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DC Federal Judge Refuses To Confirm Arbitration Award To Hardy Oil & Gas

The United State District Court for the District of Columbia on Thursday refused to confirm the arbitration award which would have resulted in Hardy Exploration & Production (India) Inc (HEPI) returning to work in India’s natural gas reserves.

U.S. District Judge Rudolph Contreras asserted that U.S. policy respects rights of other nations to manage resources within their own territories. The Judge in fact went on to add that the case presented a unique opportunity to balance two “important” American public policy values: respect for the sovereignty of other nations and respect for foreign arbitration agreements.

Factual matrix

In 1997, HEPI entered into a contract with the Government of India, allowing HEPI to search for and potentially extract hydrocarbons from an area off of India’s southeastern coast. HEPI discovered a reserve of hydrocarbons in 2006 through an exploratory well drilled in the geographic block, and claimed that it was natural gas, entitling it to a five-year appraisal period.

India disagreed, asserting that the discovery was crude oil, which allowed an appraisal period of two years. After the shorter, two-year appraisal period ended, India — which had maintained that the discovery was crude oil — insisted that HEPI had forfeited its rights to the block.

This dispute led to arbitration, and the Tribunal ultimately found in HEPI’s favor, ordering India to allow HEPI back onto the block for another three years to continue its assessment. The Tribunal further awarded HEPI interest at the rate of 9% on Rs. 500 crore (US$ 113 million) spent on the block.

India then appealed the award before the Delhi High Court, and HEPI filed a separate suit in the High Court to enforce the award. This has now reached Supreme Court, which has referred to a larger bench the question as to when the arbitration agreement specifies the “venue” for holding the arbitration sittings by the arbitrators but does not specify the “seat”, then on what basis and by which principle, the parties have to decide the place of “seat” which has a material bearing for determining the applicability of laws of a particular country for deciding the post-award arbitration proceedings.

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 the US 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.

On specific performance of award

The Court found that enforcement of the specific performance portion of the arbitral award would violate United States public policy, opining that the “forced interference with India’s complete control over its territory violates public policy to the extent necessary to overcome the United States’ policy preference for the speedy confirmation of arbitral awards”.

The Court also found that while the Foreign Sovereign Immunities Act grants federal courts jurisdiction over arbitral award confirmation proceedings, the spirit of the United States’ policy preference over specific performance is clear from the exclusion from the statutory text of any mention of specific performance or extraterritorial enforcement, apart from the terrorism and expropriation exceptions.

It further noted that while the doctrine of international comity does not generally counsel against confirmation of arbitral awards, the confirmation of this award might raise an opposite situation wherein a foreign court might end up confirming such awards against the United States for acts within its own borders.

On the interest part of the award

The Court found that even if the interest awarded by the Tribunal was meant to be compensatory rather than punitive, it cannot enforce it in view of its inability to enforce the primary component of the award, opining that the two components are “inextricably intertwined”.

It observed, “To order otherwise would be to impermissibly coerce India into complying with an order that this Court has determined it cannot issue. The Court cannot coerce through an interest award an action that it cannot order directly…

…In this case, the practical effect of confirming the Tribunal’s award of interest would be to coerce a foreign state into complying with a non-existent order from this Court, a non-existent order which, as explained above, would be a severe affront to India’s sovereignty and would violate U.S. public policy.”

It further asserted that interest portion of the award is so inseparable from the specific performance portion of the award, that the confirmation of the interest portion of the award must also be found, necessarily, to be violative of U.S. public policy.

“We find this victory as a major one considering the traditional pro Arbitration attitude of the US Courts which normally supports enforcement of New York Convention Awards. Most importantly, the new dimension given to the sovereignty principle in the realm of natural resources contact by the US Court is a contribution to the international arbitral jurisprudence” said Mr. K.R. Sasiprabhu of R.S. Prabhu & Co. Mr. K.R Sasiprabhu and Robin Vrindavanam from R.S. Prabhu & Co. were the lawyers from India instructing and coordinating the conduct of Government of India’s case in the US.

Read the Order Here

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