Supreme Court Stresses Business Efficacy in Contractual Interpretation

In a recent judicial pronouncement, the Supreme Court emphasized the paramount importance of interpreting commercial contracts in alignment with the original intent of the contracting parties. The Court maintained that straying from the plain terms of a contract is justified only when it serves business efficacy better.

This legal standpoint was underscored in reference to the case of Transmission Corporation of Andhra Pradesh Ltd v. GMR Vemagiri Power Generation Limited. The court asserted that a commercial document should not be construed in a manner that fundamentally contradicts the original intentions of the parties, except when implied terms are indispensable to enhance the efficacy of the contract.

The legal deliberation, presided over by Chief Justice of India DY Chandrachud, along with Justices JB Pardiwala and Manoj Misra, specifically addressed a Power Purchase Agreement (PPA) between the Maharashtra State Electricity Distribution Company Limited and Ratnagiri Gas and Power Private Limited & Others.

The PPA, executed on April 10, 2007, for a duration of 25 years, mandated the purchase of power by the appellant from the first respondent. However, a dispute arose in September 2011 due to a progressive decline in gas supply from the first respondent. To compensate for the shortfall, the first respondent entered into a Gas Supply Agreement (GSA) with GAIL for Recycled Liquid Natural Gas (RLNG).

The appellant contested this action, claiming a violation of Clause 5.9 of the PPA, which required prior approval for such agreements. The disagreement escalated when the appellant refused to pay fixed capacity charges.

The Court, relying on the principles of Contract Law, scrutinized the terms of the PPA. It clarified that while the agreement allowed a transition between primary fuels without the appellant’s consent, the appellant’s agreement was required only for liquid fuels. As RLNG fell under the category of primary fuel, unilateral capacity declaration based on RLNG was deemed permissible without the appellant’s prior consent.

The Court upheld the decisions of the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL), emphasizing that the GSA/GTA with GAIL was consistent with the contractual terms, and the appellant’s consent was irrelevant.

Furthermore, the Court highlighted the parties’ intention to treat capacity charges as fixed charges under the PPA. The appellant’s interpretation, suggesting that such charges could be subject to consent, was deemed contrary to the clear contractual provisions.

In concluding the matter, the Court dismissed the appeal, asserting that deviation from plain terms is not warranted when external factors, such as the gas supply shortfall, are beyond the control of the parties. Such deviation, the Court emphasized, runs counter to business efficacy.