Energy Watchdog - compiled PDF

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This is a case study of the famous Energy Watchdog Case....

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Slide 1 Greetings everyone! I Mannat Mehta from Corporate Law Journal welcome you all to this channel. As you know, the purpose of this initiative is to explore corporate literacy and impart legal education in simple and lucent manner. CLJ Judgment series is a unique idea to keep everyone informed about landmark rulings in corporate and commercial law. Today we are going to discuss a landmark judgment, Energy Watchdog Vs. Central Electricity Regulatory Commission and Ors., commonly known as the “Energy Watchdog case” passed by the Supreme Court in 2017 on the matter of “Force Majeure”. Before starting today’s session, I would like to request you all to please subscribe to the channel and press the bell icon for more updates on corporate and commercial laws. Slide 2 QUESTION OF LAWIn the present matter, we’ll be discussing whether Force Majeure can Be Invoked as a Statutory Defense Regardless of the Contractual Terms? Slide 3 FACTSTo give you a gist of the backdrop, the facts matrix, the respondents in the present appeal, 1. Gujarat Urja Vikas Nigam Limited, on 1st February, 2006, 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. 2. Similarly, Haryana Utilities also initiated a separate competitive bidding process for purchase of 2000 MW on a long term basis on 25th May, 2006. The participating bidders were also entitled to quote bids on the lines of the GUVNL public notice.

3.

On 11th January, 2007, the Adani Enterprises Consortium (herein afterwards referred to as “Appellants”) was selected by Respondents as the successful bidder for supply of 1000 MW of power and a Letter of Intent was issued in its favor, quoting a non-escalable tariff charge.

4. After being declared as the successful bidder, on 2 nd February, 2007Adani Power and Gujarat UrjaVikas Nigam Limited entered into Power Purchase Agreement (PPA) for supply of power from a power project being set up at Korba in Chhattisgarh. This was changed toa Mundra Project in Gujarat, for which a supplementary PPA was signed on 18th April, 2007. 5. As Adani Power was also declared as the successful bidder in Haryana for supply of 1424 MW on 17th July, 2008 and a Letter of Intent was issued. Two separate PPAs were executed by Adani Power with two Haryana entities for supply of 712 MW of power to each of them from the Mundra Power Project. 6. In and around 2010& 2011 a change in law in Indonesia took place 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.

Slide 4 7. As a result of this Adani Power filed a petition before the Central Electricity Regulatory Commission on 5th July, 2012under 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 force majeure and/change in law. 8. The Central Electricity Regulatory Commission did not accept the prayer of Adani but in its order dated 2nd April 2013, it held that the Central Electricity Regulatory Commission 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. 9. 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 Central Electricity Regulatory Commission proceeded to grant compensatory tariff as per order dated 21stFebruary 2014. Appeals and cross-appeals were filed.

10. On 31st October, 2014 the Appellate Tribunal rejected the prayer for condonation of delay and consequently Appeal was filed by Adani Power against this order before the Supreme Court, and, in its order dated 31st March, 2015 it held that the Appellant (Adani Power) is entitled to argue any proposition of law, be it “force majeure” or “change in law” in support of the order dated 21.2.2014 quantifying the compensatory tariff. 11. Finally, on 7th April, 2016 the Appellate Tribunal passed the impugned judgment and it held that generation and sale of power by Adani Power to Gujarat Urja Vikas Nigam Limited and Haryana Utilities was a composite scheme within the meaning of Section 79(1) (b) of the Act and that, therefore, the Central Commission would have jurisdiction to proceed further in the matter. The Appellate Tribunal considered the Supreme Court order dated 31st March, 2015. It ultimately concluded, having regard to the law on frustration contained in the Indian Contract Act, 1872 and the relevant provisions of the PPAs, that force majeure was made out on the facts of these cases and reversed the Commission on this score.It also held that change in law provisions do not apply to foreign law and, therefore, changes in Indonesian law did not come within the scope of the provisions 12. The Appellate Tribunal for Electricity (APTEL) on 6th December, 2016 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 by its order dated 6.12.2016 has arrived at a certain determinationas to compensatory tariff to be granted on account of force majeure. Slide 5: Issues and Arguments: Moving forward, lets discuss the issues raised and arguments advanced by the both the parties in the present case. The Energy Watchdog case primarily revolves around two major issues arisen out of the petition filed by the appellants with a relief 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 the occurrence of the change in law. The first issue questions how far the doctrine of frustration can be stretched and the second issue involves the interpretation of the term ‘Change in Law’ in the Power Purchase Agreement.

Slide 6 The first issue involved in the case regarding the frustration of contract as contended by the appellants limits itself to the basic fundamental constituent to the contract. The appellants argued that the performance of the contract was hindered as a result of an astronomical rise in the prices of the Indonesian coal and hence, a force majeure event was bound to take place. The appellants stated that the fundamental basis of the contract was the fuel supply agreement that was to be entered into and that the fuel-supply agreement and imported coal were important elements of both the bid and the PPAs. Accordingly, non-escalable tariffs do not lead to the conclusion that if a source of coal becomes unavailable in a manner that completely undermines the basis of the bid, the tariffs cannot be adjusted. It was contended that the contract had become commercially impracticable, and that they would have to fold up operations, which would not be in public interest. A large part of the arguments presented by the appellants were centered around the meaning of the expression “frustration” in the Indian Contract Act and the correct construction of clause 12 of the PPA. Slide 7 On the other hand, the respondents argued that force majeure must be an unforeseeable event or circumstance that wholly or partially prevents the affected party in performance of its obligations under the agreement and that the force majeure clause is only inclusive and not exhaustive. It was contended that the appellants had voluntarily decided to quote energy charges as nonescalable in order to be competitive and, therefore, get the award of the contract and cannot now, in the guise of being affected by force majeure, convert this into escalable tariff. It was further argued that the bid given by the appellants and the fundamental basis of the PPAs between the parties was not premised on the import of coal from Indonesia only and this being the case, it was open for them to get coal from any other source. The Court in the judgment on this point restricted the concept of ‘Force Majeure’ to a narrow purview and therefore, held that mere escalations in the cost of the project due to some contingent event, being change in the price of Indonesian Coal Export, cannot be constituted as ‘hindrance’ under section 56 of the Indian Contract Act and therefore, any change in the price of Indonesian coal export does not in any way contrast with the fundamental principles of the contract so made. The very genesis that 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 and hence, the doctrine of frustration remains inapplicable to the present case. Slide 8 The second issue before the court was to decide whether the phrase “Change in law” includes just change in law of the land or change in Non-Indian laws as well. The appellants argued that the change in law clause is very wide and since the PPA deals with imported coal, change in law

would also cover foreign law and that where the PPA had to restrict a particular clause to Indian law, it did so expressly. It was submitted that the guidelines published by the Government dated January 19, 2005 make it clear that any change in law, either abroad or in India, would result in consequential rise in price of coal being given to the power generators. It was argued that “change in law” is not qualified and therefore, would include foreign law. According to them, the power purchase agreement is subservient to the guidelines and can never negate the terms of the guidelines. It was also argued that if reliance is to be placed upon the fact that a commercial contract is to be interpreted in a manner which gives business efficacy to such contract and that the subject matter of the PPA is “imported coal”, then the expression “any law” as mentioned in the PPA would also refer to laws governing coal that is imported from other countries. Slide 9 On the other hand, the respondents argued that there is no change in law and that change in law applies to Indian and not Indonesian law and furthermore, that a change in the tariff policy in India will also not constitute a change in law. With respect to this, the 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. However, since the coal supplier prices weren’t affected by change in Indonesian law, therefore, 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. It was also held that change in law provisions do not apply to foreign law and, therefore, changes in Indonesian law did not come within the scope of the provisions. Slide 10-11 FINDINGS OF THE COURT Now lets discuss the findings of the court in the present case. With respect to issue one, FORCE MAJEURE: ISSUE 1 The court held that the appellants, Adani Enterprises Consortium are entitled to argue force majeure and change in law in the view of determining the quantum of compensatory tariff. Further, the Apex court cited a very famous case of Satyabrata Ghose v. MugneeramBangur& Co wherein the Court finds that the contract itself either impliedly or expressly contains a term,

according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56. Further in the case of M/s Alopi Parshad& Sons Ltd. v. Union of India, held that the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. The Apex Court after taking into consideration the above landmark pronouncements held that doctrine of frustration cannot apply to these cases as the fundamental basis of the PPAs remains unaltered. Nowhere do the PPAs state that coal is to be procured only from Indonesia at a particular price. In fact, it is clear on a reading of the PPA as a whole that the price payable for the supply of coal is entirely for the person who sets up the power plant to bear. The Court also held that it is clear that an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.SC emphasized that alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated. The Apex court in its final submission held that as has been held in particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application. On this short ground, this alternative submission of force majeure stands disposed of. Slide 12 CHANGE IN LAW: ISSUE 2 Coming to second issue, The court held that the term ‘electricity’ laws’ and clause 13 which defines ‘change in law’ of the PPA should be read together and that does not involve changes in Indonesian law, being foreign and not Indian Law. Electricity laws, as has been seen from the definition, means the Electricity Act, rules and regulations made there under from time to time, and any other law pertaining to electricity. This being so, it is clear that the expression “in force in India” in the

definition of ‘law’ goes with “all laws” and thereby interpreted the above clause to mean that change in law included only a change in the Indian laws. This interpretation was supported by the fact that Clause 13.1.2 of the PPA defined “competent court” to mean only the Indian judiciary and hence the various kinds of ‘enactments’ contained in Clause 13.1.1 would also refer only to Indian law. Thus, the change in Indonesian law did not clear the test either, the court held that the contract shall be strictly governed by the clauses of the PPA rather than by the discretion of court....