Deviation From Plain Terms Of Contract Warranted Only When It Serves Business Efficacy Better: Supreme Court

The Supreme Court recently reiterated the need of interpreting commercial contracts in alignment with the original intent of the parties involved. It also opined that a deviation from the plain terms of the contract is warranted only when it serves business efficacy better.

Reliance was also placed on the Transmission Corporation of Andhra Pradesh Ltd v. GMR Vemagiri Power Generation Limited, wherein it was held:

“26. A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation of its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy.”

A matter was placed before the Bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala, and Manoj Misra.

The same was held in the context of Power Purchase Agreement (PPA) entered between Maharashtra State Electricity Distribution Company Limited (appellant) and Ratnagiri Gas and Power Private Limited & Ors. (first respondent). The same was entered on 10 April 2007 for 25 years which required the appellant to purchase power from the first respondent. In turn, the first respondent was supposed to receive the contracted quantity of gas supply from RIL. However, from September 2011 there was a progressive decline in the gas supply. Thus, in order to make up for the shortfall, the first respondent entered into a Gas Supply Agreement (GSA) with GAIL for the supply of Recycled Liquid Natural Gas (RLNG).

The first respondent conveyed this to the appellant by a letter dated 16 December 2011. The dispute arose when the appellant refused to pay fixed capacity charges.

Placing its reliance on Clause 5.9 of the PPA, the appellant claimed that the first respondent failed to obtain the appellant’s approval before entering into the GSA with GAIL. Further, the declaration of capacity on RLNG was stated to be unilateral and arbitrary and in violation of the terms of Clause 5.9 of the PPA which mandated prior approval from the appellant.

For convenience, the clause, inter-alia, stated: “RGPPL shall be required to obtain approval of MSEDCL on contracting terms and price before entering into the GSA/GTA contract.”

Basis this, it was argued that the appellant was absolved of the liability to pay the fixed charges.

This resulted in the respondent approaching Central Electricity Regulatory Commission (CERC) for the issue of non-payment of fixed charges. CERC allowed the plea and held the appellant liable to pay fixed capacity charges under the PPA. This order was upheld by Appellate Tribunal for Electricity (APTEL). The present appeal has assailed the APTEL’s order.

Analysis

The Court took note of the respondent’s submission that the agreement with GAIL was necessitated on account of the unprecedented nationwide shortage of domestic fuel. In this regard, the Court also noted:

“The first respondent was compelled to make alternate arrangements in view of the country-wide shortage of domestic gas, making RLNG a viable and contractually permissible alternative.”

Adverting to the appellant’s argument of “unilateral” decision, the Court scrutinised the terms of PPA. It underscored that PPA shall be read as a whole as per the established principle of Contract Law. It divided clause 4.3 into two parts. In first part, it stipulated that a transition from one primary fuel i.e., LNG/Natural to another primary fuel i.e, RLNG can be done without the appellant’s agreement. However, in the second part it said that that the appellant’s agreement is required in case liquid fuels are to be used. It is important to highlight that the clause envisaged RLNG as a primary fuel.

Thus, it held:

“The requirement of an agreement, mandated for an arrangement involving liquid fuel cannot be read into the plain text of the former part of Clause 4.3. Thus, the capacity declaration based on RLNG could be done unilaterally, unencumbered by the requirement of the appellant’s consent in the latter half or the prior approval requirement under Clause 5.9 of the PPA.”

Based on this projection, the Court upheld the reasoning of CERC and APTEL that the GSA/GTA with GAIL is permissible by the terms of the contract and the consent or approval of the appellant is irrelevant.

Moreover, the Court also pointed out that the terms of the PPA also indicated the intention of the parties to the PPA which was “to put the capacity charges beyond the realm of actual energy supplied.” However, the appellant’s reading of such terms in a manner that such a fixed charge can be avoided and made subject to the consent of the appellant was contrary to the intention of the parties.

“Such a reading goes against the apparent intention of the parties to treat capacity charges as fixed charges under the PPA. The appellant’s arguments would entail reading in implied terms contrary to the contractual provisions which are otherwise clear. Such a reading of implied conditions is permissible only in a narrow set of circumstances.,” held the Court.

Before parting, the Court, while dismissing the present appeal, opined that since the shortfall of gas supply was beyond the control of the parties thus, deviation from plain terms is not merited and is opposed to business efficacy.

Case Title: Maharashtra State Electricity Distribution Company Limited v. Ratnagiri Gas and Power Private Limited & Ors., Civil Appeal No. 1922 of 2023

Citation : 2023 LiveLaw (SC) 983

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