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TMI Blog2013 (9) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. 150 existing buyers had signed long term agreements with the appellant without any provision for review of price during the currency of contract - However, the respondent did not accept the offer and did not sign long term sale agreement - Instead, it agreed to sign the second Price Side Letter which contained a provision for review of the price before expiry of 5 years term on 31.12.2013 - The respondent also insisted that RLNG price for the period from 1.4.2014 to 1.1.2019 should be mutually agreed between the parties - These terms were incorporated in the Price Side Letter sent by the respondent to the appellant vide e-mail dated 26.12.2008 - The Price Side Letter which was finally signed by the parties indicate that the price of gas had been mutually agreed between the parties - This was also mentioned in letters dated 1.10.2011 and 26.12.2011 sent by the respondent to the appellant - Therefore, the premise on which the High Court recorded the conclusion that the appellant had acted arbitrarily was non-existent and on this ground alone the order under challenge was liable to be set aside. The remedy of arbitration available to the respondent under paragraph 15.5 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of re-gasified liquefied natural gas (RLNG) from out of LNG sourced by Petronet LNG Limited. The terms and conditions of supply were incorporated in GSA dated 7.2.2004, paragraphs 3.1, 3.2, 11.3, 11.6, 15.1, 15.5, 15.6 and 20.9 of which read as under: 3.1 This Agreement shall come into force on the date it is signed and shall remain in force till 0600 Hours of 1.1.2019 (herein called "Basic Period") unless terminated earlier as per the provisions of the Agreement. 3.2 Either party may propose to extend the Agreement beyond the Basic Period by giving notice to the other Party one Year prior to expiry of this Agreement. This Agreement shall be amended accordingly prior to such extension for such period as the Parties may mutually agree, (herein called the "Extension Period"). 11.3 The above Contract Price are valid up to 31st December, 2008 and shall be reviewed only and to the extent to which Ras Gas (Supplier of LNG) agrees for a different price. 11.6 Buyer and Seller shall mutually discuss for the Contract Price of Gas to be effective from 1st January 2009. The Seller shall inform not later than 30.06.2008, the revised Contract Price and parties agree to discuss in good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he event of assignment of LNG sale directly to Seller by Ras Gas (i.e. LNG supplier), then the Agreement shall be reviewed to be inline with the comfort provided to Seller in the assignment contract. (emphasis supplied) On the same day, the appellant and the respondent executed First Price Side Letter (FPSL) which was to form an integral part of the GSA. Paragraphs 11.1(a), 11.1(b), 11.3 and 11.6 of FPSL are extracted below: 11.1 (a) The elements of Contract Price payable by the Buyer to the Seller on account of delivery of Gas under this Agreement shall be as follows: Price elements are: Sr. No Elements of Price Rs./MMBTU 1. Foreign Currency Component (USD) 135.10+2.3 2. Indian Rupees Component 29.5 Contract Price 166.90 Foreign Currency component is calculated considering the Exchange rate of 1 US$ = Rs.46.00. However, the actual exchange rate will be as per clause 11.5 below. (b) The above Contract Price includes basic custom duty and exclusive of all other Taxes Duties. Buyer shall pay/reimburse Taxes and Duties as applicable in addition to Contract Price from tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re pending adjudication. 9. On 2.12.2008, the appellant sent e-mail to the respondent along with draft RLNG contract for discussion indicating that the contract could be effective from 1.1.2009. Similar e-mails and draft agreements were sent by the appellant to 150 other buyers. Paragraphs F and G of the preface, the definition of Basic Term and Article 11 of the draft agreement were as under: F. The price under the Earlier GSA is valid until 31 December, 2008 and the Parties have agreed to terminate the Earlier GSA and enter into this Agreement to enable the Buyer to procure, from the Seller, Gas out of the Sellers share of LNG Quantity for use in its plant / premises located at Dahej, Gujarat; G. The Seller and the Buyer accordingly wish to enter into this Agreement to record the terms and conditions on which; (i) the Seller shall sell and deliver at the Delivery Point, and the Buyer shall purchase, Gas out of the Seller s share of LNG Quantity; and (ii) the Earlier GSA shall cease to be effective from 1 January, 2009, except for the right and obligations specifically referred herein. Basic Term means the period beginning at 0600 hours on the Commencement Date a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect from January 1, 2009. According to Article 11.3 of the GSA, the Contract Price agreed between the Parties is valid up to December 31, 2008 and it can be reviewed only to the extent to which Ras Gas (Supplier of LNG) agrees for a different price. Apart from such change, which Ras Gas has agreed thereto, no price revision is allowed under the GSA. In view of the above, GSPC is not in a position to agree to the changes suggested in the draft of the existing GSA except the price of Gas which shall be in accordance with Article 11.3 of the GSA. 11. On 23.12.2008, the appellant sent proposed Price Side Letter to the respondent mentioning that the contract would be effective from 1.1.2009 to 1.1.2019. The respondent did not agree to the terms of the draft agreement as also the Draft Price Side Letter and returned the corrected draft agreement indicating that during the period from 1.1.2009 to 30.9.2009 the foreign currency component shall be the Weighted Average Price of the specified quantities of LNG and matter regarding the implementation of pooled price would depend on the final adjudication by the Supreme Court and that the pooled price mechanism provided under Clause 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, pooling of LNG prices, decision of any court or change in Law), shall result in a corresponding change in the Price; and, the Seller shall by written notice inform the Buyer of such change and the Price shall accordingly stand revised to the extent, and with effect from such date as, stated in the Seller's notice. b) The Price shall stand revised from the date such change in Law is made effective or implemented by the relevant Government Agency. Further, the change in Price and the assessment adjustment shall be reflected in the subsequent Invoice. 11.4 Components of Price The Price payable by the Buyer to the Seller for supply of RLNG shall consist of (1) Contract Price; (2) Connectivity Charges and (2) Taxes and Duties Charges as detailed below: (1) Contract Price The Contract Price payable by the Buyer to the Seller under the Agreement shall consist of the following elements/components: A. Foreign Currency Component; and B. INR Component. Each of these elements/components is as follows: A. Foreign Currency Component: (g) The indicative Pooled Price for the period January to September 2009: PLL has indicated the Ex-terminal "Pooled price" for the period / J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asis supplied) 13. After signing the Price Side Letter, the parties exchanged letters dated 1.10.2011, 21.12.2011, 26.12.2011, 28.12.2011 and 6.1.2012. For the sake of reference, these letters are reproduced below: GSPC GUJARAT STATE PETROLEUM CORPORATION LTD. (A Govt. of Gujarat Undertaking) Regd- Office : GSPC Bhavan, Behind Udyog Bhavan, Sector-11, Gandhinagar-382 010, INDIA. Phone: +91-79-66701001 Fax :+91-79-23236375 E-mail : [email protected] GSPCL/COMM/2011/1021 1st October 2011 Shri A.K. Saksena Zonal General Manager GAIL (India) Limited 809, Sakar-ll, Opp. Town Hall, Near Ellisbridge Ahmedabad - 380006 Sub: Gas Price with effect from 01.01.2014 Ref: Gas Sales Agreement dated February 7, 2004 between GAIL and GSPCL ('GSA') read with the Price Side Letter dated 31.12.2008 ("Price Side Letter") Dear Sir, This is with reference to Article 11.6 of the above-referred GSA. As per the terms of the referred Article, the provisions of Article 11 as incorporated into the GSA by the Price Side Letter would remain valid till 31.12.2013. Further, the Article also stipulates that GSPCL and GAIL shall mutually discuss and finalize, no later than December 31, 2011, a fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 01.01.2014 Ref: i. Gas Sales Agreement dated February 7, 2004 between GAIL and GSPCL ('GSA') read with the Price Side Letter dated 31.12.2008 ("Price Side Letter") ii. Letter from GSPC dated October 1, 2011 Dear Sir, Please refer to our earlier communication and your most recent letter dated 21st December, 2011 on the subject matter. In connection to the same and subsequent to our meetings at GAIL Ahmedabad Zonal Office and New Delhi office on December 14, 2011 and December 23, 2011 respectively, GSPC would like to resubmit and reiterate that with regards to Price of Gas under the GSA, the current arrangements which have been mutually agreed vide Price Side Letter, be extended and continued with effect from January 1, 2014 till the expiry of the GSA. The same is without prejudice to our rights under the GSA. Yours sincerely, Sd/- Ravindra Agrawal GM (Commercial) GAIL (India) Limited (A Government of India Undertaking) Ahmedabad Zonal Office Dated: 28.12.2011 Ref: GAIL/AZO/MKTG/RLNG/2011/GSPCL To Sh. Ravindra Agarwal General Manager (Commercial) Gujarat State Petroleum Corporation Ltd. (GSPCL) GSPC Bhavan, B/h Udyog Bhavan, Sector -11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he price from GSPCL. In fact GSPCL vide its letter dated 1.10.2011 had proposed the continuation of the existing framework stated in the Price Side Letter for the remainder of the Term of the GSPCL-GAIL GSA dated 7.2.2004 ("GSPCL-GAIL GSA"), which has been reiterated by GSPCL in the meeting held on 23.12.2011 as well as vide its letter dated 26.12.2011. Please note that the GSPCL-GAIL GSA is specifically for the delivery of RLNG sourced from the regasification of the LNG sourced from the identified LNG Supplier i.e. Ras Laffan LNG Limited and regasified at an identified LNG Terminal i.e. the Petronet LNG Limited Dahej Terminal. This is clear from the provisions of Recital A (which identifies Ras Laffan LNG Limited to be the LNG supplier), read with Clause 6.7 (which also identifies the LNG supplier to be Ras Gas) and Clause 19.1 (which provides for the termination of the GSPCL-GAIL GSA in the event the GSPA between PLL and GAIL is terminated). We have already indicated that we are agreeable to the continuation of the existing gas price framework as provided in the present Price Side Letter. The existing Price Side Letter is already meeting GAIL's requirement of aligning the price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .01.2012, GAIL reiterates that the offer and understanding of the basis on which future supply could have been envisaged was that the price should be a discoverable market price having regard to international prices of LNG. In fact the attempts to prescribe a method to achieve the same failed. In view of the fact that no agreement could be reached between GAIL and GSPCL by 31.12.2011 regarding the price of gas to be applicable with effect from 01.01.2014, the agreement shall stand terminated w.e.f. 01.01.2014 and the parties hereto shall stand relieved of their obligation under the Agreement. (emphasis supplied) 16. In its reply dated 3.7.2012, the respondent rejected the offer of the appellant for maintaining future supply at the market price and also accused it of acting in a mala fide manner. Paragraphs 4 and 5 of that letter read as under: 4. You may recall the background in which the GSA dated 07.02.2004 has been executed. The GSA was executed between GAIL and GSPC pursuant to a long term gas supply contract entered into between Petronet LNG Limited (PLL) and Ras Gas. The GSA has been executed by GAIL as Gas marketer of PLL. You may please note that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to arrive at a new price side letter, albeit on account of the failure and the unreasonable conduct of GAIL, GSPC and GAIL still have a continuing agreement as to Price Cap, and therefore the sale of RLNG could nevertheless be continued at such Price Cap. 17. The appellant responded to that communication by sending letter dated 24.1.2013 and refuted the allegations of malafides. The appellant also pointed out that the respondent had not accepted its proposal to sign a GSA based on uniform pooled price in terms of letter dated 6.3.2007 of the Government of India and agreed only to sign a Price Side Letter. The relevant portions of that letter are as under: GAIL had signed fresh long term GSAs in December 2008 with all its downstream customers, except GSPCL, which are governed by the uniform pooled price in terms of the MOPNG directive dated 06.03.2007, and all such GSAs are valid till April 2028. There is no provision in any of these GSAs for reopening the price before the term ends in April 2028 unless there is a change in law or policy. It may be recalled that at the time of review for the gas price to be valid w.e.f. 01.01.2009, GAIL had offered to sign a GSA with G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han 31.12.2011"; however, GSPCL did not choose to act with diligence. Hence, the allegations of GSPCL in the letter dated 03.07.2012 that GAIL had not acted in a fair and reasonable manner and had abused its so called dominant market position are incorrect. (emphasis supplied) 18. The respondent challenged communications dated 4.5.2012 and 24.1.2013 in Special Civil Application No. 2362/2013 filed before the Gujarat High Court and prayed that a direction be issued to the appellant to engage itself in a bona fide manner to arrive at the price of gas to be effective from 1.1.2014. In the affidavit filed on behalf of the respondent, it was averred that even though Article 15.5 of the GSA contains arbitration clause, the same was not being resorted to because its complaint did not relate to any breach of the agreement but was against the arbitrary action of the appellant in fixing the price of gas. The respondent referred to letter dated 6.3.2007 of the Government of India, the Second Price Side Letter, the correspondence exchanged between the parties in 2011, 2012 and January, 2013 and pleaded that the action of the appellant seeking to terminate the GSA is violative of Articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the price of gas to be effective from 01.01.2014. From the facts above, learned senior advocate appearing for the petitioner could convince this Court that the conduct of the respondent was not found to be befitting to 'State' or 'an instrumentality of State'. Otherwise there was no reason for the respondent not to respond to letter dated 01.10.2011 till 21.12.2011. Not only that, there was no reason for the respondent to all of a sudden change the criteria for fixing the price of gas from 'pooling price' to 'aligning future price of RLNG with market conditions prevalent'. This gives reason to draw a conclusion that the respondent was not acting in a manner which can be said to be free from arbitrariness and, therefore, the matter requires to be allowed. 22. On the aforesaid premise, the Division Bench finally quashed communications dated 4.5.2012 and 14.1.2013 and directed the appellant to engage itself with the respondent to arrive at the price of gas to be effective from 1.1.2014. 23. Shri R.F. Nariman, learned senior counsel for the appellant referred to the pleadings of the parties and the documents produced by them including letter dated 6.3.2007 sent by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary and unjustified and the Division Bench of the High Court did not commit any error by directing it to enter into a fair negotiation with the respondent. Shri Andhyarujina relied upon the judgments in Dwarkadas Marfatia and sons v. Board of Trustees of the Port of Bombay (1989) 3 SCC 293, Mahabir Auto Stores and others v. Indian Oil Corporation and others (1990) 3 SCC 752, Kumari Shrilekha Vidyartha and others v. State of U. P. and others (1991) 1 SCC 212, ABL International Ltd. and another v. Export Credit Guarantee Corporation of India Ltd. and others (2004) 3 SCC 553 and Harbanslal Sahnia and another v. Indian Oil Corporation Ltd. and others (2003) 2 SCC 107 and argued that the arbitration clause contained in the GSA cannot operate as a bar to the entertaining of petition under Article 226 of the Constitution. 25. We have considered the respective arguments. At the outset, we may mention that vide e-mail dated 2.12.2008, the appellant had offered to sign fresh long term sale agreement with all the existing customers including the respondent for supply of RLNG upto April, 2028 at a uniform pooled price in terms of the policy decision of the Government of India. This is evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair and that the respondent was entitled to the benefit of the policy decision taken by the Government of India despite the fact that it had not only challenged that decision but had also shown disinclination to accept the offer made by the appellant to supply gas at the pooled price and had insisted on mutually agreed price. 28. In Arun Kumar Agrawal v. Union of India and others (2013) 7 SCC 1, this Court was called upon to consider the scope of judicial review of complex economic decision taken by the State or its instrumentalities. The Government of India, ONGC and Shell entered into a production sharing contract with a private enterprise for exploration and exploitation of crude oil and natural gas in respect of the Rajasthan Block. After due deliberation, the Government of India endorsed the decision taken by ONGC. While refusing to interfere with the decision of the Government, this Court observed: We notice that ONGC and the Government of India have considered various commercial and technical aspects flowing from the PSC and also its advantages that ONGC would derive if the Cairn and Vedanta deal was approved. This Court sitting in the jurisdiction cannot sit in judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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