Arbitration Inequality in India’s Oil & Gas Industry: Immediate Reforms Required
India’s public sector undertakings (PSUs) in the oil and gas sector — including Indian Oil Corporation Limited (IOCL), Oil and Natural Gas Corporation (ONGC), Bharat Petroleum (BPCL), Hindustan Petroleum (HPCL), Gas Authority of India Limited (GAIL), Oil India Limited (OIL), and others such as Engineers India Limited (EIL) and MECON in project management consultancy roles — often present themselves as champions of transparency and fairness. However, a closer look at their standard arbitration clauses reveals a pervasive imbalance that overwhelmingly favors the PSUs at contractors’ expense, raising serious concerns about fairness, neutrality, and due process.
Arbitration Clauses That Skewed the Balance
Until late 2024, typical contracts required that in the event of a dispute, the PSU would propose a panel of three “independent and distinguished persons.” In practice, these arbitrators were often retired judges or senior government officials closely affiliated with the PSU. Contractors had to choose one arbitrator from this panel within a set timeframe, or the PSU could unilaterally appoint one if the contractor failed to decide. This “zero deviation” policy strictly forbade bidders from requesting any modification to the arbitration clause, effectively locking contractors into a dispute resolution process they had little say in.
This system gives PSUs exclusive control over the selection of arbitrators, undermining the principle of mutual consent and impartiality essential for fair arbitration. The repeated appointments of arbitrators connected to PSUs create real or perceived conflicts of interest, jeopardizing the neutrality of the process. Moreover, the fixed seat of arbitration—usually Delhi or Mumbai—imposes significant logistical and financial burdens on contractors.
Additionally, mandatory conciliation under PSU procedural rules and the restriction of arbitration to only “notified claims” — claims that must be reported within a very short timeframe and as determined solely by PSU officials — severely limit contractors’ ability to seek timely and adequate remedies.
How This Differs from International Best Practices
International arbitration standards, such as those under UNCITRAL Model Law and institutional rules like ICC and SIAC, emphasize the equal right of parties in appointing arbitrators. When parties cannot agree, a neutral institution or court makes the appointment. In contrast, PSUs have historically retained full control over arbitrator appointment, with no neutral third-party oversight. This longstanding practice was challenged in landmark judicial rulings in late 2024 affirming the right to neutral appointment and equal treatment.
Judicial and Parliamentary Responses
Indian courts and parliamentary bodies have increasingly recognized these imbalances:
The Supreme Court’s November 2024 ruling struck down clauses allowing PSUs to unilaterally appoint arbitrators or mandate selection from PSU-curated panels.
In M/s Zillion Infra Projects Pvt Ltd Vs Bridge and Roof Co India Ltd (July 2024), the Calcutta High Court invalidated an IOCL arbitration clause that prevented a subcontractor from independently raising disputes in arbitration, finding it unconstitutional for denying equal participation.
The Parliamentary Standing Committee on Petroleum and Natural Gas highlighted the large volume of disputes involving PSUs, noting that while many are resolved in favor of PSUs, the procedural framework forces contractors into prolonged and costly litigation for redress.
Real-World Impact
Despite occasional tribunal decisions favoring contractors, the underlying structural imbalance discourages many from pursuing legitimate claims. The perception of bias leads to early settlements on unfavorable terms, prolongs dispute resolution, and burdens the judiciary. The lack of neutral arbitrator appointment mechanisms also risks the enforceability of awards, especially in international contexts where fairness is key.
Urgent Reforms Needed
To restore confidence and align with international norms, the following reforms should be adopted:
Balanced Arbitrator Appointment: Use internationally recognized model clauses that guarantee equal participation and allow neutral third-party appointment when parties cannot agree.
Broaden Arbitrable Issues: Lift restrictions limiting arbitration to “notified claims” to ensure all legitimate disputes—such as client-caused delays—can be fairly resolved.
Flexible Conciliation: Make conciliation optional or based on mutual agreement rather than mandatory under PSU rules.
Neutral Venue Selection: Enable the venue and jurisdiction to be negotiated or selected impartially, easing contractors’ logistical burdens.
End Zero Deviation Policies: Allow contractors reasonable input on arbitration clauses to prevent forced acceptance of one-sided provisions.
Regular Oversight: Establish an independent review body to monitor PSU arbitration practices and ensure ongoing compliance with fairness standards.
Conclusion
Arbitration practices entrenched in India’s Oil & Gas PSUs embody systemic norms that conflict with principles of neutrality, mutual consent, and due process. Recent judicial rulings have started to correct these imbalances, but lasting change requires proactive reform by PSUs. Aligning arbitration clauses with global standards will strengthen dispute resolution, encourage fair contracting relationships, and build greater trust and confidence in India’s vital energy sector.
Without reform, the current arbitration imbalance will continue to undermine justice and deter investment in one of India’s most critical industries.
