Supreme Court Upholds Penalty but Reverses Contract Termination in Power Purchase Dispute

Date of the Judgment: April 05, 2018

Citation: Not Available

Judges: Ranjan Gogoi, J., R. Banumathi, J.

Can a contract be terminated even when the contract itself provides for a penalty for the delay? The Supreme Court of India recently addressed this question in a dispute arising from a Power Purchase Agreement (PPA) between M.P. Power Management Company Ltd. and Renew Clean Energy Pvt. Ltd. The core issue revolved around the termination of the PPA due to delays in project commissioning, despite provisions for penalties within the agreement. The bench comprised Justices Ranjan Gogoi and R. Banumathi, with the majority opinion authored by Justice R. Banumathi.

Case Background

M.P. Power Management Company Ltd. (the appellant) initiated a bidding process for procuring power from grid-connected solar energy sources. Renew Clean Energy Pvt. Ltd. (respondent No. 1) was selected to supply 51 MW of solar power at a tariff of Rs. 5.457/kwh for 25 years. A Power Purchase Agreement (PPA) was executed on 10.11.2015, and respondent No. 1 provided a bank guarantee of Rs. 15,30,00,000/-. Respondent No. 1 faced difficulties in acquiring land for the project. Initially, the State Government allotted 96.73 acres of revenue land in Rajgarh district. However, due to encroachments and resistance, respondent No. 1 could not access the site. Consequently, respondent No. 1 requested a change of project location, which was approved by the appellant on 29.12.2016. Respondent No. 1 then purchased 253 acres of land in Ashok Nagar district and began construction. On 10.07.2017, respondent No. 1 informed the appellant that the project was in its final stages, with a tentative commissioning date of 31.08.2017, ahead of the scheduled date of 07.09.2017.

Timeline

Course of Proceedings

The appellant terminated the PPA on 11.08.2017 and imposed a penalty of Rs. 11,95,54,200/- on respondent No. 1. Aggrieved by this, respondent No. 1 filed a writ petition before the High Court of Madhya Pradesh, seeking to prevent the termination and encashment of the bank guarantee. The High Court partly allowed the writ petition on 18.08.2017, setting aside the termination but upholding the invocation of the bank guarantee. The appellant then appealed to the Supreme Court.

Legal Framework

The core of the dispute revolves around Clause 2.5 of the PPA, which deals with delays in achieving Conditions Subsequent. According to the PPA, respondent No. 1 was required to fulfill all Conditions Subsequent within 210 days from the effective date, i.e., 06.06.2017. Clause 2.5.1 of the PPA reads as follows:

“2.5.1. In case of delay in achieving any of the Conditions Subsequent under clause 2.1 (a to h), as may be applicable, MPPMCL shall encash CPG (submitted by Seller @ Rs.30 Lakhs/MW) as under, subject to Force Majeure:

a) Delay from 0-3 months – 1% per week.

b) Delay from 3-6 months – 2% per week for the period exceeding 3 months, apart from (a) above.

c) Delay from 6-9 months – 3% per week for the period exceeding 6 months, apart from (a) and (b) above.

d) In case of delay of more than 9 months, MPPMCL shall terminate PPA and release balance amount of CPG.”

This clause specifies a penalty for delays up to nine months and allows for termination of the PPA if the delay exceeds nine months. Clause 2.1 of the PPA required respondent No.1 to fulfil all Conditions Subsequent within a period of 210 days from the effective date i.e. 06.06.2017.

Arguments

Appellant’s Submissions:

• The appellant argued that respondent No. 1 failed to meet the Conditions Subsequent within the stipulated time of 210 days.
• The appellant contended that the delay exceeded the nine-month period, justifying the termination of the PPA as per Clause 2.5.1(d).
• The appellant maintained that the delay was not merely 16 days but was beyond the permissible nine-month period.

Respondent’s Submissions:

• Respondent No. 1 argued that the delay was due to unavoidable circumstances, including encroachment on the initially allotted land and subsequent change of location.
• Respondent No. 1 highlighted that they had already invested a substantial amount in purchasing land and developing the project at the new location.
• Respondent No. 1 pointed out that the project was in its final stages of commissioning and was expected to be commissioned ahead of the scheduled date.
• Respondent No. 1 contended that the termination of the contract was unfair, especially considering the advanced stage of the project.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue was whether the termination of the PPA was valid given the delay and the provision for penalties within the agreement.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The judgment does not explicitly cite any previous cases or authorities. However, it heavily relies on the interpretation of Clause 2.5 of the PPA.

Judgment

How each authority was viewed by the Court?

The Court relied heavily on the interpretation of Clause 2.5 of the PPA. The Court interpreted the clause to mean that while penalties were applicable for delays, termination was not justified when the project was in an advanced stage and the delay was due to unavoidable circumstances. The court held that the action of the appellant in terminating the contract was arbitrary and was rightly set aside by the High Court. The Court maintained the action of invocation of bank guarantee in terms of clause 2.5.1 of the PPA.

What weighed in the mind of the Court?

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

• The fact that the contract itself provided for penalties for delays.
• The unavoidable circumstances that caused the delay, including the initial land issues and the subsequent change of location.
• The substantial investment made by respondent No. 1 in purchasing land and developing the project.
• The fact that the project was in an advanced stage of commissioning and was nearing completion.
• The principle that termination of contract is not fair when the other party has fulfilled most of the obligations.

Fact:Law Ratio

Logical Reasoning:

The Court considered the interpretation of Clause 2.5 of the PPA. The Court noted that the clause provided for penalties for delays and therefore, the termination of the contract was not justified. The Court also considered the fact that the respondent had invested substantially in the project and the project was in an advanced stage. The Court also considered the fact that the delay was due to unavoidable circumstances. The Court held that the termination of the contract was arbitrary and was rightly set aside by the High Court.

The Court did not consider alternative interpretations, as the plain reading of the contract and the facts of the case were clear. The Court held that the termination was unfair and unjust, given the circumstances.

The Court’s decision was that while the respondent was liable to pay the penalty for the delay, the termination of the contract was not justified. The Court held that the termination was arbitrary and was rightly set aside by the High Court. The Court maintained the action of invocation of bank guarantee in terms of clause 2.5.1 of the PPA.

“In the light of our observations above, we are not inclined to go into the merits of this contention. Suffice to note that in cases of delay, Articles 2.5 and 2.6 provide for levy of penalty.”

“But the action of the appellant in terminating the contract is arbitrary and was rightly set aside by the High Court.”

“In our view, interest of justice would be met by directing respondent No.1 to pay penalty amount of Rs.11,95,54,200/- imposed upon respondent No.1 by the appellant.”

There was no minority opinion in this case. Both the judges concurred on the final decision.

The Court analyzed the facts of the case and the relevant clauses of the PPA. The Court held that the termination of the contract was not justified, given the fact that the contract itself provided for penalties for delays. The Court also considered the fact that the respondent had invested substantially in the project and the project was in an advanced stage. The Court held that the termination was arbitrary and was rightly set aside by the High Court.

The decision implies that parties cannot terminate a contract when the contract itself provides for penalties for delays. The decision also implies that the courts will consider the facts of the case and the circumstances surrounding the delay when deciding whether to uphold a termination of a contract.

No new doctrines or legal principles were introduced in this case. The court relied on the existing principles of contract law and the interpretation of the specific clauses of the PPA.

Key Takeaways

• Contracts should be interpreted in a manner that gives effect to all its clauses.
• Termination of a contract may not be justified if the contract provides for penalties for delays.
• Courts will consider the circumstances surrounding the delay and the stage of completion of the project before upholding a termination of contract.
• Substantial investments made by a party will be considered by the court in deciding whether to uphold a termination of contract.

Directions

The Supreme Court directed respondent No.1 to pay the penalty of Rs.11,95,54,200/- to the appellant within four weeks from the date of the judgment.

Development of Law

The ratio decidendi of the case is that a contract cannot be terminated for delays when the contract itself provides for penalties for such delays. This case reinforces the principle that contracts should be interpreted in a manner that gives effect to all its clauses and also the principle that termination of contract is not fair when the other party has fulfilled most of the obligations. There is no change in the previous positions of law.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision to set aside the termination of the Power Purchase Agreement (PPA). The Court emphasized that while the respondent was liable to pay the penalty for the delay as stipulated in the PPA, the termination was arbitrary and not justified given the circumstances. This judgment underscores the importance of interpreting contracts holistically and considering the specific facts of each case before deciding on termination.