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Judgment
PerPer: Pradeep Mittal J.Pradeep Mittal J.
This writ petition under Article 226 of the Constitution of India raises a substantial question of law of considerable importance to long-term public utility contracts entered into by the State and its instrumentalities, namely: whether a State instrumentality, upon finding that the Capacity Utilisation Factor (CUF) achieved under a hydel power generation agreement has fallen below the contractually prescribed minimum, is entitled to treat such numerical shortfall, by itself and without more, as an attributable Event of Default warranting termination of the agreement, without examining the actual availability and discharge of water essential for generation, without considering the connected contractual arrangement for supply of water, and without recording reasons for rejecting the contractor's specific defence on that count. This question is examined and answered in the succeeding paragraphs, confined strictly to the extent to which it falls for decision before this Court, and without trenching upon any aspect that the Hon'ble Supreme Court has left open for adjudication by this Court alone.
The petitioner has challenged the order dated 30.05.2022 passed by respondent No.1, whereby the Lease Agreement dated 24.03.2014 relating to the Chambal Mini Hydel Project, Morena, has been terminated. The petitioner has also questioned the notices dated 03.11.2021 and 06.04.2022, which preceded the impugned order. The principal grievance of the petitioner is that the respondents have treated the alleged failure to achieve the minimum CUF of 30 per cent as an automatic and attributable breach of the Lease Agreement, without examining the actual availability and discharge of water, the connected contractual arrangement relating to supply of water, and the circumstances which affected generation from the project. It is contended that the impugned action is arbitrary, unreasonable, contrary to the terms of the contract and violative of the principles of natural justice.
The material facts, as emerging from the pleadings and documents placed on record, are that the Chambal Mini Hydel Project consists of three units of 600 kW each and was proposed to be operated and maintained under a long-term contractual arrangement. The Notice Inviting Tender dated 23.08.2013 contemplated leasing of the project for a period of thirty years on "as is where is" basis. The project was to be operated and maintained by the selected bidder and the electricity generated was to be supplied to the distribution licensee. The petitioner participated in the tender process, submitted its bid and was thereafter awarded the contract. The Letter of Award was issued on 07.02.2014 and the Lease Agreement was executed on 24.03.2014.
The tender documents and the Lease Agreement contemplated that the contractor would undertake the operation and maintenance of the project, complete the balance works, keep the generating units in working condition and optimise generation in accordance with the contractual requirements. The definition of CUF contained in the tender documents referred to the total input energy at the end of a particular year, expressed as a percentage of the installed capacity after reduction of normative auxiliary consumption. The contractual arrangement, therefore, contained both operational obligations of the O&M Contractor and a method for determining the annual CUF on the basis of input energy and joint meter readings. The question which arises in the present case is not whether the contract prescribed a minimum CUF, but whether the respondents could treat the numerical shortfall as an attributable contractual default without examining the circumstances in which the shortfall occurred.
5 .5 . The petitioner's case is that a hydel project cannot generate electricity merely because the generating machinery is available or because the O&M Contractor is willing to operate it. Generation is directly dependent upon the availability, quantity and discharge of water through the canal. According to the petitioner, during the relevant period the project was affected by inadequate and irregular water supply, variation in water level and discharge, canal operation and other circumstances beyond the petitioner's control. It is submitted that the petitioner repeatedly brought these facts to the notice of the respondents, but the respondents proceeded only on the basis of the year-wise CUF figures and did not undertake any meaningful examination of the water supply position.
The respondents issued notice dated 03.11.2021 alleging that the petitioner had failed to achieve the minimum CUF of 30 per cent for six consecutive years. The petitioner submitted its reply dated 13.12.2021 and explained that the generation of electricity was dependent upon the availability of adequate quantity and flow of water. The petitioner further relied upon the Water Supply Agreement/Form-7A dated 05.04.2016 and contended that the water supply arrangement was a material and reciprocal component of the project. Thereafter, a further notice dated 06.04.2022 was issued, to which the petitioner submitted its reply dated 18.04.2022. The petitioner asserts that its explanation was not considered in its proper perspective and that the termination order dated 30.05.2022 was passed mechanically.
During the pendency of the writ petition, the matter reached the Supreme Court. The Supreme Court noticed that the project had remained defunct and that closure of the project was detrimental to public interest. The termination was kept in abeyance and the petitioner was permitted to operate the project and generate electricity, while the respondents were directed to purchase the electricity generated in accordance with the terms of the interim order. At the same time, the Supreme Court expressly clarified that since this Court was seized of the question concerning the validity of the termination, no opinion had been expressed on that issue. The interim orders of the Supreme Court, therefore, do not decide the merits of the impugned termination, and it is that very question - and no more - which this Court now proceeds to examine and answer, being conscious throughout that it must neither fall short of, nor travel beyond, the scope which the Supreme Court has left open for determination by this Court.
Learned counsel appearing for the petitioner submits that Article 10.3 of the Lease Agreement cannot be read as imposing an unconditional guarantee of generation irrespective of the availability of water. It is contended that the obligation to achieve the minimum CUF was necessarily dependent upon the availability of the essential input required for generation. The petitioner does not dispute that it was required to operate and maintain the plant efficiently, minimise avoidable shutdowns and maintain the generating machinery in working condition. However, it is submitted that the petitioner could not be held responsible for generation shortfall caused by inadequate water supply, reduction in canal discharge, variation in water level or circumstances beyond its control. According to the petitioner, the respondents were required to examine the actual water supply position before attributing the shortfall to the O&M Contractor.
Learned counsel for the petitioner further submits that the expression "as is where is" relates to the condition of the project at the time of handing over and cannot be construed as a waiver by the petitioner of the respondents' own contractual obligations. It is argued that the expression cannot authorise the respondents to withhold or fail to provide the essential input of water and thereafter terminate the agreement on the ground that the petitioner did not generate the prescribed quantity of electricity. It is also submitted that termination of a thirty-year project agreement, involving substantial investment and continuing obligations, was a drastic consequence and could not have been imposed merely by reproducing the CUF figures without examining the petitioner's explanation and the relevant contractual documents.
The respondents oppose the writ petition. According to them, the petitioner participated in the tender process with full knowledge that the project was being leased on "as is where is" basis. The petitioner was a commercial entity and had the opportunity to inspect the project, assess its viability and submit its bid. It is submitted that Article 10.3 expressly required the O&M Contractor to achieve a minimum CUF of 30 per cent every year during the contract period, that the obligation was mandatory, and that the petitioner cannot avoid the consequence of its failure by raising the plea of inadequate water supply. It is further submitted that Articles 2.1.1 and 2.1.2 placed upon the petitioner the responsibility of bringing the project into running condition, operating and maintaining it, minimising shutdown and tripping, optimising generation and maintaining the prescribed CUF.
The respondents have also relied upon Article 10.4.2, which provides for proportionate reduction in the O&M rate where the CUF is below 30 per cent. According to the respondents, the existence of such a provision does not absolve the petitioner from the obligation to achieve the prescribed CUF. It is submitted that the petitioner had failed to achieve the minimum CUF for six consecutive years and that such failure constituted an Event of Default under Article 20.1.1(v). The respondents have further relied upon the financial losses allegedly suffered by them and have contended that the petitioner cannot seek continuation of the agreement after repeatedly failing to perform its contractual obligations.
Learned counsel for the respondents has raised a preliminary objection regarding the maintainability of the writ petition, submitting that the dispute arises out of a contract, that the agreement contains a dispute resolution mechanism, and that courts must exercise considerable judicial restraint in matters of a contractual and commercial nature, particularly where technical and factual questions concerning generation, CUF and water availability are involved. In support of this submission, learned counsel for the respondents has placed a compilation of, and relied upon, the following decisions: (i) Silppi Constructions(i) Silppi Constructions Contractors v. Union of India, (2020) 16 SCC 489; (ii) Air India Ltd. v.Contractors v. Union of India, (2020) 16 SCC 489; (ii) Air India Ltd. v. Cochin International Airport Ltd., (2000) 2 SCC 617; (iii) MasterCochin International Airport Ltd., (2000) 2 SCC 617; (iii) Master Marine Services (P) Ltd. v. Metcalfe & Hodgkinson (P) Ltd., (2005) 6Marine Services (P) Ltd. v. Metcalfe & Hodgkinson (P) Ltd., (2005) 6 SCC 138; (iv) Joshi Technologies International Inc. v. Union of India,SCC 138; (iv) Joshi Technologies International Inc. v. Union of India, (2015) 7 SCC 728; and (v) Kerala State Electricity Board v. Kurien E.(2015) 7 SCC 728; and (v) Kerala State Electricity Board v. Kurien E. Kalathil, (2000) 6 SCC 293.Kalathil, (2000) 6 SCC 293. It is submitted, on the strength of these decisions, that writ petitions in commercial and contractual matters are not ordinarily maintainable, that the scope of judicial review is confined to examining the decision-making process rather than its merits, and that the petitioner ought to be relegated to the remedy available under the contract. The petitioner, in reply, submits that the challenge is not confined to a mere claim for money or damages, nor does it invite this Court to sit in appeal over the commercial wisdom of the respondents, but is directed against arbitrary and non-speaking action of State instrumentalities, which have terminated a long-term contract of a public utility character without examining the material defence raised by the petitioner. Each of the decisions relied upon by the respondents is dealt with, and distinguished, at the appropriate stage later in this judgment.
1 3 .1 3 . Before examining the rival submissions, it would be appropriate to notice the relevant contractual provisions. Article 2.1.1 authorises the O&M Contractor to bring the project into running condition and to operate and maintain the project for generation of electricity and supply to the distribution system. Article 2.1.2 specifies the activities to be undertaken by the O&M Contractor, including completion of balance works, streamlined and efficient operation and maintenance, minimisation of plant shutdown and tripping, optimisation of generation, maintenance and repair of the power plant and equipment, compliance with applicable laws and safety measures, and continuing technological upgradation of the project. These provisions undoubtedly impose substantial obligations upon the petitioner concerning the operation and maintenance of the generating units.
Article 10.3 provides that the O&M Contractor shall be responsible for achieving a minimum CUF of 30 per cent every year of the contract period and specifies the manner in which the CUF is to be determined on the basis of input energy and joint meter readings. Article 10.4.2 provides that if the CUF for a particular year or part thereof is less than 30 per cent, the O&M rate applicable from next year shall be reduced proportionately. The respondents have placed considerable reliance upon these provisions to contend that the petitioner's obligation was absolute. However, the provisions must be read as a whole and in the context of the nature of the project and the other contractual arrangements governing its operation.
Having heard learned counsel for the parties and having perused the record, this Court frames the substantial question of law arising for decision as follows: "Whether, on the facts and in the contractual setting of a hydel power generation project, a State instrumentality can treat a mere numerical shortfall in the Capacity Utilisation Factor, below the contractually prescribed minimum, as an attributable Event of Default justifying termination of a long-term Lease Agreement, without examining whether the shortfall was caused by inadequate or interrupted availability of water a circumstance outside the control of the O&M Contractor and within the domain of the State and its connected instrumentalities - and without recording reasons for rejecting the contractor's defence to that effect?" This question is examined below with reference to the relevant contractual provisions, the applicable statutory principles, and the case law cited by both sides.
Article 10.3 undoubtedly prescribes a minimum CUF and imposes an obligation upon the O&M Contractor to achieve the prescribed benchmark. This Court is not holding that the said obligation is non-binding or that the petitioner is free to disregard it. The provision, however, does not expressly declare that every failure to achieve the prescribed percentage, irrespective of the circumstances in which it occurred, would automatically constitute an Event of Default warranting termination. The distinction between a numerical shortfall and an attributable contractual breach is material. The fact that the CUF was below 30 per cent in a particular year may establish a numerical shortfall, but it does not, by itself, establish whether the shortfall was caused by failure of operation and maintenance, technical defects, avoidable shutdowns or inadequate availability and discharge of water.
Article 10.4.2 is also significant. It expressly contemplates a situation where the CUF for a particular year or part thereof is less than 30 per cent and provides for proportionate reduction in the O&M rate applicable from the next year. The provision may have financial consequences for the contractor. Nevertheless, the existence of such a provision does not, by itself, answer the separate question whether the shortfall was caused by a breach attributable to the petitioner and whether the contractual conditions for termination were satisfied. Article 10.4.2 must be read harmoniously with Article 10.3 and the provisions dealing with Events of Default and termination. It cannot be construed as conclusively determining that every numerical shortfall, without examination of its cause, necessarily constitutes a default warranting termination of a thirty-year contractual arrangement. The very fact that the contract itself prescribes a graded financial consequence proportionate reduction of the O&M rate for a CUF shortfall indicates that a shortfall, without more, was not intended by the parties to trigger the drastic and terminal consequence of termination; had that been the intention, Article 10.4.2 would have been rendered largely otiose.
1 8 .1 8 . The respondents have relied upon the expression "as is where is" to contend that the petitioner accepted the project in its existing condition and assumed the entire risk of its performance. The expression may require the petitioner to accept the physical and technical condition of the project at the time of taking it over and to undertake the balance works and operation and maintenance obligations specified in the agreement. However, without a clear and specific stipulation, the expression cannot be construed as an absolute waiver of the respondents' own contractual obligations or as a declaration that the availability of water would be irrelevant for determining the petitioner's performance. Acceptance of the existing condition of the project is distinct from an admission that the petitioner would be liable for every deficiency in generation, regardless of its cause.
The nature of the project is also relevant. In a thermal or other generating project, the availability of fuel or other essential inputs may be governed by a separate contractual arrangement. In a hydel project, the availability and discharge of water is an essential operational factor. The O&M Contractor may be responsible for the efficient operation of the machinery, but it cannot generate electricity in the absence of the water required to operate the turbines. The contractual obligation to optimise generation cannot reasonably be interpreted as an absolute guarantee to generate electricity irrespective of the availability of the essential input. The respondents were, therefore, required to examine whether the petitioner had failed in its own operational obligations or whether the alleged shortfall was caused by circumstances external to the petitioner.
2 0 .2 0 . The record contains Annexure P/12, namely, the Water Supply Agreement/Form-7A dated 05.04.2016, executed between the Governor of Madhya Pradesh through the Water Resources Department and Madhya Pradesh Madhya Kshetra Vidyut Vitran Company Limited. The petitioner is admittedly not a party to the said agreement. Consequently, the petitioner cannot claim direct contractual rights against the Water Resources Department solely on the basis of Annexure P/12, nor can liabilities arising exclusively under that agreement be imposed upon the petitioner. The respondents cannot rely upon Annexure P/12 as though the petitioner were a signatory to it or as though the petitioner had undertaken obligations directly under that agreement.
The fact that the petitioner is not a party to Annexure P/12, however, does not render the document irrelevant for all purposes. The agreement is a contemporaneous project document and is relevant for determining the factual and contractual background in which the hydel project was to operate. It may be examined for the limited purpose of determining the respondent's own obligations, the source and extent of the respondent's authority, the actual circumstances affecting water availability and the relationship between water supply and generation. It cannot be treated as an independent source of contractual liability against the petitioner.
The principle laid down by the Supreme Court in HindustanHindustan Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd., 2025Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd., 2025 INSC 1401INSC 1401, decided on 09.12.2025, is instructive in this context, though rendered in the setting of a reference to arbitration under Section 11 of the Arbitration and Conciliation Act, 1996. Considering whether a non-signatory could be treated as a "veritable party" to an agreement executed between other parties merely on account of a commercial connection, the Supreme Court held as follows:
"...mere presence of a commercial relationship between signatory"...mere presence of a commercial relationship between signatory and non-signatory parties is not sufficient to infer 'legal relationship'and non-signatory parties is not sufficient to infer 'legal relationship' between and among the parties." (quoting Cox and Kings Ltd. v. SAPbetween and among the parties." (quoting Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1, para 117)India (P) Ltd., (2024) 4 SCC 1, para 117)
"On the facts of this case, it is clear that the appellant and the"On the facts of this case, it is clear that the appellant and the respondent have been operating on separate orbits. It has not beenrespondent have been operating on separate orbits. It has not been established even prima facie that there was any intention to bind [theestablished even prima facie that there was any intention to bind [the non-signatory] to the contract between [the two contracting parties]."non-signatory] to the contract between [the two contracting parties]."
Applying the aforesaid principle, the petitioner, being no party to Annexure P/12, cannot be bound by it as a contracting party, nor can the respondents visit upon the petitioner obligations or liabilities that arise exclusively as between the Water Resources Department and the distribution company. The document nevertheless remains relevant, and admissible, as contemporaneous evidence of the project's operational and contractual setting.
Clause (1) of Annexure P/12 contemplates permission to draw water from the Government water source for the Chambal Mini Hydel Power Plant for the relevant period, subject to the applicable irrigation laws, rules and executive orders, and provides:
"In consideration of the Company duly making payment to the"In consideration of the Company duly making payment to the Government as hereinafter specified and duly observing and performingGovernment as hereinafter specified and duly observing and performing the covenants and conditions, both herein contained Government herebythe covenants and conditions, both herein contained Government hereby give permission to the Company to draw water from the said natural orgive permission to the Company to draw water from the said natural or from the Government water source to the Company's said plant for termfrom the Government water source to the Company's said plant for term of 30 (Thirty) years commencing from the 06 day of April 2016 on theof 30 (Thirty) years commencing from the 06 day of April 2016 on the terms and conditions herein contained."terms and conditions herein contained."
Clause (3) deals with water charges and provides, inter alia, for minimum water charges, subject to the provisions relating to short supply, in the following terms:
"The Company shall pay to the Government water rates for water"The Company shall pay to the Government water rates for water drawn by it from said natural or Government water source at the ratesdrawn by it from said natural or Government water source at the rates fixed by Water Resources Department from time to time... Excepting thefixed by Water Resources Department from time to time... Excepting the circumstancescircumstances ofof shortshort waterwater supplysupply specifiedspecified inin clauseclause (15),(15), thethe Company shall in any event pay water charges for at least 90% of theCompany shall in any event pay water charges for at least 90% of the quantum of water allowed... to be drawn by it though the actual quantityquantum of water allowed... to be drawn by it though the actual quantity of water drawn by the Company is less than 90% of the quantum ofof water drawn by the Company is less than 90% of the quantum of water allowed to be drawn by it under clause (1)."water allowed to be drawn by it under clause (1)."
The agreement also contemplates that the Company would make arrangements for use of water at its own cost, subject to the approval of the Water Resources Department. These provisions indicate that the availability and use of water were governed by the Government water source and the regulatory control of the department concerned, and that even the Company's own payment obligation under the agreement stood expressly qualified by the contingency of short water supply.
Clause (4) of Annexure P/12 specifically contemplates an emergency interruption in water supply on account of a non Government act, including a sudden reduction in inflow, and provides:
"In the event of any emergency interruption in the water supply to"In the event of any emergency interruption in the water supply to the said Government water source resulting from a non-Government Actthe said Government water source resulting from a non-Government Act (such as sudden reduction in inflow), the Executive Engineer shall give(such as sudden reduction in inflow), the Executive Engineer shall give immediate written notice to the Company. Upon receipt of such noticeimmediate written notice to the Company. Upon receipt of such notice the Company shall have no right to be compensated for any cessation inthe Company shall have no right to be compensated for any cessation in water supply nor will the Company have any liability for payments forwater supply nor will the Company have any liability for payments for water charges, local fund cess or taxes, except those amounts then duewater charges, local fund cess or taxes, except those amounts then due but unpaid, until such time as the flow of water through the said naturalbut unpaid, until such time as the flow of water through the said natural water sources shall be restored to the level required to be provided by thewater sources shall be restored to the level required to be provided by the Government hereunder."Government hereunder."
Clause (5) further provides that there is no guarantee of uninterrupted supply during a Force Majeure event, in the following terms:
"Subject to the terms and conditions of this agreement: nothing"Subject to the terms and conditions of this agreement: nothing herein contained shall be deemed to imply any guarantee on the part ofherein contained shall be deemed to imply any guarantee on the part of the Government the uninterrupted supply of water during an event ofthe Government the uninterrupted supply of water during an event of Force Majeure. The Government shall also not be responsible for suchForce Majeure. The Government shall also not be responsible for such non-supply or inadequate supply of water as result of any event of Forcenon-supply or inadequate supply of water as result of any event of Force Majeure, or for damages or losses due to any event of Force Majeure...Majeure, or for damages or losses due to any event of Force Majeure... Force Majeure shall include droughts and other similar natural disasters,Force Majeure shall include droughts and other similar natural disasters, which are beyond the control of State Government."which are beyond the control of State Government."
These two clauses, read together, establish that even as between the Government and the distribution company, interruption or inadequacy of water supply on account of natural causes or causes beyond human control was a contemplated and recognised contingency, and not one which either party to that agreement was expected to guarantee against.
Clause (8) of Annexure P/12 records an assurance that other water rights for irrigation or industrial purposes would be granted in such a manner as not to affect the availability of the required water for the project during the term of the agreement, and provides:
"Government of Madhya Pradesh hereby assures that any other"Government of Madhya Pradesh hereby assures that any other water rights granted by them for the purpose of irrigation or any otherwater rights granted by them for the purpose of irrigation or any other industrial purposes shall be granted in a manner so as not to affect theindustrial purposes shall be granted in a manner so as not to affect the availability of required water for the project throughout the term of thisavailability of required water for the project throughout the term of this agreement."agreement."
Clause (15) specifically deals with shortage of water and provides:
"In the event of there being a shortage of water in the said"In the event of there being a shortage of water in the said natural/Government water source, the Executive Engineer shall serve anatural/Government water source, the Executive Engineer shall serve a notice on the Company explaining the possibility of the anticipatednotice on the Company explaining the possibility of the anticipated shortage.shortage. TheThe CompanyCompany shallshall inin suchsuch circumstancescircumstances reducereduce thethe consumption of water and will furnish to the Executive Engineer aconsumption of water and will furnish to the Executive Engineer a weekly return showing the actual quantum of water drawn by it."weekly return showing the actual quantum of water drawn by it."
The very existence of these provisions demonstrates that shortage, interruption and variation in water availability were contemplated circumstances and were not treated as legally irrelevant matters.
On a conjoint reading of Clauses (1), (3), (4), (5), (8) and (15) of Annexure P/12, it is evident that the availability of water was subject to the conditions of the Government water source, canal operations, inflow, shortage and circumstances beyond the control of the operating agency. The agreement itself recognises that there may be circumstances in which the required flow of water is not available. A reduction in generation or CUF cannot, therefore, automatically be treated as a failure on the part of the petitioner to operate or maintain the project. Before attributing such shortfall to the petitioner, the respondents were required to examine whether the requisite quantity of water was actually available during the relevant period, whether there was any reduction in inflow or discharge, whether any shortage notice was issued and whether the shortfall was caused by inadequate water supply or by any act or omission attributable to the petitioner.
It would also be apposite to notice the principle contained in Section 32 of the Indian Contract Act, 1872, which governs contingent contracts and provides:
"Contingent contracts to do or not to do anything if an uncertain"Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until thatfuture event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contractsevent has happened. If the event becomes impossible, such contracts become void."become void."
This Court is not holding that the Lease Agreement is, in its entirety, a contingent contract within the meaning of Section 32, nor is the petitioner's independent obligation of efficient operation and maintenance of the generating units in any manner diminished. What Section 32 usefully illustrates, by analogy, is the wider legal principle, applicable equally to ordinary as well as contingent contracts, that an obligation whose fulfilment is inherently and inseparably dependent upon an external and uncertain circumstance cannot be treated as breached, nor can its non-fulfilment be visited as a default, without first ascertaining whether that circumstance in fact materialised. Applied to the present case, the obligation to achieve the minimum CUF under Article 10.3, being an obligation whose performance is contingent upon the availability and discharge of adequate water, could not be treated by the respondents as an absolute and self-executing obligation divorced from that contingency. This is reinforced by Section 37 of the Indian Contract Act, 1872, which provides:
"The parties to a contract must either perform, or offer to perform,"The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with ortheir respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promisesexcused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of suchbind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears frompromisors before performance, unless a contrary intention appears from the contract."the contract."
Section 37 thus makes the obligation to perform expressly subject to any dispensation or excuse available "under the provisions of this Act", and Section 32, referred to above, is precisely such a provision, since it withholds enforceability of an obligation until the uncertain event on which its performance depends has actually occurred. Read together, Sections 32 and 37 confirm that the petitioner's obligation to achieve the minimum CUF, being contingent upon the availability and discharge of adequate water, could not be treated as an unexcused failure of performance.
3 7 .3 7 . The respondents have also relied upon the Force Majeure provisions contained in Annexure P/9. Article 19.1 provides:
"No Party shall be liable to the other Party if, and to the extent,"No Party shall be liable to the other Party if, and to the extent, that the performance or delay in performance of any of its obligationsthat the performance or delay in performance of any of its obligations under this Agreement is prevented, restricted, delayed or interfered withunder this Agreement is prevented, restricted, delayed or interfered with due to occurrence of any event of Force Majeure."due to occurrence of any event of Force Majeure."
Article 19.3 contemplates prompt written notice, particulars of the event, best efforts to overcome its effect and resumption of performance with dispatch, and provides:
"The Party claiming an event of Force Majeure shall promptly"The Party claiming an event of Force Majeure shall promptly notify the other Party in writing, and provide full particulars of the causenotify the other Party in writing, and provide full particulars of the cause or event and the date of first occurrence thereof as soon as possible afteror event and the date of first occurrence thereof as soon as possible after the event... The Party so affected shall use its best efforts to remove thethe event... The Party so affected shall use its best efforts to remove the cause of non-performance, and the Parties shall resume performancecause of non-performance, and the Parties shall resume performance hereunder with the utmost dispatch when such cause is removed."hereunder with the utmost dispatch when such cause is removed."
Article 19.4 deals with the consequences of prolonged Force Majeure and provides that where a Force Majeure event continues for more than 180 days, "a final notice of Termination may be issued by either Party" leading to termination of the agreement. The petitioner is not a party to the agreement containing these provisions and, therefore, Article 19 cannot be applied as a direct contractual exemption in favour of the petitioner unless its terms are otherwise incorporated into the petitioner's own contract. Nevertheless, the existence of these provisions is relevant to the interpretation of the commercial and operational setting of the project and demonstrates that the parties connected with the project contemplated circumstances which could interfere with performance.
Article 20.1.2 of Annexure P/9, dealing with the Distribution Licensee's Event of Default, also recognises that a default may be affected by Force Majeure or by breach of obligations of the O&M Contractor, and provides that the occurrence of the specified default, "unless such event occurs as a result of a Force Majeure Event or a breach by the O&M Contractor of its obligations under this Agreement, shall constitute the Distribution Licensee's event of default." Article 20.3 contemplates notice of default, an opportunity to eliminate or mitigate the default and thereafter the prescribed termination procedure, in the following terms:
"On the occurrence of an event of default by the Distribution"On the occurrence of an event of default by the Distribution Licensee under the provisions of Article 20.1.2, the O&M ContractorLicensee under the provisions of Article 20.1.2, the O&M Contractor shall issue an event of default notice to the Distribution Licensee. Theshall issue an event of default notice to the Distribution Licensee. The DistributionDistribution LicenseeLicensee shallshall eliminate/mitigateeliminate/mitigate consequencesconsequences ofof suchsuch Event of Default within a period of forty-five (45) days from the date ofEvent of Default within a period of forty-five (45) days from the date of suchsuch notice.notice. InIn casecase thethe DistributionDistribution LicenseeLicensee isis unableunable toto eliminate/mitigate the consequences of event of default within the periodeliminate/mitigate the consequences of event of default within the period stipulated..., the O&M Contractor shall issue a Termination Notice to thestipulated..., the O&M Contractor shall issue a Termination Notice to the Distribution Licensee indicating the event of default by the DistributionDistribution Licensee indicating the event of default by the Distribution Licensee, and the Agreement shall stand terminated from the fifteenthLicensee, and the Agreement shall stand terminated from the fifteenth (15th) day from the date of the Termination Notice."(15th) day from the date of the Termination Notice."
Article 20.6 provides for submission of the final bill by the O&M Contractor after the Termination Notice, while Article 20.8 contemplates preparation of the statement of the net amount payable and issuance of the closure certificate. Article 20.9 provides for release of the net amount after the closure certificate. These provisions indicate that termination is not merely a consequence of recording a numerical deficiency; it follows only after the contractual conditions for default and termination are duly established, upon notice and opportunity to cure, and the consequences of termination are worked out in accordance with the agreement.
The petitioner's reply dated 13.12.2021 specifically stated that its obligation was towards operation and maintenance of the project for generation of electricity and supply to the distribution system with a minimum CUF of 30 per cent on availability of adequate quantity of water. The petitioner asserted that its obligation to operate the plant and generate electricity at the prescribed CUF was dependent upon the ability of the concerned authorities to provide the necessary water discharge level. The petitioner's submission was not a denial of Article 10.3; it was a contention that Article 10.3 could not be applied in isolation from the actual conditions in which the project was required to operate.43. The impugned order, however, proceeds substantially on the basis that the petitioner had failed to achieve the minimum CUF and that the explanation concerning water non availability was not disputed. The petitioner had raised a specific and material issue concerning the availability of the essential input for generation. Such an issue could not be rejected merely by interpretation the word “as on where is” used in the Lease Agreement.
The requirement that the respondents record cogent reasons before rejecting the petitioner's defence and proceeding to terminate the Lease Agreement is reinforced by the law laid down by the Constitution Bench of the Supreme Court in S.N. Mukherjee v. Union of India,S.N. Mukherjee v. Union of India, (1990) 4 SCC 594(1990) 4 SCC 594. Dealing with the necessity of recording reasons in orders passed by administrative and quasi judicial authorities, the Supreme Court held:
"...the recording of reasons by an administrative authority serves a"...the recording of reasons by an administrative authority serves a salutarysalutary purpose,purpose, namely,namely, itit excludesexcludes chanceschances ofof arbitrarinessarbitrariness andand ensures a degree of fairness in the process of decision-making. The saidensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions, and its application cannotpurpose would apply equally to all decisions, and its application cannot be confined to decisions which are subject to appeal, revision or judicialbe confined to decisions which are subject to appeal, revision or judicial review."review."
The respondents were required to distinguish between generation shortfall caused by the petitioner's failure to operate or maintain the machinery efficiently and generation shortfall caused by inadequate or interrupted water supply, natural shortage, irregular discharge, variation in water level, canal operation or circumstances beyond the petitioner's control.
The respondents have relied upon the fact that the petitioner did not dispute that the CUF was below 30 per cent in the relevant years. An admission of a numerical fact, however, is not necessarily an admission of legal liability or of an attributable contractual breach. The petitioner's case was that the figures could not be treated as proof of default.
The financial loss allegedly suffered by the respondents also cannot substitute for the determination of breach. A tabulation of CUF figures and alleged loss does not determine whether the shortfall was attributable to the petitioner. The financial consequences of Article 10.4.2 may be worked out in accordance with the contract. If the petitioner does not reached the CUF criteria then he would suffer and he gets less rate than the contract and he will also suffer the investment which was incurred to run the project , therefore it is not acceptable the petitioner knowingly generates the less emerge.
The expression "as is where is" cannot be construed as transferring to the petitioner every risk relating to the project, including the risk of non-availability of water, even where such non-availability is caused by natural conditions of the water source or by acts or omissions of the Government authorities concerned. The petitioner's obligation to operate and maintain the plant efficiently is distinct from an absolute guarantee to generate electricity irrespective of the availability of water. Article 10.3 must, therefore, be read harmoniously with Articles 2.1.1 and 2.1.2, Article 10.4.2, the provisions relating to Events of Default and termination and the contemporaneous water supply arrangement.
It is true that every breach of contract cannot be converted into a constitutional challenge merely by alleging arbitrariness, and that the Court should not ordinarily undertake a technical adjudication of generation figures, CUF calculations or monetary claims in a writ petition, nor sit in appeal over the commercial wisdom of a State instrumentality. It is in this very setting that the decisions relied upon by the respondents fall to be considered, each of which, on a closer examination, reinforces rather than displaces the conclusion that a decision-making process vitiated by non-application of mind to a material and relevant circumstance is amenable to correction in the exercise of writ jurisdiction.
In Silppi Constructions Contractors v. Union of India, (2020) 16 SCC 489, relied upon by the respondents for the proposition that courts must exercise restraint in contractual matters, the Supreme Court itself recognised the very exception on which the petitioner's case rests. The Supreme Court held as follows:
"This Court being the guardian of fundamental rights is duty-bound to interfere when there is arbitrariness, irrationality, mala fides and bias. However, this Court in all the aforesaid decisions has cautioned time and again that courts should exercise a lot of restraint while exercising their powers of judicial review in contractual or commercial matters. This Court is normally loathe to interfere in contractual matters unless a clear-cut case of arbitrariness or mala fides or bias or irrationality is made out."
Silppi Constructions, therefore, does not lay down an absolute bar, it preserves judicial review precisely for cases of arbitrariness. The present case is not one where the petitioner questions the commercial wisdom of the respondents in awarding or structuring the contract, nor one where a mere technical or bona fide dispute over generation figures is sought to be elevated into a constitutional grievance. The grievance here is that the decision-making process leading to termination failed to examine a material and specifically pleaded defence going to the very cause of the shortfall a defect of the precise kind that Silppi Constructions itself holds to be within the domain of judicial review. The reliance on Silppi Constructions is, therefore, misplaced.
In Air India Ltd. v. Cochin International Airport Ltd., (2000) 2 SCC 617, relied upon by the respondents for the proposition that overwhelming public interest alone justifies judicial intervention in State contracts, the Supreme Court itself qualified the proposition in the following terms:
"...the State, its corporations, instrumentalities and agencies are"...the State, its corporations, instrumentalities and agencies are bound to adhere to the norms, standards and procedures laid down bybound to adhere to the norms, standards and procedures laid down by them and cannot depart from them arbitrarily. Though that decision isthem and cannot depart from them arbitrarily. Though that decision is not amenable to judicial review, the Court can examine the decisionnot amenable to judicial review, the Court can examine the decision making process and interfere if it is found vitiated by mala fides,making process and interfere if it is found vitiated by mala fides, unreasonableness and arbitrariness."unreasonableness and arbitrariness."
This decision, too, therefore preserves judicial review of the decision-making process where it is shown to be vitiated by unreasonableness or arbitrariness. In the present case, the requirement of overwhelming public interest, far from disentitling the petitioner, is squarely satisfied: the project is a public utility generating electricity for supply to the distribution network, the termination rendered the project defunct, and it was precisely this detriment to public interest that led the Supreme Court to keep the termination in abeyance and permit continued generation pending adjudication by this Court. The reliance on Air India is, accordingly, of no assistance to the respondents.
5 3 .5 3 . In Master Marine Services (P) Ltd. v. Metcalfe & Hodgkinson (P) Ltd., (2005) 6 SCC 138, relied upon by the respondents for the proposition that courts cannot examine the merits of contractual decisions, the Supreme Court, approvingly extracting and adopting the law laid down in Sterling Computers Ltd. v. M/s M.N. Publications Ltd., AIR 1996 SC 51, held as follows:
"While exercising the power of judicial review, in respect of"While exercising the power of judicial review, in respect of contracts entered into on behalf of the State, the Court is concernedcontracts entered into on behalf of the State, the Court is concerned primarily as to whether there has been any infirmity in the 'decisionprimarily as to whether there has been any infirmity in the 'decision making process'. By way of judicial review the Court cannot examine themaking process'. By way of judicial review the Court cannot examine the details of the terms of the contract which have been entered into by thedetails of the terms of the contract which have been entered into by the public bodies or the State... But at the same time the Courts can certainlypublic bodies or the State... But at the same time the Courts can certainly examine whether 'decision making process' was reasonable, rational, notexamine whether 'decision making process' was reasonable, rational, not arbitrary and violative of Article 14 of the Constitution." (Sterlingarbitrary and violative of Article 14 of the Constitution." (Sterling Computers Ltd. v. M/s M.N. Publications Ltd., AIR 1996 SC 51, asComputers Ltd. v. M/s M.N. Publications Ltd., AIR 1996 SC 51, as quoted with approval in Master Marine Services, para 10)quoted with approval in Master Marine Services, para 10)
This is, again, precisely the distinction on which the petitioner's case is founded. The petitioner does not ask this Court to rewrite Article 10.3, to substitute its own view of what CUF ought to have been achieved, or to sit in appeal over the terms of the Lease Agreement. What is under challenge is the decision-making process by which the respondents concluded that the shortfall was attributable to the petitioner, without examining causation. Master Marine Services, adopting the principle laid down in Sterling Computers, correctly read, supports rather than negates the maintainability of such a challenge.
In Joshi Technologies International Inc. v. Union of India, (2015) 7 SCC 728, relied upon by the respondents, the Supreme Court held, in the context of a claim for extension of a fiscal benefit under production sharing contracts, that writ petitions in purely contractual matters are ordinarily not maintainable, particularly where the relief sought is essentially a money claim or where the dispute turns on seriously disputed questions of fact requiring detailed evidence, but that a writ would nevertheless lie where the action of the State or its instrumentality is shown to be arbitrary, discriminatory or in violation of natural justice. The present case falls within that very exception. The petitioner does not seek adjudication of a monetary claim in this writ petition; that aspect has been left open for pursuit before the appropriate forum. What the petitioner impugns is the legality of the process by which a public utility contract was terminated without examining a material and specific defence - a challenge to the fairness of State action, not an attempt to enforce a private contractual entitlement through the extraordinary jurisdiction of this Court. Joshi Technologies, therefore, does not assist the respondents on the facts of the present case.
In Kerala State Electricity Board v. Kurien E. Kalathil, (2000) 6 SCC 293, relied upon by the respondents, the Supreme Court held, in the context of a claim for payment of labour escalation charges and interest arising out of a works contract, that the dispute was one of interpretation of contractual terms and quantification of amounts due, and that such a dispute, being in the realm of private law, could not have been agitated in a writ petition. The relevant observation, in para 11 of the report, is that the question whether any amount is due, and if so how much, is not a matter which could be agitated and decided in a writ petition, and that the contractor ought to have been relegated to other remedies. That case is manifestly distinguishable. It concerned a pure money claim computation of escalation charges and interest - turning entirely on disputed facts and figures peculiar to that contract, with no element of a State instrumentality exercising a power of termination over a public utility project without examining a material defence. The present case does not seek adjudication of any money claim; indeed, this Court has expressly declined to adjudicate the petitioner's claims for outstanding amounts and other monetary reliefs, leaving them open to be pursued before the appropriate forum. What survives for decision here is the distinct and antecedent question of the legality of the decision-making process culminating in termination, a question of a public law character to which the ratio of Kerala State Electricity Board v. Kurien E. Kalathil has no application.
It thus emerges, on a careful reading of each of the decisions relied upon by the respondents, that none of them lays down an absolute bar to the maintainability of the present writ petition. Each of them, properly understood, preserves judicial review of the decision-making process of a State instrumentality where that process is shown to be vitiated by arbitrariness, non-application of mind to a material circumstance, or absence of reasons - which is precisely the vice found in the impugned order.
In M.P. Power Management Company Limited, Jabalpur v. M/s Sky Power Southeast Solar India Private Limited and Others, (2023) 2 SCC 703, the Supreme Court held that the existence of an alternative remedy is a relevant consideration but is not an absolute bar to the exercise of writ jurisdiction, and that where the State or its instrumentality acts under a contract, its action may still be examined if it is shown to be per se arbitrary. The relevant observations of the Supreme Court read as under:
"It is a different matter that the scope of judicial review in respect"It is a different matter that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may beof disputes falling within the domain of contractual obligations may be more limited and in doubtful cases the parties may be relegated tomore limited and in doubtful cases the parties may be relegated to adjudicationadjudication ofof theirtheir rightsrights byby resortresort toto remediesremedies providedprovided forfor adjudication of purely contractual disputes. However, to the extent,adjudication of purely contractual disputes. However, to the extent, challenge is made on the ground of violation of Article 14 by allegingchallenge is made on the ground of violation of Article 14 by alleging that the impugned act is arbitrary, unfair or unreasonable, the fact thatthat the impugned act is arbitrary, unfair or unreasonable, the fact that the dispute also falls within the domain of contractual obligations wouldthe dispute also falls within the domain of contractual obligations would notnot relieverelieve thethe StateState ofof itsits obligationobligation toto complycomply withwith thethe basicbasic requirements of Article 14. To this extent, the obligation is of a publicrequirements of Article 14. To this extent, the obligation is of a public character invariably in every case irrespective of there being any othercharacter invariably in every case irrespective of there being any other rightright oror obligationobligation inin additionaddition thereto.thereto. AnAn additionaladditional contractualcontractual obligation cannot divest the claimant of the guarantee under Article 14obligation cannot divest the claimant of the guarantee under Article 14 of non-arbitrariness at the hands of the State in any of its actions."of non-arbitrariness at the hands of the State in any of its actions."
5 9 .5 9 . The above principle finds further reinforcement in the decision of the Supreme Court in Bangalore Electricity Supply Company Limited v. Hirehalli Solar Power Project LLP and Others, 2024 INSC 631, decided on 27.08.2024, where the Supreme Court, while examining a claim for tariff reduction and liquidated damages founded on delay in commissioning a generating project, upheld the concurrent finding that a shortfall or delay occasioned by circumstances beyond the generator's control, such as delay on the part of Government authorities in granting approvals, cannot be treated as a breach attributable to the generator, and that liquidated damages or other adverse consequences of default cannot be imposed without such an examination of cause. The principle that a numerical or performance shortfall must first be tested against its cause before it is visited upon the contracting party as a default squarely applies to the facts of the present case, where the alleged CUF shortfall is sought to be explained by the petitioner on the ground of inadequacy of water, a circumstance admittedly outside its control and squarely within the domain of the Water Resources Department and the connected distribution company.
On the question raised by the respondents' objection as to the availability of an alternative remedy under the dispute-resolution mechanism contained in the Lease Agreement, this Court reiterates that the objection, though a relevant consideration, is not an absolute bar in the facts of the present case. The contractual forum may be appropriate for adjudication of monetary claims, damages, accounts and other disputed questions requiring detailed evidence, and it is precisely for that reason that this Court has left such claims open to be agitated before the appropriate forum. However, where, as here, the termination order itself is challenged on the ground that the authority failed to consider a material defence and acted without a reasoned determination of default, the existence of an alternative remedy does not constitute an absolute bar. This Court is not undertaking a final determination of the petitioner's entitlement to payment or compensation; it is confining itself to examining whether the respondents followed a lawful, fair and reasoned process before terminating a public utility agreement.
Applying the law discussed above to the facts of the present case, the substantial question of law framed earlier is answered in the negative. A mere numerical shortfall in the Capacity Utilisation Factor below the contractually prescribed minimum cannot, by itself, be treated by a State instrumentality as an attributable Event of Default justifying termination of a long-term Lease Agreement of a public utility project, where the contractor has raised a specific and material defence attributing the shortfall to inadequate or interrupted availability of water supply a circumstance outside its control and within the domain of the State and its connected instrumentalities. Such an exercise of the power of termination, is arbitrary and falls foul of Article 14 of the Constitution of India, which provides:
"14.Equality before law.-The State shall not deny to any person"14. Equality before law.-The State shall not deny to any person equality before the law or the equal protection of the laws within theequality before the law or the equal protection of the laws within the territory of India."territory of India."
This Court is conscious that it should not substitute its own assessment of technical or commercial matters for that of the competent authority. This Court is also not holding that the petitioner has achieved the prescribed CUF or that the petitioner is entitled to disregard Article
This Court has also been careful not to travel beyond the scope of adjudication left open by the Hon'ble Supreme Court's interim order, which, while protecting the project from closure pending decision, expressly reserved the question of the validity of the termination for determination by this Court alone; nothing in this judgment either enlarges or curtails that reservation.
It is evident from the record that there is no dispute that the Water Resources Department did not supply adequate water to run the project, the only dispute is whether the respondent is responsible to supply adequate water. The respondent never visited the project to find out whether the shortfall was due to failure in the operation of machines, shortage of manpower at the plant, or non operation of any of the three turbines. It is not disputed that the project was working at high efficiency, the only dispute is that the CUF was below 30% due to inadequate quantity of water supply.
It is not alleged by the respondent that the CUF was below 30 per cent due to failure of operation and maintenance, technical defects, avoidable shutdowns, or inadequate availability. The respondent never inspected the plant to ascertain how it had been operated, the respondent has only alleged that it is not responsible for the adequate quantity of water supply to the plant. The respondent emphasizes the words "as is where is" mentioned in the agreement, contending that these words impose liability on the petitioner to procure adequate quantity of water. We are not impressed by this argument of the respondent. In our opinion, the words "as is where is" reflect the condition of the plant and machinery only, not the supply of water. The water supply agreement was executed between the Water Resources Department and the Madhya Pradesh Madhya Kshetra Vidyut Vitran Company Limited, to which the petitioner was not a party, therefore, the liability to supply water rests upon the respondent. It is clearly mentioned in the water supply agreement that the Water Resources Department shall not be responsible for non supply of water as per demand, which means the water supply demand may be fulfilled subject to availability of water. Therefore, the petitioner is not responsible for the non availability of water, and the termination of the contract on the ground that the CUF was below 30% is arbitrary. As per the agreement, if the CUF was below 30%, the rate of maintenance would be reduced according to the percentage of the CUF, meaning thereby that on the ground of CUF percentage, the agreement cannot be terminated.
In view of the above, the termination order dated 30.05.2022 of the agreement, passed by respondent No.1, is, therefore, arbitrary, unsustainable in law and liable to be set aside, and is hereby set aside. Consequently, the notice dated 03.11.2021, whereby the petitioner was called upon to explain the alleged failure to achieve the minimum CUF, and the subsequent notice dated 06.04.2022, issued in continuation of the proposed termination proceedings, are also quashed to the extent that they form the basis of the impugned termination. The petitioner is free to raise other issues before the arbitral tribunal. The parties shall bear their own costs.