Supreme Court Upholds High Court Decision on Coal Procurement Dispute: Karnataka Power Corporation Ltd. vs. EMTA Coal Limited & Anr. (20 May 2022)

Date of the Judgment: 20 May 2022
Citation: Civil Appeal Nos. 5401-5404 of 2017
Judges: N.V. Ramana, CJI, Krishna Murari, J., Hima Kohli, J.
Can a state-owned power corporation demand reimbursement from a coal supplier based on an audit report it initially contested? The Supreme Court of India recently addressed this question in a dispute over coal procurement for thermal power projects in Karnataka. The Court upheld the decision of the High Court of Karnataka, which had ruled against the power corporation’s demand for reimbursement based on a disputed audit report. The judgment was delivered by a three-judge bench comprising Chief Justice N.V. Ramana, Justice Krishna Murari, and Justice Hima Kohli.

Case Background

In 2002, Karnataka Power Corporation Limited (the appellant) entered into a joint venture with EMTA Coal Limited (EMTA) for the development of coal mines and supply of coal for its thermal power projects in Karnataka. A joint venture company, Karnataka EMTA Coal Mines Limited (KEMTA), was formed. The arrangement proceeded smoothly until the Comptroller and Auditor General of India (CAG) submitted a report in March 2013. The CAG report stated that the minimum quantity of coal rejects should be 10% of the total production, valuing Rs. 52,37,00,000. Initially, the appellant objected to the CAG report, arguing that the quantification of coal rejects should be based on actuals. However, after the CAG finalized its report, the appellant demanded reimbursement of Rs. 52,37,00,000 from KEMTA. The appellant also made deductions on bills payable to KEMTA on account of washing charges, based on the CAG’s quantification.

Timeline

Course of Proceedings

The respondents, EMTA Coal Limited and KEMTA, filed writ petitions before the High Court of Karnataka challenging the demand letters and deductions made by the appellant. The High Court allowed the writ petitions, directing the appellant not to initiate recovery based solely on the CAG report and to reimburse the deductions made. Aggrieved by this decision, the appellant filed an appeal before the Supreme Court of India.

Legal Framework

The Supreme Court considered the maintainability of writ petitions in contractual disputes involving state instrumentalities. The Court referred to previous judgments, including ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553 and Joshi Technologies International Inc. v. Union of India, (2015) 7 SCC 728, which established that while writ petitions are maintainable in such cases, the High Courts have the discretion to decide whether to exercise this jurisdiction. The Court also examined the clauses of the agreements between the parties regarding coal washing charges.

Arguments

Appellant’s Submissions:

• The High Court granted relief without properly adjudicating the disputes or appreciating the facts.
• The appellant argued that the CAG report justified their demand for reimbursement and deductions.

Respondents’ Submissions:

• The High Court’s judgment was correct and did not require interference by the Supreme Court.
• The respondents contended that the appellant’s demand was based on a report they initially objected to.
• The deductions made by the appellant were not in accordance with the agreements between the parties.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but considered the following:

• Whether the High Court correctly exercised its discretion in entertaining the writ petitions.
• Whether the appellant was justified in demanding reimbursement based on the CAG report.
• Whether the deductions made by the appellant were in accordance with the agreements between the parties.

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court:

• ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd., (2004) 3 SCC 553: The Court relied on this case to reiterate that while writ petitions are maintainable in contractual disputes involving state instrumentalities, the High Courts have discretion in exercising this jurisdiction.
• Joshi Technologies International Inc. v. Union of India, (2015) 7 SCC 728: This case was used to further clarify the principles that guide High Courts in deciding whether to exercise their writ jurisdiction in contractual disputes between a State and a private party.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the appellant’s inconsistent stance regarding the CAG report. The Court noted that the appellant initially objected to the report but later used it to demand reimbursement. The absence of any contractual basis for the deductions made by the appellant also weighed heavily in the Court’s decision. Additionally, the Court considered the long passage of time since the initial tender and the CAG report, which made it unjust to delve into the maintainability of the writ petitions.

Logical Reasoning:

The Court found that the appellant’s change of stance regarding the CAG report was not sufficiently explained. The Court also noted that there was no material placed on record to suggest any issue with the quality of coal supplied by KEMTA. The Court stated, “Such a change of stand by the appellant has not been sufficiently explained.” The Court further observed, “a bare perusal of the clauses contained in the various agreements entered into between the parties does not indicate that such deductions could be made for the purposes of washing charges.” The Court also noted, “No material has been placed on record by the appellant to suggest that there was ever any problem with respect to the quality of coal being supplied by KEMTA to the appellant.”

Key Takeaways

• State instrumentalities cannot take contradictory positions on audit reports to demand reimbursements.
• Deductions from payments must be based on clear contractual terms.
• Long-standing disputes should be resolved on merits, not technicalities.

Directions

The Supreme Court did not issue any specific directions, as it upheld the High Court’s judgment, which had already directed the appellant not to initiate recovery based on the CAG report and to reimburse the deductions.

Development of Law

The ratio decidendi of this case is that a state instrumentality cannot demand reimbursement based on an audit report it initially contested, especially when the contractual terms do not support such deductions. This case reinforces the principle that state entities must act consistently and transparently in their dealings with private parties. There is no change in the previous positions of law, but it reinforces the existing principles.

Conclusion

The Supreme Court dismissed the appeal filed by Karnataka Power Corporation Limited, upholding the High Court’s decision. The Court emphasized the importance of consistency and transparency in the actions of state instrumentalities and the need for contractual terms to be clear and unambiguous. The judgment underscores that parties cannot rely on audit reports they initially contested to demand reimbursements or make deductions without a clear contractual basis.

Category

• Contracts Law
  • Contractual Disputes
  • Breach of Contract
• Constitutional Law
  • Article 136
  • Writ Jurisdiction
• Audit and Accounting
  • CAG Report
• Karnataka Power Corporation Limited
  • Contractual Obligations
• Contract Law
  • Contracts Law: Contractual Disputes
• Article 136, Constitution of India
  • Constitutional Law: Article 136, Constitution of India

FAQ

Q: Can a government body demand money based on an audit report they initially disagreed with?
A: No, a government body cannot demand money based on an audit report they initially objected to, especially if their stance changes without a clear explanation.

Q: What happens if a contract doesn’t clearly state how payments should be calculated?
A: If a contract doesn’t clearly state how payments or deductions should be calculated, the party making the deductions may not be able to justify them.

Q: Can a court intervene in a contract dispute between a government body and a private company?
A: Yes, a court can intervene in such disputes, especially if there are issues of fairness and transparency. However, the court has discretion on whether to exercise this jurisdiction.