Madras High Court Upholds Arbitral Award Granting Damages To Power Purchaser After Supplier's First Breach

The Madras High Court on 6 March, held that an arbitral award granting damages for non-supply of electricity cannot be interfered with when the supplier itself commits the initial breach of the power supply agreement by unilaterally revising the tariff and stopping supply without following the contractual procedure.

A Division Bench of Justices C.V. Karthikeyan and K. Kumaresh Babu dismissed an appeal filed by OPG Power Generation Pvt Ltd (OPG) under Section 37 of the Arbitration and Conciliation Act and upheld the arbitral award as well as the order of the Single Judge confirming the award. The judges held:

“Both the arbitrator and the learned Single Judge had examined who was first in breach of the agreement and had come to an uniform conclusion that it was the appellant, who had initially raised the tariff and later exercising right under Clause 11.8 had stopped supply. The appellant claimed later that they had stopped supply only because the respondent failed to pay the bill within the time period stipulated. But again, even if the bill had not been paid within the time, the appellant could not and should not have stopped supply of power without following the guidelines under clause 11.4 of the agreement.”

OPG had entered into a Power Supply Agreement (PSA) dated 18 April 2018 with Shree Kartik Papers Ltd. (Shree Karthik) for a period of three years. Under the PSA, OPG agreed to supply electricity at Rs. 5.75 per unit with contractual capacity of 0.216 lakh units per day. The tariff was fixed for one year and bills were raised monthly with payment due within seven days.

On 19 September 2018, OPG notified a revision of tariff to Rs. 6.15 per unit with effect from 28 September 2018 by invoking Clause 11.8 of the PSA. Shree Karthik objected to the revision stating that no tariff hike had occurred in Tamil Nadu Generation and Distribution Corporation Limited (TANGEDCO) rates and that the PSA did not permit unilateral revision of tariff. OPG nevertheless stopped supplying power from 28 September 2018.

Consequently, Shree Karthik procured power from TANGEDCO at higher rates and also paid an increased security deposit to TANGEDCO. When the dispute was referred to arbitration, Shree Karthik claimed Rs. 51,55,488 as excess power charges and related damages. The Arbitrator awarded Rs. 40,82,400 in favour of Shree Karthik.

OPG challenged the award under Section 34 of the Arbitration and Conciliation Act. The Single Judge dismissed the challenge by order dated 19 August 2020 (Impugned Order). Aggrieved, OPG filed the present appeal under Section 37 of the Arbitration and Conciliation Act.

Before the Division Bench, OPG contended that the tariff revision was valid under Clause 11.8 of the PSA which permitted revision upon change in fuel cost, law or transmission charges. It argued that since Shree Karthik failed to pay the bill within the stipulated seven days, it was entitled under the PSA to cease supply without intimation. OPG submitted that the arbitral award and the Impugned Order were perverse and liable to be set aside.

Shree Karthik, on the other hand, contended that the PSA required any variation to be in writing and signed by both parties. OPG had not produced any documentary evidence to show that there was an increase in the cost of coal and therefore the tariff hike was unilateral and unjustified. It further submitted that OPG stopped the supply even before the seven-day payment period expired and argued that the award was well-reasoned and required no interference.

The Court observed that the issue before it was “whether grant of damages on account of non-supply of electricity was justified when it was held by the arbitrator that the appellant was entitled to stop supply of electricity on the ground of non -payment of the invoices by the respondent.”

The Bench noted that the Arbitrator had found no contemporaneous communication from OPG to Shree Karthik regarding any increase in the landed cost of coal. Although the PSA permitted stoppage of supply in case of non-payment, the Arbitrator held that the dispute arose only because OPG had unilaterally increased the tariff. In the absence of documentary proof, the claim of increase in coal cost appeared to be an afterthought.

Further, the judges observed that the Single Judge had also held that cessation of power supply by OPG amounted to breach of the PSA. Even if OPG had a right to enhance the tariff, it could have done so only after proper communication with Shree Karthik.

The Court also noted that both the Arbitrator and the Single Judge had consistently concluded that the initial breach was on the part of OPG. OPG first increased the tariff and thereafter stopped supply claiming that Shree Karthik had failed to pay within time. However, even if the bill had not been cleared within time, OPG could not have stopped the supply without following the contractual procedure.

Accordingly, the Division Bench held that neither the arbitral award nor the Impugned Order could be termed perverse and dismissed the appeal.