Recently, the Supreme Court bench led by Chief Justice of India DY Chandrachud, along with Justices JB Pardiwala and Manoj Misra, recognized the significance of interpreting commercial contracts in accordance with the original intent of the parties involved. Additionally, they articulated the perspective that deviating from the straightforward terms of a contract is justifiable only when it contributes to enhancing business efficacy.

The case's factual context unveils that Ratnagiri Gas and Power Private Limited (RGPPL), a transmission company, engaged in a Power Purchase Agreement (PPA) with the appellant, Maharashtra State Electricity Distribution Company Limited (MSEDCL), on April 10, 2007, spanning a duration of 25 years. This PPA outlined the tariffs for a gas-based generating station located in Ratnagiri, Maharashtra. The dispute emerged as a result of a reduction in the availability of domestic gas, prompting the adoption of Recycled Liquid Natural Gas (RLNG) and subsequent disagreements regarding fixed charges.

The appellant asserted that provisions within the Power Purchase Agreement (PPA), particularly Clause 5.9, mandate its approval in advance for agreements involving Recycled Liquid Natural Gas (RLNG). According to the appellant, the absence of such consent releases it from any responsibility for fixed charges. The appellant argued that the interpretations made by the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL) wrongly separated Clauses 4.3 and 5.9, resulting in a flawed understanding of the contractual terms.

Contrastingly, the respondent contended that the PPA permits the use of RLNG as the primary fuel without necessitating prior approval from the appellant. The respondent underscored the necessity for alternative arrangements due to the scarcity of domestic gas and maintained that the appellant's obligation to pay fixed charges is not contingent upon its approval for RLNG arrangements. The respondent emphasized the significance of contractual obligations and the project's feasibility as crucial factors in their argument.

The Supreme Court focused its examination on Clause 4.3, which specifies the primary fuels allowed under the Power Purchase Agreement (PPA). The Court determined that unilaterally declaring capacity based on Recycled Liquid Natural Gas (RLNG) was permissible under the initial section of Clause 4.3, without requiring the consent of the Appellant. Highlighting the unforeseen shortage of domestic gas, the Supreme Court dismissed the Appellant's claim that obtaining consent was an obligatory precondition for RLNG arrangements. The Court aligned its interpretation with the original intent of the parties involved.

In rejecting the appeal, the Supreme Court highlighted the paramount importance of interpreting commercial contracts in line with the original intentions and purposes of the parties involved. The Court dismissed the proposed departure from the clear terms of the contract by the Appellant, asserting that such a deviation would undermine business efficacy and potentially jeopardize the viability of the Respondent. In support of this stance, the Court referred to the case of Energy Watchdog v. Central Electricity Regulatory Commission (2017), emphasizing the principle of pacta sunt servanda, which underscores the significance of upholding contractual obligations and the sanctity of agreements between parties.

Furthermore, the Court invoked Satyabrata Ghose v. Mugneeram Bangur & Co. (1954), a landmark case that stressed the fundamental principle that a contract must be interpreted according to the ordinary meaning of its language, with the Court being careful not to add or subtract terms. Additionally, the reference to Steel Authority of India Ltd. v. Gupta Brothers (2009) underscored the elucidation on the significance of the business efficacy test in contractual interpretation. In this case, the Court emphasized that the interpretation of a contract should align with promoting the business or commercial purpose for which it was originally entered into.

The Court upheld the rulings of both the Central Electricity Regulatory Commission (CERC) and the Appellate Tribunal for Electricity (APTEL), confirming the Respondent's right to fixed charges for capacity declarations based on Recycled Liquid Natural Gas (RLNG) under the Power Purchase Agreement (PPA).

Case: Maharashtra State Electricity Distribution Company Limited v. Ratnagiri Gas and Power Private Limited & Ors.

Civil Appeal No. 1922 of 2023.

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