Govt Notifications Imposing Restrictions On Usage In Contracts For Supply Of Gas Are Laws Under Article 12, Must Be Complied With: Delhi HC

The bench of Justice Subramonium Prasad held that the Ministry of Petroleum and Natural Gas (“MoPNG”) had apprised the Petitioner of the Government's policy concerning the usage of APM gas. The learned Sole Arbitrator was correct in holding that the buyer of the gas would not be entitled to use the subsidised gas for any other purpose than the contemplated in the contract, i.e., production of fertilisers.

Factual Matrix:

The Gujarat State Fertilisers & Chemicals Ltd (“GSFCL”) entered into five different contracts with Gas Authority of India Limited (“GAIL”) concerning the sourcing of gas from various oil fields and supplying the same to GSFCL. The MoPNG issued a directive to GAIL and other agencies authorised for production, sale, and distribution of natural gas, stating that all available Administered Price Mechanism (“APM”) gas be supplied to power and fertiliser sector consumers.

The MoPNG vide letter dated 10.07.2006 asked GAIL to procure details concerning the quantities of APM Gas used for the production of fertiliser unit for non-fertiliser purposes. Taking note of the Comptroller and Auditor General of India's (“CAG”) Report, the MoPNG took the view that the Respondent could not devise a mechanism to ascertain the usage of APM Gas by fertiliser units. Therefore, MoPNG issued a directive on 02.07.2014, directing the Respondent to procure a quarterly return duly certified by the Fertiliser Industry Coordination Committee (“FICC”) for all future gas supplies. Failing to produce the FICC certificate, GAIL was authorised to charge non-AMP gas rates for the entire gas supplied. A dispute arose between the parties pursuant to this direction issued by the MoPNG.

GAIL issued two demand notes dated 15.01.2015 to GSFCL. The same were challenged before the Gujarat High Court, and a stay order was passed. On different dates, GAIL issued claim letters to GSFCL. In 2018, GAIL issued a claim letter raising a claim of ₹35.95 crore, pursuant to FICC Certificates. The same was challenged u/s 9 of the A&C Act before the Delhi High Court. Disposing of the said petition, Hon'ble Mr. Justice K.S.P. Radhakrishnan was appointed to adjudicate the dispute.

The learned Sole Arbitration rejected the GSFCL's contention that the APM gas could be utilised for unrestricted industrial application, i.e. for non-urea purposes. The Arbitrator further allowed the claims of GAIL. Aggrieved by the impugned Arbitral Award dated 29.07.2023, GSFCL filed this Section 34 petition before the Delhi High Court.

Submissions:

The counsel for the Petitioner made the following submissions:

• Two out of the five contracts dated 05.07.2008 do not have any clause restricting or prohibiting the usage of the gas for a particular purpose. The letters issued by the MoPNG dated 02.07.2014 and 16.12.2015 to GAIL resulted in a variation of the contract.
• MoPNG's letter dated 16.12.2015 pertains to the diversion of gas and does not relate to price fixation. GAIL had to issue invoices based on the FICC Certificate, which was not done by GAIL. Therefore, the provisional bills are not as per MoPNG's directives.
• For the period up to and beyond March 2017, the FICC hasn't issued any monthly certificates to the Petitioner. In light of the absence of the said certificates, GAIL has raised provisional claims. Furthermore, FICC and MoPNG, being the Central Government Agencies, were duty-bound to coordinate with each other in accordance with the mechanism prescribed by the MoPNG itself.

The counsel for GAIL made the following submissions:

• The impugned Arbitral Award is neither perverse nor in violation of the fundamental policy of the land, nor is the said Award crippled with any patent illegality. The sole Arbitrator has considered every material and argument, and after taking everything into consideration, the Arbitrator has come to the conclusion.
• The pricing of gas in all contracts was subject to the Government orders. ¶ 6 of the Statement of Claim, the Petitioner has agreed that the pricing of the gas was subject to a Government pricing order, and MoPNG, being the administrator of the pricing of natural gas, determined the price for a particular period for the quantity of gas supplied to the Petitioner.
• The price and usage of APM Gas are the government's prerogatives in terms of its policies. Furthermore, Article 16.1 contained in the Contracts dated 05.07.2008 states that the usage of gas has to be approved by the Government of India. Furthermore, Clause 17.1 specified that the rights and obligations of each party are subject to and governed by all the applicable laws in India.

Analysis of the Court:

At the outset, the Court observed that the contracts are subject to the directives issued by the MoPNG, and the parties cannot violate any of these directives. The Petitioner cannot get an unrestricted right to use the gas in any manner. Vide Clause 16.1 and 17.2 of the Contract, it is implied that parties are subject to and governed by all applicable Laws of India.

Pursuant to the CAG Report, the MoPNG, since June 2005, has restricted the use of APM gas for fertiliser production and certain power-generating companies. The report highlighted the substantial loss incurred by the government due to the undue utilisation of APM gas. By subsidising the price of gas, the Government regulates the usage of gas, which is to be charged at the APM Price.

The Court observed that the MoPNG vide letter dated 20.06.2005 observed that fertiliser units like the Rashtriya Fertiliser and Chemicals Limited ["RCF"] and Deepak Fertiliser & Petrochemical Limited ["DFPCL"] used APM gas for the production of chemicals instead of fertilisers. MoPNG, in conformity with the CAG Report vide letter dated 02.07.2014, came out with the mechanism of certification from FICC for calculating the subsidy.

The Court further observed that the CAG Report, read with the various letters issued by MoPNG, was sufficient to convey that APM gas was to be used only for the production of urea. The Sole Arbitrator was correct in observing that all the fertiliser units were aware of the directives issued by MoPNG concerning the usage of APM gas. The Sole Arbitrator was also correct in taking a view that the fertiliser units that used the APM gas for the production of other products, but not urea, were liable to pay the market rates.

Lastly, the Court observed that it was the Petitioner herein who committed the delay in furnishing details to FICC when the required certificates were to be issued by FICC. Therefore, the Sole Arbitrator was correct in holding that the claims were not barred by limitation. Furthermore, Sections 15, 17 and Article 12 of the Limitation Act do not have any application to the facts of the present case. The portion of the Award dealing with the aspect of limitation is irrelevant. In light of the ratio laid down in Gayatri Balasamy v. ISG Novasoft Technologies Limited, 2025, the Section 34 Court is competent to sever the invalid portion of the arbitral Award from the valid portion. In the above terms, the Section 34 Court dismissed the petition challenging the arbitral Award dated 29.07.2023.

Case Name: Gujarat State Fertilisers & Chemicals Ltd. v. M/S Gail (India) Ltd.

Case Number: O.M.P. (COMM) 301/2023

Counsel for the Petitioner: Mr. Dayan Krishnan, Sr. Advocate with Mr. Kunal Vyas, Mr. Pratham Vir Agarwal, Mr. Sukrit Seth, Ms Niyati Kohli, Advocates

Counsel for the GAIL: Mr. Vivek Kohli, Sr. Advocate, with Mr. Somiran Sharma, Mr.Yashweer Hooda, Advocates