CASE DETAILS

  • Full Name of the Case: Energy Watchdog v. Central Electricity Regulatory Commission and Ors. Etc.
  • Court: Supreme Court of India
  • Judges: Justice Pinaki Chandra Ghose and Justice Rohinton Fali Nariman
  • Citation: 2017 SCC Online SC 378
  • Date decided: 11th April, 2017

INTRODUCTION

The judgment in the case of Energy Watchdog v. Central Electricity Regulatory Commission (CERC) impacted the Law of Contracts in India to a large extant. This judgment became prominent due to its curious and notable subject matter. Its decision was given by the Supreme Court of India.

FORCE MAJEURE

The events which are unforeseeable and unavoidable are considered as an act of god. The provision of force majeure that discharges both the parties to contract from the obligation due to extraordinary events preventing one/both parties from performing the said obligations in the contract. The clause of in Indian Contract Act, 1872 is mentioned in the following sections:

  • Section 32: Enforcement of contracts contingent on an event happening- Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.
  • Section 56: Agreement to do impossible act- An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful. -A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.[1]

FACTS

On January 11th, 2007, Gujarat Urja Vikas Nigam Limited (GUVNL) selected Adani Enterprises Consortium as a successful bidder, as Adani Enterprises was already having an arrangement with Gujarat Mineral Development Corporation and was entered into Memorandum of Understanding (MOU) with a German Company and a Japanese agent. On July 17th, 2008, Haryana Utilities issued a Letter of Intent declaring Adani Power as a successful bidder. Every single act was in accordance to the guidelines issued by the Central Government on January 19th, 2005, which were amended time to time. The Haryana State Commission and the Gujarat State Commission adopted the tariff on July 31st, 2008 and December 20th, 2007 respectively. And then, Adani Consortium signed several Power Purchase Agreements (PPAs) for different projects.

An unforeseen change in Indonesian Law occurred in the year 2010 and 2011, which aligned the export price of coal from Indonesia to international market prices instead of the price that was prevailing for the last 40 years.[2]

Adani Power filed a petition before the Central Electricity Regulatory Commission (CERC) seeking relief either in discharging them from the performance of the PPAs on account of frustration, or evolving a mechanism restoring the petitioners to the same economic condition prior to the occurrence of the change in Indonesian laws.

On October 16th, 2012, the Central Commission held that the PPAs entered into by Adani Power in both the cases constituted a composite scheme for generation and sale of electricity. So, being an appropriate Commission and not the respective State Commissions, it does not have jurisdiction in the matter. On April 2nd, 2013, a review petition was filed against this order, whereby the Central Commission passed an order, submitting the claims made by Adani Power on the grounds of force majeure and/or change in Indonesian Law was held not to be admissible but it can provide redressal of grievances under section 79 of the Electricity Rules, 2005.

The Committee submitted a report, rejecting the cross-objection filed by Adani Power and on 31st October, 2014, the Appellate Tribunal rejected the prayer for condonation of delay. Hence, Adani Power filed an appeal before the Hon’ble Supreme Court.[3]

ISSUES

  1. How far is the ambit of frustration of contract and does mere change in price amount to frustration of contract?
  2. What is the interpretation of the word “Change in law” in the Power Purchase Agreement (PPA)?[4]

ANALYSIS

APPELLANT’S ARGUMENTS

The following arguments were made by the learned counsel of appellants:

  1. That the respondent (Adani Power) should not be entitled to raise the issue of force majeure and change in Indonesian law as, both the claims had been rejected by the Central Commission in its earlier order.
  2. That force majeure either under Section 56 of the Indian Contract Act, 1872 made it clear that the event it must be an unforeseen or that wholly or partly prevents the affected party in fulfilling its obligations under the agreement.
  3. That the given bid by the respondent was not premised solely on the import of coal from Indonesia but it was open to them to get coal from any source. If the price of coal as a raw material rises, a contract does not get frustrated merely because it becomes commercially onerous. The fundamental basis of the PPAs between the parties was not premised on the price of coal imported from Indonesia.[5]

DEFENDANT’S ARGUMENTS

Following arguments were contended by the respondent (Adani Enterprises):

  1. That the Central Commission has the jurisdiction on the facts of these cases, in as much as Sections 79 and 86 [6] form part of one scheme.
  2. That under Section 86[7], the State Commissions have to deal with generation and sale of electricity within the State, when generation and sale takes place outside the State (as in this case), the State Commission would have no jurisdiction under Section 86[8], and consequently Section 79(1) (b)[9] has to be read as part of a scheme in which the moment generation and sale of electricity is inter-State and not intra State, the Central Commission alone would have jurisdiction.
  3. That the fundamental basis of the contract was the agreement of fuel supply that was to be entered into, and pointed out various clauses in the PPAs to show that the fuel supply agreement and imported coal were both very important elements, both in the bid and the PPAs.[10]

JUDGMENT

  1. That if the contract does not include an explicit clause of force majeure, the affected party could claim the relief under the doctrine of frustration as mentioned under Section 56 of the Indian Contract Act, 1872. However, to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible and not merely onerous.
  2. That “change in law/ Indonesian law” did not include foreign law, Indian law for the PPAs by holding that any change in government policy (such as the Ministry of Coal amending guidelines for supply of coal, etc) comes within the ambit of force majeure. Hence, the word “change in law” in PPA under force majeure clause does not cover Indonesian laws.[11]

CONCLUSION

The judgment in the case of Energy Watchdog v. Central Electricity Regulatory Commission and Ors. Etc., delivered by the Supreme Court of India, is related to Law of Contracts. The judgment was well put together and has successfully sets a benchmark for the doctrine of frustration of contract and force majeure; however, the underlying implications of the judgment have become an evergreen subject of debate in commercial circles.

RESOURCES

  1. https://www.legallyindia.com/views/entry/force-majeure-under-indian-contract-law-energy-watchdog-v-cerc-sci
  2. https://www.argus-p.com/uploads/blog_article/download/1585981479_force-majeure-in-the-time-of-covid-19---an-overview.pdf
  3. https://www.airtract.com/article/case-brief-energy-watchdog-vs-central-electricity-regulatory-on-11th-april-2017-
  4. https://www.irccl.in/post/energy-watchdog-v-cerc-the-contractual-crisis-plaguing-india-s-electricity-sector
  5. https://www.mondaq.com/india/oil-gas-electricity/628912/future-of-compensatory-tariff-in-light-of-the-supreme-court-decision-in-energy-watchdog-v-cerc
  6. https://thecolumnofcurae.wordpress.com/2020/04/23/force-majeure-as-envisaged-by-supreme-court-in-energy-watchdog-v-cerc/
  7. https://indiankanoon.org/doc/29719380/

[1] Indian Contract Act, 1872

[6] Electricity Act, 2003

[7] Electricity Act, 2003

[8] Electricity Act, 2003

[9] Electricity Act, 2003

[11] https://thecolumnofcurae.wordpress.com/2020/04/23/force-majeure-as-envisaged-by-supreme-court-in-energy-watchdog-v-cerc/


About the Author: This Case Brief is prepared by Ms. Arushi Jain, law student at Jagran Lakecity University. She can be reached at arushijain3@yahoo.com 

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