Courts can imply a term in a contract only if literal interpretation fails to give the result intended by both the parties August 21, 2019
Published in: Between The Lines
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Mr. Arpit Sinhal
Ms. Batul Barodawala
Mr. Mahim Sharma
Mr. Drushan Engineer
Ms. Ishita Mishra
The Supreme Court of India in the case of Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission (decided on July 2, 2019) held that courts can imply terms in a contract only when literal interpretation fails, and has enunciated the scenarios in which such implication is allowed.
Gujarat Urja Vikas Nigam Limited (“GUVNL”), a holding company engaged in the business of bulk purchases from the power generators and supply to the distribution companies in the State of Gujarat entered into a Power Purchase Agreement (“PPA”) with M/s. Adani Power Ltd. (“Appellant”). The Appellant herein contended that the bid submitted by it on the basis of which the PPA was entered was solely on the assurance given by Gujarat Mineral Development Corporation (“GMDC”) to supply four million tonnes of coal. Since GMDC was not abiding by the assurance given, the Appellant sent various notices to the Government of Gujarat to find a solution.
Due to the non-compliance of the Fuel Supply Agreement (“FSA”) between the Appellant and GMDC, the Appellant informed GUVNL that the FSA had not been finalized yet. In June 2008, GUVNL asked the Appellant to furnish an additional performance bank guarantee since it had not complied with the conditions of the PPA. The Appellant stated non-execution of the FSA as the reason for not supplying power, in their reply to GUVNL, and that the Appellant had no other option but to terminate the PPA unless the coal supply comes from the GMDC.
Thereafter, there was an attempt to amicably settle the matter amongst the Appellant, GUVNL, GMDC and the Government of Gujarat which was unsuccessful. Finally, the Appellant by a communication dated December 28,2009, issued a notice to GUVNL, terminating the PPA with effect from January 04, 2010. GUVNL addressed a communication to the Government of Gujarat on December 30, 2009, requesting the Government to impress upon the Appellant to withdraw its termination notice dated December 28, 2009 and also impress upon the GMDC for resolution of FSA with the Appellant. GUVNL also addressed a communication to the Appellant on January 05, 2010, requesting it to keep the notice of termination in abeyance. On January 06, 2010, the Appellant addressed another communication to GUVNL, informing it that since the period of termination has already expired, the PPA stands terminated with effect from January 04, 2010.
The Appellant also deposited an amount of INR 25 crores with GUVNL towards liquidated damages in addition to the performance bank guarantee of INR 75 crores. GUVNL returned INR 25 crores and asked the Appellant to withdraw the termination notice but the same was not accepted. GUVNL filed a petition under the Electricity Act, 2003, for adjudication of the dispute. The Gujarat Electricity Regulatory Commission (“Commission”) held that the termination of the PPA was illegal, and directed the Appellant to supply the power to the procurer at the rate determined in the PPA. The Appellant approached the Appellate Tribunal for Electricity (“Appellate Tribunal”) against the order of the Commission which was dismissed and the present appeal was filed before the Supreme Court.
The Appellant argued that the bid which was initially submitted by the Appellant in furtherance of which the PPA was created, was only submitted on the basis of the commitment by the GMDC that it will supply the coal required for generation of power. This information was communicated by the Appellant to GUVNL. Thus, when GMDC failed to execute the FSA, non-compliance of Article 3.1.2 of the PPA was observed which entitled the Appellant to terminate the Agreement by giving seven days’ notice in accordance with Article 3.4.2 of the PPA.
The Appellant also argued that the Commission and the Appellate Tribunal have grossly erred in their judgment, wherein they stated that an express agreement between GUVNL and the Appellant stating the non-compliance under Article 3.1.2 would be the only way to invoke Article 3.4.2 of the PPA. The Appellant further argued that since the PPA provided for liquidated damages, the Commission and the Appellate Tribunal ought not to have given an order for specific performance. The Appellant further alleged that the Commission and the Appellate Tribunal have varied the terms of the contract executed between the parties which is not permissible in law.
GUVNL submitted that the PPA which was entered was not on the basis of the commitment by GMDC. It further argued that the source of coal is immaterial to GUVNL, and the PPA is only for the supply of power between the Appellant and GUVNL. The Respondent further argued that on the failure of GMDC to supply indigenous coal, the Appellant should have made an alternative arrangement and fulfilled their obligations under the PPA.
Therefore, by not doing so, it was the Appellant who was committing the default and hence, a party in default cannot be permitted to terminate the PPA. They have also contended that despite having a provision for liquidated damages in the PPA, the courts are not powerless to direct specific performance of the contract. GUVNL finally submitted that the contract is supposed to be read as a whole and the provisions of the contract cannot be read in isolation.
OBSERVATIONS OF THE SUPREME COURT
The Supreme Court in the instant case referred to a number of precedents to determine the issue of the interpretation of clauses in the contract between the said parties. In the case of Satya Jain v. Anis Ahmad Rushdie [(2013) 8 SCC 131], the Supreme Court had emphasized on the principle of business efficacy. It was held that the principle of business efficacy is normally invoked to read a term in a contract to achieve the result or the consequence intended by the parties, acting as prudent businessmen. Thus, the test of business efficacy requires a term to be implied only if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties would not have reasonably foreseen.
The Supreme Court also observed the “Five Condition Test” which has been set out in the case of B.P Refinery (Westernport) Proprietary Limited v. Shire of Hastings [1977 UKPC 13] wherein the conditions to be fulfilled for an implied condition to be read into the contract are: (1) reasonable and equitable; (2) necessary to give business efficacy to the contract; (3) the Officious Bystander Test; (4) capable of clear expression; and (5) must not contradict any express term of the contract. Relying on the above judgments and a long line of precedents following the business efficacy test, the Supreme Court observed that the clauses in any agreement ought to be given their plain, literal and grammatical meaning, and terms may be implied in a contract only if they find that the literal interpretation fails to portray the intention of the parties.
The Supreme Court also observed that the Appellate Tribunal’s interpretation wherein they held that there is no need for an express agreement between the parties to be able to invoke the provisions of termination, would amount to inserting a whole new condition and re-writing of the contract, and is therefore not equitable.
DECISION OF THE SUPREME COURT
The appeal of the Appellant was allowed, and the notice of termination and the consequent termination was held valid and legal. The Appellant was directed to approach the Central Electricity Regulatory Commission for determination of the compensatory tariff, including various other aspects payable to it from the date of supply of electricity.
Vaish Associates Advocates View
This decision of the Supreme Court is in line with a catena of precedents on interpretation of contracts pertaining to situations wherein contractual provisions can be implied. However, this judgment creates an exception by including a third party within the ambit of the contract. The Supreme Court has given the concept of business efficacy and the Five Condition Test a very wide ambit by including a third party with no privity of contract into the application of the contract. The Supreme Court has taken a liberal approach by looking at the conduct of the parties and the communications exchanged inter-se, to establish that the third party was a major factor to the successful execution of the contract, and both the parties were aware of the same.
Therefore, the Supreme Court has made a positive move in the fora of contract law by widening the horizon for implication in contracts. This precedent marks a new era of reading between the lines and extracting the intention of the parties, who may otherwise choose to hide behind literal interpretations, while being fully aware of extraneous circumstances as in the instant case. Further, this judgment is pertinent in situations wherein the government or the public sector undertakings are parties and try to hide behind the veil of ignorance of what prevails in other departments, even though they are closely associated.
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