Commercial/civil law – substantive

Rules and industry standards

Describe any industry-standard form contracts used in the energy sector in your jurisdiction.

Until recently, contracts for exploration and exploitation of oil, including hydrocarbons, were granted under NELP, which was launched by the government in February 1999. NELP provided a broad policy framework for the grant of licences to parties chosen through competitive bidding to explore and exploit hydrocarbons. In view of various disputes between operators and the government under the NELP regime, NELP was replaced by HELP in 2016. Under HELP, the DGH has released a model revenue sharing contract (RSC) and a model reconnaissance contract (RC). The key difference between NELP and HELP is that the profit sharing mechanism under the former has now been replaced by a revenue-sharing model. Under the profit sharing model, profits were shared between the government and the contractor after recovery of cost. As the ascertainment of the cost incurred by the contractor was often controversial, this led to many delays and disputes. Under HELP, the government receives a share of the gross revenue from the project. Further, under NELP the government used to identify blocks and thereafter initiate competitive bidding to select a successful bidder, which led to delays. However, under HELP, any party can submit a suo motu EoI on the basis of the information available in the National Data Repository, a technical database of information on Indian sedimentary basins. On receipt of an EoI, the government will assess it against the qualification criteria outlined in HELP. Once an EoI is accepted, the government will conduct a competitive bid to award the block or area demarcated in such EoI for an RC or RSC, as the case may be.

The model RSC sets out the terms and conditions of the licence, such as the period of operation, contours of the work programme, rights and obligations of parties, environmental protection measures to be taken, confidentiality standards to be maintained, etc. The model RC regulates reconnaissance operations for all kinds of hydrocarbons for a period of two years.

Some other standard-form contracts include:

  • Fuel supply agreements released by Coal India Limited (CIL) that govern the purchase of coal from CIL and its subsidiaries. CIL is practically a monopoly in the commercial mining of coal as mines allocated to the private sector are typically for an exclusive pre-specified end use.
  • Model design-build-finance-own-operate (DBFOO) and design-build-finance-own-transfer (DBFOT) contracts have been issued by the MoP for long-term procurement of thermal power by distribution utilities. Under the DBFOO model, a licensed distribution licensee invites bids to procure a fixed quantum of power, while also prescribing the type of fuel and technology that is to be used for such supply. Under the DBFOT model, one or multiple government agencies may collectively invite bids for setting up projects on the basis of the lowest tariff, while also specifying the fuel and location of the project (which is required to be arranged by the government agency).
  • On 3 August 2017, the MoP notified the Guidelines for Tariff Based Competitive Bidding Process for Procurement of Power from Grid Connected Solar PV Power Projects, whereby power purchase agreements and power supply agreements have been standardised for competitive bids.

What rules govern contractual interpretation in (non-consumer) contracts in general? Do these rules apply to energy contracts?

The substantive law regulating contracts in India is the Indian Contract Act 1872 (ICA). The first principle that Indian courts typically bear in mind while construing commercial contracts is to give effect to the explicit words used by the parties. Where the words used in a contract are clear, Indian courts refrain from resorting to external aids of interpretation. However, when multiple interpretations are permissible, courts typically construe a term considering the meaning that the word has acquired in established trade usage. Further, commercial contracts are generally construed in a harmonious fashion, to ensure that the interpretation of one part of the contract does not do violence to other parts. Another principle that is applied in the construction of commercial contracts is the contra proferentem rule. In accordance with this rule, any ambiguity in a contractual provision has to be construed against the party that drafted the contract. This rule is particularly relevant in the Indian energy sector as the majority of contracts are standard form agreements drafted by the government.

Where the explicit terms of a contract are unclear as to the intention of the parties, courts occasionally apply the ‘business efficacy’ test, which is an interpretation to achieve the purpose intended by the parties acting as prudent businessmen. The Indian Supreme Court has recently held in its judgment in Nabha Power Limited v Punjab State Power Corporation Limited & Anr (2018) 11 SCC 508, that implied conditions may be read in to interpret a contract in five limited circumstances:

  • when the same appears reasonable and equitable;
  • when it is necessary to give business efficacy to the contract;
  • when such words go without saying;
  • when the conditions are capable of clear expression; and
  • the conditions must not contradict any express term of the contract.

The ejusdem generis rule is also regularly invoked by Indian courts to interpret general phrases appearing at the end of list of specific terms forming part of the same class or category of terms. The construction of such a generic phrase is limited by the subject matter and context of the specific terms. The ejusdem generis rule is a facet of the broader noscitur a sociis rule, which stipulates that a term must be interpreted in the context of the terms associated with it, unless a contrary intention appears from the contract.

Describe any commonly recognised industry standards for establishing liability.

In oil and gas contracts, such as the model RSC under HELP, contractors are obligated to adopt Good International Petroleum Industry Practices (GIPIP). In 2016, the DGH released a consolidated list of what constitutes GIPIP in key areas, such as: exploration and operations; discovery; production; health, safety and environment; and procurement procedure. Similarly, the erstwhile model PSC contained the concept of reasonable prudent operator, which held an operator to a standard equivalent to a reasonable operator in the same or similar circumstances. Besides GIPIP in HELP, a key parameter against which the conduct of most stakeholders in the energy sector is assessed is ‘prudent utility practices’. Typically, these are defined as internationally accepted best practices adopted by similarly placed operators, which account for the operation and maintenance guidelines provided by original equipment manufacturers; the requirements of applicable law; the physical conditions of the site; and the safety of the environment and personnel. Claims for exemption from liability would need to be substantiated by establishing that an operator acted with reasonable care and foresight by doing all in its power to avoid the occurrence of any injury or accident by following internationally accepted best practices.

Indian courts have construed the term ‘wilful misconduct’ to mean misconduct that is of a more serious nature than misconduct simpliciter, and must therefore satisfy a higher threshold. The Supreme Court in Shiv Nath Rai Ram Dhari and Ors v Union of India AIR 1965 SC 1666 has construed misconduct to mean ‘mere negligence or omission would not be enough but that negligence or omission should be such that a businessman would say that it amounted to bad management or mismanagement’.

Further, a party undertaking an energy project is also required to be cognizant of relevant environmental law standards as it can be held liable for any environmental damage resulting from its actions. Indian courts have recognised some important principles in this regard. As per the precautionary principle, an entity undertaking any operations that have environmental consequences is bound to take all precautionary measures permissible to ensure that its actions do not result in the causation of any environmental damage. Similarly, as per the polluter pays principle, if any negative environmental consequences result from the actions of a party, it is duty bound to pay for the same.

As per article 14 of the model RSC under HELP, an energy developer is required to take necessary and adequate steps to prevent or minimise environmental damage, provide adequate compensation to those affected and ensure that its operations are conducted in an environmentally safe and acceptable manner. These obligations have also been imposed on energy developers conducting reconnaissance operations under article 16 of the model RC.

Performance mitigation

Are concepts of force majeure, commercial impracticability or frustration, or other concepts that would excuse performance during periods of commodity price or supply volatility, recognised in your jurisdiction?

Yes. The concepts of force majeure and frustration are recognised under Indian law. However, commercial impracticability or the coming into existence of more onerous commercial conditions is not recognised as a valid basis to excuse performance. The Supreme Court has held in the case of M/s Dhanrajamal Gobindram v Shamji Kalidas 1961 AIR 1285 that a force majeure event is one that is beyond the control of the parties. Further, a party must take all possible measures to mitigate the impact of a force majeure event, and cannot claim relief for such periods by which it ought to have recovered from the effects of a force majeure event.

A comprehensive force majeure clause finds mention in the HELP model RSC (article 29) and model RC (article 13). These articles are identically worded. The article clarifies that a party is exempted from any liability flowing from a delay in performing its obligation or for non-performance if the reason for such delay or non-performance is a force majeure event. The key parameter for ascertaining if an event constitutes force majeure is if it was entirely beyond the control of the party in question and the article sets out a non-exhaustive indicative list of the same. It bears noting, however, that the mere unavailability of funds is expressly excluded from the definition of force majeure. Force majeure relief is typically contingent on the prompt provision of adequate notice to the counterparty within a fixed time frame of the occurrence of the event, setting out the details of the event and its consequences.

Section 56 of the ICA absolves a party of the obligation to perform a contract when its performance becomes impossible (ie, when the contract stands frustrated). In a leading judgment in the case of Energy Watchdog v Central Electricity Regulatory Commission and Ors (2017) 14 SCC 80, the Supreme Court held in the context of a power purchase agreement that relief for force majeure cannot be sought solely on the ground of performance of a contract becoming more commercially onerous. If alternative modes of performance remain open, the doctrines of force majeure or frustration do not come into play.

Following the Energy Watchdog v Central Electricity Regulatory Commission and Ors (2017) 14 SCC 80 judgment, the state government of Gujarat set up a three-member high-powered committee on 3 July 2018 to find solutions for the three thermal power plants located in the state that were facing closure due to unviability. The committee has recommended measures that would, inter alia, pass on the cost of the force majeure events to consumers through tariffs. On the basis of the recommendations of the said high-level committee, the Supreme Court has granted the three generators liberty to approach the Central Electricity Regulatory Commission for approval of amendments to their existing power purchase agreements to enable their continued viability.

Nuisance

What are the rules on claims of nuisance to obstruct energy development? May operators be subject to nuisance and negligence claims from third parties?

In India, nuisance constitutes a crime as well as a tort. Under section 268 of the Indian Penal Code 1860 (IPC), any person who engages in any conduct that causes any common injury, danger or annoyance to the public is guilty of public nuisance. The Criminal Procedure Code, 1973 lays down the procedural scheme for punishing a party for committing public nuisance. Whenever the appropriate magistrate arrives at a finding that any activity is causing public nuisance, he or she is empowered to issue a conditional order for the stoppage of such activity. After hearing the accused, the magistrate is empowered to make such order absolute. Further, the Magistrate is authorised to prohibit the continuation of the public nuisance, an unlawful act; and damage, actual or presumed.

In the realm of tort law, a civil suit can be filed under the Civil Procedure Code 1908 (CPC) against any party committing public nuisance. The Advocate General or two or more persons with the consent of the Advocate General, even if they are not specially impacted by the nuisance, can institute such a suit. The relief of a declaration that the practice in question constitutes nuisance or an injunction against those causing the nuisance can be sought. As per the Supreme Court’s judgment in Rafat Ali v Sugjani Bai (1999) 1 SCC 133, the following two parameters must be satisfied for proving the commission of nuisance: an unlawful act; and damage, actual or presumed.

Operators in the energy sector may also be held liable for negligence in certain cases. According to the Supreme Court’s judgment in Poonam Verma v Ashwin Patel (1996) 4 SCC 332, the following parameters must be established for proving the commission of negligence: a legal duty to exercise due care; breach of the duty; and consequential damages.

Consequently, an entity developing energy projects can be held liable for nuisance or negligence if it can be established that its conduct meets the aforementioned criteria by a third party.

Liability and limitations

How may parties limit remedies by agreement?

Parties have wide contractual freedom to limit available remedies, and courts are typically slow to override such freedom. However, damages are not awarded to penalise the party that has breached the contract, or to reward or confer any benefit or gain on the affected party, over and above the actual loss suffered by it. Liquidated damages clauses in respect of specific breaches of contract, general liquidated damages clauses and overall limitation of liability clauses are common in Indian energy contracts. That said, the Supreme Court’s judgment in Kailash Nath Associates v Delhi Development Authority (2015) 4 SCC 136 holds that liquidated damages can only be awarded if they are a genuine pre-estimate of the losses incurred. Even where a contract contemplates liquidated damages, if the extent of damages is ascertainable, the party affected by a breach would only be entitled to reasonable compensation. Thus, liquidated damages are treated as a maximum cap, subject to proving actual loss as a matter of evidence. The fundamental principle of damages for a breach of contract is that these are awarded to place the injured party in the same position in which it would have been, had the breach not occurred. Further, damages are awarded to compensate for losses that arise in the normal course of events because of the other parties’ breach and not for indirect or remote losses.

Under the ICA, an explicit prohibition is imposed on the ‘contracting out’ or waiver of certain rights, such as the right to judicial redress and the right to exercise a lawful profession, trade or business. Similarly, the Supreme Court has recently held in the case of All India Power Engineer Federation & Ors v Sasan Power Ltd & Ors (2017) 1 SCC 487 that where a bilateral waiver of any contractual right ultimately has an adverse impact on public interest, it will not be given effect to.

Under article 4.7 of the model RSC, the liability of a contractor is limited to any damage arising out of anything connected with the contract from the effective date of the contract up to the date of relinquishment. As per article 14.10, the liability of a contractor is confined to any damage that occurs to the environment after the effective date of the contract and is attributable to any act or omission of the contractor.

Is strict liability applicable for damage resulting from any activities in the energy sector?

Yes. Indian courts have evolved the concept of ‘absolute liability’, which is an even higher standard than strict liability. In the case of MC Mehta v Union of India (1987) 1 SCC 395, the Supreme Court transformed the doctrine of strict liability into absolute liability. As per the doctrine of absolute liability, where an entity is engaged in a hazardous or inherently dangerous activity, it is obligated to ensure that no harm results from such activity under any circumstances. Consequently, the entity must conduct its operations with the highest standards of safety, and it cannot escape liability by contending that it was not negligent.

The leading case where absolute liability was applied is the case of Union Carbide Corporation v Union of India 1990 AIR 273. The Supreme Court upheld the principle of ‘absolute liability’, which applies without limitation or exception and is applicable squarely to enterprises that are involved in hazardous or inherently dangerous activities. Unlike other tort claims where the remoteness of damage and the likelihood of its foreseeability is considered, in absolute liability, any person undertaking such hazardous activity will have to be prepared for the most unlikely situations as well. Undertaking exploration and drilling activities especially in eco-sensitive zones may attract the principle of absolute liability.

Under section 4(4) of the Civil Liability for Nuclear Damage Act (CLND Act), an operator is strictly liable for any damage arising out of a nuclear accident. As per section 6(2), the liability of such an operator is capped at 15 billion rupees. As per section 5(1) of the CLND Act, if the accident arises because of a force majeure event, like a natural disaster or armed conflict, the central government, and not the operator, is liable. The liability of the central government is capped at US$415 million. Further, section 5(2) of the CLND Act contains a proviso stating that any compensation liable to be paid by an operator for nuclear damage (payable in accordance with section 4 of the CLND Act) shall not have the effect of reducing the amount of its liability under any other Indian laws. Hence, it is possible for concurrent claims under the CLND Act, tort law and under Indian criminal law.