In CIVIL APPEAL No.8714 OF 2022-SC- Parties can be said to have entered into contract or contract would be said to be concluded only when they are ad idem on all essential terms of contract, rules Apex Court
Justices K.M. Joseph, Aniruddha Bose & Hrishikesh Roy [22-11-2022]

Read Judgment: KARNATAKA POWER TRANSMISSION CORPORATION LIMITED Vs. JSW ENERGY LIMITED (EARLIER KNOWN AS JINDAL THERMAL POWER COMPANY LIMITED & JINDAL TRACTABEL POWER COMPANY LIMITED) & ORS 

LE Correspondent

New Delhi, November 23, 2022: While partly allowing the appeal filed by Karnataka Power Transmission Corporation Limited, the Supreme Court has clarified that there cannot be concluded contract without parties being ad idem about essential terms.

Elucidating upon the requirements of a concluded contract, the Larger Bench of Justice K.M. Joseph, Justice Aniruddha Bose and Justice Hrishikesh Roy said,“We say this, as the parties can be said to have entered into a contract or a contract would be said to be concluded only when they are ad idem on all the essential terms of the contract. In other words, if the proposals containing the essential terms have been accepted, and the acceptance is communicated and, if the other conditions in Section 2 of the Indian Contract Act are complied with, viz., that is there is consideration and the contract is enforceable in law, within the meaning of Section 10 of the Act, it would lead to the creation of a concluded contract.”

The facts of this case were such that the first respondent-JSW Energy Ltd. was permitted by Government of Karnataka (GoK) to set up a 2X130 MW cortex gas/ coal based thermal power plant at Bellary and Jindal Vijayanagar Steel Limited (JVSL) was to consume the power produced from the thermal plant to be set up by the first respondent. The Central Electricity Authority granted the required technical economic clearance in March 1996. Originally, GoK gave approval to set up the power plant by JTPCL for 300 MW but it was reduced to 260 MW . There were to be two units, that is Unit No.1 and Unit No.2. 

Karnataka State Electricity Board (KEB) entered into a heads of terms with JTPCL which was followed up by a wheeling and banking agreement between the two. Later, in 2000  a draft power purchase agreement came to be made between the appellant and the first respondent.A letter was sent to the Commission which was treated as an application by the appellant (KTPCL) for entering into a power purchase agreement under Section 25 (3) of the Act read with Section 17(1) of the Karnataka Electricity Reforms Act, 1999.

Based on a public notice, objections were filed by five objectors.The stand taken by the first respondent was that the Commission was bereft of jurisdiction to examine the PPA on the ground that it merely represented a contract which was concluded with it prior to the commencement of the Act, and therefore, the case fell within the four walls of the proviso to sub-section 2 of Section 27 of the Act.

Thereafter, it was found that the power proposed to be supplied to the appellant (KPTCL) was surplus power and the grant of IPP status by communication dated February 1,1996 would not avail the first respondent. Then, the Commission directed the appellant to negotiate with the first respondent based on the calculation made and to come up with a fresh proposal. 

The first respondent did not negotiate. The Commission proceeded to approve a draft PPA with few modifications. These orders came to be challenged by the first respondent before the High Court under Section 41 of the Karnataka Electricity Reforms Act, 1999. 

By the impugned judgment, the High Court had allowed Miscellaneous First Appeal filed by JSW Energy Ltd. and set aside the orders passed by the Commission. The High Court directed the appellant to comply with the tariff rate specified in the order of the GoK dated May 12, 1999. 

The main question which arose for consideration before the Bench was whether there was a concluded contract between the first respondent and the KEB and if so, whether such a contract was concluded before June 1, 1999 as this date marked the commencement of the Act.

Noting that the parties contemplated a written PPA containing various details apart from the tariff rate and the tenure, the Bench opined that there couldnot be concluded contract without parties being ad idem about those terms.

“Therefore, the supply of power, in our view, by the first respondent, after 01.06.1999, cannot be relied upon, in view of the facts revealed by the correspondence, which itself makes it a stop gap arrangement, and what is more subject to conditions which included execution of a PPA, to conclude that the subsequent conduct, unerringly pointed to the fact that a contract within the meaning of Section 27(2) stood concluded before 01.06.1999”, the Bench clarified.

As per the Bench, the parties were not ad idem as regards the issues which were expressly left open for negotiations in the communication dated April 23, 1999. Noticing that GoK also contemplated finalizing a PPA, the Bench observed that word finalizing and the word PPA, both of which did not take place before June 1,1999, had resulted in a situation where a contract could not be said to be concluded even within the meaning of the proviso to Section 27(2) of the Act. 

The subject matter of the contract, the position of the parties, the implications of the working of the contract and more importantly, the intention of the parties did not persuade the Bench to safely gather that there was a concluded contract upon negotiations and correspondence, culminating in the Government Order dated May 12, 1999.

“The Commission is an Expert Body. Interference with its findings cannot be sustained, to begin with, if it is bereft of reasons”, the Bench noted while also adding that findings of such a body must receive due deference.

Thus, the Bench remitted  the matter back to the High Court asking it to proceed on the basis that there was no concluded contract within the meaning of the proviso to Section 27(2).