The judgment established the principle that the interpretation of force majeure clauses in contracts must be based on the specific terms and intentions of the parties, and that the party seeking relief must demonstrate irretrievable hardship.

1. Coastal Andhra Power Limited (‘CAPL’) has filed this petition under Section 9 of the Arbitration & Conciliation Act, 1996 (‘Act’) against the Andhra Pradesh Central Power Distribution Company Limited (‘APCPDCL’), Andhra Pradesh Southern Power Distribution Company Limited (‘APSPDCL’), Andhra Pradesh Eastern Power Distribution Company Limited (‘APEPDCL’) and Andhra Pradesh Northern Power Distribution Company Limited (‘APNPDCL’) as well as seven other State Electricity Boards in Karnataka, Maharashtra and Tamil Nadu arising out of a Power Purchase Agreement (‘PPA’) dated 23rd March 2007 executed between the parties.

2. The background to the present petition is that the Government of India intended to set up nine Ultra Mega Power Projects (‘UMPPs’) at various places in the country. As per the UMPPs Policy, the Petitioner CAPL was registered as a 100% subsidiary of the Power Finance Corporation (‘PFC’), a Public Sector Undertaking, as a Special Purpose Vehicle (‘SPV’) for construction, commissioning and operation of the project. The shares in CAPL were to be transferred to a party who quoted the lowest level tariffs for sale of electricity after construction of the project pursuant to a public bidding.

3. While bidding process was in progress, the PPA dated 23rd March 2007 was executed between the Petitioner and all the Respondents. At that stage, CAPL was wholly owned subsidiary of the PFC. The PPA defined fuel to mean primary fuel used to generate electricity and this meant imported coal.

4. Reliance Power Limited (‘RPL’) bid for the project on the basis of prevailing price of Indonesian coal quotations. RPL was declared as a successful bidder on 30th November 2007. According to CAPL at the relevant time, a party could enter into a long term contract with companies in Indonesia who would supply coal on long term basis at a fixed price and at a fixed escalation.

5. Pursuant to it being declared as a successful bidder, RPL purchased the entire 100% shareholding of CAPL from the PFC on 29th January 2008. On 8th April 2010 CAPL executed a Fuel Supply Agreement (‘FSA’) with Reliance Coal Resources Private Limited (‘RCRPL’) which had acquired interests in coal from coal mines in Indonesia for supply of coal to CAPL. Under the said FSA, RCRPL was to supply coal required for project for the entire term of the PPA at a pre-fixed price. In terms of the said PPA, CAPL was to buy coal at the price of US Dollar (‘USD’) 24 Per Metric Ton (‘PMT’).

6. On 23rd September 2010 a new regulation came into effect in Indonesia whereby it was made mandatory for the companies in Indonesia to sell coal on the basis of the international benchmark market prices. All existing FSAs were to be brought in line with the new regulations within a period of 12 months. This meant that all long term supply contracts with companies in Indonesia became unenforceable unless amended and brought in conformity with the new regulation.

7. According to CAPL as a result of the above regulation, the price of coal in Indonesia rose from USD 24 PMT to USD 60 PMT. CAPL states that the exponential increase in the price of imported Indonesian coal by 150% rendered the project wholly unviable, non-bankable and impossible to set up. CAPL claimed that the unavailability of fuel or dramatic increase in the cost of fuel was a force majeure event under Article 12.4 of the PPA. The sudden change of the foreign law was according to CAPL not in contemplation of the parties at the time of entering into the PPA. In terms of Article 12.7 neither party would be held to be in breach of its obligation during the subsistence of the force majeure event. CAPL also pleaded that it was impossible to import coal from another source either at the given price or near that price. Further, even though CAPL had entered into arrangements for debt financing from various banks and financial institutions, it was based on the FSA for coal and prior to the change in the Indonesian regulation.