Recently, newspapers reported that certain power producers proposed to sell large amount of their stake in the Ultra Mega Power Projects. The proposal to sell their stakes is a direct outcome of the recent decision of the Supreme Court of India in Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors. The dispute between power producers such as the Tata Power Co. Ltd. (“Tata”) and Adani Power Ltd. (“Adani”) on the one hand and the electricity regulators on the other was adjudicated upon finally by the Supreme Court by ruling in favour of the latter.
Followers of commercial law in India would be well aware of this issue on compensatory tariff allowed by the Central Electricity Regulatory Commission and the appellate proceedings thereon in the case of these power producers. The case has enormous implications on contract law, in general, and the law on force majeure, in particular. The seminal decision also impacts energy and regulatory laws. This post analyses the decision and its possible impact on contract law and the electricity sector in India.
Brief Facts
Mundra Ultra Mega Power
Project (“MUMPP”) was conceived to be a huge power project which was to supply
power to at least three states- Gujarat, Haryana and Rajasthan through the state
power procurers. The tariff for the sale of power was to be determined through
a competitive bidding process as per the electricity regulatory laws, which was
undertaken. In the competitive bidding process, the bidders had the flexibility
to choose escalable or non-escalable tariff (that is, tariff based on an increase
in tariff formula). Both Adani and Tata quoted a non-escalable tariff. This was
because the only major component that required an escalable tariff was an
increase in fuel (coal) price. Since Adani and Tata had long term fuel supply
agreements from coal mines in Indonesia at fixed/ predictable prices, there was
no need to factor in price escalation.
Accordingly the lowest
tariff was arrived at and power producers began to sell power at the said
tariff after executing Power Purchase Agreements (PPAs) with the state power
procurers. In two-three years after the determination of tariff, there was a
massive jolt to the power producers in the form of new regulations passed by the
Indonesian Government. The effect of these regulations was that the coal price
under the long term fuel supply agreements was to be benchmarked to the international
prices instead of the then prevailing pricing mechanisms. This meant that the
price under those agreements had drastically increased, thereby making the
tariff at which these price producers sold price to the power procurers totally
unviable. It may be recollected that a non-escalable tariff was quoted because
of the long term fuel supply agreements.
Proceedings before the CERC and the APTEL
Consequently, Adani
filed an application in 2012 with the Central Electricity Regulatory Commission
(CERC) under the Electricity Act either to discharge them from performance of
the PPA due to frustration of contract or to evolve a mechanism to restore them
to the same economic position prior to occurrence of force majeure and/ change
in law. The CERC did not accept the prayer of Adani but held in April 2013 that
the CERC had the power to redress grievances of power producers considering larger
public interest and constituted a committee to look into the difficulties of
power producers so as a to find an acceptable solution. A Committee was
constituted in August 2013 and the Committee recommended grant of compensatory
tariff to Adani in its report. Consequent to the report, the CERC proceeded to
grant compensatory tariff in February 2014.
Against this decision,
appeals and cross-appeals were filed before the Appellate Tribunal for
Electricity (APTEL). A summary of APTEL’s decision on the dispute is worth noting
here:
- Performance of the PPAs was hit by force majeure under the provisions of the Indian Contract Act, 1872 (ICA).
- Changes in Indonesian law did not come within the purview of “Change of Law” clause in the PPA.
- The purported power exercised by the Commission in constituting a committee and awarding compensatory tariff was beyond the statutory mandate of the Commission and the terms and conditions of the sale and purchase of power was governed by the PPAs.
- Where there is an express or implied term of contract on force majeure, the same is covered under Section 31 of the ICA dealing with contingent contracts. Where there is no such term, force majeure is governed by Section 56.
- In Indian law, under Section 56, as held in Satyabrata Ghose v. Mugneeram Bangur 1954 SCR 310 impossibility is not simply physical or literal impossibility but means impracticability and futility in performance from the perspective of object and purpose of the parties.
- A more onerous performance method of performance or a mere rise in price would not amount to frustration.
- Application of the frustration doctrine required a multi-factorial approach and some of the factors that are to be considered are the contract itself, the context, the parties’ knowledge, expectations, assumptions and contemplations, especially as regards risk at the time of contracting which the parties could reasonably foresee.
- Application of the doctrine is not straightforward since it involves not only the contract but also an inquiry into the “contemplation of the parties”.
- The “Change of Law” contemplated in the PPA was only of Indian law and which were made by Indian Governmental Instrumentalities or Competent Courts in India.
- Certain clauses referred to the expression “Indian law” but such an expression nowhere found its place in the clause pertaining to “Change of Law”. Consequently, it would be dangerous to interpret the Change of Law clause merely on the basis of such usage in other parts of the PPA.
- For these reasons, the contention that since the PPA envisaged import of fuel, Law should also be taken to mean non-Indian law should also be negated.
The APTEL remanded the matter
back to the Commission to determine the impact of force majeure so as to grant
compensatory tariff to the power producers. The Commission arrived at a
compensatory tariff in December 2016.
Judgement of the Supreme Court
Appeals were filed to the Supreme Court. The Supreme Court held
against the power producers on the force majeure as well as the change of law
arguments.
Summary of the judgement of the Supreme Court on contentions
relating to force majeure is given below:
- The doctrine of frustration is inapplicable to the present case as the fundamental basis of the PPA remains unaltered, the PPA nowhere states that coal is to be procured only from Indonesia at a particular price, and the fuel supply agreement is only a part of the PPA to establish that fuel supply is available and is in order. When the power producers quoted the tariff, they very well knew the existence of the risk of increased prices of Indonesian coal and knowingly took it by quoting a non-escalable tariff. However, mere fact that they quoted non-escalable tariff does not mean that they would be disentitled from raising a plea of frustration if they were otherwise entitled to under law.
- Force majeure clauses are to be narrowly construed. On a construction of the force majeure clause in the PPA, “Hindrance” could mean an event wholly or partly preventing performance.But mere rise in prices is not hindrance, whole or part. Clause 12.4 specifically excluded rise in fuel cost or agreement becoming onerous to perform from the purview of force majeure.
- Since Clause 12.4 specifically excluded rise in fuel cost from force majeure, since the fundamental basis of the contract was never dislodged and since alternative modes of performance were available even though at a higher price, there was no force majeure. Further, since there was a specific clause addressing force majeure, Section 56 did not have any application.
Another argument taken
up by the power producers was that the change in Indonesian regulations fell
within the scope of the “change of law” clause in the PPA and that they were entitled
to relief under the said clause. Among other things, the PPA defined “Law” to
mean “all laws including Electricity Laws
in force in India… and any statute…. Or any interpretation of any of them by an
Indian Governmental Instrumentality... and shall include all applicable rules…
by an Indian Governmental Instrumentality…” Article 13.2 of the PPA
provided that in case a party was affected by Change of Law, such party was
entitled to be restored through Monthly Tariff Payments to the same economic
position as if such change had not occurred. The Court dismissed the argument
of the power producers and the following is a summary of the judgement on this
aspect:
On facts, the court
also noted that there was a Change of Law insofar as a change in India law was
concerned. During the currency of the PPAs, the Ministry of Power issued a
Notification in 2013, which was reflected in the Revised Tariff Policy of 2016.
The Court held that if these notifications resulted in affecting Indian coal
procurement, the Change of Law clause would be applicable. But change in
Indonesian law affecting coal supply or prices would not amount of “Change of
Law” for PPA purposes.
The Court ultimately
set aside the decisions of the APTEL and the Commission and remanded the matter
back to the Commission on the minor issue as to determination of effect on
Change of Indian law on the power producers.
The decision of the Supreme
Court clarifying the law on the issue is of fundamental importance on several
counts. First, the judgement constitutes an important restatement on the law of
force majeure. Second, special word about RF Nariman, J. Since assuming
judgeship, he has passed several judgements clarifying and restating various
aspects of commercial law thereby rendering clarity and updating various contract
law concepts to the present times and breathing in fresh air to the 145 year
old Indian Contract Act, 1872. Third, in the context of regulatory law, the
decision offers clarity in the extent to which a tribunal/ court can go in
balancing the competing interests of protecting consumers on the one hand and
preserving the efficacy of the industry sought to be regulated on the other. Balancing
the competing aims of preserving the efficacy of the industry by upholding the
legitimate interests of the regulated on the one hand and protecting consumer
interests on the other is the fundamental challenge in regulatory law. This
case affords considerable clarity in the extent to which a regulator of a
tribunal could or could not rewrite contractual terms between the regulator and
the regulated.
The decision calls for
an off-the-cuff remark. One of the arguments of the power producers was that Section
56 ICA operated de hors the force majeure clause in PPA. It may be recollected
from the above analysis that the court negatived this contention. It would have
been great if RF Nariman, J. referred to the concept of default rules to
explain away how Section 56 operated as a default rule and how the PPA clause
on force majeure eclipsed Section 56 and occupied its field instead. Even so,
the effect of RF Nariman, J’s analysis remains the same.
One last remark. The decision
of the Supreme Court has received considerable criticisms from the power
industry. A direct result of the judgement has been that both Adani and Tata
have asked the State power procurers to take control of the power projects (see
here).
Adani seems to have discontinued power supply from its power plant (see here).
Experts also argue that the once-power surplus state of Gujarat could be facing
the risk of power scarcity (See here).
There is a strong argument that the power producers are to be protected
considering that they had invested in public goods which was meant for
consumption of the economy and that in case of failure to protect such
investors, economy, and ultimately, the consumers will suffer. From the other
end of the spectrum it has been argued that the power producers attempted to
engage in crony capitalism by entering into unviable contracts knowing fully
well that they could later demand renegotiation of the PPAs (see here).
The reality, perhaps, lies somewhere in between.
Power producers have
suggested two alternatives for the current arrangement. The first one is that
they would forego their security deposits under the PPA and that fresh bids
should be called from power generators. The second alternative is that the
state power procurers should import coal directly and that the power producers
would offer their power generation capacity (see here).
It will be interesting how this issue would be resolved. For now, the Centre
has taken a stand that the issue is for the power producers and the State power
procurers to resolve but it doubtable if the stance is correct considering that
the problem pertains to the nation as a whole.
