 2015) (alteration in original) (internal citations and quotation marks omitted).

         IV. ANALYSIS

         India has presented two major arguments for why HEPI should not be granted the confirmation it seeks. First, it argues that confirmation of the two remaining portions of the arbitral award-specific performance and interest-would violate U.S. public policy. See Resp. at 6-7. Second, it argues that if the Court finds that the award does not violate U.S. public policy, and therefore that it should be confirmed, the Court should stay the enforcement of the award while India's appeal of the award and HEPI's parallel litigation to enforce the award proceed through the Indian court system. Id. at 40. The Court first addresses India's arguments regarding a stay of these proceedings, and, finding that a stay is not warranted, then addresses India's arguments regarding whether confirmation of the award would violate U.S. public policy.

         A. Request for Stay

         India has moved for a stay of these proceedings pending the resolution of its appeal of the arbitral award in India pursuant to Article VI of the New York Convention, which provides that “[i]f an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V(1)(e), the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award.” New York Convention, art. VI. A “competent authority” referred to in Article V(1)(e) is one “of the country in which, or under the law of which, that award was made.” New York Convention, art. V(1)(e). India further argues that this Court should stay the proceedings pursuant to the doctrines of forum non conveniens and international comity. See Resp. at 40. HEPI counters that because India brought a set-aside suit in India, rather than Malaysia, the requirements of an Article VI stay have not been met. See Pet'r's Mem. P. & A. Resp. Resp't's Opp'n (“Pet'r's Resp.”) at 34- 35, ECF No. 29. It further argues that forum non conveniens and international comity are not available as defenses to enforcement actions in this Circuit. See Id. at 23, 31-32. For the reasons set forth below, the Court finds a stay of these proceedings unwarranted, and therefore denies India's request.

         The D.C. Circuit has explained that “the FAA affords the district court little discretion in refusing or deferring enforcement of foreign arbitral awards: the Convention is ‘clear' that a court ‘may refuse to enforce the award only on the grounds explicitly set forth in Article V of the Convention, '” and a court “may adjourn enforcement proceedings only on the grounds explicitly set forth in Article V(1)(e) of the Convention.” Belize Soc. Dev. Ltd. v. Gov't of Belize, 668 F.3d 724, 727 (D.C. Cir. 2012) (quoting TermoRio S.A. E.S.P, 487 F.3d at 935). While other circuits have found that “a district court nevertheless retains the inherent authority to issue a stay for the purposes of managing its own docket” in FAA cases, the D.C. Circuit has eschewed such flexibility. Cf. Four Seasons Hotels & Resorts, B.V. v. Consorcio Barr S.A., 377 F.3d 1164, 1172 n.7 (11th Cir. 2004); see also Hewlett-Packard Co. v. Berg, 61 F.3d 101, 106 (1st Cir. 1995) (concluding that a district court may consider staying a case in broader circumstances than those found in Article VI of the Convention, but cautioning that the power to stay should be used judiciously). As such, the Court is limited ...


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