Monday, August 21, 2017
NEW DELHI: In 2010, the Government of Indonesia issued new guidelines aligning the export price of coal from Indonesia with the prevalent international market prices. Thereby, making the export price of coal considerably higher than seen in the previous four decades.
Earlier in 2007, when Adani Power had bid aggressively to supply power to Gujarat Urja Vikas Nigam Limited (GUVNL) and Haryana utilities they had not taken into consideration such a possibility. This decision by the Indonesian Government turned out to be a financial calamity for Adani Power, that had on the premise of cheaper coal from Indonesia bid successfully and entered into a long-term Power Purchase Agreements for supplying power to GUVNL and Haryana utilities .
Though, it is to be noted that the bidders had the option of quoting escalable tariff (they could have incorporated provisions for suitable escalation of fuel costs in the Request for Proposal) to cover any possible financial risks. However, in spite of this option the Adani consortium decided to quote non escalabale tariffs.
Subsequently in 2012, in view of the dramatic increase in imported coal from Indonesia, Adani Power filed a petition in the Central Electricity Regulatory Commission (Commission) under section 79 (power of Central Commission to determine and regulate tariff) of the Electricity Act, 2003 (Act) to either discharge them from their obligation under the PPA in view of the change in price of Indonesian coal or evolve a scheme protecting them from the impact of such change in law. Section 79 of the Act gives power to the Commission to regulate and determine tariff or to discharge any other action as provided by the Electricity Act.
The Commission in exercise of its regulatory power under the Act set up a committee to consider the alleged difficulties of Adani Power. This was done taking into consideration larger public interest and to ensure electricity is available at reasonable prices.
Subsequently, the Committee advised granting compensatory tariff to Adani Power and The Central Commission on February 21, 2014 proceeded as advised to grant compensatory tariff.
This order was challenged by the Consumer Groups in the Appellate Tribunal, Eventually the legal issues first whether “change in law” would include change in foreign law and second, whether force majeure clause was drawn or not.
The Appellate tribunal held on a reading of the Indian Contract Act 1872 and the Power Purchase Agreements entered by Adani Power that the force majeure clause was applicable to the facts of the case while also holding that the change in law in Indonesia did not fit into “change in law” as contemplated by the PPA .
The Appellate Tribunal further decided that the Commission shall determine the amount of compensatory tariff to be given to the Adani Power. The Commission accordingly on December 6, 2016 determined the compensatory tariff to be given to Adani Power.
This is when the Supreme Court of India was approached by consumer groups challenging the order of the Appellate Tribunal dated April 7, 2016 on the grounds that the force majeure clause will not be attracted as a reading of section 32 and 56 (agreement to do impossible act) of the Indian Contract Act and clauses 12.3 (Force Majeure) and 12.7( Relief for Force Majeure) of the PPA would indicate that there must be an unforeseen circumstance that hinders the performance of the contract, which is not the case in the present petition. Further they also argued that the Adani enterprise voluntarily decided on non escalable tariff to be competitive and also that the agreement was not premised on the import of coal from Indonesia alone.
While Adani enterprise argued that Non-escalable tariffs can not mean that if the source of coal becomes unavailable and thereby negatively impacts the economic viability of the contract the tariff should not be adjusted. It was argued that the commercial unworkability would force the folding up of operations and this would lead to consumers procuring electricity at a higher rate and that would be against public interest. While curiously at the same time it was also argued by Adani Power that since GUVNL and Haryana utilities had not appealed themselves and that the consumer groups do not have locus in the current petition.
The Supreme Court of India presiding in a bench consisting of Justice P.C. Ghoshe and Justice Rohinton Nariman hearing the arguments gave a systematic explanation on the law when dealing with the above stated issues.
The Court set out the law present in both the United Kingdom and in India on when a commercial contract can be said to be frustrated. The Judgement relied heavily on the previous judgement of the Indian Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co. and also on the Judgement of the Court of Appeal of England and Wales in Sea Angel case, 2013 (1) Lloyds Law Report 569 amongst others to rule that the doctrine of frustration would be invited only where the fundamental basis of the contract itself is found altered.
The Court held that the PPA’s entered by Adani nowhere contemplates that coal is to be secured exclusively from Indonesia. Further the agreement makes clear that the price to be paid for supply of coal is entirely on the person setting up the power plant. The Supreme Court was also of the view that alternative modes of acquiring coal were available and the contract could not be frustrated on the premise of the unforeseen rise in Indonesian coal. Therefore, the Court ruled that neither clause 12.3 nor 12.7 (force majeure), or Section 32 of the Contract Act, will apply to enable the grant of compensatory tariff to Adani Enterprise.
Adani Enterprise also argued that the Central Government Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licensees issued in 2005 (clauses 4.7 dealing with change in law impacting revenue, 5.17 dealing with arbitration and Clause 13 dealing with change in law ) read together would show that any change in law affecting revenue will be adjusted separately and also that these guidelines would supersede the provisions of the PPA’s and in view of these guidelines the PPA’s must contemplate the change in foreign law as seen in Indonesia.
The Court was of the view that the above argument is incorrect, this was substantiated by pointing out that in the PPA clauses 12.4(f)(ii), 4.1.1(a) and 17.1, specify the term Indian law further that “Electricity laws”, means the Electricity Act, rules and regulations made thereunder. This being so it is clear that the legal regime clearly contemplates reference only to law in India. The Court also made clear that Article 13 of the Guidelines dealing with “change in laws” will apply to changes in Indian Law. Thereby the decisions of the Power Ministry on coal distribution policy would fall under “change in law” and the CERC will determine required change to power generators falling under Article 13 as decided by the Judgement.
Many legal commentators believe that the legal obligation of a bid process should not become the ultimate test of deciding compensatory tariff but the commercial viability of a project must also be contemplated when the Court is adjudicating rights in commercial contracts. It has also been argued that the Government when formulating bid documents for such projects must contemplate the price volatility of commodities (coal in this instance), especially when entering long term contracts so as to ensure sustainability of such an agreement.
As of today, this Judgement of the Supreme Court makes clear that the Parties must be bound by the promise made in the contract.
(Abhik Chimni is a lawyer)