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Commercial contract is to be interpreted in accordance with the language used and context in which it is prepared, reiterates SC

The Supreme Court in Transmission Corporation of Andhra Pradesh and Others v. M/s GMR Vemagiri Power Generation Ltd. and Another reiterated that a commercial contract is to be interpreted in accordance with the language used with reference to the context it came to be prepared.

Facts of the case

The Andhra Pradesh State Electricity Board in 1995 invited bids for establishing short gestation gas/Naphtha/fuel oil based power stations to bridge the demand supply gap of power in the State of Andhra Pradesh. Pursuant to which a Power Purchase Agreement was executed between the parties in 1997 under which Naphtha was the primary fuel and gas an alternate fuel. Considering the high price of Naphtha, the PPA was amended in 2003 making gas as primary fuel and Naphtha as alternative fuel. The PPA was further amended in 2007 restricting the term ‘fuel’ to “natural gas only”. Since Gas Authority of India Limited could not supply gas under the agreement, the respondent was permitted to purchase natural gas from M/s. Reliance Industries Ltd at GAIL prices. The respondent, in 2012, sought permission of the appellant to allow use of Regasified Liquefied Natural Gas as fuel for generating power which was rejected stating that under the PPA, fuel meant “natural gas only” and did not include RLNG. The respondent thereafter approached the Andhra Pradesh Electricity Regulatory Commission which held that the term ‘fuel’ as used in the PPA meant natural gas only in its natural form, and did not include RLNG. The appellate Tribunal, by the impugned order, that the use of the word “only” after natural gas, in the PPA was never intended to restrict the meaning of the word natural gas to exclude RLNG.

On behalf of the appellant, Senior Counsel Adv. Basava Prabhu Patil contended that under the PPA, only natural gas in its natural form was agreed to be used as fuel for generation of power and that merely because RLNG may be a variant of natural gas, will not suffice to bring it within the definition of fuel under the PPA. It was contended that since there was no ambiguity in language used in the PPA, there was no occasion warranting any inclusion to the definition either by implication or intention.

Senior Counsel, Vikas Singh, appearing for the respondents stated that the conduct of the appellant in not accepting availability declaration with regard to RLNG was unjustified and that merely because the cost of RLNG was higher, the same cannot be a ground to contend that that it was never intended to be included within the definition of natural gas or was contrary to interest of the consumer. He further relied upon the definition of the term natural gas in Section 2(za)(i) of the Petroleum and Natural Gas Regulatory Board Act, 2006 which includes both liquefied natural gas (LNG) and RLNG as the term natural gas was not defined in the PPA.

The bench of Justices R.F Nariman and Navin Sinha, taking note of the amendment of the PPA, stated that if the parties had intended for the inclusion of RNLG considering the availability, the same would have been discussed in the Commission. The Court holding that the PPA was a technical commercial document drafted by persons conversant with business, the terms of the agreement have to be read to understand the scope and meaning with regard to the nature of the agreement that the parties had in mind. The Court observed,

“19. It will not be a safe method to interpret a contract by picking out one clause of the same defining fuel, apply a technical scientific meaning to it as observed in Truetuf Safety Glass Industries (supra) and then conclude that being a form of natural gas, RLNG was intended to be impliedly included in the definition of fuel. The terms of a contract have to be given their plain meaning with regard to the intendment of the parties as to what was intended to be included and what was not intended to be included, as distinct from an express exclusion. The commercial parlance test will also have to be applied as to whether those in the business consider the two forms of gas as synonymous and interchangeable. Quite obviously the answer has to be in the negative considering the importation of RLNG, additional processes involved and the consequent higher costs involved.”

The Court after referring to the communications between the parties and the circumstances that led to the amendment of the PPA observed that contextual interpretation has to be given to the question whether RLNG was ever intended to be included within the term “Natural Gas”. The Court found that in the facts and circumstances of the case, the parties were clear in their understanding that RLNG was not to be included within the term “Natural Gas” under the PPA. The Court held,

“25. A commercial document cannot be interpreted in a manner to arrive at a complete variance with what may originally have been the intendment of the parties. Such a situation can only be contemplated when the implied term can be considered necessary to lend efficacy to the terms of the contract. If the contract is capable of interpretation on its plain meaning with regard to the true intention of the parties it will not be prudent to read implied terms on the understanding of a party, or by the court, with regard to business efficacy…”

Holding that the definition of the definition of natural gas in Section 2(za)(i) of the PNGRB Act, has no relevance and that since the intention of the parties under the agreement was to generate power from reasonably priced fuel, choice of fuel as natural gas has to be understood as being confined to natural gas only in its natural form, the Court set aside the judgment of the appellate tribunal and affirmed the order of the commission.

Read the judgment below:

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