The Supreme Court held that deviation from the plain terms of the contract is only justified when it improves business efficiency.
Title: Maharashtra State Electricity Distribution Co. Ltd. v. Ratnagiri Gas & Power Pvt. Ltd. & Ors
Decided on: 09 November, 2023
+ Civil Appeal No. 1922 of 2023
CORAM: HON’BLE Chief Justice of India Dr. Dhananjaya Y Chandrachud
Introduction
The importance of interpreting business contracts in accordance with the parties’ original intentions was recently emphasized by the Supreme Court. Additionally, it stated that a departure from the contract’s plain language is only acceptable when it improves business efficacy.
Facts of the Case
Regarding the Power Purchase Agreement (PPA) that Ratnagiri Gas and Power Private Limited & Ors. (first respondent) and Maharashtra State Electricity Distribution Company Limited (appellant) entered into. The appellant was compelled to buy power from the first respondent under the terms of the 25-year agreement, which was entered on April 10, 2007. The first respondent was then expected to receive from RIL the agreed-upon amount of gas delivery. But starting in September 2011, the availability of gas gradually decreased. Thus, the first respondent entered into a Gas Supply Agreement (GSA) with GAIL for the supply of Recycled Liquid Natural Gas (RLNG) in order to make up for the shortfall. This was communicated to the appellant by the first respondent via letter dated December 16, 2011. The appellant’s refusal to pay fixed capacity charges gave rise to the dispute. The appellant said that the first respondent did not get the appellant’s consent before to entering into the GSA with GAIL, citing Clause 5.9 of the PPA as support. Furthermore, it was claimed that the RLNG capacity declaration was arbitrary and unilateral, and that it violated PPA Clause 5.9, which required the appellant’s prior consent. For convenience, the condition said, among other things: “Before signing the GSA/GTA contract, RGPPL shall be required to acquire clearance from MSEDCL regarding contractual terms and pricing. It was contended that the appellant was released from the obligation to pay the fixed costs on the basis of this.
Courts analysis and decision
The respondent contended that the exceptional nationwide scarcity of domestic gasoline made the agreement with GAIL necessary, and the court acknowledged this. Returning to the appellant’s “unilateral” decision argument, the Court carefully examined the PPA’s wording. It emphasized that the PPA should be interpreted in accordance with the accepted principles of contract law. Clause 4.3 was split into two sections. The first section said that the appellant’s consent was not required for a change from one primary fuel, such as LNG/Natural, to another primary fuel, such as RLNG. On the other hand, the second section said that if liquid fuels are to be used, the appellant’s consent is necessary. It is crucial to emphasize that RLNG was intended to be the main fuel under this paragraph. The GSA/GTA with GAIL is permitted by the provisions of the contract, and the appellant’s agreement or consent is irrelevant, according to the reasons presented by CERC and APTEL, which the court upheld.
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Written by- Hargunn Kaur Makhija