Supreme Court Overturns Tribunal’s Order on “Change in Law” Claims in Power Purchase Agreement: Haryana Power Purchase Centre vs. Sasan Power Ltd (06 April 2023)

Date of the Judgment: 06 April 2023
Citation: Not Available in the source
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 interpretation of law or due to errors in reports provided during the bidding process? The Supreme Court of India recently addressed this question in a dispute arising from a long-term power purchase agreement (PPA). This case revolves around claims of “change in law” and the extent to which a regulatory body can intervene in a contractually agreed tariff. The bench, comprising Justices K.M. Joseph and B.V. Nagarathna, overturned the Appellate Tribunal for Electricity’s (Tribunal) order, holding that the Tribunal had overstepped its jurisdiction by granting relief outside the scope of the PPA.

Case Background

The case involves a dispute arising from a long-term power purchase agreement (PPA) for an Ultra Mega Power Project. The Power Finance Corporation Limited of India (PFC) acted as the nodal agency and incorporated Sasan Power Ltd (first respondent) as a Special Purpose Vehicle (SPV). The project aimed to select a successful bidder through international competitive bidding to operate the power plant. The power generated was to be supplied to procurers (appellants), who are distribution licensees, for final supply to consumers.

The bidding process was governed by guidelines issued by the Central Government under Section 63 of the Electricity Act, 2003. These guidelines detailed the bidding process, tariff structure, and dispute resolution mechanisms. The Request for Qualification (RFQ) was issued on 31.03.2006, and Reliance Power Limited was pre-qualified. Subsequently, on 21.08.2006, a Request for Proposal (RFP) was issued. Reliance Power Limited emerged as the successful bidder and acquired 100% shareholding of the first respondent. A PPA was signed on 07.08.2007, for a period of 25 years.

The PPA stipulated two phases: construction and operation of the power plant. After the PPA, the first respondent filed a petition before the Central Electricity Regulatory Commission (Commission) on 19.02.2013, claiming compensation for increased costs due to “change in law” during the construction period. The claims included increased land costs, resettlement and rehabilitation expenses, geological report costs, compensatory afforestation costs, water intake system costs, and levy of excise and customs duties.

Timeline

Course of Proceedings

The Central Electricity Regulatory Commission (Commission) initially rejected the first respondent’s claims for compensation related to the water intake system and customs duty on mining equipment. The Commission found that the increased cost of the water intake system was not due to a “change in law” and that the customs duty was not exempted.

The first respondent then appealed to the Appellate Tribunal for Electricity (Tribunal) under Section 111 of the Electricity Act, 2003. The Tribunal set aside the Commission’s order, holding that the procurers could not evade responsibility for providing erroneous information in the pre-bid report regarding the water intake system. The Tribunal also held that the customs duty exemption should apply to mining equipment, as the captive coal mines were an integral part of the project. The Tribunal remanded the matter back to the Commission for fresh consideration.

Following the remand, the Commission ordered payment of Rs. 176 crores for the water intake system but rejected the customs duty claim. This led to further appeals before the Tribunal, which are currently pending. The present appeals before the Supreme Court are against the Tribunal’s order.

Legal Framework

The case is primarily governed by the Electricity Act, 2003, particularly Section 63, which deals with the adoption of tariffs discovered through competitive bidding. The Central Government issued guidelines under Section 63, which are binding on the procurers. The PPA also contains specific clauses addressing “change in law” (Article 13) and dispute resolution (Article 17).

Article 13.1.1 of the PPA defines “Change in Law” as:

“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.”

Article 17.3.1 of the PPA outlines the dispute resolution mechanism:

“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.”

Arguments

Arguments of the Appellants (Procurers)

• No “Change in Law” for Water Intake System: The Tribunal erred in granting relief for the increased cost of the water intake system after agreeing that there was no “change in law”. The PPA was meticulously drafted, and once the Commission found no change in law, the Tribunal lacked the jurisdiction to grant relief.
• Disclaimer Clauses: The RFP contained explicit disclaimer clauses, stating that the procurers were not liable for any inaccuracies in the WAPCOS report. The bidders were expected to conduct their own site studies and verify the information. The first respondent’s reliance on the WAPCOS report was at its own peril.
• Second WAPCOS Report: The second WAPCOS report, which formed the basis for the first respondent’s claim, was commissioned unilaterally without involving the procurers. This report did not invalidate the first report.
• Customs Duty: The first respondent should have sought a refund from the customs department instead of passing the burden to the procurers. The Tribunal incorrectly interpreted the customs notifications, as there was no exemption for mining equipment at the cut-off date. The Joint Secretary in the Ministry of Power is not the final authority to interpret customs law.
• Joint Secretary’s Office Memorandum: The Office Memorandum issued by the Joint Secretary, Ministry of Power, merely followed the advance ruling and does not constitute a “change in law” under the PPA.

Arguments of the First Respondent (Sasan Power Ltd)

• Long-Term Contract: The PPA is a long-term power procurement contract subject to regulation, not a fixed, unchangeable agreement.
• “Change in Law” for Water Intake System: There was a “change in law” because the procurers failed to provide adequate water linkage, as per Schedule II of the PPA. The initial consent included providing land for the power plant and pipeline, which was affected by the erroneous WAPCOS report.
• Disclaimer Clauses: The disclaimer clauses should not absolve the procurers of their responsibility for providing a grossly erroneous report. The first respondent relied on the WAPCOS report, a study by a government agency.
• Customs Duty: The captive coal mines are an integral part of the project, and the customs duty exemption should apply to mining equipment. The Office Memorandum issued by the Joint Secretary constituted a “change in law.”
• Regulatory Power: Section 79(1)(b) of the Electricity Act, 2003, grants the Commission power to regulate tariffs, even if not explicitly covered by the PPA. The amended guidelines and Article 17.3.1 of the PPA provide a broad scope for the Commission to intervene and ensure fair tariff determination.
• Incomplete Contracts: The PPA is an incomplete contract, and the Commission has the power to intervene and ensure a fair tariff, considering the long-term nature of the agreement and unforeseen circumstances.
• Misrepresentation: The first respondent was misled by the erroneous WAPCOS report, entitling it to relief under Sections 18 and 19 of the Indian Contract Act, 1872.

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether the Tribunal was justified in granting relief to the first respondent for the increased cost of the water intake system after agreeing that there was no “change in law” as defined in the PPA.
2. Whether the Office Memorandum issued by the Joint Secretary in the Ministry of Power constituted a “change in law” entitling the first respondent to compensation for customs duties paid on imported mining equipment.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court

Legal Provisions Considered by the Court

• Electricity Act, 2003: Section 63 (adoption of tariffs), Section 79(1)(b) (regulatory powers of the Central Commission), Section 111 (Appellate Tribunal’s powers), Section 125 (appeals to the Supreme Court).
• Indian Contract Act, 1872: Sections 18 (misrepresentation), 19 (voidability of agreements without free consent).
• Power Purchase Agreement (PPA): Article 13 (change in law), Article 17 (dispute resolution), Schedule 2 (initial consents).
• Customs Act, 1962: Section 25 (power to grant exemptions).
• Notifications: Notification No. 21/2002-Customs, Notification No. 49/2006-Customs, and other related notifications.

Judgment

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

How each authority was viewed by the Court?

• Energy Watchdog v. Central Electricity Regulatory Commission and Others (2017) 14 SCC 80:* The Court affirmed that while the Commission has regulatory powers, it must adhere to the guidelines issued under Section 63 and cannot act outside the scope of those guidelines.
• Uttar Haryana Bijli Vitran Nigam Ltd. & Anr. v. Adani Power Limited & Ors. (2019) 5 SCC 325:* The Court reiterated the restitutionary principle in Article 13.2 but held that it must be applied within the framework of the contract and not as a basis for disregarding the specific formula provided in the PPA.
• Gujarat Urja Vikas Nigam Ltd. v. Essar Power (2008) 4 SCC 755:* The Court acknowledged the respondent’s reliance on this case but did not find it to support the argument that regulatory power can override the express terms of the PPA.
• Skandia Insurance Co. Ltd. v. Kokilaben Chandravan & Ors. (1987) 2 SCC 654, DLF Universal Limited v. Director, Town and Country Planning Department, Haryana (2010) 14 SCC 1, Sumitomo Heavy Industries v. Oil and Natural Gas Commission of India (2010) 11 SCC 296, Nabha Power Limited v. PSPCL (2018) 11 SCC 508:* The Court recognized the respondent’s reliance on these cases regarding disclaimer clauses but held that the specific and unambiguous disclaimers in the RFP and PPA were valid and binding.
• Prahlad & Ors. v. State of Maharashtra & Anr. (2010) 10 SCC 458, State of Punjab & Ors. v. Bakshish Singh (1998) 8 SCC 222, Mahant Dhangir & Anr. v. Madan Mohan & Ors. (1987) (Supp) SCC 528:* The Court acknowledged the respondent’s reliance on these cases regarding the power under Order XLI Rule 22 and Rule 33 but did not find them relevant to the core issues of the case.
• Uttar Pradesh Power Corporation Limited v. National Thermal Power Corporation Limited and Others (2009) 6 SCC 235:* The Court clarified that the power under regulation 92 must be understood as confined to situations under Section 61 read with Section 62 of the Act and may not apply when the tariff is fixed under Section 63.
• Gujarat Urja Vikas Nigam Limited v. Tarini Infrastructure Limited and Others (2016) 8 SCC 743:* The Court acknowledged the respondent’s reliance on this case but found that it did not support the argument that regulatory power can override the express terms of the PPA.
• PTC India Limited v. Central Electricity Regulatory Commission (2010) 4 SCC 603:* The Court found that this case did not advance the first respondent’s argument, as it primarily dealt with the jurisdiction of the Appellate Tribunal and the nature of the Commission’s functions.
• Manohar Lal Sharma v. Principal Secretary & Ors. (2014) 9 SCC 516 and Manohar Lal Sharma v. Principal Secretary & Ors. (2014) 9 SCC 614:* The Court acknowledged the respondent’s reliance on these cases but did not find them to determine the question of whether the goods imported for the captive mining plant were exempt.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Contractual Obligations: The Court emphasized the sanctity of contracts, particularly those resulting from competitive bidding. It held that the Tribunal could not rewrite the PPA or create a new bargain for the parties.
• Disclaimer Clauses: The Court gave significant weight to the disclaimer clauses in the RFP and PPA, which clearly stated that the procurers were not liable for inaccuracies in the WAPCOS report.
• Lack of “Change in Law”: The Court found that neither the change in the water intake system nor the Office Memorandum regarding customs duty constituted a “change in law” as defined in the PPA.
• Limited Regulatory Power: While recognizing the regulatory powers of the Commission, the Court held that these powers could not be used to override the express terms of the contract or create new obligations for the parties.
• Absence of Evidence: The Court noted the lack of evidence supporting the first respondent’s claims, particularly regarding the exemption of mining equipment before the cut-off date.
• Adherence to Guidelines: The Court stressed the importance of adhering to the guidelines issued under Section 63 of the Electricity Act, 2003, and the specific clauses of the PPA.

Logical Reasoning

Issue 1: Increased Cost of Water Intake System

The Court’s reasoning was as follows:

• No “Change in Law”: The Tribunal itself acknowledged that there was no “change in law” as defined in the PPA. Therefore, the Tribunal lacked jurisdiction to grant relief.
• Disclaimer Clauses: The RFP and PPA contained clear disclaimer clauses stating that the procurers were not liable for any inaccuracies in the WAPCOS report. The bidders were expected to conduct their own site studies and verify the information.
• Second WAPCOS Report: The second WAPCOS report, which formed the basis for the first respondent’s claim, was commissioned unilaterally without involving the procurers. This report did not invalidate the first report.
• Contractual Interpretation: The PPA was meticulously drafted, and the parties were bound by its terms. The Court emphasized that the Tribunal could not rewrite the contract or create new obligations for the parties.

Issue 2: Customs Duty on Mining Equipment

The Court’s reasoning was as follows:

• Office Memorandum: The Office Memorandum issued by the Joint Secretary in the Ministry of Power did not constitute a “change in law” under the PPA. The Joint Secretary was not the final authority to interpret customs law.
• Customs Notifications: There was no evidence that mining equipment was exempt from customs duty at the cut-off date specified in the PPA. The relevant notifications did not support the first respondent’s claim.
• Burden of Proof: The first respondent had the burden of proving that a “change in law” had occurred, which they failed to do.

Overall Reasoning

• Sanctity of Contracts: The Court emphasized the importance of upholding contractual obligations and the need to avoid judicial interference in freely negotiated contracts.
• Regulatory Power: While recognizing the regulatory powers of the Commission, the Court held that these powers could not be used to override the express terms of the contract or create new obligations for the parties.
• Interpretation of “Change in Law”: The Court strictly interpreted the “change in law” clause in the PPA, holding that it did not cover situations where the cost increase was due to errors in pre-bid reports or changes in the interpretation of customs law by a non-final authority.

Conclusion

The Supreme Court’s judgment in the case of Haryana Power Purchase Centre vs. Sasan Power Ltd is a significant decision that reinforces the sanctity of contracts, particularly in the context of power purchase agreements. The Court held that regulatory bodies cannot rewrite contracts or create new obligations for the parties. The decision emphasizes the importance of adhering to the specific terms of the contract and the guidelines issued under Section 63 of the Electricity Act, 2003.

The Court’s decision has several implications:

• Contractual Certainty: The judgment provides greater certainty to parties entering into long-term power purchase agreements. It underscores that parties are bound by the terms of their contracts and cannot seek relief for issues that were not explicitly covered by the contract.
• Limited Scope of “Change in Law”: The Court’s strict interpretation of the “change in law” clause limits the scope for claiming compensation for increased costs due to factors that were not explicitly covered by the definition in the PPA.
• Due Diligence: The decision highlights the importance of conducting thorough due diligence before entering into contracts. Bidders cannot rely solely on pre-bid reports or information provided by the procurers and must verify the information independently.
• Regulatory Restraint: The Court’s decision places a limit on the regulatory power of the Commission, clarifying that it cannot act outside the scope of the contract or the guidelines issued under Section 63 of the Electricity Act, 2003.

In summary, the Supreme Court’s judgment in this case reinforces the principle that contracts, especially those resulting from competitive bidding processes, should be interpreted and enforced as agreed upon by the parties. It also sets a precedent for limiting the scope of “change in law” claims and for ensuring that regulatory bodies do not overstep their jurisdiction.

This case serves as a reminder of the importance of clear contractual language, thorough due diligence, and the need for parties to be bound by the terms of their agreements. It also underscores the limits of regulatory intervention in freely negotiated contracts.