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Energy Watchdog v. Central Electricity Regulatory Commission and Ors. Etc.

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 5399-5400 of 2016)Decided 11 Apr 2017
Civil Appeal Nos. 5399-5400 of 2016
Justice Pinaki Chandra Ghose · Justice Rohinton Fali Nariman

Background

Several power generating companies (including Adani Power and Tata Power's Mundra plant) had signed long-term, non-escalable tariff Power Purchase Agreements to supply electricity, relying on imported Indonesian coal. When Indonesia changed its coal-pricing regulations in 2010-2011, linking domestic coal sale prices to international benchmark prices, the generators' fuel costs rose sharply, and they sought tariff relief from the Central Electricity Regulatory Commission (CERC) on the grounds of "force majeure" and "change in law" under their PPAs. Consumer groups (Energy Watchdog, Prayas, and state power distribution utilities) challenged the relief granted by CERC and upheld (in modified form) by the Appellate Tribunal for Electricity, arguing that a foreign regulatory change could not justify altering a competitively-bid, fixed tariff.

Decision Breakdown

The Supreme Court held that a change in Indonesian law could not qualify as a "change in law" event under the PPAs, since the agreements' change-in-law clause (read with the bidding guidelines) was concerned with changes in Indian law, not foreign law, so the generators could not claim relief on that basis for the Indonesian regulatory change. It also held that mere difficulty or commercial hardship in performing a contract (even a drastic rise in fuel cost) does not amount to force majeure or "frustration" under the Indian Contract Act unless performance becomes genuinely impossible; a contract is not frustrated merely because it becomes onerous. However, the Court found that a later change in India's own coal-allocation policy (the 2013 reduction in supply from Coal India) did qualify as a "change in law" to the limited extent it affected the Indian-sourced component of coal. It set aside the Tribunal's and CERC's orders and directed CERC to redetermine, afresh, what relief the generators were entitled to strictly on this narrower "change in Indian law" basis.

Lesson Learnt

A rise in costs or a foreign government's regulatory action does not, by itself, excuse performance of a fixed-price commercial contract as "force majeure" unless the contract's own force-majeure/change-in-law clause specifically covers it: commercial hardship alone is not legal impossibility, and parties bidding on fixed, non-escalable tariffs bear the risk of foreseeable cost fluctuations unless they have expressly contracted otherwise.

Official source (sci.gov.in)View Judgment (PDF)

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