Between the Lines | Supreme Court: In seeking to construe a clause in contract, there is no scope for adopting either a liberal or a narrow approach

The Supreme Court of India (“Supreme Court”) in the case of Bangalore Electricity Supply Company Limited v. E.S Solar Power Private Limited and Others [C.A. 9273 of 2019] by judgement dated May 03, 2021, upheld the decision of the Appellate Tribunal for Electricity (“APTEL”). The APTEL had passed an order reversing the findings of the Karnataka Electricity Regulatory Commission (“KERC”). KERC, more specifically, had imposed tariff reduction for solar power projects based out of Bagepalli and Bidar, Karnataka.

Facts

Karnataka Renewable Energy Development Limited (“KREDL”) had issued a request for proposal in 2015 to invite bids for development of ‘Solar PV ground mount power plants’ in Karnataka, pursuant to the government’s decision of development of 1200 MWA of solar power through private sector participation. Emmvee Photovoltaic Power Private Limited, respondent no. 2 herein, (“EPL”) incorporated two special purpose vehicles as per the terms of the request for proposal and submitted the bid for acceptance of Bangalore Electricity Supply Company Limited, the appellant herein (“BESCL”). Respondent no. 1 in Civil Appeal 9273 of 2019 (filed by BESCL before KERC) is a special purpose vehicle constituted by EPL for setting up a Solar PV ground mount project with a capacity of 10 MWA (AC) in Bidar. Respondent no. 1 in Civil Appeal 9274 of 2019 (filed by BESCL before KERC) is a special purpose vehicle for setting up a 20 MWA (AC) capacity Solar PV ground mount Project in Bagepalli. The projects were awarded on March 31, 2016. Thereafter, power purchase agreements (“PPA”) were entered between the parties on May 23, 2016. PPA was approved by KERC on October 17, 2016. Supplementary PPAs were also entered into between the parties on December 17, 2016 incorporating further modifications suggested by KERC. In respect of the Bidar project and Bagepalli project, a commissioning certificate was issued on October 25, 2017 and November 23, 2017 respectively.

Proceedings before KERC

Original petition no. 18 of 2018 was filed in Civil Appeal 9274 of 2019, contesting the reduction of tariff payable by BESCL from INR 6.10/kWh to INR 4.36/kWh and imposition of damages of INR 20,00,000/- for delay in commissioning the plant. It was contended that the Bagepalli project commenced within 12 months from the approval of the PPA. Therefore, imposition of damages and reduction of tariff payable by BESCL was contrary to provisions of PPA. Original petition no. 19 of 2018 was also filed in Civil Appeal 9723 of 2019 in respect of the Bidar project for reliefs similar to those claimed in original petition no. 18 of 2018. KERC by an order dated October 23, 2018, dismissed the aforementioned original petitions.

KERC had originally framed four issues for consideration:

• Whether the scheduled commissioning date of the power projects would fall on October 16, 2017 or October 17, 2017.
• The date on which the solar power projects in the abovementioned original petitions have started injection of power into the state grid.
• Whether injection of power into the state grid was essential to declare that project is commissioned.
• Whether commissioning of the project/commercial operation of the project is the same or are different concepts.

Observations of KERC

In respect of issue (i), the scheduled date of commissioning was October 16, 2017 and not October 17, 2017. As far as issues (ii), (iii) and (iv) were concerned, injection of power into the state grid was a sine qua non for declaring that the project was commissioned. However, this had in fact occurred on October 17, 2017. In view of the above, KERC dismissed the above-mentioned original petitions.

Proceedings before APTEL

Thereafter, appeal nos. 332 and 333 of 2018 were filed against the order of KERC before APTEL. The tribunal considered: Whether the project was delayed by one day in terms of PPA and if KERC was justified in imposing liquidated damages for such delay in commissioning.

Observations of APTEL

The commissioning date of both the Bidar and Baghepalli plants was October 16, 2017. The scheduled date of commissioning was done within the time limit prescribed under the agreements even if the commencement was in fact taken to be on October 17, 2017. Allowing the appeals, APTEL set aside the orders passed by KERC. Thereafter, BESCL has challenged the orders passed by APTEL before the Supreme Court.

Contentions of BESCL before the Supreme Court

APTEL’s conclusion regarding the scheduled date of commissioning was contrary to the terms of the PPA. Clauses of the PPA justified the decision taken in respect of reductions of tariff and imposition of liquidated damages. Injection of power into the state grid was a prerequisite to determine the date of commissioning. KERC had in fact correctly interpreted the PPA to include the first date and the last date, that is, the date on which PPA was approved by the KERC for determining the scheduled commissioning date. As per records, there was minimum generation of power on October 16, 2017, which did not satisfy the condition of injection power into the state grid. Therefore, the entities were not entitled to the tariff at the rate of 6.10/kWh. APETL had also committed an error by relying on the judgements relating to General Clauses Act, 1897 when the PPA excluded applicability of the same.

Contentions of Respondent Nos. 1 and 2 (E. S. Solar Private Limited and EPL) (“Respondents”) before the Supreme Court

The 12-month period for deciding the scheduled commissioning date started from October 17, 2016 which was also date of approval of PPA. As per the covenants of the PPA, the date of approval of PPA had to be excluded for computing 12-month period for deciding the scheduled date of commissioning. As such there is no dispute regarding injection of power into the grid on October 17, 2017. Therefore, there is no default as far as the entities were concerned. Alternatively, even if October 17, 2016 is not excluded, the 12-month period ends on October 16, 2017 on which the plants were commissioned. Further, commissioning date of the plant was different from commercial operation date. Moreover, the PPA were entered into on the basis of the offer to pay tariff at Rs. 6.10/kwh. Reduction of tariff would also be detrimental in respect of the plants.

Observations of the Supreme Court

The dispute in these appeals is whether the projects were not commissioned before the expiry of 12 months from October 17, 2016, which is the date of approval of PPA by KERC. The conflicting views herein relate to computation of 12 months for the purpose of determining whether the scheduled date of commissioning is October 16, 2017 or October 17, 2017. Thereafter, the second aspect being whether injection of power was a pre-requisite for deciding the date of commissioning and whether the commercial operation date and commissioning date were the same. The court noted that its duty was not to delve deep into the intricacies of human mind to explore the undisclosed intention, but only to take the meaning of words used, that is, to say expressed intentions. In seeking to construe a clause in a contract, there is no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise or process to be undertaken is to determine what the words mean. It may happen, at times that the conclusion is ambiguous. In such cases, court has to prefer one above the other in accordance with the settled principles. If one meaning is more in accord with what the court considers to the underlined purpose and intent of the contract, or part of it, than the other, then the court will choose the former. The intention of the parties must be understood from the language they have used, considered in the light of the surrounding circumstances and object of the contract. In light of article 5.8.1 of the PPA, liquidated damages could be imposed on the developer if he was unable to commence supply of power by the scheduled commissioning date. Article 12 of the PPA, which deals with applicable tariff, is reproduced herein:

“12.1. The Developer shall be entitled to receive the Tariff of INR6.10 / kWh of energy supplied by it to BESCOM in accordance with the terms of this Agreement during the period between COD and the Expiry Date.

12.2. Provided further that as a consequence of delay in Commissioning of the Project beyond the Scheduled Commissioning Date, subject to Article 4, if there is change in KERC applicable tariff, the changed applicable Tariff for the Project shall be the lower of the following: I. Tariff at in Clause 12.1 above II. KERC applicable Tariff as on the Commercial Operation Date.”

The issue here is whether the scheduled commissioning date is October 16, 2017 or October 17, 2017. KERC approved the PPAs on October 17, 2016. Whereas the scheduled commissioning date should be, as per the agreement, 12 months from October 17, 2016. There is no dispute as such that 12 months equals to be 365 days. As per BESCL, if October 17, 2016 is included in the computation, the scheduled commissioning date would be October 16, 2017. Whereas if it is excluded in the calculation, October 17, 2017 would be the scheduled commissioning date. KERC relied on clause 1.2.1 (m) of the PPA to conclude that October 17, 2016 has to be included for interpreting the period of 365 days. Whereas, APTEL held that article 1.2.1 (k) of the PPA would be the relevant interpretation clause. Both of these clauses from the PPA are reproduced hereunder:

“Article 1.2 (k): any reference to month shall mean a reference to a calendar month as per the Gregorian calendar;

Article 1.2 (l) and (m): any reference to any period commencing “from” a specified day or date and “till” or “until” a specified day or date shall include both such days or dates; provided that if the last day of any period computed under this Agreement is not a business day, then ·the period shall run until the end of the next business day”

Reduction of tariff is permissible under the PPA only if there is a delay in commissioning of the project beyond scheduled commissioning date. The parties agree that the effective date is undoubtedly October 17, 2016. The court looked at the definition of the expression ‘month’ as provided under article 21.1 of the PPA. Month had been defined to mean a period of 30 days and excluding (the date of the event) where applicable, else a calendar month. If the date of the event, that is, October 17, 2016 is excluded, the scheduled commissioning date would be October 17, 2017. Article 21 of the PPA is reproduced herein:

“COD” or “Commercial Operation Date” shall mean the actual commissioning date of respective units of the Power Project where upon the Developer starts injecting power from the Power Project to the Delivery Point.

“Effective Date” shall mean date of Approval of PPA by KERC;

“Month” shall mean a period of thirty, (30) days from (and excluding) the date of the event, where applicable, else a calendar month.

“Scheduled Commissioning Date” shall mean 12 (twelve) months from the Effective Date

Decision of the Supreme Court

KERC was incorrect in its interpretation regarding definition of month. It had applied article 1.2.1 (m) of the PPA which refers to a period commencing from a specified date to a specified day for the purpose of including the date of the event. The correct provision applicable was article 1.2.1 (k) of the PPA read with the definition of month in article 21.1 of the PPA. There is a specific mention of twelve months in the scheduled commissioning date and article 1.2.1 (k) of the PPA provides that any reference to a month shall mean a calendar month. This interpretation therefore in clear terms, excludes the applicability of article 1.2.1 (m) of the PPA. The court noted the second issue raised by BESCL, that the injection of power into the state grid being on October 17, 2017 and the scheduled date being October 16, 2017, the reduction of tariff was justified. Whereas, the Respondents contended that even if scheduled date was October 16, 2017, plants had been commissioned on October 16, 2017 itself. They were objecting to the premise adopted by BESCL that the actual injection of power was required to show that solar plants were commissioned. The court noted that APTEL had reversed KERC’s findings by relying on the commissioning certificate which is to the effect that the plants were commissioned on October 16, 2017 itself. The court held that that there was no dispute that the power was injected into the state grid on October 17, 2017. However, in view of the observations of the court that the scheduled date was October 17, 2017, it was not necessary to look into the point in respect of actual injection of power into the grid vis-à-vis date of commissioning.

VA View:

The SC in this instance reiterated that there was no scope for adopting either a liberal or a narrow approach, whatever that may mean. The exercise or process taken by the courts would be to determine what the words actually mean. Even if in terms of determining the contract, there are two different meanings, the court would opt one over the other, if it is in synchronization with the intent and underlying purpose of the contract.

The background of the contract can also be taken into consideration to construe the intent of the contract. It would provide an insight into the understanding between the parties to an agreement. This would be helpful in adopting one interpretation over the other, in the face of two conflicting interpretations.

For more information please write to Mr. Bomi Daruwala at [email protected]

Between the Lines | Delhi High Court: An arbitral award cannot be interfered with on account of disagreement over inference drawn from evidence

The Delhi High Court (“DHC”) has in its judgment dated April 15, 2021, in the matter of Megha Enterprises and Others v. M/s Haldiram Snacks Private Limited [O.M.P (COMM) 79/2021], held that an arbitral award cannot be interfered with on account of disagreement over inference drawn from evidence.

Facts

Megha Enterprises (“Petitioner”), engaged in the trade of crude palm oil (edible grade), entered into two agreements dated February 2, 2013 and February 25, 2013 with M/s Coral Products Private Limited (“Coral”) for sale and purchase of crude palm oil on a high sea sale basis (“High Sea Sale Agreements”). Pursuant thereto, Coral sold 1470 MT and 2500 MT of crude palm oil to the Petitioner at a rate of INR 46,600/- per MT and INR 48,750/- per MT respectively, and issued two separate invoices dated February 2, 2013 (for INR 6,85,02,000/-) and February 25, 2013 (for INR 12,18,75,000/-), to the Petitioner aggregating to INR 19,03,77,000/-.

Thereafter, in terms of a scheme of amalgamation under Section 391-394 of the Companies Act, 1956 (“Act”), Coral merged with M/s Haldiram Snacks Private Limited (“Respondent‟). Under the terms of the said scheme of amalgamation, all the assets of Coral stood vested with the Respondent, which also included the sum of INR 19,03,77,000/- receivable from the Petitioner in respect of the High Sea Sale Agreements. According to the Respondent, the Petitioner took delivery of the crude palm oil at Kakinada, which was the port of delivery, in accordance with the terms and conditions of the documents executed between Coral and the Petitioner. However, the aforesaid amount of INR 19,03,77,000/- remained outstanding as the Petitioner failed to pay the same.

Consequently, by a notice dated May 18, 2016 addressed to the Petitioner, the Respondent invoked the arbitration clauses under the High Sea Sale Agreements, and sought the consent of the Petitioner to appoint a sole arbitrator from amongst a set of three former judges of the DHC. In the said notice, the Respondent sought payment of INR 19,03,77,000/- together with interest at the rate of 18% per annum, which according to the Respondent was in terms of the High Sea Sale Agreements as well as the custom and usage of trade. The Petitioner responded to the said notice under a letter dated June 3, 2016 denying its liability to pay the said amount as claimed by the Respondent and also declined to give consent for the appointment of an arbitrator. The Petitioner further claimed that the arbitration clause was not binding on any of the parties.

Thereafter, the Respondent filed a petition with the DHC under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) seeking appointment of a sole arbitrator to adjudicate the disputes arising out of the High Sea Sale Agreements in question. The said petition was allowed by the DHC and under an order dated April 18, 2017, the DHC then referred the parties to the Delhi International Arbitration Centre (“DIAC”) with a direction for the DIAC to appoint an arbitrator in accordance with the provisions of the 1996 Act and its rules.

Following this, the Respondent filed its statement of claims before the sole arbitrator on June 5, 2017 claiming (a) INR 19,03,77,000/- as the amount outstanding against the sale of crude palm oil; (b) interest at the rate of 18% per annum from the date the amount became due till the date of filing of the statement of claims, quantified at INR 14,56,38,405/-; (c) pendente lite and future interest at the rate of 18% per annum from the date of filing of the claim till payment of the award; and (d) costs of litigation. In response, the Petitioner filed its statement of defence raising several contentions including the Respondent’s claims being barred by limitation as the arbitration clause was invoked on May 18, 2016, which was beyond a period of three years from the date on which the amounts became payable under the High Sea Sale Agreements. The arbitral tribunal, however, rejected the contention that the claims made by the Respondent were barred by limitation and in its award (i) held that a sum of INR 19,03,77,000/- was due and payable by the Petitioner to the Respondent, (ii) interest at the rate of 9% from April 1, 2013, that is, the date of filing the statement of claims till the recovery of the said amount would be payable by the Petitioner to the Respondent, and (iii) awarded costs of INR 5,00,000/- in favour of the Respondent.

Aggrieved by the arbitral award, the Petitioner filed the present petition under Section 34 of the 1996 Act challenging the impugned arbitral award dated October 26, 2020, before the DHC.

Issue

Whether the arbitral award can be interfered upon the ground of disagreement over inference drawn from evidence.

Arguments

Contentions raised by the Petitioner:

The Petitioner, inter alia, contended that the Respondent’s claim was barred by limitation and the arbitral tribunal’s conclusion to the contrary, was patently illegal. It was submitted that the High Sea Sale Agreements in question were entered into on February 2, 2013 and February 25, 2013 and invoices (of INR 6,85,02,000/- and INR 12,18,75,000/-) were also issued on the aforesaid dates. In terms of clause 11 of the High Sea Sale Agreements, which were identically worded, the payment for the same was required to be made on expiry of ten days from the date of the High Sea Sale Agreements. Accordingly, the payment of INR 6,85,02,000/- against the invoice dated February 2, 2013 was to be made by February 12, 2013 and the payment of INR 12,18,75,000/- against the invoice dated February 25, 2013 was required to be made by March 7, 2013. Since the notice invoking arbitration was issued on May 18, 2016, it was contended by the Petitioner that the said notice was beyond the period of three years from the agreed dates of payment and hence the Respondent’s claim was barred by limitation. It was also contended that the arbitral tribunal had erred in accepting the Respondent’s contention that one Mr. Avneesh Agarwal of Coral had received a letter dated May 31, 2013 (“Balance Confirmation Letter”) acknowledging the liability of the Petitioner under the invoices. The Petitioner contended that the said letter was not signed and therefore, could not have been considered as an acknowledgement under Section 18 of the Limitation Act, 1963 (“Limitation Act”). It was further contended that an e-mail dated June 4, 2013 forwarding the Balance Confirmation Letter which was purportedly forwarded by one Mr. Mohan Maganti of M/s KGF Cottons Private Limited to the said Mr. Avneesh Agarwal could not be construed to extend the period of limitation as it had not been sent by any of the constituent partners of the Petitioner. Further, there was no evidence that Mr. Mohan Maganti was an employee of the Petitioner. Additionally, the e-mail itself indicated that it was sent on behalf of M/s KGF Cottons Private Limited, and a communication by a third party (in this case, an incorporated company) could not be considered as an acknowledgement by the Petitioner or on its behalf.

Contentions raised by the Respondent:

The Respondent, on the other hand, contended that the arbitral tribunal had carefully examined the evidence on record and concluded that the Petitioner had acknowledged the debt owed against the two invoices in question. It was submitted that the arbitral tribunal had seen and appreciated the e-mail dated June 4, 2013 as well as the Balance Confirmation Letter. It was contended that the arbitral tribunal had also examined the question whether the Balance Confirmation Letter was required to be signed and had in this regard followed the decision of the Karnataka High Court in Sudarshan Cargo Private Limited v. Techvac Engineering Private Limited [2014 Company Cases 71], where it was held that e-mails can be construed and read as due acknowledgment of debt and the same would meet the parameters as laid down under Section 18 of the Limitation Act.

Observations of the Delhi High Court:

The DHC observed that basis the arbitral tribunal’s findings it was clear that it had examined the question of limitation in detail. It had, first of all accepted, on evaluation of evidence led before it that the e-mail dated June 4, 2013 had been sent by one Mr. Mohan Maganti from the e-mail address, [email protected], to Mr. Avneesh Agarwal, representative of the Respondent. The contents of the said e-mail clearly indicated that the Balance Confirmation Letter issued by M/s KGF Cottons Private Limited and the Petitioner, as on March 31, 2013, were forwarded pursuant to the request made by one, Mr. Mohit Dua. The Balance Confirmation Letter which was attached along with the said e-mail, clearly confirmed that a sum of INR 19,03,77,000/- was outstanding in the ledger accounts of the Petitioner as on March 31, 2013. The arbitral tribunal also concluded that M/s. Good Health Agro Private Limited was a part of the same group company as the Petitioner. This had been conceded by the witness examined by the Petitioner during the proceedings before the arbitral tribunal. Basis this, the arbitral tribunal concluded that it was sent on behalf of one of the employees of the group company and thus, obviously on behalf of the Petitioner. The DHC observed that the Petitioner did not produce its books of accounts or its ledger to otherwise contest the contents of the said e-mail. Thus, no evidence was produced by the Petitioner to establish that the assertion made in the Balance Confirmation Letter that its ledger accounts reflected a sum of INR 19,03,77,000/- as outstanding towards Coral/Respondent was incorrect. The DHC also noted that the affidavit filed by the witness on behalf of the Respondent affirmed that the written acknowledgement dated May 31, 2013 in the form of the Balance Confirmation Letter was sent through an e-mail dated June 4, 2013 and it had confirmed that the credit balance of INR 19,03,77,000/- was standing in the books of accounts of the Petitioner as on March 31, 2013 and that the arbitral tribunal had accepted the same.

It was further observed that the scope of examination of an arbitral award under Section 34 of the 1996 Act was extremely limited. It is trite law that the DHC would not undertake the exercise of re-appreciation of evidence on the ground of patent illegality. In the present case, no case had been made out by the Petitioner that the arbitral award was contrary to the fundamental policy of India as it could not by any stretch be considered to be opposed to justice or morality. The DHC noted that the dispute in the present case related to a simple transaction of sale and purchase of goods and that all that the arbitral tribunal had done after having found that the Petitioner had not paid for the goods purchased by them, was to award that the said consideration be paid with interest. The DHC observed that it was trite that a delay in filing a claim only bars the remedy but does not extinguish any debt. Viewed with this perspective, the arbitral tribunal had after evaluating the material on record, rejected the Petitioner’s contention that the Respondent be denied its remedy to seek what it claimed to be legitimately due to it. Therefore, there was no question of such an approach offending any sense of morality as was embodied in the expression “public policy” as used in Section 34(2)(6) of the 1996 Act.

It was also observed that while the evaluation of evidence by the arbitral tribunal may have been erroneous and perhaps the DHC may have taken a different view but that was not the scope of examination under Section 34 of the 1996 Act and the DHC could not interfere with the arbitral award merely on the ground that it did not concur with the inference drawn by the arbitral tribunal from the evidence led by the parties.

Decision of the Delhi High Court

In dismissing the petition, the DHC refused to interfere with the arbitral award on the ground that the arbitral tribunal had arrived at an erroneous conclusion on the evidence led by the parties. Accordingly, the present petition was disposed of.

VA View:
In passing the above order, the DHC has reiterated the set principle that the scope of examination of an arbitral award under Section 34 of the 1996 Act is limited and does not warrant interference or re-examination of the evidence on record on the ground of patent illegality, unless there has been some gross injustice or violation of public policy.

The view taken by the DHC in arriving at its order is well reasoned, as any such re-examination of evidence that has already been dealt with by an arbitral tribunal would not only defeat the intent of Section 34 of the 1996 Act but also negate the objective of speedy and time bound resolution of disputes by arbitration.

For more information please write to Mr. Bomi Daruwala at [email protected]