Supreme Court Orders Refund for Unreasonable Delay in Electricity Demand Reduction: Madras Aluminium Co. Ltd. vs. Tamil Nadu Electricity Board (2023) INSC 607 (06 July 2023)

Introduction

Date of the Judgment: 06 July 2023

Citation: (2023) INSC 607

Judges: B.R. Gavai, J., Sanjay Karol, J., and Aravind Kumar, J.

Can a state electricity board delay acting on a request to reduce contracted electricity demand for years, forcing a company to pay for unused power? The Supreme Court of India recently addressed this issue, examining whether such delays are arbitrary and unreasonable. This case revolves around a dispute between The Madras Aluminium Co. Ltd. and the Tamil Nadu Electricity Board concerning the reduction of contracted electricity demand and the subsequent charges. The judgment was delivered by a three-judge bench comprising Justice B.R. Gavai, Justice Sanjay Karol, and Justice Aravind Kumar, with the opinion authored by Justice Sanjay Karol.

Case Background

The Madras Aluminium Co. Ltd. (Appellant), established in 1965, is a power-intensive company involved in manufacturing aluminium. Due to financial difficulties, it was declared a ‘sick industrial unit’ in 1987. In 1994, a new management took over, and production resumed in 1995. Initially, the company’s maximum electricity demand was 67000 KVA, which was later reduced to 23000 KVA through an agreement on May 3, 1999. On December 24, 2001, the Appellant requested a further reduction to 10000 KVA, effective from January 27, 2002, offering to pay the necessary one-time charge. Despite this request, the Tamil Nadu Electricity Board (Respondent) did not take immediate action, continuing to bill the Appellant for 23000 KVA. This led to the Appellant paying charges under protest and filing petitions to seek redressal.

Timeline

Course of Proceedings

The Appellant initially filed writ petitions before the High Court of Madras, challenging the electricity board’s demand for charges based on the contracted 23000 KVA, despite their request to reduce it to 10000 KVA. The learned Single Judge dismissed the writ petitions, holding that the Appellant was bound to pay charges as per the contract. The High Court, in its appellate jurisdiction, upheld the Single Judge’s decision, stating that such disputes could not be adjudicated under Article 226 of the Constitution of India. The High Court also noted that the plea regarding similar applications being processed promptly was raised for the first time at the appellate stage.

Legal Framework

The case primarily revolves around the interpretation of the 1999 agreement between the Appellant and the Respondent. Key clauses from the agreement include:

• “Subject to the provisions hereinafter contained, the Board supply and the consumer shall take from the Board electrical energy for a maximum demand not exceeding 23000 KVA which shall be in contracted load for its exclusive use…”
• “From the date this agreement comes into force the consumer, shall be bound by and shall pay to the Board, maximum demand charges, energy charges, surcharges, meter rent and other charges, if any, in accordance with the tariff applicable…”
• “The consumer agrees that the board shall have the right to vary, from time to time, tariffs, general and miscellaneous charges and the terms and conditions of supply of electricity under this agreement…”
• “This agreement shall remain in force for a period of five years from the date of its commencement…and shall remain in force until it is terminated by either party as provided in the conditions of supply.”

The Supreme Court also considered the principles of fairness and reasonableness in state contracts, drawing from previous judgments. The Court referred to the principle that a contract cannot be amended unilaterally, as stated in Ssangyong Engg. & Construction Co. Ltd. v. National Highways Authority of India [(2019) 15 SCC 131]. The Court also emphasized that State actions, even in contractual matters, must adhere to Article 14 of the Constitution, ensuring fairness, reasonableness, and non-arbitrariness, as highlighted in Kumari Shrilekha Vidyarthi and Others v. State of U.P. and Others [(1991) 1 SCC 212]. Additionally, the concept of ‘reasonable time’ was discussed, citing Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari [(2019) 5 SCC 90] and Mansaram v. S.P. Pathak and Ors. [(1984) 1 SCC 125], which state that when no specific time limit is prescribed, actions must be taken within a reasonable period.

Arguments

Appellant’s Arguments:

• The Appellant argued that the electricity board’s refusal to alter the contract as requested imposed unfair costs on them.
• They contended that the board was obligated to grant permission for reduction, provided the payment as per Clause 19.02 was made.
• Referring to Clause 13.04, which allows for termination of the agreement with one month’s notice, the Appellant argued that their application dated December 24, 2001, should be treated as a notice of termination for the 13000 KVA reduction.
• The Appellant pointed out that similar applications were processed promptly, and the delay in their case was arbitrary and unreasonable.
• The Appellant emphasized that they had repeatedly followed up with the authorities to effectuate the reduction.

Respondent’s Arguments:

• The Respondent argued that the 1999 agreement stipulated that the request for reduction in maximum demand would not be effective until processed and approved by the board.
• They contended that the Appellant unilaterally amended the contract by reducing the maximum demand to 10000 KVA without their approval.
• The Respondent relied on the clauses of the 1999 agreement and the Terms and Conditions of Supply of Electricity to justify their position.
• The Respondent maintained that the Appellant was bound to pay charges as per the contracted demand in the absence of a sanction from the board.

Sub-submissions Categorized by Main Submissions

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the action of the Respondents in taking considerable time from when the application was made for reduction to 10000 KVA, to when the revised agreement was entered into, was arbitrary and unreasonable?
2. Contingently, whether the Appellant is entitled to a refund of the amount of difference between the amounts payable for 23000 KVA and 10000 KVA which, have been paid under protest?

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:

On the principle that a contract cannot be amended unilaterally:

• Ssangyong Engg. & Construction Co. Ltd. v. National Highways Authority of India [(2019) 15 SCC 131] – Supreme Court of India. The Court cited this case to emphasize that a unilateral alteration of a contract cannot be imposed on an unwilling party.

On the applicability of Article 14 to state contracts:

• Kumari Shrilekha Vidyarthi and Others v. State of U.P. and Others [(1991) 1 SCC 212] – Supreme Court of India. This case was used to highlight that state actions in contractual matters must adhere to the principles of fairness, reasonableness, and non-arbitrariness under Article 14 of the Constitution.
• Natural Resources Allocation, IN Re, Special Reference No.1 of 2012 [(2012) 10 SCC 1] – Supreme Court of India. This case was used to emphasize that “governmental policy” drawn with reference to contractual matters, must conform to the parameters of Article 14 of the Constitution of India.

On the concept of ‘reasonable time’:

• Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari [(2019) 5 SCC 90] – Supreme Court of India. This case was cited to support the principle that when no limitation period is prescribed, power must be exercised within a reasonable time.
• Mansaram v. S.P. Pathak and Ors. [(1984) 1 SCC 125] – Supreme Court of India. The Court referred to this case to reiterate that a power to effectuate a purpose must be exercised within a reasonable time.
• State of Gujarat v. Patel Raghav Natha [(1969) 2 SCC 187] – Supreme Court of India. This case was cited to illustrate that a delay of one year was considered too long for exercising revisional jurisdiction.
• Securities and Exchange Board of India v. Sunil Krishna Khaitan and Ors. [(2023) 2 SCC 643] – Supreme Court of India. This case was used to show the recent application of the principle of reasonable time.

On the relevant provisions of the 1999 Agreement:

• The Court considered the clauses of the 1999 agreement, particularly those related to maximum demand, payment of charges, and the board’s right to vary terms.

Table of Authorities Considered by the Court:

Judgment

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

How each authority was viewed by the Court?

✓ Ssangyong Engg. & Construction Co. Ltd. v. National Highways Authority of India [(2019) 15 SCC 131]* was used to reinforce the principle that a contract cannot be unilaterally amended.

✓ Kumari Shrilekha Vidyarthi and Others v. State of U.P. and Others [(1991) 1 SCC 212]* was used to emphasize that state actions in contractual matters must adhere to the principles of fairness, reasonableness, and non-arbitrariness under Article 14 of the Constitution.

✓ Natural Resources Allocation, IN Re, Special Reference No.1 of 2012 [(2012) 10 SCC 1]* was used to emphasize that “governmental policy” drawn with reference to contractual matters, must conform to the parameters of Article 14 of the Constitution of India.

✓ Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari [(2019) 5 SCC 90]* was used to support the principle that when no limitation period is prescribed, power must be exercised within a reasonable time.

✓ Mansaram v. S.P. Pathak and Ors. [(1984) 1 SCC 125]* was used to reiterate that a power to effectuate a purpose must be exercised within a reasonable time.

✓ State of Gujarat v. Patel Raghav Natha [(1969) 2 SCC 187]* was cited to illustrate that a delay of one year was considered too long for exercising revisional jurisdiction.

✓ Securities and Exchange Board of India v. Sunil Krishna Khaitan and Ors. [(2023) 2 SCC 643]* was used to show the recent application of the principle of reasonable time.

The Court reasoned that the Tamil Nadu Electricity Board’s delay in acting upon the Appellant’s request for reduction of electricity demand was arbitrary and unreasonable. The Court noted that the Board had taken over two and a half years to approve the reduction, which was not justified by any valid reason. The Court held that the Board could not take refuge in the clauses of the 1999 agreement, especially when the company was saddled with heavy costs due to the delay. The Court emphasized that State actions, even in contractual matters, must adhere to the principles of fairness and reasonableness under Article 14 of the Constitution.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by the principle that State actions, even in contractual matters, must be fair, reasonable, and non-arbitrary. The Court was particularly concerned with the significant delay by the Tamil Nadu Electricity Board in processing the Appellant’s request for reduction of electricity demand. The Court noted that the delay was not only unreasonable but also caused substantial financial prejudice to the Appellant, who was forced to pay for unutilized electricity. The following points weighed heavily in the mind of the Court:

• Unreasonable Delay: The fact that the Board took over two and a half years to act on the application was deemed unacceptable.
• Financial Prejudice: The Appellant was forced to pay for electricity they did not use, causing financial strain.
• Lack of Justification: The Board failed to provide any valid reason for the extensive delay.
• Precedent of Promptness: Other similar applications were processed within a reasonable period, highlighting the discriminatory nature of the delay in this case.
• Adherence to Article 14: The Court emphasized that state actions must adhere to Article 14 of the Constitution, which requires fairness and non-arbitrariness.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning:

The Court considered alternative interpretations, such as the Respondent’s argument that the 1999 agreement allowed them to delay the process. However, the Court rejected this interpretation, emphasizing that contractual clauses cannot justify unreasonable delays, especially when they result in financial prejudice to the other party. The final decision was reached by balancing the contractual obligations with the principles of fairness and reasonableness, as mandated by Article 14 of the Constitution.

The Supreme Court’s decision was unanimous, with all three judges concurring. The Court’s reasoning was based on the following key points:

• The delay by the Tamil Nadu Electricity Board was unreasonable and arbitrary.
• The Board’s inaction caused financial prejudice to the Appellant.
• The Board failed to provide a valid reason for the delay.
• State actions, even in contractual matters, must adhere to Article 14 of the Constitution.
• The principle of ‘reasonable time’ applies when no specific time limit is prescribed.

The Court’s decision has significant implications for future cases involving state contracts, emphasizing that state entities cannot use contractual clauses to justify arbitrary and unreasonable actions.

Key Takeaways

• State entities must act within a reasonable time when processing applications, even in contractual matters.
• Contractual clauses cannot justify arbitrary and unreasonable delays.
• Companies are entitled to a refund for excess charges paid due to unreasonable delays by state entities.
• State actions must adhere to the principles of fairness and non-arbitrariness, as mandated by Article 14 of the Constitution.
• This judgment sets a precedent for holding state entities accountable for delays that cause financial prejudice to other parties.

Directions

The Supreme Court directed the Tamil Nadu Electricity Board to:

• Return the amount paid by the Appellant for 13000 KVA (the difference between 23000 KVA and 10000 KVA).
• Calculate the refund from six months after the application date (24th December 2001), i.e., from 23rd June 2002, until the date of the new agreement in July 2004 (1st July 2004).
• Pay simple interest at 6% per annum on the refund amount.
• Pay the refund and interest within a period of three months from the date of the judgment.