SC upholds GAIL decision to end contract with GSPL

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Sep 18 2013, 09:15am hrs
In a matter related to the fixing of re-gasified liquified natural gas (RLNG) prices, the Supreme Court on Tuesday endorsed the GAIL (India) decision to terminate contract with the state-owned oil and gas exploration company, Gujarat State Petroleum Corporation, for providing natural gas imported from Qatar.

While setting aside the Gujarat HC's judgment that quashed its termination letter, a bench comprising justices GS Singhvi and V Gopala Gowda said the HC should have relegated GSPL to the remedy of arbitration keeping in view the complex nature of the price fixation mechanism.

Unfortunately, the HC presumed that the negotiations held between the (parties) were not fair and that (GSPL) was entitled to the benefit of the policy decision taken by the Centre despite the fact that it had not only challenged that decision but had also shown disinclination to accept the offer made by the appellant (GAIL) to supply gas at the pooled price and had insisted on mutually agreed price, the apex court said.

... the appellant (GAIL) had offered to sign fresh long-term sale agreement with all the existing customers including the respondent (GSPL) for supply of RLNG upto April, 2028 at a uniform pooled price in terms of the policy decision ... A reading of the draft RLNG contract and Price Side Letter sent by the appellant to the respondent also shows that the appellant had offered to supply gas to the respondent at the pooled price but the latter did not agree and insisted on negotiation for the contract price of RLNG to be effective from 1.10.2009, Justice Singhvi, writing for the bench, stated.

While the HC also asked GAIL to engage in a bonafide manner in fixing the gas prices with the state PSU from January 1, 2014, senior counsel R Nariman, appearing for GAIL, argued that the HC could not have entered into a contract for GAIL and direct it to charge only pool prices.

GAIL had entered into a a long-term gas sale agreement for 15 years in February 2004 with GSPC to provide gas till 2019. And as per the contract, the price renewal for the gas to be provided from January 1, 2014, onwards was to be negotiated by the two parties by December 31, 2011.

However, the prices could not be agreed within the stipulated time and after the deadline got over, GAIL terminated the contract to supply the gas. GAIL's termination order was challenged by GSPC in the HC, which allowed its plea.

However, GAIL referred to a GoI's letter of March 2007 that said that the price of gas should be based on the pooled price mechanism prescribed by the ministry of petroleum and natural gas.

Nariman argued that GAIL had not discriminated the GSPL in fixing the RLNG price as it had made identical offer to all the buyers, including state PSU for supply of gas at the pooled price determined by the Central government, but the latter declined to accept the offer and insisted on fresh agreement being signed on mutually agreed price.

Senior counsel Andhyarujina, appearing for GSPL, argued that the GAIL's refusal to supply gas at pooled price was totally arbitrary and unjustified and GAIL cannot discriminate GSPL and charge more than the pooled price. He further submitted that the decision of GAIL to insist for determination of price through market mechanism was totally uncalled for, arbitrary and unjustified.