Energy Watchdog v Central Electricity Regulatory Commission (2017)

This is the modern Supreme Court restatement of the law of frustration in India, and the case every answer on s. 56 should now cite alongside Satyabrata Ghose. Two propositions come out of it and both are heavily examinable.

First, the division of labour between s. 32 and s. 56. Where the parties have themselves provided for the supervening event by a force majeure clause, the contract is dissolved, if at all, under its own terms, and the matter falls under s. 32 as a contingent contract. Section 56 operates only where the frustrating event occurs outside the contract altogether. Second, that a rise in the price of raw material does not frustrate a contract, however commercially painful, where performance remains possible by some alternative mode.

Competitive bidding under s. 63 of the Electricity Act led to power purchase agreements between generating companies and State distribution utilities. Adani Power, having been selected as the successful bidder, entered into a PPA with GUVNL on 2 February 2007 for the supply of 1000 MW, and later PPAs with the Haryana utilities for the supply of 1425 MW at a levelised tariff of Rs.2.94/kWh. The energy charges quoted were non-escalable — a tariff structure the bidders chose in order to be competitive.

Changes in Indonesian law in 2010 and 2011 aligned the export price of Indonesian coal to international market prices instead of the price that had prevailed for the previous forty years. The cost of imported coal rose sharply. Adani Power petitioned the Central Electricity Regulatory Commission under s. 79 of the Electricity Act, seeking either to be discharged from performance of the PPAs on the ground of frustration or to have a mechanism evolved to restore it to its former economic position.

On 2 April 2013 the Central Commission rejected the claims of force majeure and change in law, but purported to grant relief under its regulatory powers, and on 21 February 2014 granted a compensatory tariff. The Appellate Tribunal for Electricity, by its judgment of 7 April 2016, held that force majeure was made out and remanded the matter for quantification. Consumer groups and distribution utilities appealed to the Supreme Court.

The Court began by locating force majeure within the Contract Act: "In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof." Where the event occurs outside the contract, "it is dealt with by a rule of positive law under Section 56".

That division comes from Satyabrata Ghose v Mugneeram Bangur & Co., on which the Court relied: where the contract itself, expressly or impliedly, contains a term under which performance stands discharged in certain circumstances, the dissolution takes place under the terms of the contract and the case falls under s. 32; if frustration is to take place de hors the contract, s. 56 governs.

The Court traced the doctrine from Taylor v Caldwell and through the Indian authorities. From Alopi Parshad & Sons Ltd v Union of India it took the rule that an abnormal rise or fall in prices does not by itself get rid of the bargain, and that "the performance of a contract is never discharged merely because it may become onerous to one of the parties." From Naihati Jute Mills Ltd v Khyaliram Jagannath it took the proposition that a contract is not frustrated merely because the circumstances in which it was made are altered: "The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events."

The doctrine, the Court said, is confined: "applying the doctrine of frustration must always be within narrow limits." Tsakiroglou & Co Ltd v Noblee Thorl GmbH was cited — the closure of the Suez canal did not frustrate a sale of groundnuts although the voyage round the Cape of Good Hope was three times the distance and the freight double — for the principle that where performance remains possible, a mere rise in freight does not discharge a party. Chitty and Treitel were relied on to the same effect, and the multi-factorial approach of the Sea Angel case was approved, including its warning that "mere incidence of expense or delay or onerousness is not sufficient" and that there must be "a break in identity between the contract as provided for and contemplated and its performance in the new circumstances."

Applying that law, the Court held: "the doctrine of frustration cannot apply to these cases as the fundamental basis of the PPAs remains unaltered." Nowhere did the PPAs state that coal was to be procured only from Indonesia at a particular price; on a reading of the agreements as a whole, the price payable for coal was entirely for the person setting up the power plant to bear. Accordingly, "an unexpected rise in the price of coal will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took."

The Court was careful not to overstate the effect of the non-escalable bid. A non-escalable tariff does not preclude a plea of frustration if that plea is otherwise available in law; it is a factor going only to show where the risk lay.

On the contractual clause itself, the respondents were right that the force majeure definition in clause 12.3 was inclusive rather than exhaustive, but the argument that performance had merely been "hindered" failed on construction. Reading clauses 12.3 and 12.7(a) as part of one scheme, "hindered" went with "partly prevents", so that something must in fact partly prevent performance. "Force majeure clauses are to be narrowly construed". English authority — Tennants (Lancashire) Ltd v G.S. Wilson and Co. Ltd. and Peter Dixon & Sons Ltd v Henderson, Craig & Co. Ltd. — established that a mere rise in price rendering performance more expensive is not a hindrance.

Decisively, clause 12.4 expressly excluded from force majeure any "changes in cost of the plant, machinery, equipment, materials, spare parts, fuel or consumables for the Project" and "Insufficiency of finances or funds or the agreement becoming onerous to perform". The Court observed: "This clause makes it clear that changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA itself."

The conclusion followed in a single sentence: "Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated."

Counsel argued in the alternative that even if clause 12 did not assist, s. 56 would. The Court rejected this. Having held that clause 12.4 applied, so that a rise in the price of fuel was contractually not a force majeure event, it was difficult to appreciate a submission that s. 56 would apply in the alternative. On the authority of Satyabrata Ghose, "when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application." The alternative submission was disposed of on that short ground.

The appeals were disposed of. The rise in the price of Indonesian coal neither frustrated the power purchase agreements under s. 56 nor amounted to a force majeure event under clauses 12.3 and 12.7, which are referable to s. 32; the compensatory tariff could not be sustained on that basis. A change in Indonesian law was not a change in law under the guidelines read with the PPA, but a change in Indian law was, and to that limited extent relief was available under clause 13 of the PPA itself. The judgment of the Appellate Tribunal and the Commission's orders following it were set aside, and the Central Commission was directed to determine afresh what relief should be granted to generators falling within clause 13.