Supreme Court Upholds High Court Decision on Power Purchase Agreement Termination: M.P. Power Management vs. Sky Power (2022)

Introduction

Date of the Judgment: 16 November 2022

Citation: 2022 INSC 1006

Judges: K.M. Joseph, J., Hrishikesh Roy, J.

Can a state-owned company unilaterally terminate a power purchase agreement (PPA) without adhering to the contractual terms? The Supreme Court of India recently addressed this critical question, focusing on the balance between contractual obligations and the need for fair state action. This case, M.P. Power Management Company Limited, Jabalpur vs. M/S. Sky Power Southeast Solar India Private Limited & Others, delves into the nuances of contract law, particularly in the context of power purchase agreements and the extent of judicial review over state actions.

The core issue revolves around the termination of a PPA between M.P. Power Management Company Limited (MPPMCL), a state-owned entity, and M/S. Sky Power Southeast Solar India Private Limited, a solar power company. The Supreme Court examined whether MPPMCL’s termination was justified, considering the contractual terms and the principles of fairness. The bench consisted of Justices K.M. Joseph and Hrishikesh Roy.

Case Background

The case originated from a Request for Proposal (RFP) issued by MPPMCL on May 6, 2015, for the long-term procurement of 300 MW of solar energy. M/s Sky Power Southeast Asia Holding Limited won the bid for three 50 MW units. Subsequently, M/s Sky Power Southeast Solar India Private Limited (Sky Power) was incorporated as a special purpose company for one of these projects, with a tariff of Rs. 5.109 per unit. A Power Purchase Agreement (PPA) was signed on September 18, 2015, which included conditions subsequent to be fulfilled by Sky Power within 210 days (by April 15, 2016), with a possible nine-month extension upon payment of a penalty. This extended period would end on January 15, 2017.

Sky Power claimed compliance with the conditions, but MPPMCL raised concerns about incomplete land documents and unregistered lease deeds. MPPMCL threatened termination of the PPA, leading to a series of communications. Sky Power insisted that they had completed the land acquisition by March 14, 2017. However, MPPMCL terminated the PPA on August 11, 2017, citing non-compliance with conditions subsequent. This termination was challenged by Sky Power in a writ petition, which was allowed by the High Court on June 20, 2018. The High Court set aside the termination order, noting that a similar termination was previously set aside in the case of Renew Clean Energy, which was affirmed by the Supreme Court. The High Court allowed MPPMCL to pass fresh orders in accordance with the PPA.

MPPMCL issued a fresh termination notice on July 7, 2018, which was challenged again by Sky Power in a second writ petition. This led to the High Court setting aside the termination order on February 27, 2020, which was upheld by the Supreme Court.

Timeline:

Legal Framework

The judgment references several key legal provisions and contractual clauses:

• ✓ Article 298 of the Constitution of India: Grants the executive power of the Union and each State to make contracts for any purpose.
• ✓ Article 299 of the Constitution of India: Specifies the manner in which contracts made in the exercise of the executive power of the Union or the State are to be made.
• ✓ Section 63 of the Electricity Act, 2003: Allows the appropriate commission to adopt tariffs determined through a transparent bidding process, in accordance with the guidelines issued by the Central Government.
• ✓ Article 2.1 of the PPA: Requires the seller (Sky Power) to complete all activities at its own cost and risk within 210 days from the effective date, unless affected by force majeure.
• ✓ Article 2.5.1 of the PPA: Specifies the consequences of delays in achieving the conditions subsequent, including termination of the PPA for delays exceeding nine months.
• ✓ Article 2.6 of the PPA: Sets the timeline for commissioning the plant within 12 months from the date of financial closure.
• ✓ Article 9.1 of the PPA: Requires the non-defaulting party to issue a default notice to the defaulting party, and if the default is not rectified within three months, the non-defaulting party can terminate the agreement by giving a seven-day notice.
• ✓ Article 9.4(a) of the PPA: Defines a seller event of default as the failure to commence supply of power to MPPMCL up to the contracted capacity within 24 months.

Arguments

Appellant (MPPMCL) Arguments:

• ✓ The PPA is not a statutory contract, and therefore, a writ petition is not maintainable.
• ✓ The PPA has a dispute resolution mechanism, and the first respondent should have resorted to a civil suit.
• ✓ Sky Power failed to fulfill the conditions subsequent by January 15, 2017, and also failed to commission the project within the stipulated time.
• ✓ The termination was a contractual right, and the state should not be denied the ability to exercise its rights under the contract.
• ✓ The High Court should not have interfered, as the case involved disputed questions of fact.
• ✓ The approval from the Chief Electrical Inspector General (CEIG) was obtained through misrepresentation.
• ✓ Public interest favored termination because power was available at a cheaper rate, and implementing the High Court’s order would burden consumers.

First Respondent (Sky Power) Arguments:

• ✓ Sky Power was the lowest bidder among 182 competitors and made an investment of nearly Rs. 350 crores.
• ✓ The delay in fulfilling conditions subsequent was only 56 days, similar to the Renew Energy case where a delay of 16 days was condoned.
• ✓ Sky Power had 24 months to commission the project, and it was ready before the expiry of this period.
• ✓ The state must act fairly, and the termination was arbitrary, violating Article 14 of the Constitution.
• ✓ The High Court was correct in setting aside the termination order, following the precedent in the Renew Energy case.
• ✓ MPPMCL did not issue a pre-termination notice as required by Article 9.1 of the PPA.
• ✓ The project was ready for commissioning, and any issues were due to thefts after the initial termination.
• ✓ The CEIG had inspected and approved the project, and minor discrepancies should not invalidate the entire project.
• ✓ The first respondent has completed all the necessary requirements for commissioning.

Sub-Submissions by Parties

Innovativeness of the Argument:

Sky Power’s argument that the state cannot act arbitrarily even in contractual matters, drawing on Article 14 of the Constitution, was particularly innovative. They highlighted the need for fairness and transparency in all state actions, even after a contract has been entered into.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the PPA in question is a statutory contract?
2. What is the scope of judicial review of action by the State in a matter arising from a contract and what is the effect of the contract not being statutory? What is arbitrariness?
3. What is the concept of public law in judicial review in a contractual matter?
4. Whether there is an arbitration clause in regard to the subject matter?
5. Whether the order dated 07.07.2018 terminating the contract based on first respondent not fulfilling the conditions subsequent is sustainable having regard to the judgment rendered by the High Court in the earlier round of litigation on 20.06.2018? And will the said judgment bar the appellant from terminating the contract on the ground of non-fulfilment of conditions subsequent?
6. Whether the writ petition must be dismissed as the case involves disputed questions of facts?
7. Whether the case of the first respondent is on par with Renew Energy?
8. What is the effect of non-compliance of Article 9.1 of the PPA, namely, the effect of appellant not issuing notice contemplated therein before issuing the impugned termination dated 07.07.2018?
9. What is overwhelming public interest in the context of judicial review in a contractual matter? Is the concept applicable only to cases which involve challenge to award of largesse by the State or is it applicable across the Board irrespective of the stage when the matter arises in relation to a contract?
10. Whether this Court should interfere with the judgment of the High Court in the totality of facts?

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:

Judgment

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

How each authority was viewed by the Court?

• ✓ Kerala State Electricity Board and Another v. Kurien E. Kalathil and Others [CITATION]: The Court distinguished this case, clarifying that the present case has a public law element, unlike the cited case.
• ✓ ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. [CITATION]: The Court followed this case, reiterating that a writ petition is maintainable in contractual matters when the state acts arbitrarily.
• ✓ Shrilekha Vidyarthi (Kumari) v. State of U.P [CITATION]: The Court referred to this case to emphasize that the state must act fairly, justly, and reasonably, even in contractual matters.
• ✓ State of U.P. v. Sudhir Kumar Singh and Others [CITATION]: The Court followed this case, stating that a breach of natural justice by the state is a public law issue.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors, with a strong emphasis on fairness and adherence to contractual procedures. The Court found that MPPMCL had acted arbitrarily by not issuing a default notice under Article 9.1 of the PPA, which was a crucial procedural lapse. The Court also noted that the earlier High Court judgment barred MPPMCL from re-litigating issues related to the non-fulfillment of conditions subsequent. The Court emphasized that public interest is not solely about monetary gain but also about upholding contracts and promoting renewable energy projects. The Court also highlighted that the state must act fairly and reasonably in all its actions, including contractual matters.

Fact:Law Ratio

Logical Reasoning:

Judgment

The Supreme Court upheld the High Court’s decision, dismissing MPPMCL’s appeal. The Court found that MPPMCL had acted arbitrarily by terminating the PPA without adhering to the contractual requirement of issuing a default notice under Article 9.1. The Court emphasized that while the PPA was not a statutory contract, the state is still bound by principles of fairness and reasonableness. The Court also noted that the earlier High Court judgment barred MPPMCL from re-litigating issues related to the non-fulfillment of conditions subsequent.

The Court underscored that public interest should not be narrowly defined by monetary considerations alone but also includes upholding contracts and promoting renewable energy. The Court also observed that the first respondent had taken steps for commissioning, and the deficiencies pointed out by the appellant could have been rectified if a default notice had been issued. The Court also noted that the appellant had not conducted an inspection despite the first respondent’s request.

Key quotes from the judgment:

• ✓ “The mere fact that relief is sought under a contract which is not statutory, will not entitle the respondent -State in a case by itself to ward-off scrutiny of its action or inaction under the contract, if the complaining party is able to establish that the action/ inaction is, per se, arbitrary or unreasonable.”
• ✓ “The State is bound to act fairly, reasonably, and justly in all its actions, including contractual matters.”
• ✓ “The public interest is not solely about monetary gain but also about promoting fairness and upholding contracts, especially in renewable energy projects.”

Implications

The Supreme Court’s judgment in M.P. Power Management Company Limited vs. Sky Power Southeast Solar India Private Limited has significant implications for contract law and the conduct of state entities in contractual matters. The judgment reinforces the principle that even in non-statutory contracts, state actions are subject to judicial review under Article 14 of the Constitution. This means that state entities cannot act arbitrarily or unfairly, even when exercising their contractual rights. The judgment also emphasizes the importance of adhering to contractual procedures, such as issuing default notices before terminating an agreement.

The case highlights the need for state entities to act with fairness and transparency in all their dealings, particularly in the context of renewable energy projects. The Court’s emphasis on upholding contracts and promoting renewable energy sends a positive message to investors and developers in the sector. The judgment also clarifies that public interest is not solely defined by monetary considerations but also includes the need to uphold contractual obligations and promote sustainable energy initiatives.

Impact on Contract Law:

• ✓ State actions in contractual matters are subject to judicial review for arbitrariness.
• ✓ Contractual procedures, such as default notices, must be strictly followed.
• ✓ The principle of fairness and reasonableness applies to all state actions, even in non-statutory contracts.

Impact on State Actions:

• ✓ State entities must act fairly and transparently in all their dealings.
• ✓ State entities cannot act arbitrarily or unfairly, even when exercising their contractual rights.
• ✓ State actions must be consistent with the principles of public interest, which includes upholding contracts and promoting sustainable development.

Conclusion

The Supreme Court’s judgment in M.P. Power Management Company Limited vs. Sky Power Southeast Solar India Private Limited is a landmark decision that reaffirms the importance of fairness, transparency, and adherence to contractual procedures in all state actions. The Court’s ruling underscores that even in non-statutory contracts, state entities are bound by the principles of Article 14 of the Constitution and cannot act arbitrarily. The judgment also highlights the significance of upholding contracts and promoting renewable energy initiatives as part of the broader public interest.

The case serves as a reminder that state entities must act responsibly and fairly in all their dealings, and that judicial review is available to ensure that they do so. The judgment also emphasizes the need for state entities to follow contractual procedures, such as issuing default notices, before terminating an agreement. The Court’s decision has significant implications for both contract law and the conduct of state entities in contractual matters, promoting a more just and equitable system for all stakeholders.

Key Takeaways:

• ✓ State actions in contractual matters are subject to judicial review for arbitrariness.
• ✓ Contractual procedures, such as default notices, must be strictly followed.
• ✓ The principle of fairness and reasonableness applies to all state actions, even in non-statutory contracts.
• ✓ Public interest is not solely about monetary gain but also about upholding contracts and promoting sustainable development.

By upholding the High Court’s decision, the Supreme Court has sent a clear message that state entities must act responsibly and fairly in all their dealings, and that judicial review is available to ensure that they do so.