Once in a way may come a case, which is unprecedented, as they say, as stated by Heraclitus – the Greek Philosopher “the only thing that is constant is a change”
The change is perpetual. The change in circumstances -that exists at the time of negotiations, when the contract is entered and during the life of the contract, however it is not every change which matters, but only such changes which are so grave and serious destroying the very substratum of the basic foundation of the contract, demands attention. In such extraordinary cases one needs to examine whether there exists powers either under the statute or under the contract to address and mitigate such unprecedented changes so as to achieve the overall objective. Blackburn J. while delivering the verdict in famous case of Taylor v. Caldwell observed that:
“…the contract in which the performance depends on the continued existence of a given person or thing, a condition is implied that theimpossibility of performance arising from the perishing of the person or thing, shall excuse the performance.”
Whether it is Article 370 of the Constitution of India or Section 377 of Indian Penal Code, all have gained a lot public debate and attention due to winds of change, like wise is the debate on the powers of the electricity regulator for changes that have taken place in the recent times. Developers/Power generators who agreed to sell power to the electricity distribution companies through long term Power Purchase Agreement (PPA) at fix rates (with negligible escalable component, if any) are witnessing the toughest of their times to sustain and operate their mammoth power projects owing to commercial unviability due to uncertainty in the supply of domestic (local) coal, procurement of high price imported coal, foreign exchange rate variation, high priced land acquisition, additional fulfilment of the conditions levied by the authorities, rising rate of interest, debt repayment, etc. Unfortunately, the tariffs which were agreed (4-5 years back), while executing the PPA, were quoted after considering the relative risk of escalationin prices keeping in mind the instances existing at the relevant time of bidding.
The Competitive Bidding Guidelines for the procurement of power issued by Central Government on 19th January, 2005 are based on the fact that internationally competition has led to reduction in price of electricity and in significant benefits for consumers. This Competitive Bidding Guidelines provides for separate kinds of procurement process (i.e. Case 1 and Case 2), wherein Case 1 is an open bid where the project developer has to decide for fuel, location and technology; whereas in Case 2 bids the developer is expected to bid on the basis of specific fuel and specific location where the specifics are provided by the Central/State government which is calling for bids. The tariff so determined through competitive bidding is to be adopted by the Electricity Regulatory Commission under section 63 of the Electricity Act, 2003. The other route is the determination of tariff by the Regulator under section 62 where no competitive bidding takes place and there is merely an evaluation process of the right tariff.
At present, the moot question which has created much uproar in the hefty litigations in the sector, right from Regulatory Commissions upto the Apex Court, is whether the duty of the Regulatory Commission is confined only upto the adoption of the Tariff so determined through competitive bidding by simply blessing the PPA or is he also supposed to exercise his regulatory powers as provided under the statute, if the situation warrants. In other words, whether the provision of section 63 is so sacrosanct that it supersedes the power to regulate, even when the long term contract has become commercially unviable to perform?
The format of the PPA and the tariff therein, once blessed by the Electricity Regulatory Commission, becomes a statutory contract and the role of the Regulatory Commission under Section 63 ends with the adoption of tariff. However, the role of Regulatory Commission, as a regulator, continues beyond the competitive bidding process and during the implementation and tenure of the PPA in terms of regulatory powers vested in them under the Electricity Act, 2003 read with relevant provisions of the Competitive Bidding Guidelines. The tariff determined both under Section 62 (on cost plus basis) as well as Section 63 are to be governed by the principles laiddown under Section 61 of the Electricity Act (to balance the twin objectives of consumer interest while ensuring the recovery of cost of supply). Therefore, if the equilibrium to be maintained under Section 61 is completely wiped out/ altered due to an extraneous event, beyond the control of the parties, even in a competitively discovered tariff, Regulatory Commission has powers to regulate the same in terms of Section 79 and 86 of the Electricity Act.
PPA, being a contract, is also governed by the provisions of the Indian Contract Act, 1872 (“Contract Act”) as the provisions of the Electricity Act are in addition to and not in derogation of the Contract Act in terms of Section 175 of the Electricity Act.
Section 56 of the Indian Contract Act, 1872 provides, inter alia, that “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 whenthe act becomes impossible or unlawful.” Thus, if a PPA has become impossible to perform due to certain unforeseen circumstance, the PPA would be void under Section 56 of the Contract Act.
There is a provision of Change in Law and Force Majeure in every PPA which is having a very wide scope to cover every aspect arising during the tenure of the contract. However, while force majeure and change in law are grounds for revision of tariff under the PPA, Section 56 of the Contract Act would operate for reasons beyond the contract. The question here comes is whether it also operates in the event of commercial hardship? Undoubtedly yes in my views, as this commercial hardship and unviability will lead to the closure of the project and subsequently impossibility in the performance of the contract.
What puzzles and fazed me is that in Indian law commercial impossibility, so far, has not clearly been defined as a ground for frustration of contract. For which, one reason may be because this type of situation is usually beingconsidered as merely a short term hardship; and not in the form of impossibility in the performance of the contract especially of the long term. The Supreme Court in Sushila Devi v. Hari Singh, (1971) 2 SCC 288 observed as follows:
“As observed by this Court in Satyabrata Ghose v. Mugneeram Bangur and Co., the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act. The view that Section 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The impossibility contemplated by Section 56 of the Contract Act is notconfined to something which is not humanly possible. If the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become impossible. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract.”
Unfortunately, most of these case laws relate to ordinary supply of goods dealing with one time or short term transactions and do not deal with contracts of ‘continuous supply’ of a regulated public good for a period of 25 years, particularly when the principle raw materials required to perform the contract is a ‘nationalized’ commodity, entirely controlled by the Central Government. Hence, in such cases it is necessary to consider that a regulatory body has wide jurisdiction and, are often in a position to exercise powers that are not available with the civil courts. The legal precedentsestablished by civil court judgments have to be distinguished keeping in view the statutory powers of the Regulatory Commission to revise tariff, on the basis of the special jurisdiction available under the statue. In this context, reference may be made to the judgment of the Supreme Court in Cellular Operators Association of India and Ors. Vs. Union of India (UOI) and Ors., reported in (2003)3SCC186, wherein it was held that the regulatory bodies have wide jurisdiction. They lay down the law. They may prosecute. They may punish. Intrinsically, they act like an internal audit. They may fix the price, they may fix the area of operation and so on and so forth. While doing so, regulators may, interfere with the existing rights of the parties as well. It was on this premise that Parliament thought of creating an independent expert tribunal which, if an occasion arises may interfere with the finding of fact, finding of law or a mixed question of law and fact. It reads further that there cannot be any doubt whatsoever that when jurisdiction upon a court or a tribunal is conferred by a statute, the same has to be construed in terms thereof and not otherwise. It must be kept in mind that the power to regulate is different from the power of judicial review of the Supreme Court as also of the High Court.
While all said and done, in my view, judicial establishment has to play an overriding role in a given situation, since a practical and pragmatic approach is required to ensure the survival of the much needed power projects otherwise it will turn India’s energy sector revolution tale to topsy-turvy.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
