Holding

The term 'fuel' in the PPA is to be interpreted as 'natural gas only in its natural form' and does not include Regasified Liquefied Natural Gas (RLNG).

Summary

The appellant, Transmission Corporation of Andhra Pradesh Ltd., challenged the respondent GMR Vemagiri Power Generation Ltd.'s use of Regasified Liquefied Natural Gas (RLNG) under a Power Purchase Agreement (PPA) originally amended to specify "fuel" as "natural gas only". The Supreme Court examined whether the term "fuel" in clause 1.1.27 included RLNG, considering the parties' correspondence, the commercial purpose of the contract, and the principle of business efficacy. It held that the parties intended the fuel to be natural gas in its natural form, expressly excluding RLNG, and that the contract could not be read to imply otherwise. The Court rejected the respondent's argument that RLNG was a variant of natural gas and that cost considerations made its exclusion unreasonable. Consequently, the appeal was allowed, overturning the Appellate Tribunal’s decision and affirming the Commission’s order.

Issues considered

The meaning of the term 'fuel' in clause 1.1.27 of the PPA – whether it means 'natural gas only' or includes RLNG.
Whether the definition of 'natural gas' under the PNGRB Act is relevant to the PPA interpretation.
Whether an implied term or business efficacy can be read into the contract to include RLNG.
Whether the appellant's refusal to accept RLNG amounts to waiver or the principle of approbate and reprobate.
Whether the cost differential between natural gas and RLNG influences the contractual intent.

Legislation cited

Andhra Pradesh Electricity Reforms Act, 1998s. 21(5)
Electricity Act, 2003s. 11
Petroleum and Natural Gas Regulatory Board Act, 2006s. 2(za)(i)

Subjects

contract interpretationpower purchase agreementfuel definitionnatural gasRLNGcommercial documentbusiness efficacywaiverelectricity law

Judgment

390 [2018] REPORTS
SUPREME COURT 10 S.C.R. 390 [2018] 10 S.C.R.

A TRANSMISSION CORPORATION OF ANDHRA PRADESH
LTD. AND OTHERS
v.
M/s. GMR VEMAGIRI POWER GENERATION LTD. AND
ANOTHER
B
(Civil Appeal No. 8747 of 2014)
FEBRUARY 16, 2018
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
Contract – Power Purchase Agreement (PPA) – Interpretation
C
of – Predecessor of the appellant, the Andhra Pradesh State
Electricity Board, in 1995 invited bids for establishing short gestation
gas/Naphtha/fuel oil based power stations – Respondent was a
successful bidder and had set up a power generation plant –
Pursuant to the same, a PPA was executed between the parties on
D 31.03.1997 under which Naphtha was the primary fuel and gas an
alternate fuel – In 2003, PPA was amended making gas the primary
fuel and Naphtha an alternate fuel – The PPA underwent further
amendment in 2007, restricting the term ‘fuel’ to ‘natural gas only’
– Respondent had sought permission to use Regasified Liquefied
Natural Gas (RLNG) as fuel for generating power as RLNG is a
E
form of natural gas – Whether the word ‘fuel’ as used in clause of
the PPA means ‘natural gas only’ or includes RLNG – Held: In the
event of any ambiguity arising, the terms of the contract will have
to be interpreted by taking into consideration all surrounding facts
and circumstances, including correspondence exchanged, to arrive
F at the real intendment of the parties, and not what one of the parties
may contend subsequently to have been the intendment or say as
included afterwards – The respondent’s letters to appellant
specifically requested for permission to use RLNG to supplement
shortfall in gas, requesting to acknowledge its usage – Appellant in
its reply explicitly stated that under the agreement no other fuel
G
except natural gas could be used and that RLNG was never
contemplated in the definition of fuel declining to accept the spot
supply agreement for RLNG supplies, citing the cost of power per
unit from the same (RLNG) more costly in comparison to per unit
cost from natural gas – Therefore, the intention of the parties under
H the agreement, as amended from time to time, was to generate power
390
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 391
VEMAGIRI POWER GENERATION LTD.

from fuel reasonably priced, so as to ultimately make available power A
to the consumers at reasonable rates – The choice of fuel as natural
gas only has, therefore, to be understood as being confined to
natural gas only in its natural form – The respondent was well aware
that RLNG was never intended to be included in the definition of
natural gas as understood by parties, notwithstanding that it may
B
be a variant of natural gas – Petroleum and Natural Gas Regulatory
Board Act, 2006 – s.2(za)(i).
Deeds and Documents – Commercial Document –
Interpretation of – Held: A commercial document cannot be
interpreted in a manner to arrive at a complete variance with what
may originally have been the intendment of the parties – Such a C
situation can only be contemplated when the implied term can be
considered necessary to lend efficacy to the terms of the contract –
If the contract is capable of interpretation on its plain meaning
with regard to the true intention of the parties it will not be prudent
to read implied terms on the understanding of a party, or by the D
court, with regard to business efficacy
Allowing the appeal, the Court
HELD: 1. It will not be a safe method to interpret a contract
by picking out one clause of the same defining fuel, apply a
technical scientific meaning to it and then conclude that being a E
form of natural gas, Regasified Liquefied Natural Gas (RLNG)
was intended to be impliedly included in the definition of fuel.
The terms of a contract have to be given their plain meaning with
regard to the intendment of the parties as to what was intended
to be included and what was not intended to be included, as distinct F
from an express exclusion. The commercial parlance test will
also have to be applied as to whether those in the business
consider the two forms of gas as synonymous and interchangeable.
Quite obviously the answer has to be in the negative considering
the importation of RLNG, additional processes involved and the
consequent higher costs involved. [Para 19] [403-A-C] G
2. In the event of any ambiguity arising, the terms of the
contract will have to be interpreted by taking into consideration
all surrounding facts and circumstances, including correspondence
exchanged, to arrive at the real intendment of the parties, and
not what one of the parties may contend subsequently to have H
392 SUPREME COURT REPORTS [2018] 10 S.C.R.

A been the intendment or to say as included afterwards. [Para 20]
[403-D]
Bank of India & Anr. v. K. Mohandas & Ors. (2009) 5
SCC 313 : [2009] 5 SCR 118 – relied on.
3. The respondent’s letters dated 07.08.2012 and
B 27.08.2012 become crucially relevant for the understanding that
it was itself under no misapprehension that RLNG was never
intended to be included within the definition of natural gas under
the contract. The respondent requested for permission to use
RLNG to supplement shortfall in gas from the KG-D6 Basin,
C requesting to acknowledge its usage. The contention of the
respondent that these were only intimations and not request for
permission to use RLNG stands belied from the plain language
used in them. The appellant in its reply dated 10.09.2012 explicitly
stated that under the agreement no other fuel except natural gas
could be used and that RLNG was never contemplated in the
D definition of fuel declining to accept the spot supply agreement
for RLNG supplies, citing the cost of power per unit from the
same at Rs.9-10 in comparison to Rs.3/- per unit from natural
gas. It is only thereafter the respondent approached the
Commission. The pleadings of the respondent further confirm
E its own understanding that RLNG was never intended to be
included in the definition of fuel which was confined to natural
gas. [Para 21] [403-G-H; 404-A-C]
4. The sporadic use of RLNG on one or two occasions under
pressing circumstances, after due orders under Section 11 of the
F Electricity Act, 2003, for short durations, cannot make the
exception the norm to contend either that RLNG was included in
the term fuel or that the appellant had agreed to its use. The
question of waiver by the appellant or application of the principle
of approbate and reprobate does not arise in the facts of the case.
[Para 22] [404-F-G]
G
5. The present was a contract for purchase of power
generated from fuel which was reasonably priced so as to keep in
check the cost of power generated from the same, in the interest
of the consumer. Undoubtedly, cost of fuel was a primary
consideration in the mind of the appellant. The contextual
H background in which the PPA originally came to be made, the
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 393
VEMAGIRI POWER GENERATION LTD.

subsequent amendments, the understanding of the respondent A
of the agreement as reflected from its own communications and
pleadings make it extremely relevant that a contextual
interpretation be given to the question whether RLNG was ever
intended to be included within the term “Natural Gas”. [Para 23]
[404-G-H; 405-A-B]
B
Bihar State Electricity Board v. Green Rubber Industries,
(1990) 1 SCC 731 : [1989] 2 Suppl. SCR 275 –
referred to.
6. In the facts and circumstances of the present case, there
can be no manner of doubt that the parties by their conduct and C
dealings right up to the institution of proceedings by the
respondent before the Commission were clear in their
understanding that RLNG was not to be included within the term
“Natural Gas” under the PPA. [Para 24] [405-C-D]
Gedela Satchidananda Murthy v. Dy. Commissioner, D
Endowments Department, A.P. & Ors., (2007) 5 SCC
677 : [2007] 6 SCR 762 – relied on.
7. A commercial document cannot be interpreted in a
manner to arrive at a complete variance with what may originally
have been the intendment of the parties. Such a situation can E
only be contemplated when the implied term can be considered
necessary to lend efficacy to the terms of the contract. If the
contract is capable of interpretation on its plain meaning with
regard to the true intention of the parties it will not be prudent to
read implied terms on the understanding of a party, or by the
court, with regard to business efficacy. [Para 25] [405-H; F
406-A-B]
Satya Jain (D) thr. Lrs. & Ors. v. Anis Ahmed Rushdie
(D) thr. Lrs. & Ors. (2013) 8 SCC 131 : [2013]
3 SCR 319 – relied on.
G
8. Therefore, it leads to the inevitable conclusion that the
intention of the parties under the agreement, as amended from
time to time, was to generate power from fuel reasonably priced,
so as to ultimately make available power to the consumers at
reasonable rates. The choice of fuel as natural gas only has,
therefore, to be understood as being confined to natural gas only H
394 SUPREME COURT REPORTS [2018] 10 S.C.R.

A in its natural form. The respondent was well aware that RLNG
was never intended to be included in the definition of natural gas
as understood by the parties, notwithstanding that it may be a
variant of natural gas. [Para 27] [407-H; 408-A-B]
Polymat India (P) Ltd. & Anr. v. National Insurance Co.
B Ltd. & Ors. (2005) 9 SCC 174 : [2004] 6 Suppl.
SCR 535; Timblo Irmaos Ltd., Margo v. Jorge Anibal
Matos Sequeira & Anr. (1977) 3 SCC 474 : [1977]
2 SCR 451; Sappani Mohamed Mohideen and Anr. v.
R. V. Sethusubramania Pillai and Ors., (1974) 1 SCC
615 : [1974] 2 SCR 594; Trutuf Safety Glass Industries
C v. Commissioner of Sales Tax, U.P. (2007) 7 SCC 242 :
[2007] 8 SCR 860; The Union of India v. M/s. D. N.
Revri and Co. and Ors. (1976) 4 SCC 147 : [1977]
1 SCR 483; Nabha Power Ltd. v. Punjab State Power
Corporation Ltd. & Anr. (2017) SCC Online 1239;
D Bharat Aluminum Company v. Kaiser Aluminum
Technical Services Inc., (2016) 4 SCC 126 : [2016] 1
SCR 364; Association of Natural Gas & Ors. v. Union
of India & Ors. (2004) 4 SCC 489 : [2004] 3 SCR 534;
Khardah Company Ltd. v. Raymon & Co. (India) Private,
Ltd. [1963] 3 SCR 183 – referred to.
E
Case Law Reference
[2004] 6 Suppl. SCR 535 referred to Para 10
[2007] 6 SCR 762 relied on Para 10
[1977] 2 SCR 451 referred to Para 10
F
[1974] 2 SCR 594 referred to Para 10
[2007] 8 SCR 860 referred to Para 10
[1977] 1 SCR 483 referred to Para 10
[2016] 1 SCR 364 referred to Para 10
G
[2004] 3 SCR 534 referred to Para 14
[1963] 3 SCR 183 referred to Para 18
[2009] 5 SCR 118 relied on Para 20
[1989] 2 Suppl. SCR 275 referred to Para 23
H [2013] 3 SCR 319 relied on Para 25
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 395
VEMAGIRI POWER GENERATION LTD.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8747 A
of 2014
From the Judgment and Order dated 30.06.2014 of the Appellate
Tribunal for Electricity in Appeal No. 222 of 2013.
Basava Prabhu S. Patil, Sr. Adv., Ms. Prerna Singh, Guntur
Prabhakar, Geet Ahuja, Advs. for the Appellants. B

Vikas Singh, Sr. Adv., Amit Kapur, Ms. Apporva Mishra, Ms.
Raveena Dhamija, Ms. Deepika Kalia, Ms. Rahat Sharma, Shiv Ram
Pandey, Pukhrambam Ramesh Kumar, Advs. for the Respondents.
The Judgment of the Court was delivered by C
NAVIN SINHA, J. 1. The controversy for determination in the
present appeal is, whether the word ‘fuel’ as used in clause 1.1.27 of the
Power Purchase Agreement (hereinafter referred to as ‘PPA’) means
“natural gas only” or includes Regasified Liquefied Natural Gas
(hereinafter referred to as ‘RLNG’) also. D
2. The Andhra Pradesh Electricity Regulatory Commission
(hereinafter referred to as “the Commission”), in O.P. No. 20 of 2013
dated 08.08.2013, preferred by the respondent, held that the term ‘fuel’
as used in the PPA meant natural gas only in its natural form, and did not
include RLNG. Simply because the physical composition of natural gas
E
and RLNG are similar, it does not automatically entitle the respondent to
generate power with RLNG, which was more expensive and not
domestically available, affecting the per unit supply of power generated
by it, as ultimately the consumer would have to pay more.
3. In Appeal No. 222 of 2013 preferred by the respondent, the
F
Appellate Tribunal by the impugned order dated 30.06.2014 held that
use of the word “only” after “natural gas” in the PPA dated 02.05.2007
had to be understood in context of the deletion of other alternate fuel
such as Naphtha etc. incorporated in the earlier PPAs, and it was never
intended to restrict the meaning of the word natural gas to exclude RLNG,
which was a variant of natural gas and did not come in the category of G
an alternate fuel. It further held that the higher price of RLNG could not
be a determinative factor to exclude it from the agreement as any increase
in price of gas was an accepted risk, especially in view of the non-
availability of natural gas from the KG-D6 basin. The use of RLNG had
also been permitted on earlier occasions without any amendment to the
PPA. H
396 SUPREME COURT REPORTS [2018] 10 S.C.R.

A 4. The predecessor of the appellant, the Andhra Pradesh State
Electricity Board, in May, 1995 invited bids for establishing short gestation
gas/Naphtha/fuel oil based power stations to bridge the demand supply
gap of power in the State of Andhra Pradesh. Pursuant to the same, a
PPA was executed between the parties on 31.03.1997 under which
Naphtha was the primary fuel and gas an alternate fuel. Considering
B
the high price of Naphtha, in March 2000, the Government of Andhra
Pradesh decided to make gas the primary fuel. The Ministry of Petroleum
on 05.06.2000 allotted 1.64 MMSCMD of natural gas to the respondent
from the KG-D6 Basin sourced through the Gas Authority of India Ltd
(GAIL), leading to a gas supply agreement dated 31.08.2001 between
C the respondent and the latter. The PPA was accordingly amended on
18.06.2003 making gas the primary fuel and Naphtha an alternate fuel.
The PPA underwent further amendment on 02.05.2007, restricting the
term ‘fuel’ to “natural gas only”. A comparative status of the three PPA’s
can beneficially be set out as follows:
D PPA dated Amendment Amendment
31.03.1997 Agreement to the Agreement dated
PPA dated 02.05.2007
18.06.2003

E
“1.1.27) “Fuel: 1.1.27) “Fuel: means 1.1.27) “Fuel: means
means gas, Naptha, Natural Gas that is Natural Gas only.”
low sulphur heavy intended to be used
stock or furnace oil, as primary fuel by
and the like, that is one or more units of
F intended to be used the project to generate
as primary fuel, by or in case of
one or more units of unavailability of
the Project to primary fuel, Naptha
generate power from or Low Sulphur heavy
G the Project or in case stock and the like as
of unavailability of alternate fuel.”
Naptha any of the
above as alternate
fuel.”
H
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 397
VEMAGIRI POWER GENERATION LTD. [NAVIN SINHA, J.]

5. GAIL having been unable to supply gas under the agreement A
due to prioritisation of other sectors, the respondent was permitted to
purchase natural gas from M/s. Reliance Industries Ltd (RIL) at GAIL
prices. The respondent, on 07.08.2012 and 27.08.2012, sought permission
to allow use of RLNG as fuel for generating power. The appellant
rejected the request on 10.09.2012 stating that under the PPA dated
B
02.05.2007, fuel meant “natural gas only” and did not include RLNG,
which was priced much higher affecting the per unit price of power
generated from the same to the ultimate detriment of the consumers.
6. Shri Basava Prabhu Patil, learned senior counsel appearing for
the appellant, submitted that under the PPA, it was only natural gas in its
natural form which was agreed to be used as fuel for generation of C
power. Merely because RLNG may be a variant of natural gas, will not
suffice to bring it within the definition of fuel under the PPA. The cost
of RLNG being three to four times higher than natural gas, the
Commission rightly held that it was also a relevant factor to hold that
RLNG was never intended by the parties to be included in the agreement. D
dated 7. The word ‘fuel’, as defined in the agreement, had to be given
its natural meaning by confining it to natural gas only as intended by the
parties. The definition could not be extended so as to include RLNG, as
the parties never intended the same. There is no ambiguity in language
warranting any inclusion to the definition either by implication or intention. E
means Even if there was any ambiguity with regard to the intendment of the
nly.” parties, the true intent has to be gathered from the plain meaning of the
words used, read conjunctively with all surrounding circumstances and
documents. Applying the common parlance test, RLNG was not
synonymous with natural gas in the business and neither interchangeable,
because of the additional processes required in the latter and the resultant F
higher cost involved including importation, as distinct from natural gas
available at a lesser price and domestically.
8. Under the PPA dated 31.03.1997, Naphtha was the primary
fuel and gas was an alternate fuel. Clause 3.3 dealing with energy
charge defined cost of fuel based on indigenous and importation cost. G
The PPA contemplated approval of the fuel supply agreement by the
fuel supply committee, to ensure reasonable prices as the cost of power
generation was of paramount consideration in the interest of the
consumer. The cost of Naphtha being higher, the PPA came to be
H
398 SUPREME COURT REPORTS [2018] 10 S.C.R.

A amended on 18.06.2003 making natural gas the primary fuel, and Naphtha
an alternate fuel. If RLNG was in contemplation of the parties, and was
considered to fall within the term natural gas, there would have been
some discussion regarding it in the deliberations of the Commission while
approving the amendments to the PPA, especially in view of the price
difference. Such absence makes it manifest that the parties never
B
intended to include RLNG in the term natural gas. The significance of
the words “only” after “natural gas” in the third PPA dated 02.05.2007
cannot be lost sight of. It was necessitated in context of the realization
that the parties may have resorted to other costly alternate fuels
consequent to the dismantling of the administered price mechanism and
C the fuel supply committee.
9. The fact that RLNG may have been permitted to be used for a
short period of seven days from 16.04.2009 to 23.04.2009 under pressing
circumstances of a power crisis, by special orders under Section 11 of
the Electricity Act, 2003 or again for a short duration from 15.02.2011 to
D 31.05.2011 cannot be stretched to contend that RLNG was intended to
be included within the term natural gas. The cost of power generated
from natural gas was Rs.1.75 per KWH while that from RLNG works
out to Rs.4.63 per KWH and the financial burden for this short duration
is Rs.427 crores. In March and April use of RLNG was permitted at
per unit generation cost of Rs.9/- compared to Rs.3/- per unit with existing
E natural gas leading to a financial burden of Rs.3.7 crores per day. These
exceptions can never be construed to mean the norm to contend that
use of RLNG was always in the contemplation of the parties and was
intended to be included within the term natural gas. The very fact that
the respondent sought permission on 07.08.2012 and 27.08.2012 to use
F RLNG for power generation makes it manifest that even as per its
understanding, RLNG was not included within the term natural gas
according to the intent of the parties. The appellant in its reply dated
10.09.2012 had reiterated that RLNG did not fall within the ambit of the
PPA which was confined to natural gas only citing the cost difference of
power per unit also.
G
10. A contract document had to be interpreted in accordance with
the language used, with reference to the context in which it came to be
prepared. A technical view of an agreement, torn out of context, cannot
be taken to reinterpret the agreement and arrive at a new finding with
regard to the intendment of the parties by including something which
H
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 399
VEMAGIRI POWER GENERATION LTD. [NAVIN SINHA, J.]

was never intended to be included, to the prejudice of a party to the A
contract, while giving an undue advantage to the other. A primary
consideration will also be the understanding of the parties of the terms
of the contract and what was intended, as reflected inter alia from their
conduct. The contract being a commercial document, utmost importance
had to be given to its efficacy. Shri Patil, in support of the submissions
B
placed reliance on Polymat India (P) Ltd. & Anr. vs. National
Insurance Co. Ltd. & Ors., 2005 (9) SCC 174, Gedela Satchidananda
Murthy vs. Dy. Commissioner, Endowments Department, A.P. &
Ors., 2007 (5) SCC 677, Timblo Irmaos Ltd., Margo vs. Jorge Anibal
Matos Sequeira & Anr., 1977 (3) SCC 474, Sappani Mohamed
Mohideen and Anr. vs. R.V. Sethusubramania Pillai and Ors., 1974 C
(1) SCC 615, Trutuf Safety Glass Industries vs. Commissioner of
Sales Tax, U.P., (2007) 7 SCC 242, The Union of India vs. M/s. D.N.
Revri and Co. and Ors., 1976 (4) SCC 147, Nabha Power Ltd. vs.
Punjab State Power Corporation Ltd. & Anr., 2017 SCC Online 1239
and Bharat Aluminum Company vs. Kaiser Aluminum Technical
D
Services Inc., 2016 (4) SCC 126.
11. Shri Vikas Singh, learned senior counsel appearing for the
Respondent, submitted that the original bid documents permitted import
of fuel also, and fuel tie up linkage was the responsibility of the bidder.
The Respondent invested approximately Rs.1153.10 crores in setting up
the power generation plant, of which, 68.29% of the funding was from E
banks and financial institutions. The plant has operated intermittently for
approximately 64 months only in the last 11 years. The conduct of the
appellant in not accepting availability declaration with regard to RLNG
was unjustified. The appellant was well aware of the possibility of future
hike in gas prices, and more particularly after dismantling of the F
administrated price mechanism inclusive of inflation, all of which would
make the gas prices market driven. Therefore, merely because the cost
of RLNG was higher could not be a ground to contend that it was never
intended to be included within the definition of natural gas or was contrary
to interest of the consumer. RLNG was but a form of natural gas,
compressed for transformation from gaseous to liquid state, reducing G
the volume to facilitate transportation in a safe and stable manner. Once
delivered at the destination, it is regasified and then supplied to the
consumer. Even according to the dictionary meaning they are the same.

H
400 SUPREME COURT REPORTS [2018] 10 S.C.R.

A 12. The deletion of the words “intended to be used” after the
words “natural gas”, as used in the second PPA, and the replacement
thereof in the third PPA by the words “natural gas only” gave a much
wider meaning and amplitude to the word natural gas so as to take within
its ambit RLNG also. The deletion of “importation charges” in the PPA
dated 18.06.2003 was of no significance as RLNG was to be delivered
B
at the project site through the pipeline, and the cost of fuel was to be at
the metering point at the project site, which would be inclusive of
importation cost. Evidently there would be no separate charges by GAIL
towards importation of RLNG. So long as the supplies were at GAIL
prices, the appellants cannot raise objections with regard to price.
C 13. The term natural gas has not been defined under the PPA.
The definition of natural gas in Section 2(za)(i) of the Petroleum and
Natural Gas Regulatory Board Act, 2006 (hereafter referred to as the
“PNGRB Act”) includes both liquefied natural gas (LNG) and RLNG.
The appellants on more than one occasion had themselves permitted
D use of RLNG for production of power in 2011, 2012 and 2013. It is
demonstrative of the fact that RLNG was never intended to be excluded
under the PPA. It was only when the respondent wrote to the appellant
for operationalising the RLNG scheme, that the appellant replied on
27.03.2015 raising objection to RLNG being outside the terms of the
PPA. The respondent had never sought permission from the appellant
E for use of RLNG by its letters dated 07.08.2012 and 27.08.2012, but
merely given intimation about what was otherwise permissible under the
PPA. After the dismantling of the administered price mechanism and
the fuel Supply Committee, there was no requirement for consent or
approval of the appellant.
F 14. The appellant having itself permitted use of RLNG on more
than one occasion, cannot contend its exclusion especially when the
agreement clearly is suggestive of its inclusion. Alternately, there had
been waiver on part of the appellant by having permitted its use on more
than one occasion. The appellant cannot be permitted to approbate and
G reprobate. Natural gas had been defined in Association of Natural
Gas & Ors. vs. Union of India & Ors., 2004 (4) SCC 489. The plea
that power generated by RLNG would be more costly and not in the
interest of the consumer is belied by the fact that today the appellant is
purchasing power at higher rate. The Director General, Petroleum
Planning and Analysis Cell had now fixed price for marketing including
H
TRANSMISSION CORPORATION OF A. P. LTD. v. M/s. GMR 401
VEMAGIRI POWER GENERATION LTD. [NAVIN SINHA, J.]

pricing freedom for gas to be produced from discoveries in deepwater, A
ultra-deepwater and high pressure-high temperature areas for the period
01.04.2016 to 31.09.2016 at US$ 6.61/MMBTU on GCV basis. On
05.05.2016, the respondent wrote to the appellant informing that GAIL
had communicated that ONGC has indicated availability of the gas in
the KG basin from its deepwater fiels-S1 and VA fields at the rate of
B
6.3$/MMBTU even which has not been acceded to, as being beyond
the PPA.
15. We have considered the submissions on behalf of the parties,
and are not in agreement with the conclusions of the Appellate Tribunal.
16. The original PPA dated 31.03.1997, provided for Naphtha to C
be used as the primary fuel for generation of power and gas was an
alternate fuel. Importation was also permissible. The price was to be
fixed by the fuel supply committee, both to keep it reasonable, and to
ensure that the cheaper option was always used. In March 2000, the
Government of Andhra Pradesh, due to the cost factor, decided to replace
gas as the primary fuel, and Naphtha was made an alternate fuel leading D
to allotment of natural gas by the Ministry of Petroleum and execution
of an agreement between the respondent and GAIL. The PPA was then
amended on 18.06.2003 making gas the primary fuel. Subsequently,
when GAIL was unable to supply the allocated quantities of natural gas
to the respondent because of sector prioritisation, the respondent was E
permitted to obtain supplies of natural gas from RIL. The realisation
that in the circumstances, the generator could resort to use of other
costly fuels also, led to the third amended PPA dated 02.05.2007 confining
the definition of ‘fuel’ to “natural gas only”.
17. It is relevant to notice that at both stages of the amendment to F
the PPA, in the proceedings before the Commission under Section 21(5)
of the Andhra Pradesh Electricity Reforms Act, 1998, the parties never
referred to the availability of RLNG as fuel contemplated within the
term “natural gas” and the discussion was confined to “natural gas only”.
Had the parties intended otherwise, or the respondent had any such
inkling in mind of RLNG being a variant of natural gas and consequently G
intended to be included in it, coupled with its availability as compared to
natural gas, surely it would have figured in the discussion before the
Commission. The absence of the same, combined with RLNG having
to be imported, deletion of the importation clause in the PPA of 18.06.2003,
H
402 SUPREME COURT REPORTS [2018] 10 S.C.R.

A the higher price of RLNG, leads to the inevitable conclusion that it was
never in the contemplation of the parties that RLNG was to be included
in the term “natural gas” even though it may be a variant of the same. It
stands to reason that if Naphtha was removed as primary fuel because
of the cost factor and made an alternate fuel in the second amendment
to the PPA, the question of RLNG being included within the term of
B
“natural gas only” irrespective of the cost factor, will not stand the test
of reason.
18. A wrong question will inevitably lead to a wrong answer. The
question for consideration presently is not if RLNG is a form of natural
gas, but whether the parties intended to exclude any form of gaseous
C fuel from the ambit of the contract except for natural gas in its natural
form from the domestic market, keeping the price of gas in mind, which
would ultimately set the price per unit of electricity for the consumer.
The PPA is a technical commercial document. It has been drafted by
persons conversant with the business. RLNG and natural gas as used in
D the agreement are not synonymous or interchangeable. The principle of
business efficacy will also have to be kept in mind for interpreting the
contract. The terms of the agreement have to be read first to understand
the true scope and meaning of the same with regard to the nature of the
agreement that the parties had in mind. It will not be safe to exclude any
word in the same. In Khardah Company Ltd. vs. Raymon & Co.
E (India) Private, Ltd., 1963 (3) SCR 183, on interpretation of a contract
it was observed as follows:
“18. … We agree that when a contract has been reduced to writing
we must look only to that writing for ascertaining the terms of the
agreement between the parties but it does not follow from this
F that it is only what is set out expressly and in so many words in
the document that can constitute a term of the contract between
the parties. If on a reading of the document as a whole, it can
fairly be deduced from the words actually used therein that the
parties had agreed on a particular term, there is nothing in law
G which prevents them from setting up that term. The terms of a
contract can be expressed or implied from what has been
expressed. It is in the ultimate analysis a question of construction
of the contract. And again it is well established that in construing
a contract it would be legitimate to take into account surrounding
circumstances…”
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19. It will not be a safe method to interpret a contract by picking A
out one clause of the same defining fuel, apply a technical scientific
meaning to it as observed in Truetuf Safety Glass Industries (supra)
and then conclude that being a form of natural gas, RLNG was intended
to be impliedly included in the definition of fuel. The terms of a contract
have to be given their plain meaning with regard to the intendment of the
B
parties as to what was intended to be included and what was not intended
to be included, as distinct from an express exclusion. The commercial
parlance test will also have to be applied as to whether those in the
business consider the two forms of gas as synonymous and
interchangeable. Quite obviously the answer has to be in the negative
considering the importation of RLNG, additional processes involved and C
the consequent higher costs involved.
20. In the event of any ambiguity arising, the terms of the contract
will have to be interpreted by taking into consideration all surrounding
facts and circumstances, including correspondence exchanged, to arrive
at the real intendment of the parties, and not what one of the parties may D
contend subsequently to have been the intendment or to say as included
afterwards, as observed in Bank of India & Anr. vs. K. Mohandas &
Ors., (2009) 5 SCC 313:
“28. The true construction of a contract must depend upon the
import of the words used and not upon what the parties choose to E
say afterwards. Nor does subsequent conduct of the parties in
the performance of the contract affect the true effect of the clear
and unambiguous words used in the contract. The intention of the
parties must be ascertained from the language they have used,
considered in the light of the surrounding circumstances and the
object of the contract. The nature and purpose of the contract is F
an important guide in ascertaining the intention of the parties.”
21. The respondent’s letters dated 07.08.2012 and 27.08.2012
become crucially relevant for the understanding that it was itself under
no misapprehension that RLNG was never intended to be included within
the definition of natural gas under the contract. In the former, the G
respondent wrote, “We await the confirmation from your good office to
take it up further for obtaining necessary consent, if any, in accordance
with law for use of RLNG and the resultant tariff increase.” The latter
again requested for permission to use RLNG to supplement shortfall in
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404 SUPREME COURT REPORTS [2018] 10 S.C.R.

A gas from the KG-D6 Basin, requesting to acknowledge its usage. The
contention of the respondent that these were only intimations and not
request for permission to use RLNG stands belied from the plain language
used in them. The appellant in its reply dated 10.09.2012 explicitly stated
that under the agreement no other fuel except natural gas could be used
and that RLNG was never contemplated in the definition of fuel declining
B
to accept the spot supply agreement for RLNG supplies, citing the cost
of power per unit from the same at Rs.9-10 in comparison to Rs.3/- per
unit from natural gas. It is only thereafter the respondent approached
the Commission in OP No.20 of 2013. The pleadings of the respondent,
as quoted hereinafter, further confirm its own understanding that RLNG
C was never intended to be included in the definition of fuel which was
confined to natural gas only :-
“9. Since the above scenario affects the generation activities
of the Petitioner, the Petitioner proposed to use RLNG. In this
respect, the Petitioner has already made representations to
D the Respondent Nos. 2 and 3 vide its letters dated 7.8.2012
and 27.8.2012 (produced as Annexures P-2 and P-3
respectively). In both these letters, the Petitioner appealed to
the said Respondents to allow usage of RLNG and
substantiated the circumstances/reasons for the said request
of the petitioner.
E
10. To the utter surprise and shock of the Petitioner, instead
of acceding to the above requests of the Petitioner, the
Respondent No.3 has rejected the above requested of the
Petitioner vide its letter dated 10.09.2012.”

F 22. The sporadic use of RLNG on one or two occasions under
pressing circumstances, after due orders under Section 11 of the Electricity
Act, 2003, for short durations, cannot make the exception the norm to
contend either that RLNG was included in the term fuel or that the
appellant had agreed to its use. The question of waiver by the appellant
or application of the principle of approbate and reprobate does not arise
G in the facts of the case.
23. The present was a contract for purchase of power generated
from fuel which was reasonably priced so as to keep in check the cost
of power generated from the same, in the interest of the consumer.
Undoubtedly, cost of fuel was a primary consideration in the mind of the
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appellant. The contextual background in which the PPA originally came A
to be made, the subsequent amendments, the understanding of the
respondent of the agreement as reflected from its own communications
and pleadings make it extremely relevant that a contextual interpretation
be given to the question whether RLNG was ever intended to be included
within the term “Natural Gas”, as observed in Bihar State Electricity
B
Board vs. Green Rubber Industries, (1990) 1 SCC 731:
“23…. Every contract is to be considered with reference to its
object and the whole of its terms and accordingly the whole context
must be considered in endeavouring to collect the intention of the
parties, even though the immediate object of enquiry is the meaning
of an isolated clause….” C

24. In the facts and circumstances of the present case, there can
be no manner of doubt that the parties by their conduct and dealings
right up to the institution of proceedings by the respondent before the
Commission were clear in their understanding that RLNG was not to be
included within the term “Natural Gas” under the PPA. The observations D
in Gedela Satchidananda Murthy (supra) are considered apposite in
the facts of the present case :-
“32…The principle on which Miss Rich relies is that formulated
by Lord Denning, M.R. in Amalgamated Investment & Property
Co. Ltd. v. Texas-Commerce International Bank Ltd., [1982] 1 E
QB at p.121:
‘If parties to a contract, by their course of dealing, put a
particular interpretation on the terms of it—on the faith of which
each of them—to the knowledge of the other—acts and conducts
their mutual affairs—they are bound by that interpretation just as F
much as if they had written it down as being a variation of the
contract. There is no need to inquire whether their particular
interpretation is correct or not—or whether they were mistaken
or not—or whether they had in mind the original terms or not.
Suffice it that they have, by their course of dealing, put their own G
interpretation on their contract, and cannot be allowed to go back
on it.’
(emphasis supplied)”
25. A commercial document cannot be interpreted in a manner to
arrive at a complete variance with what may originally have been the H
406 SUPREME COURT REPORTS [2018] 10 S.C.R.

A intendment of the parties. Such a situation can only be contemplated
when the implied term can be considered necessary to lend efficacy to
the terms of the contract. If the contract is capable of interpretation on
its plain meaning with regard to the true intention of the parties it will not
be prudent to read implied terms on the understanding of a party, or by
the court, with regard to business efficacy as observed in Satya Jain
B
(D) thr. Lrs. & Ors. vs. Anis Ahmed Rushdie (D) thr. Lrs. & Ors.,
(2013) 8 SCC 131, as follows:-
“33. The principle of business efficacy is normally invoked to read
a term in an agreement or contract so as to achieve the result or
the consequence intended by the parties acting as prudent
C businessmen. Business efficacy means the power to produce
intended results. The classic test of business efficacy was proposed
by Lord Justice Bowen,L.J. in Moorcock. 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
D parties cannot as reasonable businessmen have intended. But only
the most limited term should then be implied–the bare minimum to
achieve this goal. If the contract makes business sense without
the term, the courts will not imply the same. The following passage
from the opinion of Bowen, L.J. in the Moorcock (supra) sums up
the position: (PD p.68)
E
“…In business transactions such as this, what the law desires
to effect by the implication is to give such business efficacy to
the transaction as must have been intended at all events by
both parties who are business men; not to impose on one side
all the perils of the transaction, or to emancipate one side from
F all the chances of failure, but to make each party promise in
law as much, at all events, as it must have been in the
contemplation of both parties that he should be responsible for
in respect of those perils or chances.”
34. Though in an entirely different context, this court in United
G India Insurance Co. Ltd. v. Manubhai Dharamasinhbhai Gajera
and Ors. had considered the circumstances when 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. Certain observations in this regard
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expressed by Courts in some foreign jurisdictions were noticed A
by this court in Para 51 of the report. As the same may have
application to the present case it would be useful to notice the
said observations :(SCC p.434)
“51. …’…”Prima facie that which in any contract is left to
be implied and need not be expressed is something so B
obvious that it goes without saying; so that, if, while the
parties were making their bargain, an officious bystander,
were to suggest some express provision for it in their
agreement, they would testily suppress him with a common
‘Oh, of course!’ ‘’ Shirlaw v. Southern Foundries (1926)
Ltd., KB p.227.’ C

* * *
“An expressed 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 D
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, formed part of the contract which the parties
made for themselves. Trollope and Colls Ltd. v. North West E
Metropolitan Regl. Hospital Board, All ER p.268a-b.’ “
35. The business efficacy test, therefore, should be applied only
in cases where the term that is sought to be read as implied is
such which could have been clearly intended by the parties at the
time of making of the agreement...” F
26. The definition of natural gas in Section 2(za)(i) of the PNGRB
Act, has no relevance to the present controversy as the Act was enacted
with the object to oversee and regulate refining, processing, distribution
and marketing of petroleum products and natural gas. Similarly, the
observation made in Association of Natural Gas (supra) in context of G
the controversy with regard to legislative entry has no relevance to the
interpretation of the PPA.
27. The aforesaid discussion, therefore, leads to the inevitable
conclusion that the intention of the parties under the agreement, as
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408 SUPREME COURT REPORTS [2018] 10 S.C.R.

A amended from time to time, was to generate power from fuel reasonably
priced, so as to ultimately make available power to the consumers at
reasonable rates. The choice of fuel as natural gas only has, therefore,
to be understood as being confined to natural gas only in its natural form.
The respondent was well aware that RLNG was never intended to be
included in the definition of natural gas as understood by the parties,
B
notwithstanding that it may be a variant of natural gas.
28. The appeal, therefore, has to be allowed, the Appellate Tribunal
judgment is reversed, and the Commission order dated 08.08.2013 is
affirmed.
C
Ankit Gyan Appeal allowed.

D

E

F

G

H