Contractual terms prevail over powers of regulatory commissions

In Haryana Power Purchase Centre v Sasan Power Ltd and Ors, the Supreme Court held that neither regulatory commissions nor the Appellate Tribunal for Electricity (APTEL) can use regulatory powers to vary the terms of a contract.

Disputes arose between Sasan Power, the developer of an ultra mega power project (UMPP), and the distribution licensees or procurers who were to supply power to consumers. The power purchase agreement (PPA) was concluded in 2007.

The first dispute was whether Sasan was entitled to compensation in respect of an allegedly inaccurate water intake report attached to the request for proposal (RFP). After signing the PPA, Sasan commissioned an independent study, resulting in a change to the course of a water pipeline. This led to increased costs of construction. Sasan claimed that this constituted a change in law under the PPA. The RFP contained disclaimers, requiring bidders to make independent enquiries and satisfy themselves with respect to all information, inputs, conditions, circumstances and factors affecting their bids. The RFP indemnified the procurer and its representatives against liability for statements in it.

The Central Electricity Regulatory Commission relied on these pre-contractual disclaimers, holding that Sasan had to satisfy itself on the suitability of the water intake location and independently calculate costs before bidding. As Sasan had not done so, it was not entitled to compensation.

In the second dispute, Sasan claimed exemption from customs duty on mining equipment imported for a captive coal mine for use in the UMPP. It argued that an office memorandum written in 2011 by an official of the Ministry of Power denied it such exemption. Sasan said the memorandum constituted a change in law as defined in the PPA. The commission rejected the contention, as Notification 21 of 2002-Customs treated power projects and mining projects separately. Coal mining projects were liable to pay duty under that notification. The commission ruled that Sasan had failed to prove any implication that coal mining equipment would be exempted from duty.

On appeal, the APTEL also held that neither circumstance was a change in law, but ruled that Sasan was entitled to increase costs. The procurers could not rely on the disclaimer in the bid document to excuse a grossly erroneous report. The APTEL also held that the duty exemptions applied to the import of equipment for the whole project, including for captive mines. The coal mine was exclusively tied to the UMPP and other commercial exploitation was not permitted.

The Supreme Court allowed the appeal of the procurers against the decision of the APTEL. It held the APTEL had failed to consider the disclaimers in the RFP. Sasan was contractually bound to check the correctness of the first report. The tribunal had also failed to compare the two reports as the second report had identified no error in the first.

As to the mining equipment, the court held that Sasan had failed to show that the memorandum was a change in law as defined in the PPA. There was nothing to show the mining equipment was exempt or so treated before the PPA. The Supreme Court upheld the definition in the PPA that a change in law was such only after a court, tribunal or government agency being a final authority had declared it so. A memorandum from an official in a ministry was not a final authority.

The Supreme Court has significantly curtailed the discretionary powers of commissions and tribunals. The court upheld the supremacy of the contract binding the parties, holding that it was not open to the commission, in the purported exercise of its regulatory powers, to rewrite what the parties had agreed.

While this judgment deals with the powers of the electricity regulator, it also affects other infrastructure projects. The court’s acceptance of disclaimers means a procurer or tenderer can avoid liability where unforeseen circumstances arise. Bidders must carry out due diligence at the pre-bid stage to avoid unexpected costs in the future. This will increase bids by suppliers, resulting in higher prices for the ultimate consumers.

The decision absolves procurers when the RFP contains incorrect information. It will discourage suppliers from bidding. Those who do bid will increase the price to cover the considerable costs of pre-tender due diligence.

Mani Gupta is a senior partner and Aman Choudhary is a senior associate at Sarthak Advocates & Solicitors