Principal of business efficacy: Court can imply term in contract only when literal interpretation fails

In CIVIL APPEAL NO.11133 OF 2011, M/S ADANI POWER (MUNDRA) LTD. vs GUJARAT ELECTRICITY REGULATORY COMMISSION AND ORS., the appellant cancelled a contract as per terms of the agreement when it realised the contract cannot be fulfilled and paid the damages as per agreement. The respondent however did not want to cancel and insisted that the appellant fulfill their part. The matter went to the Commission and thereafter to the Appellate body where the orders were against the appellant herein. Thus the appeal before Supreme Court.

The Supreme Court observed that from a plain reading of the contract it is clear that in the event of non-compliance with any of the requirements as provided in Article 3.1.2 within the period specified in the said Article, an option is available both to the seller or the procurer to terminate the PPA. The only requirement is that, in either of the situations, the liability would be only on the seller to pay the liquidated damages at the rate of Rs. 10 lakhs per MW.

The Supreme Court held that the principle of business efficacy could be invoked only if by a plain literal interpretation of the term in the 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. If the contract makes business sense without the term, the courts will not imply the same. It is amply clear that courts can imply a clause only if it is found that the plain and literal meaning given to the expression used in the terms is not in a position to make out the intention of the parties. 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. As held in the case of Nabha Power Ltd. (supra), for invoking the business efficacy test and carving out an implied condition, not expressly found in the language of the contract, the following five conditions will have to be satisfied:

(1) Reasonable and equitable;

(2) Necessary to give business efficacy to the contract;

(3) It goes without saying i.e. the Officious Bystander Test;

(4) Capable of clear expression; and

(5) Must not contradict any express term of the contract.

The Supreme Court observed that it has been held by this Court that every attempt has to be made to harmonize apparently conflicting entries not only of different Lists but also of the same List and to reject that construction which will rob one of the entries of its entire content and make it nugatory and that that to harmonize is not to destroy any statutory provision or to render it otiose.

Applying the aforesaid principles to various clauses of the agreement, an attempt has to be made to harmoniously read the provisions of Articles 3.1.2, 3.4.2 and 14.1, 14.2, 14.3 and 14.4. An attempt has also to be made to give effect to all the provisions. If so read, it will be clear that Article 14 deals with various eventualities in which procurer or the seller can terminate the agreement. Article 14.1 provides for termination in the event of various defaults committed by the seller. Article 14.3 provides for procedure to be followed in cases of default by the seller. Article 14.2 provides various grounds with regard to default by procurer. The procedure for termination in cases of default by the procurer has been provided in Article 14.4. Perusal of grounds stated in Articles 14.1 and 14.2 would reveal that these are general in nature. Per contra, provisions of Article 3.4.2 would reveal that termination under this Article can be made only if there is non-compliance with any of the conditions in Article 3.1.2. The power is available to both procurer and seller. However, in either of the cases i.e. termination by seller or termination by procurer, there is a specific provision of damages at the rate of Rs 10 lakhs per MW, whereas consequences of the termination in Articles 14.1 and 14.2 are totally different. As such, effect will have to be given to both the provisions, which are independent of each other.

We find, that both the Commission and the Appellate Tribunal have grossly erred in arriving at finding that termination can be effected under Article 3.4.2 only if there is an agreement with regard to non-compliance of condition under Article 3.4.2 by both the parties. If the finding of the Appellate Tribunal is accepted, it will be amounting to making provisions of Article 3.4.2 a dead letter and rendering them otiose. In the present case, the perusal of various Articles would reveal that provisions under Article 14 are general in nature. The provision under Article 3.4.2 is specific, only to be invoked in the case of non-compliance with any of the conditions as provided under Article 3.1.2. As such, the special provision made in Article 3.4.2 will exclude the applicability of general provisions contained in Article 14 of the contract.