This article lays a comprehensive analysis of the Energy Watchdog v. Central Electricity Regulatory Commission & Ors. case decided in 2016. Alongwith complete breakdown of facts, the issues raised before the court are also hereby analysed using judicial precedents.
- BACKGROUND AND FACTS OF THE CASE.
1st February, 2006 : Gujarat Urja Vikas Nigam Limited (herein afterwards referred to as “Respondents”) issued a public notice inviting tenders for supply of power.The participating bidders were to decide on the tariff and quote such tariff after competing against each other. The bidders were entitled to quote escalable or non-escalable tariff, as was considered appropriate.
11th January, 2007 : The Adani Enterprises Consortium (herein afterwards referred to as “Appellants”)was selected by Respondents as the successful bidder quoting a non-escalable tariff charge.
2nd February, 2007 : A Power Purchase Agreement was entered into between Respondents and Appellants
31st July, 2010 : There is a change in law in Indonesia took place in 2010 and 2011, which aligned the export price of coal from Indonesia to international market prices instead of the price that was prevalent for the last 40 years
5th July, 2012 :Appellants filed a petition before the Central Electricity Regulatory Commission being Petition No.155 of 2012, under Section 79 of the Electricity Act seeking relief on the score of the impact of the Indonesian Regulation to either discharge them from the performance of the PPA on account of frustration, or to evolve a mechanism to restore the petitioners to the same economic condition prior to occurrence of the change in law.
2nd April, 2013 : The Central Commission passed an order, whereby the claim of Appellants on the grounds of force majeure and/or change in law was held not to be admissible. However, the Commission considering the larger public interest, and hence constituted a committee to look into the alleged difficulties faced by Respondents and to find an acceptable solution thereto.
21st February, 2014 : Based on the Committee’s report, the Central Commission proceeded to grant compensatory tariff to Appellants.
7th April, 2016 : The Appellate Tribunal by going into the arguments of Force Majeure and Change in law reversed the commission’s order.
“A force majeure clause in a contract is an express provision of circumstances in which performance under the contract will be excused”.[i]The purpose of such clause is to prevent the performing party from the consequences of anything which is not in control of the party. The force majeure principle in the Indian Contract Act, 1872 is established through Section 32 and 56. Section 32 provides that if the performance of contract is based on the contingency of an event than, the impossibility of such event shall lead to contract becoming void.
- Issues:
- How far the ambit of frustration of contract can be stretched?
- Interpretation of the term “Change of law” in Power Purchase Agreement?
- ANALYSIS
The first issue involved in the case regarding the frustration of contract limits itself to the basic fundamental constituent to the contract. In the aforementioned judgment change in price of Indonesian coal export did not in any way contrast with the fundamental principles of contract so made. The concept of force majeure is to be restricted to a narrow purview and thus mere escalations in the cost of project due to some contingent event would not constitute the hindrance under section 56. In the landmark judgment of Satyabrata Goshv. Mugneeram Bangur & co. [ii]held section 56 to be flowing from positive school of law and renders the intention of the parties to the contract immaterial. Court also stated “the courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.”
The Power Purchase Agreement(herein afterwards referred to as “PPA”) provided for clause 12.3 stating the non-exhaustive list of force majeure event, clause 12.4 provided force majeure exclusion for any increase in the cost of plant, machinery, equipment, material, spare parts, fuels and consumables for the project. In the judgment of M/s Alopi Parshad& Sons Ltd. v. Union of India[iii]the apex court stated that unanticipated conditions such as escalation of prices which are an obstacle to execution does not get rid the contractual parties of the bargain they have made and hence mere circumstantial change cannot be exclaimed as frustration.
Now the issue before the court was how elastic is the scope of force majeure in India. The very genesis pops up is that the contracting parties always presume the existence of a certain quantity of risk involved in the execution of contract and which cannot contribute the non-performance on the ground of impossibility. In the case of Tsakiroglou & co. Ltd v. Noblee Thorl[iv],the court concluded that mutual agreement to transfer the risk of performance sets an obligation on the contracting parties to execute the commitment against all odds as far as practicable.
Hence the doctrine of frustration remains inapplicable to the present case as drawing from the facts of the case it becomes evident that there is a presumption of risk involved by the aggrieved as they quoted for the non-escalable tariff in the competitive bidding process based on long term fuel supply agreement from Indonesia.
The second issue before the court was to decide whether the phrase “Change of law” includes just change in law of the land or change in Non-Indian laws. Article 13.2 of Power Purchase Agreement provided for the compensatory aspect if there is change in law; thereby defined as “all laws including electricity law in force in India…and any statute….or any interpretation of any of them by Indian governmental instrumentality and shall include all applicable rules by an Indian governmental instrumentality. With respect to this, court was of the opinion that if the change of law in Indonesia would have resulted in affecting court procurement then the prayer of the aggrieved could have been accepted.But here the coal supplier prices weren’t affected by change in Indonesian law and thus this contention was rejected. The court also held that the definite specifications of what this phrase means is very well defined in the PPA itself and thus there is no scope left for any kind of broader interpretation by the court. The contract shall be strictly governed by the clauses of the PPA rather than by the discretion of court.
- CRITIC COMMENT
This Supreme Court judgment was unwelcomed by the power industry. The Appellants with drew from the project and asked the state power procurer’s to take control of the project resulting thereby in a possibility that the once power surplus state of Gujarat might face the risk of power scarcity. The investment by the power producers is deemed to be investment in public goods for consumption of economy and thus the failure to protect such investor will seemingly be afiasco in public policy execution. On the other hand it is also contended that such type of agreement are a sheer attack to engage in crony capitalism later demanding renegotiation.[v]
The Appellants however had suggested two alternatives; first one of foregoing of security deposits and conducting fresh bids or offering power generating capacity while the state procures the coal.
The Appellate Tribunal’s judgment and the Commission’s orders following the said judgment are set aside.
[i] Pollock and Mulla, Indian Contract and Specific Relief Acts (13th edition., 2006)
[ii] 1954 SCR 310
[iii] 1960 (2) SCR 793
[iv] GmbH, 1961 (2) All ER 179
[v] https://www.linkedin.com/pulse/force-majeure-under-indian-contract-law-energy-v-cerc-srinivasan>,last accessed 26-02-2018, 17:02 PM
This article is written by Shipra Sayal of
Nirma University, Ahmedabad
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