Supreme Court Upholds Termination Clause in Power Purchase Agreement: Rithwik Energy vs. BESCOM (2018)

Introduction

Date of the Judgment: 06 February 2018

Citation: 2018 INSC 101

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

Can a power company terminate a power purchase agreement (PPA) if the notice of default doesn’t strictly follow the contract’s terms? The Supreme Court of India recently addressed this question in a dispute between Rithwik Energy Generation Pvt. Ltd. and Bangalore Electricity Supply Co. Ltd. (BESCOM). The court examined whether a notice of default must precisely adhere to the contractual requirements and whether a party can challenge a finding on an issue it had previously raised. The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Navin Sinha.

Case Background

Rithwik Energy Generation Pvt. Ltd. (the appellant), a power generating company, entered into an agreement with the Government of Karnataka on 26 September 2006, to establish a 24.75 MW mini hydro-electric power plant. Subsequently, on 3 May 2007, the appellant signed a Power Purchase Agreement (PPA) with Bangalore Electricity Supply Co. Ltd. (BESCOM, Respondent No. 1). BESCOM sent the PPA to the State Commission for approval. However, on 6 June 2007, the State Commission returned the PPA, stating that BESCOM’s 10% quota under the Karnataka Regulations of 2004 was already exhausted.

On 26 July 2008, the appellant entered into another PPA with PTC India Limited to sell electricity and sought the Commission’s approval for supply to PTC under the Open Access provisions of the Electricity Act. On 31 August 2009, the appellant filed O.P. No. 29 of 2009 before the State Commission, seeking a declaration that no valid PPA existed between the appellant and BESCOM. The appellant argued that it was free to enter into another PPA and supply electricity under the Open Access system.

The State Commission dismissed the appellant’s O.P. on 23 December 2010, holding that the return of the PPA did not mean rejection, and the non-approval did not invalidate the PPA. The appellant then appealed to the Appellate Tribunal. During the pendency of the appeal, the appellant sent a letter dated 5 May 2011, to BESCOM, which became a central point of contention. The letter, marked “WITHOUT PREJUDICE,” addressed “Permission to sell Power to Third Parties.” It stated that if the PPA was valid, BESCOM had defaulted on its obligations by not making payments on time, not paying interest, and not opening a Letter of Credit. The letter requested BESCOM to permit the appellant to sell power to third parties, citing Article 9.2.2 of the PPA.

Timeline

Course of Proceedings

The State Commission dismissed the appellant’s O.P., stating that the return of the PPA did not invalidate it. The Appellate Tribunal also dismissed the appeal, agreeing with the State Commission. However, the Appellate Tribunal also considered an affidavit filed by the appellant, which brought subsequent events on record. The Appellate Tribunal referred to Clause 9.3.2 of the PPA, which deals with termination for default by BESCOM. It noted that the appellant had not issued a default notice as required by the clause.

On 11 May 2012, the appellant purported to terminate the PPA, relying on the 5 May 2011 letter as a default notice. BESCOM responded by paying the interest and substituting the Letter of Credit. Subsequently, BESCOM filed O.P. No. 6 of 2013 before the State Commission, seeking a declaration that the termination of the PPA was invalid. The State Commission allowed BESCOM’s O.P., relying on the Appellate Tribunal’s observations that the 5 May 2011 letter was not a valid default notice. The Appellate Tribunal dismissed the appeals filed against both the 9 May 2013 and 17 October 2013 orders, reiterating that the 5 May 2011 letter did not comply with Clause 9.3.2 of the PPA.

Legal Framework

The core of the dispute revolves around Clause 9.3.2 of the Power Purchase Agreement (PPA), which outlines the procedure for termination due to the corporation’s (BESCOM’s) default. The clause states:

“9.3.2 Termination for corporation’s Default: Upon the occurrence of an event of default as set out in sub-clause 9.2.2 above, Company may deliver a Default Notice to the Corporation in writing which shall specify in reasonable detail the Event of Default giving rise to the default notice, and calling upon the BESCOM to remedy the same. At the expiry of 30 (thirty) days from the delivery of this default notice and unless the Parties have agreed otherwise or the Event of Default giving rise to the Default Notice has been remedied, Company may deliver a Termination Notice to Corporation. Company may terminate this Agreement by delivering such a Termination Notice to Corporation and intimate the same to the Commission. Upon delivery of the Termination Notice this Agreement shall stand terminated.”

This clause requires a two-step process for termination: first, a default notice specifying the default and calling for remedy, and second, a termination notice if the default is not remedied within 30 days, unless otherwise agreed.

Arguments

Appellant’s Arguments (Rithwik Energy):

• The finding by the Appellate Tribunal on the letter dated 05.05.2011 was not a matter directly and substantially in issue, but merely collateral, and therefore, not res judicata.
• The notice dated 05.05.2011 substantially complied with Clause 9.3.2 of the PPA and should be considered a valid default notice.
• The termination notice dated 11.05.2012 was valid, and the judgments of the State Commission and the Appellate Tribunal were incorrect.
• Defaults by BESCOM continued and were remedied long after the period stated in the PPA.

Respondent’s Arguments (BESCOM):

• The appellant is estopped from arguing that there was no res judicata, as the appellant itself filed an affidavit before the Appellate Tribunal seeking a finding on subsequent events.
• The Appellate Tribunal’s judgment dated 21.10.2011 was correct in law.
• A Letter of Credit was opened, and any initial shortfall was rectified.

The innovativeness of the argument by the appellant was that even though the letter dated 05.05.2011 did not specifically use the words “remedy the default,” it substantially complied with the requirements of Clause 9.3.2.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the finding of the Appellate Tribunal based on the letter dated 05.05.2011 was res judicata.
2. Whether the notice dated 05.05.2011 was a valid default notice under Clause 9.3.2 of the PPA.
3. Whether the termination notice dated 11.05.2012 was valid in law.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Pasupuleti Venkateswarlu vs. The Motor & General Traders, [1975] 3 S.C.R. 958 – This case was cited to support the principle that a court can consider events subsequent to the filing of a petition if they have a fundamental impact on the right to relief.
  
  Ratio: The Court can take cognizance of events and developments subsequent to the institution of the proceedings to make the right or remedy claimed meaningful.
• Sajjadanashin Sayed Md. B.E. EDR. (D) by LRs vs. Musa Dadabhai Ummer and Others, (2000) 3 SCC 350 – This case was cited to define what constitutes an issue that is directly and substantially in issue, as opposed to being collaterally and incidentally in issue.
  
  Ratio: An issue is directly and substantially in issue if it was necessary to be decided for adjudicating the principal issue, or if the court considers its adjudication material and essential for its decision.
• Nani Gopal Biswas vs. The Municipality of Howrah, [1958 S.C.R. 774 – This case was cited by the appellant to argue that a notice should be considered valid if it substantially complies with the law.
  
  Ratio: A notice under a wrong provision of law would make no difference to the substance of the notice if the effective part of the notice is clear.
• Thakur Pratap Singh vs. Shri Krishna Gupta and Others, [1955] 2 S.C.R. 1029 – This case was cited by the appellant to argue that minor discrepancies in a form should not invalidate it.
  
  Ratio: If there is enough material in the paper to enable the candidate to be identified beyond doubt, minor discrepancies in the form would not matter.

Legal Provisions:

• Clause 9.3.2 of the Power Purchase Agreement (PPA) – The clause that specifies the procedure for termination of the PPA due to the corporation’s default.

Judgment

How each authority was viewed by the Court:

✓ Pasupuleti Venkateswarlu vs. The Motor & General Traders, [1975] 3 S.C.R. 958* – The Court relied on this case to support its decision to consider the subsequent events brought on record by the appellant.

✓ Sajjadanashin Sayed Md. B.E. EDR. (D) by LRs vs. Musa Dadabhai Ummer and Others, (2000) 3 SCC 350* – The Court used this case to define what constitutes an issue that is directly and substantially in issue.

✓ Nani Gopal Biswas vs. The Municipality of Howrah, [1958 S.C.R. 774* – The Court distinguished this case, stating it was not applicable to the facts of the present case.

✓ Thakur Pratap Singh vs. Shri Krishna Gupta and Others, [1955] 2 S.C.R. 1029* – The Court distinguished this case, stating it was not applicable to the facts of the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the strict interpretation of the contractual clauses and the principle of estoppel. The Court emphasized that the appellant, having invited the Appellate Tribunal to consider the subsequent events, could not later argue that the finding was merely collateral. Furthermore, the Court held that the default notice did not comply with the requirements of Clause 9.3.2 of the PPA, as it did not explicitly call upon BESCOM to remedy the defaults within the stipulated time.

The Court’s reasoning was primarily based on the legal interpretation of the contractual clauses and the application of legal principles (70%), with a lesser emphasis on the factual aspects of the case (30%).

Logical Reasoning:

The Court rejected the appellant’s argument that the letter dated 05.05.2011 substantially complied with the requirements of Clause 9.3.2 of the PPA. The Court emphasized that both parts of the clause were important: specifying the event of default and calling upon the corporation to remedy it within 30 days. The Court stated, “Both parts of Clause 9.3.2 are important – one specifying in reasonable detail the event of default and the second, calling upon Respondent No.1 to remedy the same within a period of 30 days.”

The Court also noted that the parties could agree otherwise, which further highlighted the importance of the second part of the clause. The Court stated, “It is also important to note that the parties may otherwise agree, in which case the Respondent No.1 may remedy the defaults mentioned in the notice either before or after the expiry of 30 days period laid down, showing that the parties considered that this part of Clause 9.3.2 is as important as the first part, for otherwise, a termination notice could, de hors the second part of Clause 9.3.2 have issued straight away without more.”

The Court distinguished the cases cited by the appellant, stating that they were not applicable to the facts of the present case. The Court stated, “Substantial compliance, therefore, can be no answer to such a mandatory requirement.”

Key Takeaways

✓ Notices of default under contracts, especially PPAs, must strictly adhere to the terms of the agreement.

✓ A party cannot challenge a finding on an issue it introduced and invited the court to consider, due to the principle of estoppel.

✓ Substantial compliance is not sufficient when a contract specifies mandatory requirements for a notice of default.

✓ This judgment reinforces the importance of precise language and adherence to contractual terms in commercial agreements.

Directions

No specific directions were given by the Supreme Court.

Specific Amendments Analysis

There were no specific amendments discussed in this judgment.

Development of Law

The ratio decidendi of this case is that a default notice under a contract must strictly adhere to the terms of the contract, and a party cannot challenge a finding on an issue it introduced. This judgment reinforces the importance of precise language and adherence to contractual terms in commercial agreements. There is no change in the previous positions of law.

Conclusion

The Supreme Court dismissed the appeals, upholding the decisions of the lower courts and tribunals. The Court held that the appellant was estopped from challenging the findings of the Appellate Tribunal on the subsequent events. It also held that the notice dated 05.05.2011 did not comply with Clause 9.3.2 of the PPA, as it did not call upon BESCOM to remedy the defaults within the stipulated time. Therefore, the termination notice was deemed invalid. This case underscores the importance of strict adherence to contractual terms, particularly in default notices, and the principle of estoppel in legal proceedings.

Category

Parent Category: Contract Law

Child Categories:

• Power Purchase Agreement (PPA)
• Termination Clause
• Default Notice
• Estoppel

Parent Category: Electricity Act

Child Category: Power Purchase Agreement, Electricity Act

Frequently Asked Questions (FAQs)

Q1: What was the main legal issue in the Rithwik Energy vs. BESCOM case?

A: The main legal issue was whether a notice of default under a Power Purchase Agreement (PPA) must strictly adhere to the terms of the agreement to be valid, and whether a party can be estopped from challenging a finding on a subsequent event it introduced.

Q2: What is the significance of Clause 9.3.2 in the Power Purchase Agreement (PPA)?

A: Clause 9.3.2 outlines the procedure for termination of the PPA due to the corporation’s (BESCOM’s) default. It requires a two-step process: a default notice specifying the default and calling for remedy, and a termination notice if the default is not remedied within 30 days.

Q3: Why was the appellant’s default notice deemed invalid by the Supreme Court?

A: The appellant’s default notice was deemed invalid because it did not explicitly call upon BESCOM to remedy the defaults within 30 days, as required by Clause 9.3.2 of the PPA.

Q4: What is the principle of estoppel, and how was it applied in this case?

A: The principle of estoppel prevents a party from arguing a point that contradicts what they have previously asserted or implied. In this case, the appellant was estopped from arguing that the finding on the 5 May 2011 letter was merely collateral because the appellant itself had invited the Appellate Tribunal to consider the subsequent events.

Q5: What does the Supreme Court’s decision in this case imply for future contracts?

A: The decision implies that parties must ensure strict adherence to contractual terms, especially when issuing default notices. Substantial compliance is not sufficient when a contract specifies mandatory requirements.

Q6: What was the ratio of Fact to Law in the Supreme Court’s judgment?

A: The ratio of Fact to Law in the Supreme Court’s judgment was 30% Fact and 70% Law.

Q7: What was the key takeaway from the judgment?

A: The key takeaway from the judgment was that notices of default under contracts, especially PPAs, must strictly adhere to the terms of the agreement, and a party cannot challenge a finding on an issue it introduced.