In this article, Shantanu Derhgawen discusses the Importance of Dispute Resolution Clause in a Power Purchase Agreement by analysing the Delhi High Court Judgment on Coastal Andhra Power Limited vs Andhra Pradesh Central Power.
This article revolves around the recent judgment of the Delhi High Court where Reliance Power Limited failed to get any relief pursuant to the change in prices of coal in Indonesia. The present judgments under examination have surfaced in the dispute of Coastal Andhra Power Limited (the “CAPL”) against Andhra Pradesh Central Power Distribution Co. Ltd and Power Finance Corporation (the “PFC”) and has provided for some major learnings when it comes to the understanding, drafting and interpretation of certain essential elements of any power purchase agreement.
This article aims to understand the core issues of dispute with regards to the understanding of what constitutes force majeure in light of power purchase agreements while also understanding the maintainability of application under Section 9 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) in view of other legislation governing a power purchase agreement. In the end, we shall have a look at the various ways in which the courts and tribunals have dealt with power purchase agreements in the past while evaluating a way out.
The government of India in its efforts to set up several Ultra Mega Power Projects (the “UMPP”) floated a special purpose vehicle, namely the Coastal Andhra Power Limited as a one hundred percent subsidiary of the Power Finance Corporation, a public sector undertaking. The primary function of this SPV was to look after the process of construction, commissioning, and operation of the UMPP. After bids were invited by the government and duly submitted by a number of bidders, Reliance Power Limited (the “RPL”) was awarded the project. CAPL, on the other hand, executed a Power Purchase Agreement (the “PPA”) with the PFC while the bidding process was going on. By the virtue of being the successful bidder, RPL purchased the entire one hundred percent shareholding of CAPL from the PFC. RPL, in turn, executed a Fuel Supply Agreement with Reliance Coal Resources Private Limited that had acquired access to coal mines in Indonesia and further agreed to supply coal for the entire term of the PPA at a pre-fixed price of USD 24 Per Metric Ton.
In September of 2010 the Indonesian government passed a law making it mandatory for all companies in Indonesia to sell coal at a price that was in line with the international benchmark market price. This resulted in a one hundred and fifty percent escalation in the price of coal from USD 24 Per Metric Ton to USD 60 Per Metric Ton giving rise to the claim of CAPL stating that the dramatic increase in the price of coal was a force majeure event holding neither party in breach of its obligation(s) as per the terms of the PPA. In response to this, PFC demanded INR 400 crores for failing to comply with the terms of the PPA while laying emphasis on invoking the bank guarantee provided CAPL failed to pay. Ultimately CAPL, before the Single Judge of the Delhi High Court filed a petition under Section 9 of the Arbitration Act.
The question to be decided by the Single Judge Bench here was if the petition under Section 9 of the Arbitration Act was maintainable in view of Section 79 (1) (f) of the Electricity Act, 2003 (the “EA”). In order to understand the same better, the following is the dispute resolution clause from the PPA-
“17.3 Dispute Resolution
17.3.1 Where any dispute arises from a claim made by any Party for any change in or determination of the Tariff or any matter related to Tariff or claims made by any Party which partly or wholly relate to any change in the Tariff or determination of any of such claims could result in change in the Tariff or (ii) relates to any matter agreed to be referred to the Appropriate Commission under Articles 4.7.1, 13.2, 18.1 or clause 10.1.3 of Schedule 17 hereof, such Dispute shall be submitted to adjudication by the Appropriate Commission. Appeal against the decisions of the Appropriate Commission shall be made only as per the provisions of the Electricity Act, 2003, as amended from time to time. The obligations of the Procurers under this Agreement towards the Seller shall not be affected in any manner by reason of inter-se disputes amongst the Procurers.
17.3.2 If the Dispute arises out of or in connection with any claims not covered in Article 17.3.1, such Dispute shall be resolved by arbitration under the Indian Arbitration and Conciliation Act, 1996 and the Rules of the Indian Council of Arbitration, in accordance with the process specified in this Article. In the event of such Dispute remaining unresolved as referred to in Article 17.2.3 hereof, any party to such Dispute may refer the matter to the registrar under the Rules of the Indian Council of Arbitration.
(i) The Arbitration Tribunal shall consist of three (3) arbitrators to be appointed in accordance with the Indian Council of Arbitration Rules.
(ii) The place of arbitration shall be Delhi, India. The language of the arbitration shall be English.
(iii) The arbitration tribunal’s award shall be substantiated in writing. The arbitration tribunal shall also decide on the costs of the arbitration proceedings and the allocation thereof.
(iv) The award shall be enforceable in any court having jurisdiction, subject to the applicable Laws.
(v) The provisions of this Clause shall survive the termination of this PPA for any reason whatsoever.”
In the 2012 judgment of the Single Judge of the Delhi High Court, it was noted that the change in the price of coal could not be kept away from affecting the tariff at all. It is to understand that although the contention of CAPL that the change in the price of coal in the Indonesian market lead to its claim under the force majeure clause of the PPA and thus was not within the ambit of Article 17.3.1 of the PPA, the essence of the very argument was the change in price of coal in Indonesia which could not be treated in isolation from its effect on the tariff. It was possible that the determination of the current dispute could lead to determination or change in the tariff bringing the scope of the current question within the purview of Article 17.3.1 of the PPA. Thus, the submission of the CAPL that it was not looking forward to any relief with regards to the determination of tariff stood negated. Considering the fact that specific subject matter jurisdiction rested with the Central Electricity Regulatory Commission (the “CERC”), the matter could have only been referred to arbitration only upon the satisfaction of Section 79 (1) (f) of the EA.
The recent judgment of the Delhi High Court pronounced on January 15, 2019, settled the question, with regards to if the change in the laws of Indonesia would give way to force majeure as claimed by the CAPL. In order to decide the same, the Delhi High Court placed complete reliance on the Supreme Court’s judgment in Energy Watchdog vs. Central Electricity Commission. The Supreme Court had concluded that in the general conduct of business it is very common to come across a certain unexpected turn of events. Such an occurrence cannot give way to invoking force majeure. Only in certain circumstances where the parties did not wish to be bound in any manner at a fundamental level as per the terms of the contract, then the contract may cease to bind. In additions to this, the PPA did not specifically push upon CAPL to purchase coal from Indonesia only. The judges, if not the court, could probably spot the intent of the CAPL [wholly owned by RPL] willing to conduct business with a sister company only. It has often been reiterated that commercial contracts should be viewed from a business perspective which draws the fact that when such bids were submitted it was a risk taken by the bidder with the full knowledge of the fact that a change in the price of the coal could take place. It is a further settled principle by way of the Supreme Court’s judgment in the Energy Watchdog case that a change in Indonesian law will not amount to a change in law or to force majeure within the meaning of the PPA. The Delhi High Court thus very rightly concluded that the CAPL did not have a prima faciecase in the present matter.
While in the eyes of the law the above interpretation of the honourable courts is well within set limits, the courts need to realize that when the commercial viability element is removed from a commercial contract then it shall no more be of interests to the private parties. Three projects, namely Mundra-Adani Power, CGPL-TATA Power, and EPGL became completely economically unviable after the changes in the price of the coal imported from Indonesia, discussed above. While CERC and the Appellate Tribunal for Electricity had granted relief to the three projects under the force majeure clause of their respective PPAs, the Supreme Court’s judgment in the Energy Watchdog case overruled the same. Reports suggest that the three power plants have suffered losses to the tune of more than INR 210 billion. In October 2018, the Supreme Court’s step of allowing amendments to the existing PPAs of the three projects before the CERC was much welcomed and gave a ray of hope. Such amendments are expected to push the target prices by 30 percent however the same can again be challenged in the court of law of competent jurisdiction. Keeping in mind the decision of the Supreme Court to allow amendments to the PPAs, could be a new trend, including the present matter, wherein the entities shall approach the CERC to approve amendments to their PPAs.
