A case study on RIL vs. RNRL disputeLegal Aspects of Business

- By

Aparajita Sharma

(R230207017)

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Brief Summary

Power shortage, in India, is not unheard of. Such grim is the outlook that India is expected to miss

its 2012 power generation target by nothing less than 60%. Hence India, once again, started to look

at Natural Gas to cater for this deficiency. Successful exploration of gas from KG basin was widely

anticipated as a solution to all lacunas persisting today. As a result, India or Reliance Power planned

a under construction, gas fired power plant, one of the single largest gas fired power plant (5500

MW) in the world, in Dadri, UP. However complications started immediately after the death of Mr.

Dhirubhai Ambani. Family feud between Ambani sons – Mr. Mukesh and Mr. Anil unveiled for

public interpretation. Considering the mammoth size of Reliance conglomerate – then Rs 100,000

Crore, about 2% of India‘s economy a lot was at stake, it was imperative to reach an amicable and

agreeable solution to the dispute. Mother Kokilaben played an important part to reach at amicable

solution. The agreement contained a clause named Gas Supply Master Agreement (GSMA).

According to GSMA, RIL (part of Mukesh Ambani group) was to supply gas at subsidized rate of

$2.34 per million British thermal units (mmbtu) for a period of 17 years. The amount of gas would

be equivalent to 28 Million Metric Standard Cubic Meter Per Day (mmscmd) from the KG basin.

Reliance Natural Resource Ltd. (RNRL) Of Anil Ambani in 2006 claimed that Reliance Industries

Ltd. (RIL) Of Mukesh Ambani had reneged on part of a promise under the demerger agreement to

supply gas from Krishna-Godavari basin to the RNRL’s planned power stations. RIL then argued the

agreement was subject to government approval and that in 2007, a ministerial committee set a price

of $4.29/mmBtu. The feud was never settled for good. It was painfully visible by the fact that RIL

was never intending to supply gas at a contractual price when it will be making a loss. In November

2008, RNRL filed company application, over gas supply, taking dispute with RIL to court. The

Bombay High Court upheld the maintainability of RNRL’s plea and asked RIL to supply gas to the

latter. The court asked the two parties to enter into an agreement within a month along the stipulated

ruling. The HC also said the parties can approach Kokilaben Ambani — the mother of the estranged

industrialists Anil and Mukesh Ambani to reach an arrangement.

Following this, both the companies – RIL and RNRL moved to Supreme Court. It admitted the

petitions. Such a dramatic turn of events forced the GOI to take a stand. The government has filed

the affidavit as an intervener which means that it gets to assist the court in coming to a conclusion.

Oil and petroleum ministry filed a petition in court claiming that KG basin and its natural assets are

public property, and hence, no MOU regarding the same is legally valid unless the GOI has

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consented to the MOU. On this ground, it requested the Apex court to declare the MOU null and

void. Supreme court hearing will be on the 20th October regarding this case.

TimeLine

* July 2002 - Dhirubhai Ambani, a school teacher's son and founder of the Reliance business empire,

dies. Mukesh Ambani becomes chairman and managing director of Reliance Industries Ltd, and Anil

Ambani is made vice-chairman.

* Nov 2004 - Feud between the brothers becomes public.

* June 2005 - Family reaches a settlement to split the Reliance group in a deal brokered by their

homemaker mother, Kokilaben. Memorandum of Understanding was signed between the brothers,

which included provision of providing natural gas from RIL to RNRL at lower prices.

* 2006 - Formal split takes place, with Mukesh taking control of flagship Reliance Industries, with

interests in petrochemicals, oil and gas exploration, refining and textiles. He has since launched a

retail venture. Anil gets telecoms, power, entertainment and financial services. The Anil Dhirubhai

Ambani Group includes Reliance Communications Ltd, Reliance Infrastructure Ltd, Reliance Capital

Ltd, Reliance Natural Resources Ltd (RNRL), and Reliance Power Ltd.

* December, 2006 – RNRL goes to Bombay High court against RIL on Krishna- Godavari Natural

gas issue.

* June 15, 2009 - Mumbai's High Court directs Reliance Industries and RNRL to enter a gas supply

agreement within a month. Notwithstanding Government policies and the provisions of the PSC, the

order observes that the provisions of the MOU are binding on the parties. The MOU, as per the

judgment, provides that 12 mmscmd will be given to NTPC, 28 mmscmd will be given to RNRL and

the remaining, at the option of ADAG, will be shared between RIL and RNRL in the ratio of 60:40.

The MOU also stipulates that this share of gas will be applicable to gas not only from reserves of KG

D-6 field, but also from other fields to be explored and operated by RIL, even consequent to future

bidding by RIL.

* July 18, 2009 - The government filed a petition before the Supreme Court, made a case for

scrapping the gas supply agreement between RIL & RNRL.

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* July 23, 2009 - The Petroleum Ministry filed a special leave petition, seeking direction for

declaring as 'null and void' a memorandum of understanding between RIL and RNRL that provides

for gas supply.

* October 20, 2009 - The Supreme Court will hear the government's petition for admissibility, as

also the cross-appeals by RIL and RNRL.

AGREEMENTS OR CONTRACTS PRESENT IN RELIANCE GAS ROW

Production Sharing Contract (PSC) between RIL and Government:

Under the government's New Exploration and Licensing Policy (NELP) there is a production

sharing contract (PSC) between RIL and Government signed in April 2006, which sets out the terms

and conditions under which RIL operates its lease of Gas fields in KG-D6, including the share of

revenues that would accrue to the Government.

MOU between RIL and RNRL:

In 2005, RNRL and RIL signed a memorandum of understanding (MOU) on the terms under which

gas would be supplied for the RNRL’s Dadri power project in UP. This MOU specified that the price

at which the gas would be supplied would be the same as the price at which RIL would supply gas to

an NTPC project. In 2004, RIL made successful bid for NTPC to supply gas at a price of $2.34 per

mmbtu. 

LEGAL COMPLICATIONS INVOLVED IN THE CASE:

Contract Act: Contract & MOU

A contract is an agreement, enforceable by law. Every promise and every set of promises forming

the consideration for each other is an agreement. All agreements are contracts if they are made by the

free consent of parties competent to contract, for a lawful consideration and with a lawful object, and

are not hereby expressly declared to be void.

A memorandum of understanding (MOU) is a legal document describing a bilateral agreement

between parties.  It expresses a convergence of will between the parties, indicating an intended

common line of action, rather than a legal commitment.  It is a more formal alternative to a

gentlemen’s agreement, but generally lacks the bind power of a contract.

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However in some cases, depending on the exact wording, MOUs can have the binding power of a

contract; as a matter of law, contracts do not need to be labeled as such to be legally binding.

Whether or not a document constitutes a binding contract depends only on the presence or absence of

well-defined legal elements in the text proper of the document.

Sales of Goods Act

Oil and petroleum ministry filed a petition in court claiming that KG basin and its natural assets are

public property. On this ground, we cannot treat Natural gas under the sales of goods act. Hence

price determination of Natural gas between Family business agreements might not be considered as

valid.

Model production sharing contract

The government’s stance in the Reliance Industries Ltd (RIL) case against Anil Ambani’s Reliance

Natural Resources Ltd (RNRL) is that the agreement between RIL-RNRL to supply gas has no legal

sanctity since RIL had to get the contract approved of by the government first. The Production

Sharing Contract (PSC) which governs the rights and obligations of both the government and

winning bidders like RIL is quite clear on this. The model PSC issued for the current round of the

New Exploration and Licensing Policy (NELP-VIII). Clause 21.3 says the contractor has the

freedom to market the gas “as per Government Policy for utilization of gas among different sectors”

and 21.3.1 elaborates on this, saying “the Government may from time to time frame policy for

utilization of gas among different sectors”.

The problem, however, is that this is not the PSC that RIL signed with the government in 2000. That

contract, under the NELP-I, gave unrestricted freedom to the contractor (RIL) to sell and the

government’s role was restricted to ensuring it got its proper share of the profits. In other words, it

would appear that the government changed the model PSC (the changes first came about in NELP-

VII in 2007) terms around the same time that the RIL-RNRL fight was heating up — this is when the

petroleum ministry said it had the right to reject the RIL-RNRL contract under the PSC. If the

ministry has this right, the RIL-RNRL case goes for a toss — while RIL maintains it cannot sell any

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gas from the KG Basin without the ministry’s explicit approval, RNRL contends the ministry has no

such rights under the PSC.

Future Course

With RNRL challenging RIL’s decision on reneging the agreement and latter’s equally ferocious

rejoinder; with NTPC filing a court case against RIL; with government allegedly favouring RIL and

yet not taken a firm stand and putting a leg down on either parties; with other stakeholders

(customers) of KG basin gas – Gautami group, a power plant owner in AP moving to apex court for

continuance of gas supply to other non-disputing parties the situation couldn’t get more murkier.

Until the government, or the apex court, decides in favour of either parties, it’s not just a national

loss in form of worsening power situation but a loss to both RIL and RNRL – loss of revenue,

increased time and other costs associated with litigation; a loss to the stakeholders associated with

the business of extraction and supply of gas, of power generation business and of other consumers of

KG basin gas.

It is absolutely necessary for both the companies to reach on common ground to save all

the losses. But it looks a distinct possibility now with the Anil Ambani’s attack on RIL through

aggressive newspaper advertisements. Government needs to take fair & firm stand on this case to

save huge losses. However, the most important is—it is the shareholders who would benefit with a

solution and consumers who will benefit with an uninterrupted supply of gas.

CONCLUSIONS

Supreme Court verdict will entirely depend on the answer of the following questions.

1. Is there any consideration involved in the MOU to consider it as a valid contract? (Supreme Court

might ask to produce complete MOU to conclude on this part as both brothers have produced only

certain part of MOU in front of the court.)

2. Can we consider Natural Gas which is a public property under sales of goods act? (Stand of

petroleum ministry will play important part in deciding on this issue.)

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3. Can Government force laws of new act on this contract which was based on the old act? (Firm

stand from government & Supreme Court is required to assure that there are no extraordinary losses

or supernormal profit to either party.)