Supreme Court upholds termination of PPA by Adani Power against Gujarat Urja Vikas

The Supreme Court yesterday held that the notice of termination of a Power Purchase Agreement given by the Adani Power Mundra Limited to the Gujarat Urja Vikas Nigam Limited (GUVNL) in 2009 was legal and valid.

While setting aside the decision of the Appellate Tribunal for Electricity, the judgment rendered by the Bench of Justices Arun Mishra, BR Gavai, and Surya Kant allowed Adani Power to approach the Central Electricity Regulatory Commission (CERC) for determination of compensatory tariff for the power the company supplied to GUVNL. The CERC has been directed to decide on this issue within a period of three months.

The Court also directed that the payment of this compensatory tariff to be made by GUVNL to Adani within a period of three months after the decision by the CERC.

Facts

In 2007, Adani Power signed a PPA with GUVNL for the supply of 1,000 MW power at a certain rate from its power project situated in Korba in Chhattisgarh. However, Adani later informed GUVNL that the power supply would be from its plant located in Mundra instead of from Korba. Therefore, another PPA was signed between the two entities and there was an assurance given to Adani by the Gujarat Mineral Development Corporation (GMDC) that it would supply coal to Adani.

The GMDC however, did not supply coal to Adani as assured and the situation remained the same despite several reminders sent by Adani to Gujarat Government, GMDC and GUVNL in this regard. Subsequently, Adani terminated the PPA and fulfilled the condition of payment of liquidated damages as was stipulated in the PPA.

The termination notice was challenged before the Gujarat Electricity Regulatory Commission (GERC) which held that Adani Power illegally terminated the PPA. This decision was upheld by the Appellate Tribunal for Electricity leading to the appeal before the Supreme Court.

Arguments

The argument advanced by Adani Power was that the second PPA was based on the assurance of coal supply by GMDC. The supply of coal by GMDC was stipulated as a condition in the PPA between Adani and GUVNL. Since the GMDC failed to abide by its commitment to supply coal as stipulated in the conditions specified in the PPA, Adani was entitled to terminate the PPA. It was contended that Adani had abided by the procedure laid down in the PPA for its termination of PPA in case of non-compliance with the conditions.

GUVNL, on the other hand, argued that the PPA was not executed between the parties on the basis of the commitment made by GMDC as regards supply of coal and that GUVNL was not concerned about the source from which Adani procured coal. It was further submitted that the contract ought to have been read as a whole and the provisions of the same could not be read in isolation.

Judgment

The Court held that a harmonious reading of the provisions of the contract showed that non-compliance with any of the conditions specified in the PPA within the time-frame prescribed, gave the parties the right to terminate the PPA. The appellant in the case would be required to pay a specified amount of liquidated damages. Thus the Court held,

“We are of the considered view that the finding of the Appellate Tribunal that the provisions under Article 3.4.2 (for termination) of the PPA can be invoked only when there is an agreement between the parties that there is violation of any of the conditions specified in Article 3.1.2 of the PPA is totally incorrect.”

The Court further held, that if such an argument is accepted, it would amount to re-writing the contract between the parties.

“We find, that both the Commission and the Appellate Tribunal have grossly erred in arriving at finding that termination can be effected under Article 3.4.2 only if there is an agreement with regard to non-compliance of condition under Article 3.4.2 by both the parties. If the finding of the Appellate Tribunal is accepted, it will be amounting to making provisions of Article 3.4.2 a dead letter and rendering them otiose.”

Thus, the Court allowed the appeal filed by Adani and held that compensatory tariff be paid to Adani based on the principles of economic justice since Adani would have incurred huge losses.

“In order to do economic justice, on the principle of business efficacy, the appellant would be entitled for adjustment of cost of the project and would also be entitled to the interest on the expenditure incurred by it for completion of the project. The expenditure towards running of the project after obtaining the coal from the open market would also be required to be taken into consideration,”

[Read Judgment]