TRANSMISSION CORPORATION OF ANDHRA PRADESH LTD. AND OTHERS versus M/S. GMR VEMAGIRI POWER GENERATION LTD. AND ANOTHER on 16 February 2018

SUPREME COURT REPORTS

[2018] 10 S.C.R.

ATRANSMISSION CORPORATION OF ANDHRA PRADESHLTD. AND OTHERS

v.

M/s. GMR VEMAGIRI POWER GENERATION LTD. ANDANOTHER

B

(Civil Appeal No. 8747 of 2014)

FEBRUARY 16, 2018

[R. F. NARIMAN AND NAVIN SINHA, JJ.]

Contract – Power Purchase Agreement (PPA) – InterpretationCof – Predecessor of the appellant, the Andhra Pradesh StateElectricity Board, in 1995 invited bids for establishing short gestationgas/Naphtha/fuel oil based power stations – Respondent was asuccessful bidder and had set up a power generation plant –Pursuant to the same, a PPA was executed between the parties onD31.03.1997 under which Naphtha was the primary fuel and gas analternate fuel – In 2003, PPA was amended making gas the primaryfuel and Naphtha an alternate fuel – The PPA underwent furtheramendment in 2007, restricting the term ‘fuel’ to ‘natural gas only’– Respondent had sought permission to use Regasified LiquefiedNatural Gas (RLNG) as fuel for generating power as RLNG is aEform of natural gas – Whether the word ‘fuel’ as used in clause ofthe PPA means ‘natural gas only’ or includes RLNG – Held: In theevent of any ambiguity arising, the terms of the contract will haveto be interpreted by taking into consideration all surrounding factsand circumstances, including correspondence exchanged, to arriveFat the real intendment of the parties, and not what one of the partiesmay contend subsequently to have been the intendment or say asincluded afterwards – The respondent’s letters to appellantspecifically requested for permission to use RLNG to supplementshortfall in gas, requesting to acknowledge its usage – Appellant inits reply explicitly stated that under the agreement no other fuelGexcept natural gas could be used and that RLNG was nevercontemplated in the definition of fuel declining to accept the spotsupply agreement for RLNG supplies, citing the cost of power perunit from the same (RLNG) more costly in comparison to per unitcost from natural gas – Therefore, the intention of the parties underHthe agreement, as amended from time to time, was to generate power from fuel reasonably priced, so as to ultimately make available powerto the consumers at reasonable rates – The choice of fuel as naturalgas only has, therefore, to be understood as being confined tonatural gas only in its natural form – The respondent was well awarethat RLNG was never intended to be included in the definition ofnatural gas as understood by parties, notwithstanding that it maybe a variant of natural gas – Petroleum and Natural Gas RegulatoryBoard Act, 2006 – s.2(za)(i).

Deeds and Documents – Commercial Document –Interpretation of – Held: A commercial document cannot beinterpreted in a manner to arrive at a complete variance with whatmay originally have been the intendment of the parties – Such asituation can only be contemplated when the implied term can beconsidered necessary to lend efficacy to the terms of the contract –If the contract is capable of interpretation on its plain meaningwith regard to the true intention of the parties it will not be prudentto read implied terms on the understanding of a party, or by thecourt, with regard to business efficacy Allowing the appeal, the Court

Conclusion

Allowing the appeal, the Court

HELD: 1. It will not be a safe method to interpret a contractby picking out one clause of the same defining fuel, apply atechnical scientific meaning to it and then conclude that being aform of natural gas, Regasified Liquefied 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 withregard to the intendment of the parties as to what was intendedto be included and what was not intended to be included, as distinctfrom an express exclusion. The commercial parlance test willalso have to be applied as to whether those in the businessconsider the two forms of gas as synonymous and interchangeable.Quite obviously the answer has to be in the negative consideringthe importation of RLNG, additional processes involved and theconsequent higher costs involved. [Para 19] [403-A-C]

2. In the event of any ambiguity arising, the terms of thecontract will have to be interpreted by taking into considerationall surrounding facts and circumstances, including correspondenceexchanged, to arrive at the real intendment of the parties, andnot what one of the parties may contend subsequently to have AB

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Abeen the intendment or to say as included afterwards. [Para 20][403-D]

Bank of India & Anr. v. K. Mohandas & Ors. (2009) 5SCC 313 : [2009] 5 SCR 118 – relied on.

3. The respondent’s letters dated 07.08.2012 andB27.08.2012 become crucially relevant for the understanding thatit was itself under no misapprehension that RLNG was neverintended to be included within the definition of natural gas underthe contract. The respondent requested for permission to useRLNG to supplement shortfall in gas from the KG-D6 Basin,Crequesting to acknowledge its usage. The contention of therespondent that these were only intimations and not request forpermission to use RLNG stands belied from the plain languageused in them. The appellant in its reply dated 10.09.2012 explicitlystated that under the agreement no other fuel except natural gascould be used and that RLNG was never contemplated in theDdefinition of fuel declining to accept the spot supply agreementfor RLNG supplies, citing the cost of power per unit from thesame at Rs.9-10 in comparison to Rs.3/- per unit from naturalgas. It is only thereafter the respondent approached theCommission. The pleadings of the respondent further confirmEits own understanding that RLNG was never intended to beincluded in the definition of fuel which was confined to naturalgas. [Para 21] [403-G-H; 404-A-C]

4. The sporadic use of RLNG on one or two occasions underpressing circumstances, after due orders under Section 11 of theFElectricity Act, 2003, for short durations, cannot make theexception the norm to contend either that RLNG was included inthe term fuel or that the appellant had agreed to its use. Thequestion of waiver by the appellant or application of the principleof approbate and reprobate does not arise in the facts of the case.[Para 22] [404-F-G]G

5. The present was a contract for purchase of powergenerated from fuel which was reasonably priced so as to keep incheck the cost of power generated from the same, in the interestof the consumer. Undoubtedly, cost of fuel was a primaryconsideration in the mind of the appellant. The contextualHbackground in which the PPA originally came to be made, the subsequent amendments, the understanding of the respondentof the agreement as reflected from its own communications andpleadings make it extremely relevant that a contextualinterpretation be given to the question whether RLNG was everintended to be included within the term “Natural Gas”. [Para 23][404-G-H; 405-A-B]

Bihar State Electricity Board v. Green Rubber Industries,(1990) 1 SCC 731 : [1989] 2 Suppl. SCR 275 –referred to.

6. In the facts and circumstances of the present case, therecan be no manner of doubt that the parties by their conduct anddealings right up to the institution of proceedings by therespondent before the Commission were clear in theirunderstanding that RLNG was not to be included within the term“Natural Gas” under the PPA. [Para 24] [405-C-D]

Gedela Satchidananda Murthy v. Dy. Commissioner,Endowments Department, A.P. & Ors., (2007) 5 SCC677 : [2007] 6 SCR 762 – relied on.

7. A commercial document cannot be interpreted in amanner to arrive at a complete variance with what may originallyhave been the intendment of the parties. Such a situation canonly be contemplated when the implied term can be considerednecessary to lend efficacy to the terms of the contract. If thecontract is capable of interpretation on its plain meaning withregard to the true intention of the parties it will not be prudent toread implied terms on the understanding of a party, or by thecourt, with regard to business efficacy. [Para 25] [405-H;406-A-B]

Satya Jain (D) thr. Lrs. & Ors. v. Anis Ahmed Rushdie(D) thr. Lrs. & Ors. (2013) 8 SCC 131 : [2013]3 SCR 319 – relied on.

8. Therefore, it leads to the inevitable conclusion that theintention of the parties under the agreement, as amended fromtime to time, was to generate power from fuel reasonably priced,so as to ultimately make available power to the consumers atreasonable rates. The choice of fuel as natural gas only has,therefore, to be understood as being confined to natural gas only

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Ain its natural form. The respondent was well aware that RLNGwas never intended to be included in the definition of natural gasas understood by the parties, notwithstanding that it may be avariant of natural gas. [Para 27] [407-H; 408-A-B]

Polymat India (P) Ltd. & Anr. v. National Insurance Co.BLtd. & Ors. (2005) 9 SCC 174 : [2004] 6 Suppl.SCR 535; Timblo Irmaos Ltd., Margo v. Jorge AnibalMatos Sequeira & Anr. (1977) 3 SCC 474 : [1977]2 SCR 451; Sappani Mohamed Mohideen and Anr. v.R. V. Sethusubramania Pillai and Ors., (1974) 1 SCC615 : [1974] 2 SCR 594; Trutuf Safety Glass IndustriesCv. Commissioner of Sales Tax, U.P. (2007) 7 SCC 242 :[2007] 8 SCR 860; The Union of India v. M/s. D. N.Revri and Co. and Ors. (1976) 4 SCC 147 : [1977]1 SCR 483; Nabha Power Ltd. v. Punjab State PowerCorporation Ltd. & Anr. (2017) SCC Online 1239;DBharat Aluminum Company v. Kaiser AluminumTechnical Services Inc., (2016) 4 SCC 126 : [2016] 1SCR 364; Association of Natural Gas & Ors. v. Unionof India & Ors. (2004) 4 SCC 489 : [2004] 3 SCR 534;Khardah Company Ltd. v. Raymon & Co. (India) Private,Ltd. [1963] 3 SCR 183 – referred to.E

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8747of 2014

From the Judgment and Order dated 30.06.2014 of the AppellateTribunal for Electricity in Appeal No. 222 of 2013.

Basava Prabhu S. Patil, Sr. Adv., Ms. Prerna Singh, GunturPrabhakar, Geet Ahuja, Advs. for the Appellants.

Vikas Singh, Sr. Adv., Amit Kapur, Ms. Apporva Mishra, Ms.Raveena Dhamija, Ms. Deepika Kalia, Ms. Rahat Sharma, Shiv RamPandey, Pukhrambam Ramesh Kumar, Advs. for the Respondents.

The Judgment of the Court was delivered by NAVIN SINHA, J. 1. The controversy for determination in thepresent appeal is, whether the word ‘fuel’ as used in clause 1.1.27 of thePower Purchase Agreement (hereinafter referred to as ‘PPA’) means“natural gas only” or includes Regasified Liquefied Natural Gas(hereinafter referred to as ‘RLNG’) also.

2. The Andhra Pradesh Electricity Regulatory Commission(hereinafter referred to as “the Commission”), in O.P. No. 20 of 2013dated 08.08.2013, preferred by the respondent, held that the term ‘fuel’as used in the PPA meant natural gas only in its natural form, and did notinclude RLNG. Simply because the physical composition of natural gasand RLNG are similar, it does not automatically entitle the respondent togenerate power with RLNG, which was more expensive and notdomestically available, affecting the per unit supply of power generatedby it, as ultimately the consumer would have to pay more.

3. In Appeal No. 222 of 2013 preferred by the respondent, theAppellate Tribunal by the impugned order dated 30.06.2014 held thatuse of the word “only” after “natural gas” in the PPA dated 02.05.2007had to be understood in context of the deletion of other alternate fuelsuch as Naphtha etc. incorporated in the earlier PPAs, and it was neverintended to restrict the meaning of the word natural gas to exclude RLNG,which was a variant of natural gas and did not come in the category ofan alternate fuel. It further held that the higher price of RLNG could notbe a determinative factor to exclude it from the agreement as any increasein price of gas was an accepted risk, especially in view of the non-availability of natural gas from the KG-D6 basin. The use of RLNG hadalso been permitted on earlier occasions without any amendment to thePPA.

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A4. The predecessor of the appellant, the Andhra Pradesh StateElectricity Board, in May, 1995 invited bids for establishing short gestationgas/Naphtha/fuel oil based power stations to bridge the demand supplygap of power in the State of Andhra Pradesh. Pursuant to the same, aPPA was executed between the parties on 31.03.1997 under whichNaphtha was the primary fuel and gas an alternate fuel. ConsideringBthe high price of Naphtha, in March 2000, the Government of AndhraPradesh decided to make gas the primary fuel. The Ministry of Petroleumon 05.06.2000 allotted 1.64 MMSCMD of natural gas to the respondentfrom the KG-D6 Basin sourced through the Gas Authority of India Ltd(GAIL), leading to a gas supply agreement dated 31.08.2001 betweenCthe respondent and the latter. The PPA was accordingly amended on18.06.2003 making gas the primary fuel and Naphtha an alternate fuel.The PPA underwent further amendment on 02.05.2007, restricting theterm ‘fuel’ to “natural gas only”. A comparative status of the three PPA’scan beneficially be set out as follows:

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DPPA dated Amendment Amendment 31.03.1997 Agreement to the Agreement dated PPA dated 02.05.2007 18.06.2003 E“1.1.27) “Fuel: 1.1.27) “Fuel: means 1.1.27) “Fuel: means means gas, Naptha, Natural Gas that is Natural Gas only.”low sulphur heavy intended to be used stock or furnace oil, as primary fuel by and the like, that is one or more units of Fintended to be used the project to generate as primary fuel, by or in case of one or more units of unavailability of the Project to primary fuel, Naptha generate power from or Low Sulphur heavy Gthe Project or in case stock and the like as of unavailability of alternate fuel.” Naptha any of the above as alternate fuel.”

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5. GAIL having been unable to supply gas under the agreementdue to prioritisation of other sectors, the respondent was permitted topurchase natural gas from M/s. Reliance Industries Ltd (RIL) at GAILprices. The respondent, on 07.08.2012 and 27.08.2012, sought permissionto allow use of RLNG as fuel for generating power. The appellantrejected the request on 10.09.2012 stating that under the PPA dated02.05.2007, fuel meant “natural gas only” and did not include RLNG,which was priced much higher affecting the per unit price of powergenerated from the same to the ultimate detriment of the consumers.

6. Shri Basava Prabhu Patil, learned senior counsel appearing forthe appellant, submitted that under the PPA, it was only natural gas in itsnatural form which was agreed to be used as fuel for generation ofpower. Merely because RLNG may be a variant of natural gas, will notsuffice to bring it within the definition of fuel under the PPA. The costof RLNG being three to four times higher than natural gas, theCommission rightly held that it was also a relevant factor to hold thatRLNG was never intended by the parties to be included in the agreement.

7. The word ‘fuel’, as defined in the agreement, had to be givenits natural meaning by confining it to natural gas only as intended by theparties. The definition could not be extended so as to include RLNG, asthe parties never intended the same. There is no ambiguity in languagewarranting any inclusion to the definition either by implication or intention.Even if there was any ambiguity with regard to the intendment of theparties, the true intent has to be gathered from the plain meaning of thewords used, read conjunctively with all surrounding circumstances anddocuments. Applying the common parlance test, RLNG was notsynonymous with natural gas in the business and neither interchangeable,because of the additional processes required in the latter and the resultanthigher cost involved including importation, as distinct from natural gasavailable at a lesser price and domestically.

8. Under the PPA dated 31.03.1997, Naphtha was the primaryfuel and gas was an alternate fuel. Clause 3.3 dealing with energycharge defined cost of fuel based on indigenous and importation cost.The PPA contemplated approval of the fuel supply agreement by thefuel supply committee, to ensure reasonable prices as the cost of powergeneration was of paramount consideration in the interest of theconsumer. The cost of Naphtha being higher, the PPA came to be A

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Aamended on 18.06.2003 making natural gas the primary fuel, and Naphthaan alternate fuel. If RLNG was in contemplation of the parties, and wasconsidered to fall within the term natural gas, there would have beensome discussion regarding it in the deliberations of the Commission whileapproving the amendments to the PPA, especially in view of the pricedifference. Such absence makes it manifest that the parties neverBintended to include RLNG in the term natural gas. The significance ofthe words “only” after “natural gas” in the third PPA dated 02.05.2007cannot be lost sight of. It was necessitated in context of the realizationthat the parties may have resorted to other costly alternate fuelsconsequent to the dismantling of the administered price mechanism andCthe fuel supply committee.

9. The fact that RLNG may have been permitted to be used for ashort period of seven days from 16.04.2009 to 23.04.2009 under pressingcircumstances of a power crisis, by special orders under Section 11 ofthe Electricity Act, 2003 or again for a short duration from 15.02.2011 toD31.05.2011 cannot be stretched to contend that RLNG was intended to

be included within the term natural gas. The cost of power generatedfrom natural gas was Rs.1.75 per KWH while that from RLNG worksout to Rs.4.63 per KWH and the financial burden for this short durationis Rs.427 crores. In March and April use of RLNG was permitted atper unit generation cost of Rs.9/- compared to Rs.3/- per unit with existingEnatural gas leading to a financial burden of Rs.3.7 crores per day. Theseexceptions can never be construed to mean the norm to contend thatuse of RLNG was always in the contemplation of the parties and wasintended to be included within the term natural gas. The very fact thatthe respondent sought permission on 07.08.2012 and 27.08.2012 to use FRLNG for power generation makes it manifest that even as per itsunderstanding, RLNG was not included within the term natural gasaccording to the intent of the parties. The appellant in its reply dated10.09.2012 had reiterated that RLNG did not fall within the ambit of thePPA which was confined to natural gas only citing the cost difference of power per unit also.G

10. A contract document had to be interpreted in accordance withthe language used, with reference to the context in which it came to beprepared. A technical view of an agreement, torn out of context, cannotbe taken to reinterpret the agreement and arrive at a new finding withregard to the intendment of the parties by including something whichH

was never intended to be included, to the prejudice of a party to thecontract, while giving an undue advantage to the other. A primaryconsideration will also be the understanding of the parties of the termsof the contract and what was intended, as reflected inter alia from theirconduct. The contract being a commercial document, utmost importancehad to be given to its efficacy. Shri Patil, in support of the submissionsplaced reliance on Polymat India (P) Ltd. & Anr. vs. NationalInsurance Co. Ltd. & Ors., 2005 (9) SCC 174, Gedela SatchidanandaMurthy vs. Dy. Commissioner, Endowments Department, A.P. &Ors., 2007 (5) SCC 677, Timblo Irmaos Ltd., Margo vs. Jorge AnibalMatos Sequeira & Anr., 1977 (3) SCC 474, Sappani MohamedMohideen and Anr. vs. R.V. Sethusubramania Pillai and Ors., 1974(1) SCC 615, Trutuf Safety Glass Industries vs. Commissioner ofSales Tax, U.P., (2007) 7 SCC 242, The Union of India vs. M/s. D.N.Revri and Co. and Ors., 1976 (4) SCC 147, Nabha Power Ltd. vs.Punjab State Power Corporation Ltd. & Anr., 2017 SCC Online 1239and Bharat Aluminum Company vs. Kaiser Aluminum TechnicalServices Inc., 2016 (4) SCC 126.

11. Shri Vikas Singh, learned senior counsel appearing for theRespondent, submitted that the original bid documents permitted importof fuel also, and fuel tie up linkage was the responsibility of the bidder.The Respondent invested approximately Rs.1153.10 crores in setting upthe power generation plant, of which, 68.29% of the funding was frombanks and financial institutions. The plant has operated intermittently forapproximately 64 months only in the last 11 years. The conduct of theappellant in not accepting availability declaration with regard to RLNGwas unjustified. The appellant was well aware of the possibility of futurehike in gas prices, and more particularly after dismantling of theadministrated price mechanism inclusive of inflation, all of which wouldmake the gas prices market driven. Therefore, merely because the costof RLNG was higher could not be a ground to contend that it was neverintended to be included within the definition of natural gas or was contraryto interest of the consumer. RLNG was but a form of natural gas,compressed for transformation from gaseous to liquid state, reducingthe volume to facilitate transportation in a safe and stable manner. Oncedelivered at the destination, it is regasified and then supplied to theconsumer. Even according to the dictionary meaning they are the same.

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A12. The deletion of the words “intended to be used” after thewords “natural gas”, as used in the second PPA, and the replacementthereof in the third PPA by the words “natural gas only” gave a muchwider meaning and amplitude to the word natural gas so as to take withinits ambit RLNG also. The deletion of “importation charges” in the PPAdated 18.06.2003 was of no significance as RLNG was to be deliveredBat the project site through the pipeline, and the cost of fuel was to be atthe metering point at the project site, which would be inclusive ofimportation cost. Evidently there would be no separate charges by GAILtowards importation of RLNG. So long as the supplies were at GAILprices, the appellants cannot raise objections with regard to price.

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13. The term natural gas has not been defined under the PPA.The definition of natural gas in Section 2(za)(i) of the Petroleum andNatural Gas Regulatory Board Act, 2006 (hereafter referred to as the“PNGRB Act”) includes both liquefied natural gas (LNG) and RLNG.The appellants on more than one occasion had themselves permittedDuse of RLNG for production of power in 2011, 2012 and 2013. It isdemonstrative of the fact that RLNG was never intended to be excludedunder the PPA. It was only when the respondent wrote to the appellantfor operationalising the RLNG scheme, that the appellant replied on27.03.2015 raising objection to RLNG being outside the terms of thePPA. The respondent had never sought permission from the appellantEfor use of RLNG by its letters dated 07.08.2012 and 27.08.2012, butmerely given intimation about what was otherwise permissible under thePPA. After the dismantling of the administered price mechanism andthe fuel Supply Committee, there was no requirement for consent orapproval of the appellant.

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14. The appellant having itself permitted use of RLNG on morethan one occasion, cannot contend its exclusion especially when theagreement clearly is suggestive of its inclusion. Alternately, there hadbeen waiver on part of the appellant by having permitted its use on morethan one occasion. The appellant cannot be permitted to approbate andGreprobate. Natural gas had been defined in Association of NaturalGas & Ors. vs. Union of India & Ors., 2004 (4) SCC 489. The pleathat power generated by RLNG would be more costly and not in theinterest of the consumer is belied by the fact that today the appellant ispurchasing power at higher rate. The Director General, PetroleumPlanning and Analysis Cell had now fixed price for marketing including H

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pricing freedom for gas to be produced from discoveries in deepwater,ultra-deepwater and high pressure-high temperature areas for the period01.04.2016 to 31.09.2016 at US$ 6.61/MMBTU on GCV basis. On05.05.2016, the respondent wrote to the appellant informing that GAILhad communicated that ONGC has indicated availability of the gas inthe KG basin from its deepwater fiels-S1 and VA fields at the rate of6.3$/MMBTU even which has not been acceded to, as being beyondthe PPA.

15. We have considered the submissions on behalf of the parties,and are not in agreement with the conclusions of the Appellate Tribunal.

16. The original PPA dated 31.03.1997, provided for Naphtha tobe used as the primary fuel for generation of power and gas was analternate fuel. Importation was also permissible. The price was to befixed by the fuel supply committee, both to keep it reasonable, and toensure that the cheaper option was always used. In March 2000, theGovernment of Andhra Pradesh, due to the cost factor, decided to replacegas as the primary fuel, and Naphtha was made an alternate fuel leadingto allotment of natural gas by the Ministry of Petroleum and executionof an agreement between the respondent and GAIL. The PPA was thenamended on 18.06.2003 making gas the primary fuel. Subsequently,when GAIL was unable to supply the allocated quantities of natural gasto the respondent because of sector prioritisation, the respondent waspermitted to obtain supplies of natural gas from RIL. The realisationthat in the circumstances, the generator could resort to use of othercostly fuels also, led to the third amended PPA dated 02.05.2007 confiningthe definition of ‘fuel’ to “natural gas only”.

17. It is relevant to notice that at both stages of the amendment tothe PPA, in the proceedings before the Commission under Section 21(5)of the Andhra Pradesh Electricity Reforms Act, 1998, the parties neverreferred to the availability of RLNG as fuel contemplated within theterm “natural gas” and the discussion was confined to “natural gas only”.Had the parties intended otherwise, or the respondent had any suchinkling in mind of RLNG being a variant of natural gas and consequentlyintended to be included in it, coupled with its availability as compared tonatural gas, surely it would have figured in the discussion before theCommission. The absence of the same, combined with RLNG havingto be imported, deletion of the importation clause in the PPA of 18.06.2003,

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Athe higher price of RLNG, leads to the inevitable conclusion that it wasnever in the contemplation of the parties that RLNG was to be includedin the term “natural gas” even though it may be a variant of the same. Itstands to reason that if Naphtha was removed as primary fuel becauseof the cost factor and made an alternate fuel in the second amendmentto the PPA, the question of RLNG being included within the term ofB“natural gas only” irrespective of the cost factor, will not stand the testof reason.

18. A wrong question will inevitably lead to a wrong answer. Thequestion for consideration presently is not if RLNG is a form of naturalgas, but whether the parties intended to exclude any form of gaseousCfuel from the ambit of the contract except for natural gas in its naturalform from the domestic market, keeping the price of gas in mind, whichwould ultimately set the price per unit of electricity for the consumer.The PPA is a technical commercial document. It has been drafted bypersons conversant with the business. RLNG and natural gas as used inDthe agreement are not synonymous or interchangeable. The principle ofbusiness efficacy will also have to be kept in mind for interpreting thecontract. The terms of the agreement have to be read first to understandthe true scope and meaning of the same with regard to the nature of theagreement that the parties had in mind. It will not be safe to exclude anyword in the same. In Khardah Company Ltd. vs. Raymon & Co.E(India) Private, Ltd., 1963 (3) SCR 183, on interpretation of a contractit was observed as follows:

“18. … We agree that when a contract has been reduced to writingwe must look only to that writing for ascertaining the terms of theagreement between the parties but it does not follow from thisFthat it is only what is set out expressly and in so many words inthe document that can constitute a term of the contract betweenthe parties. If on a reading of the document as a whole, it canfairly be deduced from the words actually used therein that theparties had agreed on a particular term, there is nothing in lawGwhich prevents them from setting up that term. The terms of acontract can be expressed or implied from what has beenexpressed. It is in the ultimate analysis a question of constructionof the contract. And again it is well established that in construinga contract it would be legitimate to take into account surroundingcircumstances…”

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19. It will not be a safe method to interpret a contract by pickingout one clause of the same defining fuel, apply a technical scientificmeaning to it as observed in Truetuf Safety Glass Industries (supra)and then conclude that being a form of natural gas, RLNG was intendedto be impliedly included in the definition of fuel. The terms of a contracthave to be given their plain meaning with regard to the intendment of theparties as to what was intended to be included and what was not intendedto be included, as distinct from an express exclusion. The commercialparlance test will also have to be applied as to whether those in thebusiness consider the two forms of gas as synonymous andinterchangeable. Quite obviously the answer has to be in the negativeconsidering the importation of RLNG, additional processes involved andthe consequent higher costs involved.

20. In the event of any ambiguity arising, the terms of the contractwill have to be interpreted by taking into consideration all surroundingfacts and circumstances, including correspondence exchanged, to arriveat the real intendment of the parties, and not what one of the parties maycontend subsequently to have been the intendment or to say as includedafterwards, as observed in Bank of India & Anr. vs. K. Mohandas &Ors., (2009) 5 SCC 313:

“28. The true construction of a contract must depend upon theimport of the words used and not upon what the parties choose tosay afterwards. Nor does subsequent conduct of the parties inthe performance of the contract affect the true effect of the clearand unambiguous words used in the contract. The intention of theparties must be ascertained from the language they have used,considered in the light of the surrounding circumstances and theobject of the contract. The nature and purpose of the contract isan important guide in ascertaining the intention of the parties.”

21. The respondent’s letters dated 07.08.2012 and 27.08.2012become crucially relevant for the understanding that it was itself underno misapprehension that RLNG was never intended to be included withinthe definition of natural gas under the contract. In the former, therespondent wrote, “We await the confirmation from your good office totake it up further for obtaining necessary consent, if any, in accordancewith law for use of RLNG and the resultant tariff increase.” The latteragain requested for permission to use RLNG to supplement shortfall in

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Agas from the KG-D6 Basin, requesting to acknowledge its usage. Thecontention of the respondent that these were only intimations and notrequest for permission to use RLNG stands belied from the plain languageused in them. The appellant in its reply dated 10.09.2012 explicitly statedthat under the agreement no other fuel except natural gas could be usedand that RLNG was never contemplated in the definition of fuel decliningBto accept the spot supply agreement for RLNG supplies, citing the costof power per unit from the same at Rs.9-10 in comparison to Rs.3/- perunit from natural gas. It is only thereafter the respondent approachedthe Commission in OP No.20 of 2013. The pleadings of the respondent,as quoted hereinafter, further confirm its own understanding that RLNGCwas never intended to be included in the definition of fuel which wasconfined to natural gas only :- “9. Since the above scenario affects the generation activitiesof the Petitioner, the Petitioner proposed to use RLNG. In thisrespect, the Petitioner has already made representations toDthe Respondent Nos. 2 and 3 vide its letters dated 7.8.2012and 27.8.2012 (produced as Annexures P-2 and P-3respectively). In both these letters, the Petitioner appealed tothe said Respondents to allow usage of RLNG andsubstantiated the circumstances/reasons for the said requestof the petitioner.E10. To the utter surprise and shock of the Petitioner, insteadof acceding to the above requests of the Petitioner, theRespondent No.3 has rejected the above requested of thePetitioner vide its letter dated 10.09.2012.”F22. The sporadic use of RLNG on one or two occasions under F22. The sporadic use of RLNG on one or two occasions underpressing circumstances, after due orders under Section 11 of the ElectricityAct, 2003, for short durations, cannot make the exception the norm tocontend either that RLNG was included in the term fuel or that theappellant had agreed to its use. The question of waiver by the appellantor application of the principle of approbate and reprobate does not ariseGin the facts of the case.

23. The present was a contract for purchase of power generatedfrom fuel which was reasonably priced so as to keep in check the costof power generated from the same, in the interest of the consumer.Undoubtedly, cost of fuel was a primary consideration in the mind of the H

appellant. The contextual background in which the PPA originally cameto be made, the subsequent amendments, the understanding of therespondent of the agreement as reflected from its own communicationsand pleadings make it extremely relevant that a contextual interpretationbe given to the question whether RLNG was ever intended to be includedwithin the term “Natural Gas”, as observed in Bihar State ElectricityBoard vs. Green Rubber Industries, (1990) 1 SCC 731:

“23…. Every contract is to be considered with reference to itsobject and the whole of its terms and accordingly the whole contextmust be considered in endeavouring to collect the intention of theparties, even though the immediate object of enquiry is the meaningof an isolated clause….”

24. In the facts and circumstances of the present case, there canbe no manner of doubt that the parties by their conduct and dealingsright up to the institution of proceedings by the respondent before theCommission were clear in their understanding that RLNG was not to beincluded within the term “Natural Gas” under the PPA. The observationsin Gedela Satchidananda Murthy (supra) are considered apposite inthe facts of the present case :- “32…The principle on which Miss Rich relies is that formulatedby Lord Denning, M.R. in Amalgamated Investment & PropertyCo. Ltd. v. Texas-Commerce International Bank Ltd., [1982] 1QB at p.121:

‘If parties to a contract, by their course of dealing, put aparticular interpretation on the terms of it—on the faith of whicheach of them—to the knowledge of the other—acts and conductstheir mutual affairs—they are bound by that interpretation just asmuch as if they had written it down as being a variation of thecontract. There is no need to inquire whether their particularinterpretation is correct or not—or whether they were mistakenor not—or whether they had in mind the original terms or not.Suffice it that they have, by their course of dealing, put their owninterpretation on their contract, and cannot be allowed to go backon it.’

(emphasis supplied)”

25. A commercial document cannot be interpreted in a manner toarrive at a complete variance with what may originally have been the

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Aintendment of the parties. Such a situation can only be contemplatedwhen the implied term can be considered necessary to lend efficacy tothe terms of the contract. If the contract is capable of interpretation onits plain meaning with regard to the true intention of the parties it will notbe prudent to read implied terms on the understanding of a party, or bythe court, with regard to business efficacy as observed in Satya JainB(D) thr. Lrs. & Ors. vs. Anis Ahmed Rushdie (D) thr. Lrs. & Ors.,(2013) 8 SCC 131, as follows:- “33. The principle of business efficacy is normally invoked to reada term in an agreement or contract so as to achieve the result orthe consequence intended by the parties acting as prudentbusinessmen. Business efficacy means the power to produceintended results. The classic test of business efficacy was proposedby Lord Justice Bowen,L.J. in Moorcock. This test requires thata term can only be implied if it is necessary to give business efficacyto the contract to avoid such a failure of consideration that theparties cannot as reasonable businessmen have intended. But onlythe most limited term should then be implied–the bare minimum toachieve this goal. If the contract makes business sense withoutthe term, the courts will not imply the same. The following passagefrom the opinion of Bowen, L.J. in the Moorcock (supra) sums upthe position: (PD p.68)

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“…In business transactions such as this, what the law desiresto effect by the implication is to give such business efficacy tothe transaction as must have been intended at all events byboth parties who are business men; not to impose on one sideall the perils of the transaction, or to emancipate one side fromall the chances of failure, but to make each party promise inlaw as much, at all events, as it must have been in thecontemplation of both parties that he should be responsible forin respect of those perils or chances.”

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34. Though in an entirely different context, this court in UnitedIndia Insurance Co. Ltd. v. Manubhai Dharamasinhbhai Gajeraand Ors. had considered the circumstances when reading anunexpressed term in an agreement would be justified on the basisthat such a term was always and obviously intended by andbetween the parties thereto. Certain observations in this regard G

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expressed by Courts in some foreign jurisdictions were noticedby this court in Para 51 of the report. As the same may haveapplication to the present case it would be useful to notice thesaid observations :(SCC p.434)

“51. …’…”Prima facie that which in any contract is left tobe implied and need not be expressed is something soobvious that it goes without saying; so that, if, while theparties were making their bargain, an officious bystander,were to suggest some express provision for it in theiragreement, they would testily suppress him with a common‘Oh, of course!’ ‘’ Shirlaw v. Southern Foundries (1926)Ltd., KB p.227.’

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“An expressed term can be implied if and only if the courtfinds that the parties must have intended that term to formpart of their contract: it is not enough for the court to findthat such a term would have been adopted by the partiesas reasonable men if it had been suggested to them: it musthave been a term that went without saying, a term necessaryto give business efficacy to the contract, a term which,although tacit, formed part of the contract which the partiesmade for themselves. Trollope and Colls Ltd. v. North WestMetropolitan Regl. Hospital Board, All ER p.268a-b.’ “

35. The business efficacy test, therefore, should be applied onlyin cases where the term that is sought to be read as implied issuch which could have been clearly intended by the parties at thetime of making of the agreement...”

26. The definition of natural gas in Section 2(za)(i) of the PNGRBAct, has no relevance to the present controversy as the Act was enactedwith the object to oversee and regulate refining, processing, distributionand marketing of petroleum products and natural gas. Similarly, theobservation made in Association of Natural Gas (supra) in context ofthe controversy with regard to legislative entry has no relevance to theinterpretation of the PPA.

27. The aforesaid discussion, therefore, leads to the inevitableconclusion that the intention of the parties under the agreement, as A

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Aamended from time to time, was to generate power from fuel reasonablypriced, so as to ultimately make available power to the consumers atreasonable rates. The choice of fuel as natural gas only has, therefore,to be understood as being confined to natural gas only in its natural form.The respondent was well aware that RLNG was never intended to beincluded in the definition of natural gas as understood by the parties,Bnotwithstanding that it may be a variant of natural gas.

28. The appeal, therefore, has to be allowed, the Appellate Tribunaljudgment is reversed, and the Commission order dated 08.08.2013 isaffirmed.

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Ankit Gyan

Appeal allowed.

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