Supreme Court Clarifies “Change in Law” in Power Purchase Agreements: Haryana Power Purchase Centre vs. Sasan Power Ltd (2023)

Date of the Judgment: April 6, 2023
Citation: 2023 INSC 326
Judges: K.M. Joseph, J. and B.V. Nagarathna, J.
Can a power generating company claim compensation for increased costs due to a change in the interpretation of law, even when the original contract disclaims liability for such changes? The Supreme Court of India recently addressed this complex issue in a dispute between Haryana Power Purchase Centre and Sasan Power Ltd, clarifying the scope of “Change in Law” clauses in Power Purchase Agreements (PPAs). The court’s decision impacts how risks are allocated in long-term power contracts and sets a precedent for similar disputes.

Case Background

The case revolves around a dispute arising from a Power Purchase Agreement (PPA) for an Ultra Mega Power Project (UMPP) in Sasan, Madhya Pradesh. The project was awarded to Sasan Power Ltd (first respondent) through a competitive bidding process. The power generated was to be supplied to distribution licensees (appellants), who would then supply it to consumers. The bidding process was governed by guidelines issued by the Central Government under Section 63 of the Electricity Act, 2003.

The dispute arose when Sasan Power Ltd claimed compensation for increased project costs, citing a “Change in Law” during the construction period. These claims included increased costs for the water intake system and customs duty on imported mining equipment.

Timeline

Course of Proceedings

The Central Electricity Regulatory Commission (Commission) initially rejected Sasan Power Ltd’s claims, stating that the increased costs did not qualify as a “Change in Law” under the PPA. Sasan Power Ltd then appealed to the Appellate Tribunal for Electricity (Tribunal). The Tribunal overturned the Commission’s decision, holding that the procurers could not use the disclaimer clauses to avoid liability for providing erroneous information in the WAPCOS report. The Tribunal also held that the customs duty issue needed re-examination. The Tribunal remanded the matter back to the Commission for reconsideration. The Commission then ordered payment of Rs. 176 crores for the water intake system. However, the Commission rejected the claim for compensation on the customs duty on the basis that the goods had been imported by the parent company of the first respondent and not the first respondent itself. This order was again appealed before the Tribunal.

Legal Framework

The core legal issue revolves around the interpretation of the “Change in Law” clause in the PPA, specifically Article 13.1.1, which defines “Change in Law” as:

“13.1.1 “Change in Law” means the occurrence of any of the following events after the date, which is seven(7) days prior to the Bid Deadline: (i) the enactment, bringing into effect, adoption, promulgation, amendment, modification or repeal, of any Law or (ii) a change in the interpretation of any Law by a Competent Court of Law, tribunal or Indian Governmental Instrumentality provided such Court of Law, tribunal or Indian Governmental Instrumentality is final authority under law of such interpretation or (iii) change in any consents, approvals or licenses available or obtained for the Project, otherwise than for default of the Seller, which results in any change in any cost of or revenue from the business of selling electricity by the Seller to the Procurers under the terms of this Agreement, or (iv) any change in the (a) Declared Price of Land for the Project or (b) the cost of implementation of the resettlement and rehabilitation package of the land for the Project mentioned in RFP or (c) the cost of implementing Environmental Management Plan for the Power Station mentioned in the RFP or (d) the cost of implementing compensatory afforestation for the Coal Mine, indicated under the RFP and the PPA; but shall not include (i) any change in any withholding tax on income or dividends distributed to the shareholders of the Seller, or (ii) change in respect of UI Charges or frequency intervals by an Appropriate Commission.”

The PPA also includes Article 17, which deals with dispute resolution, and Article 17.3.1 which states:

“Where any Dispute arises from a claim made by any Party for any change in or determination of the Tariff or any matter related to Tariff or claims made by any Party which partly or wholly relate to any change in the Tariff or determination of any of such claims could result in change in the Tariff or (ii) relates to any matter agreed to be referred to the Appropriate Commission under Articles 4.7.1, 13.2, 18.1 or clause 10.1.3 of Schedule l 7 hereof, such Dispute shall be submitted to adjudication by the Appropriate Commission. Appeal against the decisions of the Appropriate Commission shall be made only as per the provisions of the Electricity Act, 2003, as amended from time to time.”

The Supreme Court also considered Section 63 and Section 79 of the Electricity Act, 2003. Section 63 allows for tariff adoption through a transparent bidding process, while Section 79 empowers the Central Commission to regulate tariffs.

Arguments

Appellant’s Arguments

• The Tribunal erred in granting relief on the basis of an erroneous report by WAPCOS, as the PPA contained disclaimer clauses that absolved the procurers of any liability for inaccuracies in the report.
• The first respondent was required to conduct its own site study and verify the information provided in the WAPCOS report.
• The second WAPCOS report does not discredit the first report, and the first respondent unilaterally commissioned the second report.
• The office memorandum issued by the Joint Secretary is not a “change in law” as the Joint Secretary is not the final authority under law for such interpretation.
• The first respondent should have sought a refund from the customs department instead of passing the burden to the procurers.
• The Tribunal cannot rewrite the contract and create a new bargain for the parties.

Respondent’s Arguments

• The PPA is not an ordinary contract but a long-term power procurement contract subject to regulatory oversight.
• The change in the water intake system location was a “change in law” because the procurers failed to provide adequate water linkage as per Schedule II of the PPA.
• The disclaimer clauses cannot absolve the procurers of liability for providing a grossly erroneous report.
• The Tribunal has the power under Section 79(1)(b) of the Electricity Act, 2003 to revisit the fixation of tariff to ensure fairness.
• The amended guidelines and Article 17.3.1 of the PPA provide a general power to change the tariff.
• The principle of contra proferentem should be applied, as the procurers had more control over the bidding process.
• The first respondent relied on the WAPCOS report, and the procurers should not benefit from the errors in the report.
• The first respondent should be compensated to the same economic position as if the change in law had not occurred.
• The office memorandum issued by the Joint Secretary in the Ministry of Power constituted a change in interpretation of law.

Issues Framed by the Supreme Court

1. Whether the increased cost of the water intake system due to the change in location constitutes a “Change in Law” under Article 13.1.1 of the PPA?
2. Whether the office memorandum issued by the Joint Secretary in the Ministry of Power constitutes a “change in interpretation of any law” by an Indian Governmental Instrumentality within the meaning of Article 13.1.1 of the PPA?

Treatment of the Issue by the Court

Authorities

Judgment

Authorities Viewed by the Court:

• The Supreme Court relied on Energy Watchdog v. Central Electricity Regulatory Commission and Others (2017) 14 SCC 80* to clarify the regulatory powers of the Central Commission and the interpretation of Section 63 of the Electricity Act, 2003.
• The Supreme Court also referred to Uttar Haryana Bijli Vitran Nigam Ltd. & Anr. v. Adani Power Limited & Ors. (2019) 5 SCC 325* to interpret the restitutionary principle in Article 13.2 of the PPA.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the specific terms of the PPA, particularly the disclaimer clauses. The court emphasized that the parties had entered into a meticulously drafted contract, and it was not the court’s role to rewrite the contract or create a new bargain. The court also noted that the first respondent had not independently challenged the finding of the Tribunal that there was no change in law. The court also noted that the first respondent had not given notice of change in law as required in the contract. The court also emphasized that the first respondent had not proved that the goods in question were exempt before the cut-off date.

Logical Reasoning:

The court rejected the first respondent’s arguments, emphasizing the importance of adhering to the terms of the contract. The court also noted that the first respondent had failed to provide sufficient evidence that there was a change in law.

“We are of the view that the Tribunal cannot indeed make a new bargain for the parties. The Tribunal cannot rewrite a contract solemnly entered into. It cannot ink a new agreement. Such residuary powers to act which varies the written contract cannot be located in the power to regulate. The power cannot, at any rate, be exercised in the teeth of express provisions of the contract.”

“The argument that the procurers agreed to the acquisition of the land through which the new route had to travel also does not appeal to us as firmly founding the claim of the first respondent in law. The matter must be viewed from the prism of the specific provisions defining the change in law and the actual change in law which is as we have explained above.”

“In short, being awarded a contract and having entered into the PPA and without any basis as such in facts, the first respondent ventured to commission a new study and acting on the same, a new pipeline corridor came on the scene. Necessarily the cost may go up. But the question we are to decide is as to whether it is change in law and we are of the view that it could not be a change in law as contemplated in the agreement as it is not a change in initial consent which is the only case which has been argued in this regard.”

The court also rejected the argument that the Tribunal had the power to disregard the express provisions of the contract.

The court set aside the Tribunal’s order and also the order passed by the Commission consequent to the remand.

Key Takeaways

• Disclaimer clauses in PPAs are enforceable and can protect procurers from liability for inaccuracies in reports provided during the bidding process.
• Bidders are expected to conduct their own due diligence and cannot solely rely on information provided by procurers.
• A “Change in Law” clause must be interpreted strictly, and the burden of proof lies on the party claiming a change in law.
• The regulatory power of the Commission cannot override the express terms of a contract.
• A party cannot claim compensation for increased costs due to errors in a report where the contract explicitly disclaims liability for such errors.

Directions

The Supreme Court set aside the impugned order of the Tribunal. The order also benefits the three respondents who did not file an appeal. The consequential order passed by the Commission also cannot survive. The appeals filed will also lose their force.

Development of Law

The Supreme Court’s judgment clarifies the scope of “Change in Law” clauses in PPAs. It emphasizes that such clauses should be interpreted strictly and that the regulatory powers of the Commission cannot override the express terms of a contract. The judgment also reinforces the importance of due diligence by bidders in competitive bidding processes. The ratio decidendi of the case is that the Tribunal cannot rewrite the contract and create a new bargain for the parties and that the disclaimer clauses in the PPA are enforceable.

Conclusion

The Supreme Court’s decision in Haryana Power Purchase Centre vs. Sasan Power Ltd provides important clarity on the interpretation of “Change in Law” clauses in Power Purchase Agreements. The court emphasized the importance of upholding the express terms of contracts and the need for bidders to conduct their own due diligence. The judgment sets a precedent for similar disputes and clarifies the limits of regulatory intervention in contractual matters.