Courts Can Imply A Term In Contract Only If Literal Interpretation Fail... about:reader?url=https%3A%2F%2Fwww.livelaw.in%2Ftop-stories%2...

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Courts Can Imply A Term In Contract Only If

Literal Interpretation Fails To Give The Result
Intended By...

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The Court should give effect to "plain, literal and grammatical" meaning of the
clauses used in a contract, reiterated the Supreme Court while upholding Adani
Power's termination of the Power Purchase Agreement with Gujarat Urja Vikas
Ltd(GUVL).

The bench of Justices Arun Mishra, B R Gavai and Surya Kant held that the
Court can read a term into the agreement on the basis of 'business efficacy
doctrine' only if it is not possible otherwise to give effect to the intention of the
parties.

In the case, Adani had terminated the PPA with GUVL on the ground that Gujarat
Mineral Development Corporation(GMDC) had failed to supply coal to it. According
to Adani, it was the understanding between the parties that supply of power to
GUVL was conditional on coal supply by GMDC. Adani also deposited the amount
of Rs. 25 crores as liquidated damages.

Challenging the termination, GUVL approached the Gujarat State Electricity

Regulatory Commission. The Commission held the termination to be illegal . The
terms of the PPA permitted termination only if both the parties were in agreement
that default had occurred, found the Commission. This finding was upheld by the
Appellate Tribunal

Doctrine of Business Efficacy

The doctrine of business efficacy' was explained by the Supreme Court in Nabha
Power Ltd. (NPL) vs. Punjab State Power Corporation Ltd. (PSPCL) and Anr

This could be invoked only if by a plain literal interpretation of the term in the

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agreement or the contract, it is not possible to achieve the result or the

consequence intended by the parties acting as prudent businessmen. This test
requires that a term can only be implied, if it is necessary to give business efficacy
to the contract, to avoid such a failure of consideration that the parties cannot as
reasonable businessmen have intended.

In the instant case, the Court noted that there was no reason to invoke 'business
efficacy' test to read into an implied condition which was not present in the express
terms of the contract.

"Reading an unexpressed term in an agreement would be justified on the basis that

such a term was always and obviously intended by and between the parties
thereto. An unexpressed term can be implied if and only if the court finds that the
parties must have intended that term to form part of their contract. It is not enough
for the court to find that such a term would have been adopted by the parties as
reasonable men if it had been suggested to them.

It must have been a term that went without saying, a term necessary to give
business efficacy to the contract, a term which, although tacit, forms part of the
contract", observed the judgment authored by Justice Gavai.

Applying this principle to the case, the Court observed that the findings of the
Tribunal and Commission that termination clause can be invoked only when there is
an agreement between the parties that there is violation of any of the conditions
specified is totally incorrect.

"If such an argument is accepted, it will amount to inserting a totally new condition
in Article 3.4.2 of the PPA and would amount to re-writing the contract between the
parties; it would do total violence to the provisions of Article 3.4.2 of the PPA",
observed the Court.

The Court held that such a reading by the Tribunal and Commission were not
warranted by the 'business efficacy test'.

Examining the facts of the case, it was found that the parties were in agreement
that power supply will be conditional on coal supply by GMDC.

"after the GMDC resiling from its commitment and refusing to enter into FSA with
the appellant, the appellant was justified in invoking Article 3.4.2 of the PPA, in view
of non-compliance of Condition No. (ii) in Article 3.1.2 since it had failed to produce
the Fuel Supply Agreement", said the Court.

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The Court allowed the appeal filed by Adani and held that compensatory tariff be
paid to Adani based on the principles of economic justice since Adani would have
incurred huge losses.

"In order to do economic justice, on the principle of business efficacy, the appellant
would be entitled for adjustment of cost of the project and would also be entitled to
the interest on the expenditure incurred by it for completion of the project. The
expenditure towards running of the project after obtaining the coal from the open
market would also be required to be taken into consideration," said the Court in
conclusion.

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