Price Escalation And Change In Foreign Law Cannot Be Considered Force Majuere : Delhi HC [Read Judgment]

In the context of a Power Purchase Agreement(PPA), the Delhi High Court has held that escalation of price of coal and change in law abroad will not amount to "force majuere" under the agreement, so as to absolve the power generating company from its obligations.

The judgment was delivered by a Division Bench of Justices Sanjiv Khanna and Anup Jairam Bhambhani, while dealing with an appeal against vacation of interim order in a proceeding under Section 9 of the Arbitration and Conciliation Act.

The appellant Coastal Andhra Power Ltd had agreed to supply power to Andhra Pradesh Central Power Distribution Co.Ltd(APCPDL) under a PPA. The coal for power generation was to be imported from Indonesia. Meanwhile, there occurred change in Indonesian laws, which led to price rise of coal. In that backdrop, Coastal Andhra said that power generation will not be viable without renegotiation of prices. Not willing to renegotiate prices, APCPDL terminated the contract and sought for damages of Rs.400 crores from Coastal Andhra, for breach of contract. 

This led Coastal Andhra to file application under Section 9 of the Arbitration and Conciliation Act, seeking to restrain APCPDL from invoking the bank guarantee furnished by it for the claim of damages.The single judge initially granted a stay on Mach 20, 2012. Later, this stay was vacated on July 02,2012. Against the vacation of stay, appeal was filed before the Division Bench.

Meanwhile, Coastal Andhra had approached the Central Electricity Regulatory Commission(CERC) under the Electricity Act, as disputes relating to price tariff under the Agreement had to be submitted to it. Therefore, there were parallel proceedings going on, before the CERC and also the Division Bench of High Court. CERC however closed the proceedings on August 4, 2015, in view of the pendency of proceedings in High Court.

The primary issue before the DB was whether price rise and change in law abroad will amount to force majuere to absolve the appellant of its contractual obligations. This issue was answered in the negative, by relying on the SC decision in Energy Watchdog v CERC,  where a bench of Justices P C Ghose and R F Nariman held that "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". In that case, where the SC was dealing with a PPA, it was also held that change in foreign law will not make available the force majuere exemption.

On that basis, the judgment authored by Justice Bhambhani held :

Upon a perusal of the foregoing dictum of the Supreme Court, it is clear that change in Indonesian law and consequential increase in price of coal in Indonesia has been specifically held not to amount to change in law or to force majeure within the meaning of the Agreement. 

The appellant made an alternative prayer for continuation of interim order till it invokes the jurisdiction of the CERC by filing appropriate application. This prayer was rejected by the Court, holding that interim relief can be granted only in aid of the main relief. When the main proceeding itself is held to be not maintainable, no interim prayer can be granted to enable the party to invoke alternate remedies, the bench held. Reference was made to the constitution bench decision in State of Orissa vs. Madan Gopal Rungta on this point.

The bench observed :

In our view, considerations of equity and justice do not warrant extension of the stay on invocation of bank guarantees, to enable the appellant to once again approach the CERC.A prayer for withdrawal with direction to extend the interim stay would not be justified when the appeal had  ome for final hearing and when the issue on merits is covered against the appellant by the judgment of the Supreme Court in Energy Watchdog (supra).

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