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Home News Power Sector News Tata's Mundra plea: Contract Act interpretation key to verdict

Tata's Mundra plea: Contract Act interpretation key to verdict

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CERCThe verdict of the apex power regulator, which is hearing Tata Power's petition seeking higher tariff for electricity generated from its 4,000 MW Mundra ultra mega power project, could ultimately hinge on the legal interpretation of the 'doctrine of frustration' as provided under the Indian Contract Act 1872. The Central Electricity Regulatory Commission (CERC) is said to be close to a decision on the issue.

Tata Power-arm Coastal Gujarat Power Ltd (CGPL) had filed the petition with the CERC last year seeking higher tariff for electricity generated from its Mundra project, which was awarded to CGPL after it quoted a 25-year levelised tariff of Rs 2.26 per unit under a competitive bidding process. In its petition, filed under Sections 61, 63 and 79 of the Electricity Act, 2003, the company has invoked the 'force majeure' clause, citing a 'change of law' in Indonesia that has led to an "unforeseen" spike in the price of imported coal that was to fuel the project.

The CERC verdict on the issue is being seen as a legal precedent is the sector, which could impact projects being developed by the Adani Group, Reliance Power and JSW Energy.

In simple terms, 'frustration of contract' refers to a situation where a "supervening event" renders it "impossible" for either party to a contract to fulfill the provisions of the pact. In case of Tata Power's Mundra project, the promoter had tied up firm fuel supplies from Indonesia prior to committing a delivered electricity price in the tariff-based bidding process conducted by the Government in 2006. Then international coal prices were around $35 a tonne. But a change in coal mining laws by the government of Indonesia, brought in with retrospective effect, resulted in steeply higher costs due to a switch in the way royalty and income-tax was to be computed.

In the Indian context, in case of the Contract Act, the doctrine followed by the courts is of "supervening impossibility" as laid down in Section 56, with the term "impossibility" interpreted in its practical and not literal sense. The Supreme Court has sufficiently classified the position of Indian law pertaining to this specific doctrine in the 1954 'Satyabrata Ghose versus Mugneeram Bangur & Co' verdict. This provision was further clarified by the apex court in the 'Sushila Devi vs Hari Singh and others' verdict in 1971, where it noted: "If the performance of a contract becomes impracticable or unless having regard to the object and purpose the parties had in view, then it must be held that performance of the contract has become impossible. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract".

Tata Power, in its petition, has sought the upward revision in tariffs citing "unprecedented and peculiar circumstances" in the fuel supply arrangements that it had firmed up at the time it submitted the winning bid for the 4,000 MW project seven year back. Tata Power has, in the interim, operationalised all five 800 MW supercritical units of the station and is supplying power at the predesignated price.

Buyers of power from the project, led by Gujarat, have firmly opposed any reopening of the power purchase agreements (PPAs) and hiking of tariffs.

The Adani-promoted 4,620 MW station in Mundra too is partly affected on account a PPA where it has promised tariffs that the company has subsequently termed as "unviable" in view of the hike in imported coal prices. JSW Energy's 2,000 MW expansion of the Ratanagiri project has been reportedly delayed for the same reason while Reliance Power stopped work in June-2011 on its Krishnapatnam UMPP in Andhra Pradesh, invoking the 'force majeure' clause.

Legal tangle

* Tata Power-arm Coastal Gujarat Power Ltd had filed a petition with the Central Electricity Regulatory Commission last year seeking higher tariff for electricity generated from its Mundra project

* The verdict of the CERC could ultimately hinge on the legal interpretation of the 'doctrine of frustration' as provided under the Contract Act 1872

Source- Indian Express

 

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