The Supreme Court has held that cancellation of the Ganeshpur coal block allotted to Adhunik Power & Natural Resource Ltd. (APNRL) amounts to a “Change in Law” under the relevant power purchase arrangement. The ruling entitles the company to compensation from August 25, 2014.
A Bench of Chief Justice of India Surya Kant, Justice B.V. Nagarathna and Justice Joymalya Bagchi, however, clarified that APNRL cannot recover higher coal procurement costs incurred before August 25, 2014. The Court said the contract barred any escalation in energy charges when the seller sourced coal from anywhere other than the captive mine.
Background of the dispute
The dispute arose from a long-term power supply arrangement executed in 2011.
On January 5, 2011, West Bengal State Electricity Distribution Co. Ltd. (WBSEDCL) entered into a Power Supply Agreement with PTC India Limited for supply of 100 MW power for 25 years. Later, on March 25, 2011, Adhunik Power entered into a back-to-back Power Purchase Agreement with PTC for onward sale of 100 MW power to WBSEDCL. The West Bengal Electricity Regulatory Commission approved the arrangement on December 15, 2011.
Under the agreement, the buyer had to pay capacity charges, non-escalable energy charges and escalable energy charges under the tariff schedule. The contract also stated that if the seller sourced coal from somewhere other than the captive source, it could not claim separate escalation in energy charges on that ground.
Change in Law clause
The agreement contained a “Change in Law” clause. It covered enactment, amendment or repeal of a law in India. It also covered a change in interpretation or application of law by a competent court or governmental authority. In addition, it included changes in mining laws, environmental laws or taxes affecting input costs.
The clause said that if such a change materially affected the project, the affected party would receive compensation through tariff payments. The idea was to restore that party to the same economic position it would have occupied had the change not occurred.
Ganeshpur coal block and supply issues
Although the agreement did not expressly name the coal source, the minutes of a meeting held on January 3, 2011 recorded that Adhunik Power had a captive coal block at Ganeshpur in Jharkhand in a joint venture with Tata Steel Ltd.
Later, by a letter dated April 30, 2012, WBSEDCL wrote to PTC and referred to the Ganeshpur coal block. It sought details about progress in lifting and transporting coal from that mine.
Since the captive coal block did not become operational, Adhunik Power began supplying power with tapering linkage coal from Central Coalfields Ltd. It also used e-auction coal and imported coal to cover the shortfall.
On August 25, 2014, the Supreme Court cancelled coal block allocations across the country. That decision also cancelled the Ganeshpur block allotted to APNRL.
Tribunal’s findings
The Appellate Tribunal for Electricity upheld compensation awarded by the Central Electricity Regulatory Commission for coal procured through e-auction and imports. It also held that cancellation of the coal block and the later legislation amounted to a Change in Law under the agreement.
The Tribunal directed payment of compensation from August 25, 2014 along with carrying costs.
Supreme Court upholds Change in Law finding
The Supreme Court agreed with the Tribunal on the core issue. It held that cancellation of the coal block following the August 25, 2014 judgment, along with enactment of the Coal Mines (Special Provisions) Act, 2015, constituted a Change in Law under the agreement.
The Court observed:
“With regard to compensation payable on account of additional coal cost arising due to a Change in Law event i.e. cancellation of Ganeshpur captive coal block vide this Court’s decision in Manohar Lal (supra) and the subsequent promulgation of the Coal Mines (Special Provision) Act, 2015, we are in wholesome agreement with APTEL that in Manohar Lal (supra), this Court interpreted the provisions of Coal Mines Nationalization Act, 1957 (‘CMN Act’) and Mines & Minerals Development and Regulation Act, 1957 (‘MMDR Act’) in a manner different from the interpretation adopted by the Government of India, and consequently cancelled the allotment of coal blocks made by the Screening Committee as well as through the Government dispensation route.”
The Bench held that the event materially affected APNRL’s right to source coal from the captive block. It said the company had to procure coal from other sources at a higher price. Therefore, it became entitled to compensation from August 25, 2014, together with carrying costs until actual payment.
In this regard, the Bench stated:
“This change in interpretation of the CMN Act, 1957 and the MMDR Act, 1957 by this Court resulting in cancellation of the coal blocks and subsequent promulgation of the Coal Mines (Special Provision) Act, 2015 falls within Articles 10.1.1(b) and 10.1.1(f) of the PPA/PSA. There is no cavil that such Change in Law materially affected the right of APNRL to procure coal from the cancelled coal block, compelling it to source coal from other sources at a higher price. WBSEDCL cannot claim immunity under Article 2.5 of the PPA/PSA”.
No compensation before August 25, 2014
At the same time, the Court set aside the Tribunal’s direction to the extent it granted compensation for coal procured through e-auction and imports before August 25, 2014.
The Court held that until the Change in Law event actually arose, the contractual bar continued to apply. In other words, the purchaser remained protected against escalation in coal costs where coal came from sources other than the captive block.
Captive source clearly identifiable
The Bench also rejected the argument that the agreement did not identify the captive coal source.
It held that the minutes of the January 3, 2011 meeting and the later correspondence clearly showed that the Ganeshpur coal block was the contemplated captive source for the project.
On this issue, the Court observed:
“Though the captive source is not expressly identified in Article 2.5, its identity is clearly discernible from the surrounding circumstances”.
Final direction
The Supreme Court ultimately directed the Central Electricity Regulatory Commission to modify its consequential order within four weeks in line with the judgment.
Case Title: West Bengal State Electricity Distribution Co. Ltd. v. Adhunik Power & Natural Resource Ltd. & Ors.
