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06 December 2017

Contract – SC rules on when express term can be implied

The Supreme Court has held that a contract should be interpreted in accordance with the terms expressly provided in its agreement. A term can only be implied to be present in the contract if it is necessary to give efficacy to the business transaction. 
 
The Punjab State Electricity Board (PSEB) conducted a competitive bidding for the procurement of electricity from a power station, to be set up in Rajpura, District Patiala, Punjab. The bidder was to enter into a 25-year Power Purchase Agreement (PPA) with PSEB.

Immediately after executing the contract, a dispute arose with respect to interpretation of the clauses of the PPA. The dispute related to bearing the cost of washing the coal which is required for power generation, and whether the cost of such coal has to be determined based on the purchase price from SECL at the mine-end, or at the project-end.
 
The Appellant (Nabha Power Ltd. (NPL)) contended that the reference to coal and fuel in the PPA, only refers to washed coals, and thus the cost of transporting, unloading and purchasing must include the cost of washed coal.
 
The Appellants further contended, that the pre-bid clarification, which stated that the successful bidder would arrange for washing the coal, does not imply that the washing cost was to be borne by the Appellant. The terms of the PPA provided for a formula to expressly calculate the actual cost incurred to be reimbursed.
 
 The Appellant contends that the request for proposal, only referred to the cost towards operating and maintaining the power plant and not the cost associated with the cost of coal, which is a part of the energy charges.
 
The Respondents (Punjab State Power Corporation) however claimed that there are only three distinct identifiable components of coal recognized for tariff, namely a) purchase; b) transportation; c) unloading and, until and unless the claims fall under these heads, they cannot be reimbursed.  The Respondent further stated that the coal supplied would not be washed, and that the obligation of washing would lie on the Appellant.
 
The Court observed that, as per the formula in the PPA the cost of the coal is the actual cost of purchasing unwashed coal, transporting and unloading washed coal, supplied at the Project. Thus, the fact that Appellant had to arrange the washing of coal, does not imply that the Appellant must bear the cost of washing.
 
The court interpreted the document by reading the contract on the face of it and held that washed coal is a necessity for the project to maintain quality and thus includes all the relevant costs to achieve the required quality. The mere term coal, thus would have to mean washed coal, as no other type of coal is useful in the matter at hand. 

 

The Supreme Court held that:

a)      The calorific value of the coal was to be ascertained at the Project site, and all costs of the coal up to the point of the Project site should be included in the calorific value of the coal.
 
b)      The formula in the PPA only contains three elements under which the Appellant maybe reimbursed. Thus, reading the expressed terms of the PPA, the Appellant cannot be allowed to plead under any other element.
 
c)      The appeal was partly allowed to the extent that the Appellant was held entitled to the washing cost of coal, transportation from mine site where it was necessary. All the other claims in the appeal were rejected by the Supreme Court.
 
The Supreme Court held that normally a contract should be read as it reads, per its express terms provided in the contract. The reading of the implied terms in a concept is necessitated only when the five-point test comes into play i.e.
 
(1)   It must be reasonable and equitable;
(2)   It must be necessary to give business efficacy to the contract, so that no term will   be implied if the contract is effective without it;
(3)   It must be so obvious that "it goes without saying";
(4) It must be capable of clear expression;
(5) It must not contradict any express term of the contract. There must be a strict     necessity for it.
 
An express term can be implied if and only if the court finds that the parties intended that term to form a part of that contract. Merely because parties to a contract would have adopted a particular term is not enough for the Courts to imply such term in the contract. In the present case, the Hon’ble Supreme Court interpreted the literal meaning of terms of the contract.