Supreme Court Upholds Late Payment Surcharge Calculation in Power Purchase Agreements: Maharashtra State Electricity Distribution Company Limited vs. Maharashtra Electricity Regulatory Commission & Ors. (2021) INSC 648 (08 October 2021)

LEGAL ISSUE: Whether changes in the interest rate system by the Reserve Bank of India (RBI) from the Prime Lending Rate (PLR) to the Base Rate and then to the Marginal Cost of Funds Based Lending Rate (MCLR) constitute a ‘Change in Law’ under Power Purchase Agreements (PPAs).

CASE TYPE: Electricity Law, Contract Law

Case Name: Maharashtra State Electricity Distribution Company Limited vs. Maharashtra Electricity Regulatory Commission & Ors.

Judgment Date: 08 October 2021

Date of the Judgment: 08 October 2021

Citation: (2021) INSC 648

Judges: Indira Banerjee, J., V. Ramasubramanian, J.

Can a change in the banking interest rate system, mandated by the Reserve Bank of India, alter the terms of a Power Purchase Agreement (PPA) regarding Late Payment Surcharge (LPS)? The Supreme Court of India recently addressed this question in a dispute between the Maharashtra State Electricity Distribution Company Limited (MSEDCL) and several power generating companies. The core issue revolved around whether the shift from the Prime Lending Rate (PLR) to the Base Rate and then to the Marginal Cost of Funds Based Lending Rate (MCLR) constituted a ‘Change in Law’ under the PPAs, thereby affecting the calculation of LPS. The Supreme Court, in this judgment, upheld the decision of the Appellate Tribunal for Electricity (APTEL), affirming that these changes do not qualify as a ‘Change in Law’ under the specific terms of the PPAs. The judgment was delivered by a bench comprising Justice Indira Banerjee and Justice V. Ramasubramanian.

Case Background

The Maharashtra State Electricity Distribution Company Limited (MSEDCL), a distribution licensee, entered into Power Purchase Agreements (PPAs) with several power generating companies (Respondents 2 to 5) for the bulk supply of electricity. These agreements were executed in two stages, with the first set of agreements (Stage 1) signed in 2008 and 2010, and the second set (Stage 2) in 2010, 2010 and 2013. The PPAs stipulated that in case of delay in payment of monthly bills by MSEDCL, a Late Payment Surcharge (LPS) would be applicable. The LPS was to be calculated at a rate of 2% above the State Bank Advance Rate (SBAR), which was defined as the prime lending rate per annum applicable for loans with one-year maturity, as fixed by the State Bank of India (SBI).

In 2010, the Reserve Bank of India (RBI) introduced the Base Rate System, replacing the Benchmark Prime Lending Rate (BPLR) system, and in 2016, it introduced the MCLR, replacing the Base Rate System. MSEDCL contended that these changes in the interest rate system constituted a ‘Change in Law’ under the PPAs, which would necessitate a recalculation of the LPS. MSEDCL sought a reduction in the LPS, arguing that the PLR was no longer relevant, and the LPS should be linked to the Base Rate or MCLR. The power generating companies, however, maintained that the contractual terms of the PPAs should prevail, and the LPS should continue to be calculated based on the SBAR, which was still being notified by SBI.

MSEDCL filed a petition before the Maharashtra Electricity Regulatory Commission (MERC) in 2016, seeking a declaration that the introduction of the Base Rate and MCLR constituted a ‘Change in Law’. The MERC dismissed the petition, and the decision was affirmed by the Appellate Tribunal for Electricity (APTEL). MSEDCL then appealed to the Supreme Court.

Timeline

Course of Proceedings

MSEDCL initially filed Case No. 24 of 2017 before the Maharashtra Electricity Regulatory Commission (MERC), arguing that the introduction of the Base Rate and MCLR by the Reserve Bank of India (RBI) constituted a ‘Change in Law’ under the Power Purchase Agreements (PPAs). The MERC rejected MSEDCL’s claim, holding that these changes did not qualify as a ‘Change in Law’ as defined in the PPAs. MSEDCL then appealed to the Appellate Tribunal for Electricity (APTEL), which also upheld the MERC’s decision. Consequently, MSEDCL filed an appeal before the Supreme Court of India under Section 125 of the Electricity Act, 2003.

Legal Framework

The core of the legal framework in this case revolves around the interpretation of the ‘Change in Law’ clause in the Power Purchase Agreements (PPAs) and the definition of State Bank Advance Rate (SBAR). The relevant clauses from the PPAs are:

• Article 1 (Definitions and Interpretation):

  • “Change in Law – shall have the meaning ascribed thereto in Article 13.1.1 of this agreement.” (Stage 1 PPA)
  • “Change in law – shall have the meaning ascribed thereto in Article 10.1.1 of this agreement.” (Stage 2 PPA)
  • “Law – means, in relation to this Agreement, all laws including Electricity Laws in force in India and any stature, ordinance, regulation, notification or code, rule, or any interpretation of any of them by an Indian Government 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.”
  • “SBAR – means the prime lending Rate per annum applicable for loans with one (1) year maturity as fixed from time to time by the State Bank of India. In the absence of such rate, any other arrangement that substitutes such prime lending rate as mutually agreed to by the parties.”

• Article 11.3.4 (Billing and Payment – Stage 1 PPA) and Article 8.3.5 (Billing and Payment – Stage 2 PPA):

  • “In the event of delay in payment of a monthly bill by the procurer beyond its due date, a Late Payment Surcharge shall be payable by the procurer to the seller at the rate of two (2) percent in excess of applicable SBAR per annum, on the amount of outstanding payment, calculated on a day to day basis (and compounded with monthly rest) for each date of the delay.”

• Article 13.1.1 (Change in Law – Stage 1 PPA) and Article 10.1.1 (Change in Law – Stage 2 PPA):

  • “’Change in Law’ means 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 or any law or (ii) a change in 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 for such interpretation. 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.”
  • “’Change in Law’ means the occurrence of any of the following events after the date, which is seven (7) days prior, to the Bid Deadline resulting into any additional recurring/non-recurring expenditure by the Seller or any income to the Seller: *the enactment, coming into effect, adoption, promulgation, amendment, modification or repeal (without re-enactment or consolidation) in India, of any Law, including rules and regulations framed pursuant to such Law; *a change in interpretation or application of any law by any Indian Governmental Instrumentality having the legal power to interpret or apply such Law, or any Competent Court of Law; *the imposition of requirement for obtaining any Consents, Clearances and Permits which was not required earlier; * a change in the terms of conditions prescribed for obtaining any Consents, Clearances and Permits or the inclusion of any new terms or conditions for obtaining such Consents, Clearances and Permits; except due to any default of the Seller; *any change in tax or introduction of any tax made applicable for supply of power by the Seller as per the terms of this Agreement 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 or (iii) any change on account of regulatory measures by the Appropriate Commission including calculation of Availability.”

The Electricity Act, 2003, provides the overarching framework for the electricity sector in India. Section 125 of the Act allows appeals to the Supreme Court from decisions of the Appellate Tribunal for Electricity (APTEL) on grounds specified in Section 100 of the Code of Civil Procedure, 1908, which pertains to substantial questions of law.

Arguments

Arguments by MSEDCL (Appellant):

• MSEDCL argued that the notifications issued by the Reserve Bank of India (RBI) introducing the Base Rate and MCLR systems constitute a ‘Change in Law’ as per the PPAs. They contended that the RBI is an Indian Governmental Instrumentality, and its notifications have the force of law.

• MSEDCL submitted that the definition of SBAR in the PPAs refers to the interest rate applicable for loans with one-year maturity, which should be renewed annually. Therefore, upon renewal, the Base Rate or MCLR should be applicable for calculating the LPS.

• MSEDCL argued that the PLR is no longer relevant for short-term loans, and the LPS should be calculated based on the prevailing Base Rate or MCLR. They also contended that LPS, being compensatory in nature, should not result in a windfall gain for the power generating companies.

• MSEDCL argued that LPS is a facet of tariff and any change in the methodology of calculating interest rates is a change in law.

• MSEDCL argued that the power generating companies were making a profit from LPS at the cost of the Appellant, which is contrary to the concept of compensation. They cited the judgment of the Supreme Court in M/s Kailash Nath Associates v. Delhi Development Authority and Anr. [ (2015) 4 SCC 136 ], to support the argument that compensation should not result in a windfall gain.

• MSEDCL submitted that the power generating companies were availing working capital loans at interest rates computed in accordance with the RBI notifications but were claiming LPS based on the discontinued PLR methodology.

• MSEDCL argued that the APTEL erred in holding that LPS is not part of the income of the Respondent Power Generating Companies and thus does not constitute a change in law.

• MSEDCL contended that it is a revenue-neutral entity, and the MERC does not allow all expenditures, including LPS, to be passed on to consumers.

• MSEDCL argued that the delay in payments was due to circumstances beyond its control, and the LPS should not be used to unjustly enrich the power generating companies. They cited financial difficulties, delays in tariff approvals, and the impact of the COVID-19 pandemic.

• MSEDCL argued that the claim of the Appellant is not time-barred, as the Respondent Power Generating Companies failed to issue change in law notices under the Power Purchase Agreements.

Arguments by the Power Generating Companies (Respondents):

• The power generating companies argued that the appeal is not maintainable under Section 125 of the Electricity Act, 2003, as it does not involve a substantial question of law. They contended that the issue is purely factual and has been concurrently decided against MSEDCL by the MERC and APTEL.

• The power generating companies submitted that the SBAR, which is the rate of interest for loans from SBI, is still in existence and is being notified by SBI. The LPS is calculated as 2% above the SBAR, as agreed in the PPAs.

• The power generating companies argued that the introduction of the Base Rate and MCLR by the RBI does not amount to a ‘Change in Law’ under the PPAs. They contended that the PPAs specifically refer to the SBAR, which is the prime lending rate fixed by SBI, and not to any RBI circulars.

• The power generating companies submitted that the RBI notifications are applicable to banks and financial institutions, and not to the parties in the PPAs. The PPAs do not incorporate or refer to any RBI circulars.

• The power generating companies argued that the LPS is a penalty for delayed payment and is within the control of MSEDCL. If MSEDCL made timely payments, there would be no LPS liability.

• The power generating companies contended that the LPS is compensatory in nature for the time value of money lost due to delayed payment and does not result in unjust enrichment.

• The power generating companies argued that the notices for ‘Change in Law’ were issued by MSEDCL belatedly in 2016, while the Base Rate was introduced in 2010.

• The power generating companies argued that the claim of the Appellant is barred by limitation.

• The power generating companies contended that the judgment of the Supreme Court in Jaipur Vidyut Vitaran Nigam Limited & Ors. v. Adani Power Rajasthan Limited and Anr. [2020 SCC Online SC 697], is distinguishable on facts.

• The power generating companies argued that the Power Purchase Agreements are complex technical documents which the parties having knowingly executed and the express terms of the Power Purchase Agreements must be given effect. They cited Nabha Power Limited v. Punjab State Power Corporation Limited (PSPCL) And Another [ (2018) 11 SCC 508 ], Transmission Corporation of Andhra Pradesh Ltd. And Others v. GMR Vemagiri Power Generation Ltd. And Another [ (2018) 3 SCC 716 ], and Shree Ambica Medical Stores and Others. v. Surat People’s Cooperative Bank Limited and Others [ (2020) 13 SCC 564 ], in support of this argument.

Issues Framed by the Supreme Court

The Supreme Court addressed the following substantial questions of law raised by MSEDCL:

1. Whether Late Payment Surcharge (LPS) can be determined on the basis of the Prime Lending Rate (PLR) methodology, particularly when:

   • Reserve Bank of India discontinued the PLR methodology and shifted to the Base Rate system by its notification dated 01.07.2010 and Marginal Cost of Fund-based Lending Rate System (MCLR) by its notification dated 03.03.2016 as methodologies for calculation of rate of interest?
   • Should the State Bank Advance Rate (SBAR) as defined in the Power Purchase Agreement be determined only on the basis of PLR even though SBAR is for loans with one year maturity (i.e., short term loans) and not for long term loans?

2. Whether the notifications dated 01.07.2010 and 03.03.2016 issued by the Reserve Bank of India are an event of change in law in terms of Article 13 and Article 10 of the two sets of Power Purchase Agreements executed by the Appellant with the Power Generators?

3. Whether LPS, which admittedly is compensatory in nature, can in law be awarded to the Respondents without any evidence of actual loss (equivalent to the LPS determined at the rate of PLR +2%), particularly when Power Generators are availing working capital loan at much lower rate of interest, based on Base Rate or MCLR?

4. Whether LPS, which is admittedly compensatory in nature, can in law be awarded in such a manner that it results in unjust enrichment of the Power Generators, especially since the interest is to be paid by compounding monthly?

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 in its judgment:

Ratio Decidendi

The Supreme Court upheld the decisions of the Maharashtra Electricity Regulatory Commission (MERC) and the Appellate Tribunal for Electricity (APTEL), ruling that:

• The notifications issued by the Reserve Bank of India (RBI) introducing the Base Rate and MCLR systems do not constitute a ‘Change in Law’ under the specific terms of the Power Purchase Agreements (PPAs). The PPAs defined ‘Change in Law’ as the enactment, amendment, or interpretation of any law by a competent authority, and the RBI notifications were not considered to fall under this definition.

• The Late Payment Surcharge (LPS) is to be calculated based on the State Bank Advance Rate (SBAR) as defined in the PPAs, which is the prime lending rate fixed by the State Bank of India (SBI) for loans with one-year maturity. The SBI continues to notify the PLR, and the PPAs did not mandate a shift to the Base Rate or MCLR.

• The LPS is a pre-agreed penalty for delayed payment and is not a compensation for actual loss. It is a deterrent to ensure timely payments and does not result in unjust enrichment.

• The terms of the contract must be given effect to, and the courts cannot rewrite or interpret the contract in a manner that is inconsistent with the express terms of the contract.

Obiter Dicta

While the Supreme Court’s decision was primarily based on the specific terms of the Power Purchase Agreements (PPAs), the Court made certain observations that can be considered as obiter dicta:

• The Supreme Court emphasized that appeals under Section 125 of the Electricity Act, 2003, are maintainable only on substantial questions of law and not on findings of fact.

• The Court reiterated that the terms of a contract must be given effect to, and the courts cannot rewrite or interpret the contract in a manner that is inconsistent with the express terms of the contract.

• The Court observed that the Late Payment Surcharge (LPS) is a penalty for delayed payment and is a deterrent to ensure timely payments. It is not a compensation for actual loss and does not result in unjust enrichment.

• The Court observed that the RBI notifications are applicable to banks and financial institutions, and not to the parties in the PPAs.

Conclusion

The Supreme Court’s judgment in Maharashtra State Electricity Distribution Company Limited vs. Maharashtra Electricity Regulatory Commission & Ors. (2021) INSC 648 is a significant ruling that upholds the sanctity of contracts and emphasizes the importance of adhering to the express terms of the agreement. The Court clarified that changes in the banking interest rate system by the Reserve Bank of India (RBI) do not automatically constitute a ‘Change in Law’ under Power Purchase Agreements (PPAs) unless explicitly provided for in the contract.

The judgment highlights that Late Payment Surcharge (LPS) is a pre-agreed penalty for delayed payment and is not a compensation for actual loss. The Court also emphasized that appeals under Section 125 of the Electricity Act, 2003, are maintainable only on substantial questions of law and not on findings of fact.

This ruling provides clarity on the interpretation of ‘Change in Law’ clauses in PPAs and the calculation of LPS, which has significant implications for the electricity sector in India. It underscores the need for parties to carefully draft and review contractual terms to avoid future disputes.

Flowchart of the Case