Supreme Court Upholds ‘Change in Law’ Relief for Deallocation of Coal Blocks in Power Purchase Agreement (20 April 2023)

Date of the Judgment: 20 April 2023
Citation: 2023 INSC 399
Judges: B.R. Gavai, J. and Vikram Nath, J.

Can a power generating company claim relief under a Power Purchase Agreement (PPA) when a coal block allocated to it is deallocated due to a change in government policy? The Supreme Court of India recently addressed this question, affirming that such deallocation constitutes a ‘Change in Law’ event, entitling the affected company to relief. This judgment clarifies the scope of ‘Change in Law’ clauses in PPAs and their implications for power generators. The bench comprised Justices B.R. Gavai and Vikram Nath, with Justice Gavai authoring the judgment.

Case Background

Adani Power Maharashtra Limited (APML) and Maharashtra State Electricity Distribution Company Limited (MSEDCL) entered into several long-term Power Purchase Agreements (PPAs) between 2008 and 2013. These PPAs were for the supply of power from APML’s Tiroda Thermal Power Station (TPS) to MSEDCL. Prior to these agreements, APML had applied for and received allocation of the Lohara Coal Blocks from the Ministry of Coal (MoC) as a fuel source for its power generation.

However, the situation changed when the Government of Maharashtra notified a large area, including the Lohara Coal Blocks, as a Critical Tiger Habitat (CTH) and Buffer Zone for the Tadoba Andheri Tiger Reserve (TATR). This notification, issued after the cut-off date for the PPA bids, led to the deallocation of the Lohara Coal Blocks, rendering them inaccessible to APML. Consequently, APML could not supply power at the originally agreed tariff, leading to disputes with MSEDCL.

Timeline

Course of Proceedings

Initially, APML filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) seeking relief under ‘Change in Law’ and ‘force majeure’ clauses of the PPA due to the deallocation of the Lohara Coal Blocks. MERC directed the constitution of an Expert Committee to evaluate the impact of the deallocation and determine compensatory charges. However, MERC rejected APML’s claim of force majeure.

Aggrieved by MERC’s order, both APML and a consumer representative, Prayas Energy Group, filed appeals before the Appellate Tribunal for Electricity (APTEL). APTEL partly allowed Prayas’s appeal, setting aside MERC’s order but keeping the force majeure issue open. APTEL later allowed APML’s appeal, recognizing the deallocation as a ‘Change in Law’ event and remanding the matter back to MERC for fresh consideration.

MSEDCL then appealed to APTEL, contesting the ‘Change in Law’ declaration. APTEL upheld the ‘Change in Law’ finding, leading MSEDCL to file the present appeals before the Supreme Court.

Legal Framework

The case revolves around the interpretation of the ‘Change in Law’ clause in the PPA. The PPA defines “Law” broadly to include:

• All laws, including Electricity Law in force in India.
• Any statute, ordinance, regulation, notification, or code, rule.
• Any interpretation of any of them by an Indian Governmental Instrumentality.
• All applicable rules, regulations, orders, and notifications by an Indian Governmental Instrumentality.
• All rules, regulations, decisions, and orders of the Central Electricity Regulatory Commission (CERC) and the Maharashtra Electricity Regulatory Commission (MERC).

The PPA also defines “Indian Governmental Instrumentality” to include the Government of India, the Government of Maharashtra, and any ministry, department, board, agency, or other regulatory or quasi-judicial authority controlled by these governments, including CERC and MERC.

The Supreme Court emphasized that any order or notification by an Indian Governmental Instrumentality would constitute ‘Law’ under the PPA. The power to notify a Tiger Reserve as a Buffer Zone is vested with the State Government under Section 38V of the Wild Life (Protection) Act, 1972.

Arguments

MSEDCL’s Arguments:

• MSEDCL argued that the deallocation of coal blocks is a matter between APML and Coal India Limited (CIL) and that MSEDCL has no involvement in the same.
• They contended that changes to clearances and consents cannot be considered a ‘Change in Law’ event.
• MSEDCL asserted that Clause 4.1.1 of the PPA places the responsibility on APML to obtain and maintain all necessary consents.
• MSEDCL argued that in Case-1 bidding, the arrangement of fuel was the responsibility of the bidder and the source of coal was not their concern.
• They also argued that APML was solely responsible for transporting the coal and that APTEL erred in granting compensation by factoring in additional transportation costs.

APML’s Arguments:

• APML contended that the deallocation of the Lohara Coal Blocks was a direct result of the Government of Maharashtra’s notification, which was issued after the cut-off date for the PPA.
• APML argued that the bid was submitted on the basis that the Lohara Coal Blocks were allocated to it and the subsequent deallocation forced them to obtain coal from other sources at additional costs.
• APML relied on the Supreme Court’s judgments in Energy Watchdog v. Central Electricity Regulatory Commission and Others and MSEDCL v. APML and Others to support their claim that the deallocation constitutes a ‘Change in Law’ event.
• APML also submitted that the return of the Bank Guarantee by CIL, due to no fault of APML, further fortifies its claim for ‘Change in Law’ benefit.
• APML highlighted that MSEDCL was a part of the Expert Committee which had determined that APML was entitled to compensation on account of deallocation of Lohara Coal Blocks.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the deallocation of the Lohara Coal Blocks constitutes a ‘Change in Law’ event under the PPA.
2. Whether APML is entitled to restitution on account of the deallocation of the Lohara Coal Blocks.
3. Whether the methodology adopted by APTEL for calculating compensation was correct.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions 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?

The Court relied on several authorities to support its reasoning:

• Manohar Lal Sharma v. The Principal Secretary and Others (2014) 9 SCC 516: The Court cited this case to highlight the context of coal block deallocations.
• Energy Watchdog v. Central Electricity Regulatory Commission and Others (2017) 14 SCC 80: This case was used to support the argument that changes in government policies affecting the availability of domestic coal qualify as a ‘Change in Law’ event.
• Adani Rajasthan and Maharashtra State Electricity Distribution Company Limited v. Adani Power Maharashtra Limited and Others 2023 SCC OnLine SC 233: The Court relied on this case to support the principle of not interfering with concurrent findings of fact by expert bodies.
• Tata Power Company Limited Transmission v. Maharashtra Electricity Regulatory Commission 2022 SCC OnLine SC 1615: This case was cited to reinforce the principle of not interfering with concurrent findings of fact.
• Nabha Power Ltd. vs. Punjab State Power Corp. Ltd. (2018) 11 SCC 508: The Court used this case to support the inclusion of transportation costs in the landed cost of coal.
• Vivek Narayan Sharma v. Union of India: The Court relied on this case to support the principle of not interfering with the decisions of expert bodies unless they are arbitrary or illegal.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the deallocation of the Lohara Coal Blocks was a direct consequence of a government notification issued after the cut-off date specified in the PPA. This notification, which included the coal block area in the Buffer Zone of the Tadoba Andheri Tiger Reserve, was deemed a ‘Change in Law’ event as per the PPA’s definition. The Court emphasized that APML had entered into the PPA based on the assurance that coal would be available from the Lohara Coal Blocks, and the subsequent deallocation was not due to any fault of APML.

The Court also considered the recommendations of the Expert Committee, which had determined that APML was entitled to compensation for the deallocation. The Court noted that MSEDCL was part of this committee and could not now argue against its findings. The Court’s reasoning was also guided by the principle of restitution, which aims to restore the affected party to the same economic position as if the ‘Change in Law’ had not occurred.

The Court’s decision was also influenced by the fact that CIL had returned the Bank Guarantee furnished by APML, acknowledging that the deallocation was not due to any fault of APML.

Logical Reasoning

The Court rejected alternative interpretations, emphasizing that the deallocation was not due to any fault of APML, and the company was entitled to be placed in the same economic position as if the ‘Change in Law’ had not occurred.

The Court’s decision was based on a step-by-step analysis of the facts, the relevant legal provisions, and the principle of restitution. The Court emphasized that the PPA’s definition of ‘Law’ was broad enough to include the government notification that led to the deallocation of the coal blocks.

The Court quoted the following from the judgment:

• “Law” – means, in relation to this Agreement, all laws including Electricity Law in force in India and any statute, ordinance, regulation, Notification or code, rule. or any interpretation of any of them by an Indian Governmental Instrumentality and having force of law and shall further include all applicable rules. regulations. orders. Notifications by an Indian Governmental Instrumentality pursuant to or under any of them and shall include all rules. regulations. decisions and orders of the CERC and the MERC.”
• “The purpose of change in law relief/compensation is to restore the affected party to the same economic position as if the change in law had not occurred.”
• “We, therefore, hold that MSEDCL ought to pay Lohara coal cost as base (including transportation costs) while compensating Adani for the change in law events.”

There were no dissenting opinions in this case.

Key Takeaways

• ‘Change in Law’ Clauses: This judgment underscores the broad scope of ‘Change in Law’ clauses in PPAs and how they can be triggered by government actions, even those not directly related to the PPA.
• Restitution: Power generating companies are entitled to be placed in the same economic position as if the ‘Change in Law’ had not occurred. This may include compensation for additional costs incurred due to the change.
• Expert Committee Reports: The Supreme Court emphasized the importance of expert committee reports and the need to give due weight to their findings.
• Concurrent Findings: The Court reiterated that it would be slow to interfere with concurrent findings of fact by expert bodies unless they are arbitrary or illegal.
• Responsibility: The court clarified that if the deallocation of coal blocks was not due to the fault of the power generating company, it is entitled to compensation.

Directions

The Supreme Court dismissed the appeals filed by MSEDCL, upholding the decision of the Appellate Tribunal for Electricity (APTEL). The Court did not give any specific directions other than dismissing the appeals.

Development of Law

The ratio decidendi of this case is that a government notification that leads to the deallocation of a coal block, after the cut-off date of a PPA, constitutes a ‘Change in Law’ event under the PPA. The affected party is entitled to be placed in the same economic position as if the ‘Change in Law’ had not occurred, which includes compensation for additional costs incurred. This judgment reinforces the principle of restitution and clarifies the scope of ‘Change in Law’ clauses in the context of the power sector. There is no change in the previous position of law, rather the law has been reinforced.

Conclusion

In conclusion, the Supreme Court dismissed the appeals filed by MSEDCL, upholding the APTEL’s decision. The Court affirmed that the deallocation of the Lohara Coal Blocks due to a government notification was a ‘Change in Law’ event, entitling APML to relief under the PPA. The judgment emphasizes the importance of adhering to the principle of restitution and respecting the findings of expert bodies in such matters.

Category

• Power Purchase Agreement
  • Change in Law
  • Restitution
  • Coal Block Deallocation
• Electricity Act, 2003
  • Appellate Tribunal for Electricity (APTEL)
  • Maharashtra Electricity Regulatory Commission (MERC)
• Supreme Court of India
  • Judgments
  • Case Analysis