Supreme Court clarifies the scope of arbitration under the Electricity Act in a dispute between a licensee and consumer: Hindustan Zinc vs. Ajmer Vidyut Vitran Nigam (2019)

Date of the Judgment: December 04, 2019
Citation: 2019 INSC 1148
Judges: Rohinton Fali Nariman, J., Aniruddha Bose, J., V. Ramasubramanian, J.
Can a dispute between a power distribution company and a consumer be resolved through arbitration under the Electricity Act, 2003? The Supreme Court recently addressed this question, clarifying the scope of arbitration under the Act. The core issue revolved around whether the Rajasthan Electricity Regulatory Commission could appoint an arbitrator to resolve a dispute over unscheduled interchange charges between Hindustan Zinc Limited and Ajmer Vidyut Vitran Nigam Limited. The Supreme Court held that such disputes do not fall under the ambit of arbitration as defined in Section 86(1)(f) of the Electricity Act, 2003. The majority opinion was authored by Justice Rohinton Fali Nariman.

Case Background

Hindustan Zinc Limited (HZL) has four high-tension electricity connections for its units at Chanderiya, Debari, Aghucha, and Dariba. HZL entered into contracts with Ajmer Vidyut Vitran Nigam Limited (AVVNL) for the purchase of electricity for these units. In February 2005, HZL commissioned a 154 MW captive power plant at Chanderiya, synchronizing it with the Rajasthan Vidyut Prasarran Nigam Limited Grid. HZL then sought short-term open access to the grid’s transmission and distribution systems. On March 10, 2005, HZL entered into three open access agreements with AVVNL for wheeling power from its captive plant to its units at Aghucha, Debari, and Dariba. Open access commenced on March 24, 2005, with power injected at grid substations in Chittorgarh and transmitted via AVVNL’s system to HZL’s units.

A dispute arose regarding unscheduled interchange (UI) charges payable under Clauses 8 and 9 of the open access agreements. These clauses detailed the procedure for scheduling open access power and the settlement of mismatches between scheduled and actual power injection/drawl.

Timeline

Course of Proceedings

Initially, the Rajasthan Electricity Regulatory Commission (RERC) stated it would decide the dispute between HZL and AVVNL. However, on February 12, 2007, the RERC appointed an Arbitrator under Section 86(1)(f) read with Section 158 of the Electricity Act, 2003. The Arbitrator, on August 25, 2007, struck down Clauses 8(c) and 9 of the open access agreements. This award was challenged by HZL before the Commercial Court under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed on February 25, 2017. Subsequently, the High Court of Judicature for Rajasthan, Jaipur Bench, reversed the Commercial Court’s order in a Section 37 appeal on April 5, 2018, stating that the dispute was outside the scope of Section 86 of the Electricity Act.

Legal Framework

The Supreme Court examined Section 42 and Section 86 of the Electricity Act, 2003. Section 42 outlines the duties of distribution licensees and the provisions for open access. It states:

“Section 42. (Duties of distribution licensee and open access): — (1) It shall be the duty of a distribution licensee to develop and maintain an efficient co-ordinated and economical distribution system in his area of supply and to supply electricity in accordance with the provisions contained in this Act.”

Section 86 of the Electricity Act, 2003, specifies the functions of the State Commission, including the adjudication of disputes. Specifically, Section 86(1)(f) states:

“Section 86. Functions of State Commission.- (1) The State Commission shall discharge the following functions, namely: – (f) adjudicate upon the disputes between the licensees, and generating companies and to refer any dispute for arbitration;”

The Court also noted the Open Access Regulations of 2004, which provide a three-tier hierarchy for resolving disputes between distribution licensees and consumers. Additionally, Section 42(6) of the Electricity Act provides for an Ombudsman to address consumer grievances.

Arguments

Appellant (Hindustan Zinc Limited) Arguments:

• The appellant argued that the challenge to the Arbitrator’s award before the Commercial Court was solely on merits. The issue of the Arbitrator’s jurisdiction was not raised. Both parties had agreed to the arbitration order dated 12.02.2007. The appellant contended that the respondent could not challenge the Arbitrator’s appointment at a later stage.

Respondent (Ajmer Vidyut Vitran Nigam Limited) Arguments:

• The respondent argued that the High Court was correct in holding that the Arbitrator’s appointment was without jurisdiction. The respondent contended that Section 86(1)(f) of the Electricity Act applies only to disputes between licensees and generating companies, not between licensees and consumers. The respondent further argued that the appellant was acting as a consumer and not a generating company in this case.

• The respondent also pointed out that the Electricity Act provides a separate mechanism for resolving disputes between distribution licensees and consumers through the Ombudsman under Section 42(6).

Submissions Categorized by Main Arguments:

Innovativeness of the argument: The respondent’s argument that the appellant was acting as a consumer and not as a generating company, thus falling outside the scope of Section 86(1)(f), was crucial in establishing that the arbitrator’s appointment was invalid.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the appointment of the Arbitrator by the Rajasthan Electricity Regulatory Commission under Section 86(1)(f) read with Section 158 of the Electricity Act, 2003, was valid in a dispute between a distribution licensee and a consumer (open access consumer) regarding unscheduled interchange charges.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

The Supreme Court also considered the following legal provisions:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Kiran Singh and Others v. Chaman Paswan and Others (1955) 1 SCR 117*: The Supreme Court relied on this case to affirm that a decree passed without jurisdiction is a nullity and can be challenged at any stage, even in collateral proceedings. This principle was crucial in rejecting the appellant’s argument that the respondent could not challenge the arbitrator’s jurisdiction after consenting to the arbitration.
• Gujarat Urja Vikas Nigam Ltd. v. Essar Power Ltd. (2008) 4 SCC 755*: The Supreme Court used this case to interpret Section 86(1)(f) of the Electricity Act, 2003. The Court reiterated that the word “and” in Section 86(1)(f) should be read as “or” to avoid an anomalous situation where the State Commission would both decide a dispute and refer it to arbitration. It also emphasized that Section 86(1)(f) is a special provision that overrides the general provisions of the Arbitration and Conciliation Act, 1996, in disputes between licensees and generating companies.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of Section 86(1)(f) of the Electricity Act, 2003, and the principle that a lack of inherent jurisdiction can be raised at any stage of the proceedings. The Court emphasized that the legislative intent of Section 86(1)(f) was to provide a mechanism for dispute resolution between licensees and generating companies, not between licensees and consumers. The Court also considered the fact that the Electricity Act provides a separate mechanism for resolving disputes between distribution licensees and consumers through the Ombudsman under Section 42(6). This demonstrates the Court’s focus on adhering to the statutory framework and ensuring that the correct procedures are followed in dispute resolution.

Fact:Law Ratio

The court’s reasoning was heavily based on legal interpretation and statutory analysis. While the factual context of the dispute was considered, the court’s decision was primarily driven by the legal framework and the correct interpretation of Section 86(1)(f) of the Electricity Act, 2003.

Logical Reasoning:

The Court considered the argument that the parties had consented to arbitration but rejected it, citing the principle that a lack of inherent jurisdiction cannot be cured by consent. The Court also noted that the Electricity Act provides a separate mechanism for resolving disputes between distribution licensees and consumers through the Ombudsman under Section 42(6), indicating that the legislative intent was not to include such disputes under Section 86(1)(f).

The Supreme Court held that the High Court was correct in stating that the Arbitrator could not have been appointed under Section 86 of the Electricity Act. The Court stated that the award based on such appointment would be non est in law.

The Court observed that the High Court had also discussed the merits of the Award, but clarified that if the appellant wished to avail any other remedy in law, none of the observations made by the High Court regarding the merits of the award would stand in its way.

The Court quoted the following from the judgment:

“It is a fundamental principle well-established that a decree passed by a Court without jurisdiction is a nullity, and that its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon, even at the stage of execution and even in collateral proceedings.”

“In our opinion in Section 86(1)(f) of the Electricity Act, 2003 the word ‘and’ between the words ‘generating companies’ and the words ‘refer any dispute’ means ‘or’, otherwise it will lead to an anomalous situation because obviously the State Commission cannot both decide a dispute itself and also refer it to some Arbitrator.”

“This being the case, the High Court is right in stating that the Arbitrator could not, in law, have been appointed by the State Commission under Section 86 of the Electricity Act. The Award based on such appointment would be non est in law.”

There were no dissenting opinions.

Key Takeaways

• Scope of Section 86(1)(f): Section 86(1)(f) of the Electricity Act, 2003, applies only to disputes between licensees and generating companies, not between licensees and consumers.
• Jurisdiction: An arbitrator appointed under Section 86(1)(f) lacks jurisdiction to resolve disputes between a distribution licensee and a consumer.
• Alternative Dispute Resolution: Disputes between distribution licensees and consumers regarding open access should be resolved through mechanisms provided under Section 42 of the Electricity Act, 2003, such as the Ombudsman.
• Validity of Arbitral Awards: An arbitral award issued without jurisdiction is considered non est in law and can be set aside at any stage of the proceedings.
• Consent does not confer jurisdiction: Even if parties consent to arbitration, it does not validate the appointment of an arbitrator if the appointment is without jurisdiction.

Directions

The Supreme Court did not give any specific directions in this case. However, it did clarify that the observations made by the High Court on the merits of the award would not stand in the way of the appellant if it wished to avail itself of any other remedy in law.

Development of Law

The ratio decidendi of this case is that Section 86(1)(f) of the Electricity Act, 2003, does not apply to disputes between distribution licensees and consumers. This judgment clarifies the scope of arbitration under the Electricity Act, ensuring that disputes are addressed through the correct legal mechanisms. It also reinforces the principle that a lack of inherent jurisdiction cannot be cured by consent. This judgment does not change the previous position of law but clarifies the interpretation of Section 86(1)(f) of the Electricity Act, 2003.

Conclusion

The Supreme Court’s judgment in Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Limited clarifies that disputes between a distribution licensee and a consumer do not fall under the purview of arbitration as defined in Section 86(1)(f) of the Electricity Act, 2003. The Court emphasized that this section is specifically for disputes between licensees and generating companies. The decision underscores the importance of adhering to the statutory framework and using the correct legal mechanisms for dispute resolution. The Court upheld the High Court’s decision, setting aside the arbitral award and clarifying that such disputes should be resolved through alternative mechanisms like the Ombudsman under Section 42 of the Electricity Act.

Category:

Electricity Act, 2003

✓ Section 86, Electricity Act, 2003

✓ Arbitration

✓ Open Access

✓ Dispute Resolution

✓ Electricity Distribution

✓ Consumer Rights

✓ Generating Companies

✓ Licensees

✓ Ombudsman

✓ Jurisdiction

FAQ

Q: What is the main issue in the Hindustan Zinc Limited v. Ajmer Vidyut Vitran Nigam Limited case?

A: The main issue was whether a dispute between a power distribution company (licensee) and a consumer regarding unscheduled interchange charges could be resolved through arbitration under Section 86(1)(f) of the Electricity Act, 2003.

Q: What did the Supreme Court decide about the scope of Section 86(1)(f) of the Electricity Act, 2003?

A: The Supreme Court clarified that Section 86(1)(f) of the Electricity Act, 2003, applies only to disputes between licensees and generating companies, not between licensees and consumers.

Q: What is the correct mechanism for resolving disputes between a distribution licensee and a consumer?

A: Disputes between distribution licensees and consumers should be resolved through mechanisms provided under Section 42 of the Electricity Act, 2003, such as the Ombudsman, and not through arbitration under Section 86(1)(f).

Q: What happens if an arbitrator is appointed without jurisdiction?

A: An arbitral award issued by an arbitrator appointed without jurisdiction is considered non est in law and can be set aside at any stage of the proceedings.

Q: Does the consent of parties validate an arbitration if the arbitrator’s appointment is without jurisdiction?

A: No, the consent of parties does not validate the appointment of an arbitrator if the appointment is without jurisdiction. A lack of inherent jurisdiction cannot be cured by consent.