The case of Nabha Power Ltd. v Punjab State Power Corporation Ltd.  is of remarkable significance in the domain of Law of Contracts. After a comprehensive analysis of domestic and international jurisprudences, the court elucidated the methodology for the interpretation of implied terms in a contract. The Court opined in the concerned case, a five principled test that can be applied to determine what course of inference needs to be taken in bringing out the essence of the contract.
The vitality of the judgement lies in the court’s holding that is intended at minimizing the court’s own interpretative conscience, thereby imparting due credence to the standardized, principled tests and adherence to an objective sense. In clarifying the meaning of implied terms of the contract, the court did not rule out the significance of necessary implications in enforcing a contractual obligation. It only limits to the extent that any or all of such implications are not to be made unless they unequivocally constitute to be an element of the intent of both the parties to the contract. The comment endeavours to underscore the need to construe contractual terminologies, in the plainest sense unless the necessary implication is called for.
Facts of The Case
In order to install a power station in Punjab, an international bidding was held to select a developer to procure power by the ‘Punjab State Electricity Board’ (hereby referred to as PSEB). In this competitive bidding, L&T Power Development Ltd. stood out successfully and consequently acquired a complete holding of shares (100%) in Nabha Power Ltd. (hereby, “NPL”). Following this, NPL entered into a purchase agreement with the entity succeeding PSEB, the Punjab State Power Corporation Limited (hereby referred to as ‘PSPCL’) for the next 25 years which mandated the company to provide coal to PSPCL, for which it was supposed to receive monthly payments. However, when the first payment was made, there were deductions made by PSPCL in the expense report given by NPL, on the grounds that NPL was not entitled to certain costs, as they have not been covered under the agreement. Following this, a petition was filed by NPL before the ‘State Electricity Regulatory Commission’ that was dismissed by the body. NPL again filed a petition before Appellate Tribunal, which too was dismissed. Eventually, NPL moved the Supreme Court challenging the deductions.
Analysis of The Judgement
Clause of Contention
The contentious clause in the agreement was the ‘Charges Formulae Clause’, which garnered various interpretations. NPL in its claim for payment included the cost of washing the coal, transportation, storing and handling, and peripheral costs that included charges for shaping the coal in a requisite manner for transportation. On the other hand, PSPCL asserted that the cost of ‘washing’ was not an express part of the agreement and NPL was obligated to wash the coal before transporting. According to PSPCL, any incurred charge was bound to fall under three domains previously agreed upon: (a) Purchase (b) Transportation; and (c) Unloading. Since ‘washing’ does not squarely fall under any of these, they are not bound to pay for the same. Furthermore, the NPL underscored the changing GCV (‘Gross Calorific Value’) of the coal. It was contended that the value changed considerably during transportation, lasting for a span of four to five days. Thus, it was more accurate and sensible to measure it at the site of project establishment and not merely at the point of delivery. Also, the mode of transportation of the coal became a major point of contention between the parties. While the contractual clause only envisaged transportation by rail, the same was not possible due to railway siding projects of the Punjab government and thus NPL had to use both rail and road to complete the transportation. Consequently, it asserted that the due payment should be made irrespective of the mode of transportation.
The court after evaluating the factual matrix and underscoring reliance on various domestic and international jurisprudences, held that the charges to be paid include the cost of washing, transporting and storing the coal. However, peripheral charges like crushing and shaping the coal blocks cannot be reasonably inferred from the ‘charges clause’. The court noted that its arrival on the decision was premised on the nature of the contract and its intent to preserve the ‘business sense’ of the terms in the contract.
The court in reaching the conclusion derived a five-pointer test that must be met before implying terms in a contract:
a) The term should adhere to reasonability and equitability;
b) It should be seminal in imparting the business efficacy to the contract, leaving the contract ineffective, but for the implication;
c) Should be apparent enough to be concluded that ‘it goes without saying’;
d) Should carry the capability of being expressed clearly;
e) Should not be contradictory in nature to other express terms in the contract.
The court held that while it was the responsibility of NPL to arrange for the ‘washing’ of the coal, it in no sense means that the charges incurred for the same must be borne upon only by NPL. While laying down the test determining business efficacy, the principles (relying on The Moorcock case ) adhered to by the court project the objective normativity in contractual obligations. In other words, the interpretation should conform to the generic business sense. The court further emphasized the fact that the coal to be used in furtherance of the purpose could be nothing else but washed coal or it was a sine qua non for the requisite purposes of the project. Therefore, the state of coal required made it elemental to be washed and thus all reasonable charges incurred in the process of delivery are expected to be inclusive. In rejecting the demand for charges related to the shaping of the coal, the court held that since the clause in contention mentions transportation, storage and handling, any demand for charges should be incidental to these domains.
While giving due consideration to international jurisprudence, the court referred to the case of Shirlaw v. Southern Foundries , in elucidating the idea of ‘it goes without saying’. The test pictures a third party, evaluating the terminologies of the contract and expressing if the extracted inference goes without saying. In the scenario, implicating coal as washed coal, in furtherance to the purposes of the collection, unequivocally goes without saying. Delivering unwashed coal is no delivery at all because it cannot be used for the intended work. Furthermore, in the case of UOI v. M/S DN Revari & Co & Ors. , the court had held the need for any implication of a contractual term to be in conformity with the intent of the parties indulging in the obligation. Here too, the implication in no sense contradicts the intent with the contractual obligation between NPL and PSPCL was created.
Objectivity v. Subjectivity
An interesting aspect of the ruling involves the court’s address for the intention behind the contract or the subjective essence of a contract. Taking into account the five-point test based on significant principles, the court expressly highlighted the significance of express terms in a contract. In case of any contradiction that arises out of a conflict between plausible interpretations of implied terms and explicitly stated terms in a contract, the express terminology will outweigh. However, the court in reaching such a conclusion did not completely disregard the relevance of intentions and subjectivity in a contractual obligation that can pave the way for interpreting implied terms. In respect to this, the court stands opined that no interpretation of any term should be in blanket contradiction to the intent of the contract. The normative essence of a contract should be preserved at all costs.
Juxtaposing both objective and subjective narratives, in the determination of various interpretations of ambiguous or implied terms in a contract, the court clearly made it apparent through the rationale it adhered to, that an objective essence will unequivocally trump intention-based inference. In any contract, undecorated interpretations construed literally will be given more credence over peripheral interpretations insinuating the underlying intentions of the parties to the contract. In the given scenario, construing coal as ‘washed coal’ did not stretch the general ambit of interpretation. The coal to be used could only be washed coal and thus demanding charges for the same stands in conformity with the expected operations of the business. However, the claim of charges for shaping the coal brings in subjective interpretation but does not contribute to the business efficacy of the transaction. The shape of the coal does not restrict the act of transportation altogether. Transportation can be made irrespective of the shape and structure of the coal. Subjective interpretation should be taken into account when mere plain inference stands in apparent contradiction to the intent with which the parties indulged in a contractual obligation in the first place.
The court after paying due heed to material circumstances and the nature of the contractual obligation in Nabha Power Ltd. v. Punjab State Power Corporation Ltd  acknowledged the relevance of both kinds of interpretation, imparting cardinal significance to the objective essence of the contract. Modern-day contracts are meticulously crafted projecting unambiguous intentions of the parties through pellucid language and precise terminologies. It has commonly endeavoured that parties are made clear of all terms and essentials in the contract. Any implication that diverts substantially from the intended meaning of the contract, is no valid implication at all. The judgement provides relevant insights into the nature of meticulously crafted documentation and essentially cautions judicial interpretation to divert from the true sense of a contractual obligation. The court explicitly stated that it read the terms in the clause as it was and did not attempt to bring out expanded implications. It held that it was plain enough for it to impart the necessary and relevant meaning to the terms. Thus, the objective stance trumps any subjective implication as long as the need for such inference is imperative for executing the intent of the parties, with which they came into the contractual obligation.
- Civil Appeal No.179 of 2017
- (1889) 14 PD 64
-  AC 701
- 1977 SCR (1) 483
- Supra note 1
BY HARSH TRIPATHI | NALSAR UNIVERSITY OF LAW, HYDERABAD