Contract Law

Energy Watchdog v. Central Electricity Regulatory Commission

(2017) 14 SCC 80; 2017 SCC OnLine SC 378

Facts

Indian power-generating companies entered into long-term Power Purchase Agreements with electricity procurers.
The tariff had been determined through competitive bidding.
The generating companies expected to use imported Indonesian coal.
Indonesian regulations later increased the benchmark price of exported coal.
This substantially increased the generators’ cost of producing electricity.
The generators sought a compensatory tariff.
They argued that the change:
constituted force majeure under the PPAs;
frustrated the contracts under Section 56;
alternatively amounted to a change in law.
The procurers argued that the generators had assumed the commercial risk of fuel-price fluctuation.

Whether the increase in the price of Indonesian coal constituted force majeure or frustration.
Whether a contractual force-majeure clause is governed by Section 32 or Section 56.

Where the contract itself contains a force-majeure clause covering the event, the matter is governed by Section 32 as a contingent contractual arrangement.
Section 56 applies where the supervening event falls outside the contract and makes performance impossible or unlawful.
Mere increase in cost, hardship or reduced profitability does not amount to frustration.
A contract is not frustrated merely because performance has become commercially onerous.
The force-majeure clause must be interpreted strictly according to its wording.
A foreign-law change is not necessarily “change in law” where the contract defines the expression by reference to Indian law.

The PPAs contained detailed force-majeure provisions.
Therefore, the first inquiry was whether the Indonesian regulatory change fell within those clauses.
The event did not prevent electricity generation or make performance unlawful.
Coal remained available, although at a higher price.
The generators’ difficulty was economic rather than physical or legal impossibility.
The Court held that parties entering fixed-tariff bids assume ordinary commercial risks, including possible fluctuations in fuel cost.
Section 56 could not be used to rewrite a commercially disadvantageous bargain.
The Court also rejected the argument that Indonesian regulations constituted a contractual “change in law,” because the relevant clause concerned changes in Indian law.
The regulatory commission could not award a compensatory tariff outside the contractual framework simply because the original bargain had become less profitable.
The parties were bound by the risk allocation reflected in the PPAs.

The Supreme Court held that the rise in imported coal prices did not constitute force majeure or frustration.
The generators were not entitled to compensatory tariff on that basis.
Use this case for: commercial hardship or price increase does not frustrate a contract, and contractual force majeure is governed primarily by Section 32.