Case Comment: Nabha Power Limited vs. Punjab State Power Corporation Limited & Anr. – Contractual Liability of the State under Commercial Contracts

by Dhritiman Roy* 

A recent judgment delivered by the Supreme Court of India on October 5, 2017 represents a significant milestone insofar as the judicial treatment of contractual liability of the State vis-à-vis private individuals/companies in the sphere of commercial contracts in India is concerned. The stated Supreme Court decision reaffirms the principle that even in the contractual sphere, no activity of the state, whether by itself or through any of its forms or agencies, can be arbitrary, unfair or unreasonable. Once the State or its instrumentality is party to a contract, it has an obligation in law to act fairly, justly and reasonably and the state, like any private party, is bound by the express terms of the agreement entered into by it.

rohinton-nariman-and-sanjay-kishan-kaul
Picture Credit: Bar and Bench

A bench comprising of Justice R.F. Nariman and Justice Sanjay Kishan Kaul has laid down that commercial courts should interpret contracts by looking at the plain language used in the contract as the primary obligations of the parties are incorporated in express terms in most contracts. As per the dicta laid down by the Apex Court, in the present day and age, formulation of contracts is a matter involving high technical expertise with legal brains from either side involved in the process of drafting a contract. It is even preceded by opportunities of seeking clarifications and doubts so that the parties are aware of exactly what they are getting into. Thus, normally a contract should be read as it reads, as per its express terms. The judgment is significant as it upholds mutuality of obligation as an inexorable requirement in contract law even when the state is a party to the contract.

For interpreting the terms of the contract in the present case, the Hon’ble Court invoked the principle of interpretation embodied in the Latin maxim – Reddendo Singula Singulis. Bennion on Statutory Interpretation (LexisNexis, 5th Ed, 2008) at pp 1247–1248) elucidates the principle as –

Where a complex sentence has more than one subject, and more than one object, it may be the right construction to render each to each, by reading the provision distributively and applying each object to its appropriate subject. A similar principle applies to verbs and their subjects, and to other parts of speech.

Factual Background

The Appellant, NabhaPower Limited, was incorporated as a Special Purpose Vehicle by the Punjab State Electricity Board (‘PSEB) which has now been succeeded by Punjab State Power Corporation Limited (‘PSPCL’) for implementing a power plant in Rajpura, Punjab. The Appellant was constrained to file an appeal before the Supreme Court as it was aggrieved by PSPCL’s stance of  denying reimbursement of expenses incurred by the Appellant which formed part of the cost of coal as sought by the Appellant from PSPCL under various heads including, inter alia, washing of coal, road and surface transportation for bringing coal to the project site, liaising for procurement of coal, third-party analysis of coal, and transit and handling losses in transportation of coal.

The second and equally substantial grievance of Nabha Power Limited pertained to the measurement of the Gross Calorific Value (‘GCV’) of coal at the project site and not at the ‘mine-end’ where the property is supposed to pass on to the Appellant as urged by PSPCL.

Simply put, the Appellant’s case was premised on the contention that washing of coal was imperative as only coal of a specified quality could be used in its plant due to extant MoEF notifications and that the reference to coal and fuel in the Power Purchase Agreement (‘PPA’) could only mean washed coal. Therefore, the actual cost of purchasing, transporting and unloading of coal specifically referred to in Article 1.2.3 of Schedule 7 of the PPA, must refer to such actual cost of coal. The question which arose for consideration before the Bench was whether the assurance of reimbursement of the actual cost of purchasing coal would, notwithstanding the express provision of the contract, include by implication the additional cost incurred towards, inter alia, washing of the coal necessary to raise it to the grade of “Fuel” as defined under the PPA. If the aforesaid were to be answered in the affirmative, the Appellant would automatically get entitled to reimbursement for all the costs incurred by it for getting coal of required quality to its project site including, inter alia, washing charges and all transportation costs, irrespective of the mode of transport i.e. rail or road.

The second grievance of the Appellant stemmed from the fact that the GCV of coal undergoes deterioration when transported for the purposes of washing. As the coal was being transported over a distance of approximately 1000 kms., there was a notable disparity between the GCV of coal measured at the mine end and the GCV of coal unloaded at the project site. It was the case of the Appellant that the formula for calculating Energy Charge contemplates that the GCV of coal be measured at the project site and not at the mine end.

The Appellant endured two rounds of litigation – before the State Commission and then in appeal before the Appellate Tribunal for Electricity (‘APTEL’) before approaching the Supreme Court under Section 125 of the Electricity Act, 2003.  Both the State Commission and the APTEL failed to uphold the contractual terms of the PPA and rejected a majority of the claims made by the Appellant, inter alia, on the grounds that –

  1. It was found that there would be washing involved to the coal sourced by PSPCL from SECL, from mines located in Chhattisgarh;
  2.  the Successful Bidder had to arrange for the washing of coal;
  3.  In view of (i) & (ii), since the bidders did not expressly seek a further clarification in respect of specific reimbursement of washing related costs, it should be assumed that such costs were to the account of the Successful Bidder.

The Apex Court’s Raison d’etre

Legal principles for interpretation of commercial contract

The Supreme Court undertook an in-depth analysis of the legal principles for interpretation of a commercial contract. The Bench examined the applicable tests for judging whether a term is implied in a contract or not such as the test of giving ‘business efficacy’ to the transaction as laid down by the case of The Moorcock[1]. The Bench traced the development of the law on the subject from the case of The Moorcock to the present. For a term to be implied, the ‘five conditions test’ requires to be satisfied, namely that the said term ought to be – (a) reasonable and equitable; (b) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (c) it must be so obvious that “it goes without saying”; (d) it must be capable of clear expression; (e) it must not contradict any express term of the contract.[2]

The Bench ultimately, after canvassing the law on implied terms of a contract, came to the conclusion that the express terms of the contract are always the final word with regard to the intention of the parties. The conclusion arrived at by the Supreme Court is in line with its pronouncement in Modi & Co. vs. Union of India[3] where it was held –

10. It is true that when a contract is reduced to writing we must look only to that writing for ascertaining the terms of the agreement between the parties but it does not follow from this that it is only what is set out expressly and in so many words in the document that can constitute a term of the contract between the parties. If upon a reading of the document as a whole, it can fairly be deduced from the words actually used therein that the parties had agreed on a particular term, there is nothing in law which prevents them from setting up that term. The terms of the contract can be expressed or there can be a necessary implication of a term from what has been expressed in the contract. The question, therefore, resolves in the ultimate analysis upon the construction of the terms of the contract between the parties. In this connection, it is well-established that in construing such a contract it is legitimate to take into account the surrounding circumstances for ascertaining the intention of the parties.’

In Nabha’s appeal, the Appellants relied heavily upon the explicit terms of the contract but also highlighted the surrounding circumstances viz. representations on the basis of which the Appellant submitted its bid, the provisions contained in the Request for Proposal and the Guidelines for Determination of Tariff by Bidding Process for Procurement of Power by Distribution Licenses, 2005 – all of which pointed towards the liability of PSPCL to cover the expenses incurred by the Appellant.

Reddendo Singula Singulis: By referring each to each 

The meaning of the said maxim can be best understood with the help of the following example from Wharton’s Law Lexicon –

‘If any one shall draw or load any sword or gun…’

In the sentence used above, the word “draw” can only be applied to a sword and the word “load” to a gun because it is impossible to load a sword or to draw a gun. The sentence may be constructed Reddendo Singula Singulis and the words ought to be applied to the subject to which they appeal by context and to which they are most applicable.

The golden rule of construction is to adhere to the ordinary meaning of the words used which implies that sentences are to be construed accordingly unless the same results in an ambiguity. Needless to say that any conflict can almost entirely be eliminated if short sentences with a single subject and single object are used. The rule, Reddendo Singula Singulis, was formulated in an Irish case, M. Neill vs. Crommelin[4]  as –

Where there are general words of description, following an enumeration of particular things such general words are to be construed distributively, reddendo singule singulis; and if the general words will apply to some things and not to others, the general words are to be applied to those things to which they will, and not to those to which they will not apply; that rule is beyond all controversy.

The rule was applied slightly differently in the case of Bishop vs. Deakin[5]. Faced with the interpretation of Section 59(1) of the Local Government Act, 1933, the Court adopted a purposive interpretation of the Section which read as follows –

“A person shall be disqualified for being elected or being a member of a local authority, if he has within five years before the day of the election or since election been convicted of any offence and ordered to be imprisoned for a period of not less than three months without the option of a fine.”

The issue before the Court pertained to application of the Section extracted above to persons who had already been elected. If the Section was constructed as follows –

“A person shall be disqualified for being elected or being a member of a local authority if he has within five years before the day of the election been convicted of any offence and ordered to be imprisoned for a period of not less than three months without the option of a fine.”

The effect of the above construction would be that a member would be disqualified if convicted but would become eligible at once for re-election to the vacant office, as soon as the period of five years expired before the new election. The Court held that the period of five-years for a person who has already been elected refers to that which is “since election” and not “before the day of election”. 

Koteshwar Vittal Kamat vs K. Rangappa Baliga[6] was concerned with the construction of the Proviso to Article 304 of the Constitution which reads, “Provided that no bill or amendment for the purpose of clause (b), shall be introduced or moved in the legislature of a state without the previous sanction of the President”. It was held that the word “introduced” applies to “bill” and the word “moved” applies to “amendment”. The Supreme Court stated that where a sentence contains several antecedents and several consequents they are to be read distributively. That is, the words are to be applied to the subjects to which they appear by context most properly to relate and to which they are most applicable.

In Samatha vs. State of AP[7], the word ‘person’ used in Section 3 of A.P. Scheduled Area Land Transfer Regulation 1959 was under scrutiny by a three-judge Bench of the Supreme Court. Justice K. Ramaswamy opined that the maxim Reddendo Singula Singulis would apply to the interpretation of the word “person” so that the general meaning of the word “person” in its generic sense with its width would not be cut down by the specific qualification of one species, i.e., natural “person” when it is capable to encompass in its ambit, natural persons, juristic persons and constitutional mechanism of governance in a democratic set up.

Application of the rule on Nabha’s Appeal

In the appeal before the Supreme Court, the Bench was of the opinion that the contours of the controversy show that the Bench was concerned with the interpretation of a commercial contract inter se the parties. The dispute revolved around the payment of Energy Charge which was to be calculated on the basis of the formula provided in the PPA which reads thus –

MEPn     =  (NHRn x F COALn)/PCVn

Where –

NHRn      = Net Heat Rate

FCOALn    = weighted average actual cost to the Seller of purchasing, transporting and unloading the coal most recently supplied to and at the Project before the beginning of month “m” (expressed in Rs./MT in case of domestic coal)

PCVn        = weighted average gross calorific value of the coal most recently delivered to the Project before the beginning of month “m” expressed in kcal/kg.

PSPCL sought to create a distinction between the terms “to the project” used in relation to GCV of coal and “to and at the project” used in relation to cost of coal in the same formula. It was argued that as the formula uses two different expressions, the two expressions have to mean two different things and the formula does not contemplate the measurement of GCV at the project site.

The aforesaid argument advanced by PSPCL was rejected by the Bench. The Bench conducted an in-depth analysis of the formula for calculating Energy Charge. It was observed that the formula broadly refers to three components i.e. (a) purchasing, (b) transporting, and (c) unloading the coal. The three components, as identified above, are used with the term “most recently supplied to and at the project. The Bench applied the principle of Reddendo Singula Singulis and held that the word ‘to’ obviously would have reference to transporting while the word ‘at’ would have a relationship with unloading, since the coal would be ‘transported to’ and ‘unloaded at’ the project. Thus, the definition of FCOALn was constructed Reddendo Singula Singulis, to mean – the weighted average actual cost incurred by the Appellant of purchasing the coal and transporting it to the project site and thereafter unloading the coal at the project site.

Applying the aforesaid rule of construction, the Supreme Court held that a reading of the Energy Charges formula leads to only one conclusion, that all costs of coal up to the point of the Project Site have to be paid to the successful bidder and that the GCV of the coal ought to be necessarily measured at the project site.  Accordingly, the appeal filed by Nabha Power Limited was partially allowed, holding, inter alia,–

1. The term ‘coal’ in the formula for computation of Monthly Energy Charges has to mean ‘washed’ coal.

2. Transportation costs to the project site have to be compensated to the Appellant;

3. The Calorific Value of coal (GCV) has to be determined at the project site.

Nabha Power
Picture Credit: NPCL

 Analysis and Conclusion                                                                                                                                                                                                                                                                                 The decision in Nabha’s appeal is a step towards ensuring that contractual rights of private individuals, as well as the state, are based on equity. In State of Haryana vs. Mahabir Vegetable Oils Pvt. Ltd.[8], the Apex Court, noting the observations made by it in an earlier decision, opined that – “When the Government is able to show that in view of the facts as have transpired since the making of the promise, public interest would be prejudiced if the Government were required to carry out the promise, the Court would have to balance the public interest in the Government carrying out a promise made to a citizen which has induced the citizen to act upon it and alter his position and the public interest likely to suffer if the promise were required to be carried out by the Government and determine which way the equity lies. It would not be enough for the Government just to say that public interest requires that the Government should not be compelled to carry out the promise or that the public interest would suffer if the Government were required to honour it.” The reasoning employed by the Apex Court in Nabha’s appeal is a welcome departure from the judiciary’s general reluctance against enforcing contractual terms against the state. The decisions of the State Commission as well as the APTEL, with great respect, appear to be fallacious as both fora have rejected the Appellant’s claims on the grounds that a further clarification was not sought by them. A contract represents a business understanding between the parties. In the opinion of the author, the decision is fair as the state is a party to commercial dealings with private persons and is equally well versed in the transaction of business as regulated by contracts which parties opt to govern on their own volition. It is only fair that the State should be bound by the terms of the agreement as any other private party would be under similar circumstances.

* Dhritiman is an Associate at DMD Advocates, New Delhi.


[1] (1889) 14 P.D. 64

[2]Shirlaw vs. Southern Foundries (1926) Ltd. (21); B.P. Refinery (Westernport) Proprietary Limited vs. The President Councillors and Ratepayers of the Shire of Hastings (1977) UKPC 13; Investors Compensation Scheme Ltd. vs. West Bromwich Building Society (1998) 1 W.L.R. 896; Attorney General of Belize and Ors. vs. Belize Telecom Ltd. and Anr. (2009) 1 W.L.R. 1988

[3] 1968 (2) SCR 565

[4] 1858 (9) CLR 61

[5] (1936) 1 All ER 255

[6] AIR 1959 SC 504

[7] (1997) 8 SCC 191

[8] (2011) 3 SCC 778

Advertisements

One thought on “Case Comment: Nabha Power Limited vs. Punjab State Power Corporation Limited & Anr. – Contractual Liability of the State under Commercial Contracts

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s