Supreme Court Quashes Termination of U.P. Government Employee: Says Removal Without Enquiry Violates Law by Justices Vikram Nath and Sandeep Mehta

Recent Judgment handing out a major case between Nabha Power Limited (NPL) and the Punjab State Power Corporation Limited (PSPCL) was a surprising surprise to many. The issue involved the question addressed to the authority, whether NPL was entitled to enjoy certain tax benefits and compensation in light of government changes in policy due to the success in the bid on a power project. The court considered some of the main legal aspects and issues of the contract, the understanding of Change in Law in the agreement and the Power plant classification whether it can be perceived as the goods, in relation to the trade policy benefits.

Facts of the Case

The ruckus arises when Nabha Power Limited (NPL), a company constituted to capitalize a 1,400 Mega Watt coal thermal power plant succeeded in a competitive bid to provide power to the Punjab State Power Corporation Limited (PSPCL). In late 2009, the bidding process was tariff based competitive bidding process. NPL took into account some of the fiscal benefits it felt it could take advantage of in terms of the Foreign Trade Policy (FTP) when making the bid. The latter were regarded as the “deemed export” benefits that concern products being supplied in India but which would otherwise have been exported.

The government changed this, however, by issuing public notices through its Directorate General of Foreign Trade (DGFT) in April 2011 which essentially altered the rules after NPL had won the bid. The effect of these changes according to NPL was the removal of the gains that it had hinged on during the bid process leading to a sharp rise in its project cost. Consequently, NPL recourse to the court seeking a declaration on withdrawal of these benefits being a “Change in Law” as provided in its Power Purchase Agreement (PPA) with PSPCL and it should be compensated

The main questions of the problem and those that the court provides.

There were three legal questions that guided the case and which had to be answered by the court:

• Did NPL always have the benefits accessible? The court was required to ascertain whether the benefits of an export under the deemed export under the foreign trade policy were valid under a company constructing a thermal power plant.
• Was it a Change in Law as a result of the government actions? The court needed to determine whether the public notices issued by the DGFT and a press release issued by the cabinet amounted to a Change in Law as identified in the Power Purchase Agreement.
• Was NPL supposed to have claimed compensation? Had the court determined that there had been a Change in Law, it would then be necessary to determine whether NPL is the one who was supposed to obtain restitution and compensation.

The Court decision on the provisions

The judgment interpreted in the light of this conclusion as a result of close inspection of the legal provisions especially the law.

The PPA and the FTP.

Definition of the Change in Law: The PPA had a special provision under the Article 13 which defined a Change in Law. This was a significant element of this case. This was the case because DGFT issued public notices under the statutory provisions of the law, however, NPL stated that under the provisions of the project law, it is a Change in Law since those notices changed the obligations and advantages to the project. But PSPCL avers that this clause can be invoked only by new laws or regulations, but not by administrative notices. The court held that the notices issued by the public were merely administrative policy documents and did not qualify as a Change in Law in line with the PPA which meant that the document must be a legislation or a statutory enactment. The court observed that in case, NPL had a disagreement with such administrative actions then the appropriate remedy would be a court challenge of the administrative act and not a contract claim under the PPA

Application of the term goods and manufacture: The question whether a thermal power plant, a big immovable property, could be regarded/defined as goods togetAttributehebenefit of being considered an export in terms of receiving deemed export benefits under the FTP was also primary. The FTP, the court held, was structured in such a way that it made it profitable as to encourage the development of those items that were either movable and tangible, and they stood a chance of being exported. A power plant is not built and constructed in-site and therefore does not quite fit this definition. The court has compared a case heard in the past where it has stated that a machinery that is embedded to the earth qualifies as a property that is impossible to move and therefore it is not a movable good. Also, the court made clear that the assembly of power plant on-site was not manufacture as per the meaning of the law. The court also held that NPL could not attain the requirements under the FTP to ensure that the company received these benefits. Additionally, the court indicated that the approach to make benefits to the whole power plant was also inappropriate since no specific supply of the goods by a primary contractor or subcontractor as is required under the policy was furnished.

Failure to adhere to Procedural Requirements: A procedure is also a factor that was acted upon by the court as NPL had not followed the correct procedures in accordance with the PPA. In particular, NPL: failed to notify in a timely fashion of the alleged Change in Law and failed to establish the amount of the financial loss. According to the court, NPL was claiming entitlement to additional costs as calculated on a hypothetical basis and it had not established the fact that a Change in Law event had occurred.

Finally, the court provided a verdict according to the lower forums and imposed the case against NPL. It held that the appellants, Nabha Power Limited, were not justified to the deemed export benefits under Foreign Trade Policy since they were unable to meet the conditions of the Policy. There was no Change in Law and in a case where benefits were not even available to the NPL and therefore, the question of compensation never arose. The court rejected the appeals with no insinuation to alter the former judgment. The case helps to understand the lesson of having a literal argument over the contractual clauses and government policies especially in large-scale projects at the infrastructure level. It shows the significance of definitions and proper practices to be followed in the event of compensation in the change of law.