Indsil Hydro Power & Manganese Ltd. vs State of Kerala & Ors. etc.

28 February 2001 without fail – High Court dismissed the writ petition eventually holding that there was no intentional delay in construction of the transmission lines on the part of KSEB; that the tariff concession was made available only to new industries; and that the agreement between the parties did not disclose any specified time limit for the provision of transmission lines – On appeal, held: The agreement stipulated that the date of commissioning would be construed as the date from which the power generated by the units set up by the appellant was fed into KSEB grid – Though the contract did not specify the exact length of the transmission line, clause 9 made it clear that for a length of 4 kms, construction would be at the cost and expense of the appellant while the balance would be constructed by KSEB at its own cost – Clause 3 postulated that commercial operations would begin within a period of 30 months – Thus, the only reasonable construction of the contract would be that the obligations which were to be performed by KSEB, namely, the construction of the transmission line must necessarily be completed within the same period – Otherwise imposing an obligation upon the appellant to commence commercial operations within 30 months would have no meaning – Therefore, High Court was not correct in holding that the contract did not stipulate any timelines for the completion of the work of constructing the transmission line – Clause 12 of the agreement contemplated a situation where the KSEB grid is not in a position to absorb the energy generated from the project for any reason including the breakdown of transmission lines or any other reason beyond the control of KSEB – In that event, clause 12 provided the generation from the project to be restricted to the extent of generation for captive consumption as directed by KSEB – These provisions indicated that the contract was not entirely silent in regard to a situation involving the inability of KSEB’s grid to absorb the energy generated from the project for any reason – The report of the Chief Electrical inspector made it clear that it was as a result of the delay which took place in the construction of the transmission line that the actual injection of power into the grid could not take place – This clearly showed that the appellant had duly fulfilled its obligation of setting up Phase I and Phase II of its units and the only reason why it was unable to inject power into the grid was because the setting up of the transmission lines by KSEB could not take place – Thus, the basis on which State Government took a decision on 7 February 2001 and High Court affirmed it by its impugned judgment would need to be re-visited – Appellant was not entitled to the grant of deemed generation status as a matter of right – Similarly, the concessional power tariff applicable for a period of five years from 1994 to 1999 was extended until 20 August 2000 – This is undoubtedly a matter of policy and the High Court was justified in coming to the conclusion that it was not open to the Court to foist a particular measure of policy on the State – State Government to reassess the matter in proper perspective within the available framework of law and its own policy.

Administrative Law: Contractual matters – Judicial review – Scope of interference – Held: It is now a settled principle of law that the exercise of writ jurisdiction under Art.226 is not excluded in matters pertaining to contract – The States and its agencies are duty bound to act in a manner which is fair and transparent – They cannot act arbitrarily in dealings with private parties – This must particularly be the governing principle where the State as a measure of encouraging industrialisation invites the participation of private industries to respond to the policy initiative of the State – Electricity.

Deeds and documents: Interpretation of commercial documents – In construing a commercial document, the contract must be read and understood in its entirety so as to attribute to it a business meaning which was within the understanding of the contracting parties – Electricity.

Disposing of the appeals, the Court

HELD: 1. In announcing the policy initiative on 7 December 1990, the State Government intended to encourage the setting up of hydel power projects by private agencies and hence, a slew of concessions came to be provided. The agreement that was entered into between the appellant and the KSEB is undoubtedly a matter in the contractual arena. It is now a settled principle of law that the exercise of writ jurisdiction under Article 226 is not excluded in matters pertaining to contract. The States and its agencies are duty bound to act in a manner which is fair and transparent. [Para 33] [664-E-F]

2. In the instant case, under its agreement with KSEB, the appellant assumed the obligation to set up Phases I and II of a hydel project with a capacity of 21 MW and to operate the project for a period of 30 years. After the expiry of 30 years, the project would be handed over to the State free of cost. The agreement stipulated that the date of commissioning would be construed as the date from which the power generated by the units set up by the appellant was fed into KSEB grid. Under clause 3 of the agreement, the appellant was to furnish within three months a programme for construction and installation towards the completion of the project. Commercial operation was to be achieved within a period of 30 months from that date. Under clause 9 of the contract, KSEB assumed the obligation to set up the transmission line. Though the contract did not specify the exact length of the transmission line, clause 9 made it clear that for a length of 4 kms, construction would be at the cost and expense of the appellant while the balance would be constructed by KSEB at its own cost. While a superficial reading of clause 9 alone is liable to lead to the interpretation that no time was fixed for the completion of the transmission lines, this would not be a correct reading of the contract. In construing a commercial document, the contract must be read and understood in its entirety so as to attribute to it a business meaning which was within the understanding of the contracting parties. [Paras 3435] [664-G; 665-A-D]

3. Clause 3 postulated that commercial operations would begin within a period of 30 months. The only reasonable construction of the contract would be that the obligations which were to be performed by KSEB, namely, the construction of the transmission line must necessarily be completed within the same period. Otherwise imposing an obligation upon the appellant to commence commercial operations within 30 months would have no meaning. This would result in a specific term of the contract being rendered redundant which the Court must as a principle of interpretation seek to avoid. Hence, the High Court was not correct in coming to the conclusion that the contract did not stipulate any timelines for the completion of the work of constructing the transmission line. Such a requirement was implicit in clause 3 of the agreement and clause 9 must necessarily be read in that context. [Para 36] [665-E-H]

4. The submission which has been urged on behalf of KSEB principally relies on the concessions which have been provided to the appellant in regard to the tariff which is applicable to its industrial unit. These concessions were available to all new industries to whom a concessional tariff was provided over a period of five years from 1994 to 1999. These concessions were independent of and would not therefore disentitle the appellant to the benefit of the agreement that was entered into with KSEB on 30 December 1994. The grant of a concessional tariff is a matter of policy to encourage new industries to set up operations in the State. Clause 10 of the agreement stipulated that the energy drawn from the hydel units – Phase I and Phase II – would be delivered free of cost to the appellant less an amount of 12% towards wheeling charges and transmission losses. Alternatively, it would be banked by KSEB, if the appellant so desired. KSEB would collect 1% of the energy so banked as its commission. [Paras 37-39] [666-A-D]

5. Clause 12 of the agreement contemplates a situation where the KSEB grid is not in a position to absorb the energy generated from the project for any reason including the breakdown of transmission lines or any other reason beyond the control of KSEB. In that event, clause 12 provides that the generation from the project will have to be restricted to the extent of generation for captive consumption as directed by KSEB. These provisions indicate that the contract is not entirely silent in regard to a situation involving the inability of KSEB’s grid to absorb the energy generated from the project for any reason including a reason which is beyond the control of KSEB. [Para 40] [666-E-G]

6. The report of the Chief Electrical inspector makes it clear that it was as a result of the delay which took place in the construction of the transmission line that the actual injection of power into the grid could not take place. The order of the State Government dated 7 February 2001 shows that there was no deliberate act or default on the part of KSEB. Indeed, it has not been seriously disputed that at the material time, there were agitations on the part of the farmers and certain other circumstances which caused delay in the construction of the transmission lines. However as significant as these reasons are, it should not lead to a situation where a private investor who has acted upon the policy of the State Government being left in the lurch as a result of supervening circumstances which have resulted in the power not being evacuated into the grid due to the non-commissioning of the transmission lines at the material time by KSEB. It is imperative that contractual obligations entered into by the State have legal sanctity. A legal regime where the sanctity of contracts is respected and commercial contracts are enforced is essential to the maintenance of the rule of law. Trade and commerce can be freely conducted in a stable legal order which provides remedies for enforcement. [Paras 42, 43] [667-B-F]

7. Though in the order of the State Government dated 7 February 2001, it was envisaged that the transmission lines would be constructed and completed by 28 February 2001, there was a further delay of approximately three months even thereafter as a result of which the evacuation of power could commence only with effect from 1 June 2001. On the basis of the factual data which has emerged from the record, on which there is no dispute, the basis on which the State Government took a decision on 7 February 2001 and the High Court affirmed it by its impugned judgment would need to be re-visited. The appellant was not entitled to the grant of deemed generation status as a matter of right. Similarly, the concessional power tariff which is applicable for a period of five years from 1994 to 1999 was extended until

20 August 2000. This is undoubtedly a matter of policy and the High Court was justified in coming to the conclusion that it is not open to the Court to foist a particular measure of policy on the State. In what manner the State should remedy the grievance of the private investor is something which should be duly considered by the State Government within the available framework of law and its own policy. [Paras 44, 45] [667-G-H; 668-A-C] Shrilekha Vidyarthi (Kumari) v. State of U.P. (1991) 1 SCC 212 : [1990] 1 Suppl. SCR 625 ; ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. (2004) 3 SCC 553 ; Noble Resources Ltd. v. State of Orissa (2006) 10 SCC 236 : [2006] 6 Suppl. SCR 53 – referred to.