Supreme Court Upholds Restitution in Power Purchase Agreements: UHBVNL vs. Adani Power (2019)

Date of the Judgment: 25 February 2019

Citation: 2019 INSC 179

Judges: R.F. Nariman, J., Navin Sinha, J.

Can a power generating company claim compensation for increased costs due to changes in tax laws, even if the Power Purchase Agreement (PPA) doesn’t explicitly mention “carrying costs”? The Supreme Court addressed this question in a dispute between Haryana’s electricity distribution companies and Adani Power Limited. The core issue was whether Adani Power was entitled to carrying costs as part of the compensation for changes in law that impacted their operational costs. The Supreme Court, in a judgment authored by Justice R.F. Nariman, upheld the Appellate Tribunal’s decision, affirming that Adani Power was indeed entitled to these costs under the principle of restitution embedded within the PPA. The bench comprised of Justices R.F. Nariman and Navin Sinha.

Case Background

Adani Power Ltd., a power generating company, established a 4620 MW coal-fired power plant in Mundra, Gujarat. This plant was set up within a Special Economic Zone (SEZ), which initially provided certain tax exemptions. Adani Power entered into Power Purchase Agreements (PPAs) with Uttar Haryana Bijli Vitran Nigam Ltd. and Dakshin Haryana Bijli Vitran Nigam Ltd. (Haryana Discoms) on 07.08.2008 and 02.02.2007. These PPAs governed the terms of power supply to Haryana. Subsequently, the Ministry of Commerce and Industry (MoC&I) withdrew these exemptions on 06.04.2015 and 16.02.2016, leading to increased costs for Adani Power due to the imposition of customs, excise, and service taxes. Adani Power sought compensation for these increased costs under the “Change in Law” clause of the PPAs.

Timeline

Course of Proceedings

Adani Power filed Petition No. 235/MP/2015 before the Central Electricity Regulatory Commission (CERC) on 15.10.2015, seeking compensation for the increased costs due to the withdrawal of tax exemptions, invoking Article 13 of the PPAs. On 04.05.2017, the CERC acknowledged the change in law and allowed the added costs related to customs, excise, and service taxes. However, it denied the claim for “carrying costs,” relying on a previous order dated 06.02.2017, stating there was no provision for such costs in the PPA. The Appellate Tribunal for Electricity, on 13.04.2018, overturned the CERC’s decision, holding that the principle of restitution under Article 13.2 of the PPA entitled Adani Power to carrying costs from the date of the change in law until the approval of the event by the appropriate authority. The Haryana Discoms and Gujarat Urja Vikas Nigam Ltd. (GUVNL) then appealed to the Supreme Court.

Legal Framework

The core of the dispute revolved around the interpretation of Article 13 of the Power Purchase Agreements (PPAs), specifically concerning the “Change in Law” clause. Article 13.1.1 defines “Change in Law” as any alteration in law, including amendments, modifications, or repeals, that affects the cost or revenue of selling electricity. It also includes changes in the interpretation of any law by a competent court or governmental body. Article 13.2 outlines the principle of restitution, stating that the affected party should be restored to the same economic position as if the change in law had not occurred. This restitution is to be achieved through monthly tariff payments.

Article 13.4.1 specifies that the adjustment in monthly tariff payments due to a change in law should be effective from the date of the change in law itself, if the change is by way of adoption, promulgation, amendment, re-enactment or repeal of the law. If the change is on account of a change in interpretation of law, then the adjustment in monthly tariff payment shall be effected from the date of the said order/judgment of the competent authority/Tribunal or the governmental instrumentality.

The relevant provisions of the PPA are:

“13.2 Application and Principles for computing impact of Change in Law
While determining the consequence of Change in Law under this Article 13, the Parties shall have due regard to the principle that the purpose of compensating the Party affected by such Change in Law, is to restore through Monthly Tariff Payments, to the extent contemplated in this Article 13, the affected Party to the same economic position as if such Change in Law has not occurred.”

“13.4.1 Subject to Article 13.2, the adjustment in Monthly Tariff Payment shall be effective from:
(i)the date of adoption, promulgation, amendment, re-enactment or repeal of the Law or Change in Law; or
(ii) the date of order/judgment of the Competent Court or tribunal or Indian Governmental Instrumentality, if the Change in Law is on account of a change in interpretation of Law.”

Other relevant articles include:

Article 11.3.1 and 11.3.4, which deal with the payment of monthly bills and late payment surcharges.

Article 11.8.1 and 11.8.3, which concern supplementary bills and late payment surcharges on supplementary bills.

Article 18.17, which limits liability to what is explicitly provided in the agreement and excludes indirect or consequential losses.

Arguments

Appellants’ Arguments (Haryana Discoms and GUVNL):

• The appellants argued that the Central Electricity Regulatory Commission (CERC) was correct in its initial order.
• They contended that since the Power Purchase Agreements (PPAs) did not explicitly mention “carrying costs,” such costs could not be awarded.
• They asserted that resorting to principles of equity or granting interest based on equity was not permissible because of Article 18.17 of the PPA.
• They relied on judgments of the Supreme Court to support their position that carrying costs could not be claimed outside the explicit terms of the contract.
• They argued that the Appellate Tribunal had erred in awarding carrying costs, as it went beyond the scope of the PPA.

Respondent’s Arguments (Adani Power Ltd.):

• The respondent supported the Appellate Tribunal’s judgment, stating that it had not gone beyond the scope of the PPA.
• They emphasized that Article 13.2 of the PPA explicitly provides a restitutionary principle, entitling them to be restored to the same economic position as if the change in law had not occurred.
• The respondent argued that carrying costs are a necessary component of restitution to achieve the economic position as if the change in law had not occurred.
• They argued that the change in law had resulted in increased costs, and they were entitled to be compensated for these costs from the date the change in law became effective.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section but the core issue was:

• Whether the Appellate Tribunal was correct in holding that the respondent was entitled to carrying cost arising out of approval of the change in law events from the effective date of change in law till the approval of the said event by appropriate authority, under Article 13 of the PPA.

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 authority was viewed by the Court?

• The Court distinguished South Eastern Coalfields Ltd. v. State of Madhya Pradesh and Ors., (2003) 8 SCC 648* because the claim in that case was under Section 61 of the Sale of Goods Act, 1930, and was not related to a PPA with a clause like Article 18.17.
• The Court distinguished National Thermal Power Corporation Ltd. v. Madhya Pradesh State Electricity Board, (2011) 15 SCC 580* as it turned on the interpretation of specific regulations and not the interpretation of a “Change in Law” clause in a PPA.
• The Court distinguished Indian Council for Enviro-Legal Action v. Union of India and Ors., (2011) 8 SCC 161* as it dealt with restitution in the context of environmental pollution, which is different from contractual obligations under a PPA.
• The Court distinguished All India Power Engineer Federation and Ors. v. Sasan Power Ltd. and Ors., (2017) 1 SCC 487* as it concerned the acceptance of amended tariffs by the Commission and not the interpretation of a “Change in Law” clause.
• The Court cited Energy Watchdog v. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80* to emphasize the importance of the restitutionary principle under Clause 13.2 of the PPA.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the restitutionary principle embedded within Article 13.2 of the Power Purchase Agreements (PPAs). The Court emphasized that the purpose of this clause was to restore the affected party, in this case, Adani Power, to the same economic position as if the change in law had not occurred. This meant that Adani Power was entitled to compensation for the increased costs incurred due to the withdrawal of tax exemptions from the date the change in law came into effect, and this compensation included carrying costs to ensure complete restitution. The Court also noted that this was not a claim based on general principles of equity but was firmly rooted in the contractual provisions of the PPA. The Court’s reasoning focused on the specific language of Article 13.2, which mandates that the affected party be restored to the same economic position as if the change in law had not occurred.

Logical Reasoning:

The court rejected alternative interpretations that would have denied carrying costs, emphasizing that the restitutionary principle under Article 13.2 required a comprehensive approach to compensation.

The court stated, “the purpose of compensating the Party affected by such Change in Law, is to restore through Monthly Tariff Payments, to the extent contemplated in this Article 13, the affected Party to the same economic position as if such Change in Law has not occurred.”

The court also stated, “it is clear that the adjustment in monthly tariff payment has to be effected from the date on which the exemptions given were withdrawn.”

Finally, the court concluded, “Since it is clear that this amount of carrying cost is only relatable to Article 13 of the PPA, we find no reason to interfere with the judgment of the Appellate Tribunal.”

There were no dissenting opinions in this case. The bench comprised Justices R.F. Nariman and Navin Sinha, with Justice Nariman authoring the judgment.

Key Takeaways

• Restitutionary Principle: Power Purchase Agreements (PPAs) with “Change in Law” clauses that include a restitutionary principle must be interpreted to restore the affected party to the same economic position as if the change in law had not occurred.
• Carrying Costs: Carrying costs can be included as part of restitution, even if not explicitly mentioned in the PPA, if they are necessary to achieve the economic position as if the change in law had not occurred.
• Effective Date: Compensation for changes in law should be effective from the date the change in law takes effect, not from the date of the order by the regulatory authority.
• Contractual Interpretation: Claims for compensation must be rooted in the contractual provisions of the PPA and not based on general principles of equity.

This judgment has significant implications for future cases involving similar “Change in Law” clauses in PPAs, emphasizing the importance of the restitutionary principle and the need to fully compensate affected parties for increased costs due to changes in law.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that in Power Purchase Agreements (PPAs) with a “Change in Law” clause that includes a restitutionary principle, the affected party is entitled to be restored to the same economic position as if the change in law had not occurred. This includes carrying costs, even if not explicitly mentioned in the PPA, and the compensation must be effective from the date of the change in law. This judgment clarifies the interpretation of such clauses and ensures that the principle of restitution is applied comprehensively. There is no change in the previous position of law, but this judgment clarifies the interpretation of existing legal principles.

Conclusion

The Supreme Court dismissed the appeals, affirming the Appellate Tribunal’s decision that Adani Power was entitled to carrying costs under the “Change in Law” clause of the Power Purchase Agreements. The Court emphasized the restitutionary principle within the PPAs, requiring the affected party to be restored to the same economic position as if the change in law had not occurred. This decision underscores the importance of contractual interpretation and the comprehensive application of restitutionary principles in commercial agreements.

Category

Parent Category: Electricity Law

Child Category: Power Purchase Agreement

Child Category: Change in Law

Child Category: Restitution

Parent Category: Contract Law

Child Category: Interpretation of Contracts

Child Category: Commercial Contracts

Parent Category: Electricity Act, 2003

Child Category: Section 2(18), Electricity Act, 2003

FAQ

Q: What is a “Change in Law” clause in a Power Purchase Agreement (PPA)?

A: A “Change in Law” clause in a PPA is a provision that addresses how changes in laws or regulations that impact the cost or revenue of power generation will be handled. It typically outlines how the parties will adjust the tariff to account for these changes.

Q: What does “restitution” mean in the context of a PPA?

A: In the context of a PPA, restitution means restoring the affected party (e.g., the power generator) to the same economic position it would have been in if the change in law had not occurred. This may include compensating for increased costs or decreased revenues.

Q: What are “carrying costs” in the context of this judgment?

A: “Carrying costs” refer to the costs incurred by the power generator from the date of the change in law until the date the regulatory authority approves the compensation. These costs are essentially the financial burden of waiting for the compensation to be approved and paid.

Q: Why did the Supreme Court rule in favor of Adani Power?

A: The Supreme Court ruled in favor of Adani Power because the “Change in Law” clause in the PPA included a restitutionary principle. The Court interpreted this principle to mean that Adani Power was entitled to be restored to the same economic position as if the change in law had not occurred, which included carrying costs.

Q: What is the significance of this judgment for other power generators?

A: This judgment clarifies that PPAs with similar “Change in Law” clauses must be interpreted to fully compensate affected parties, including carrying costs. It emphasizes the importance of the restitutionary principle and ensures that power generators are not unduly burdened by changes in law.