ARBITRATION VS. ELECTRICITY REGULATORY COMMISSION: A TUG OF WAR

The power sector consists of complex contracts to ensure generation, transmission and distribution of electricity and such contracts involve interests of multiple private, governmental and quasi-governmental entities. Disputes arising from such contracts which demand speedy and efficient remedies.

The Electricity Act, 2003 under Section 158 provides that disputes may be referred to arbitration by the appropriate commission as prescribed in the Act and that the Arbitration and Conciliation, 1996 shall also apply.

Section 158 of the Electricity Act states that where any matter is directed to be determined by arbitration as per the Act, it shall be determined by such person or persons as the Appropriate Commission may nominate in that behalf on the application of either party; but in all other respects the arbitration shall be subject to the provisions of Arbitration and Conciliation Act, 1996. Thus, the legislation divides the electricity related disputes into two categories; arbitrable by parties and arbitrable by reference to arbitration by Appropriate Commission.

This is also evident in the model power purchase agreement published by the Ministry of Power. The long term Power Purchase Agreement model has a dispute resolution clause as following:

17.3 Dispute Resolution

17.3.1 Where any Dispute arises from a claim made by any Party for any change in or determination of the Tariff or any matter related to Tariff or claims made by any Party which partly or wholly relate to any change in the Tariff or determination of any of such claims could result in change in the Tariff  or (ii) relates to any matter agreed to be referred to the Appropriate Commission under Articles 4.7.1, 13.2, 18.1 or clause 10.1.3 of Schedule 17 hereof, such Dispute shall be submitted to adjudication by the Appropriate Commission. Appeal against the decisions of the Appropriate Commission shall be made only as per the provisions of the Electricity Act, 2003, as amended from time to time. The obligations of the Procurers under this Agreement towards the Seller shall not be affected in any manner by reason of inter-se disputes amongst the Procurers.

17.3.2  If the Dispute arises out of or in connection with any claims not covered in Article 17.3.1, such Dispute shall be resolved by arbitration under the Indian Arbitration and Conciliation Act, 1996 and the Rules of the Indian Council of Arbitration, in accordance with the process specified in this Article.  In the event of such Dispute remaining unresolved as referred to in Article 17.2.3 hereof, any party to such Dispute may refer the matter to registrar under the Rules of the Indian Council of Arbitration.…….

The model clause, also, divides the disputes into two categories – disputes pertaining to tariff and disputes which are not pertaining to tariff.

There are various issues which arise regarding the extent of applicability of Arbitration and Conciliation Act, 1996 to disputes governed under the Electricity Act, 2003. I examine only the applicability of Section 8 of the Arbitration Act, 1996.

Section 8 states that a judicial authority before which an action is brought, is bound to refer parties to arbitration if there is an arbitration agreement. The issue whether the appropriate commission are obliged to refer the parties to Arbitration if there is an agreement was recently decided in the case of Damodar Valley Corporation v. Madhya Pradesh Power Management Company Limited, MANU/CR/0185/2019 by the Central Electricity Regulatory Commission.

In the above matter, there was an arbitration clause in the Power Purchase Agreement entered between the parties. When the Petitioner approached the CERC for adjudication of dispute, the respondent challenged the maintainability of the Petition stating that the CERC is obliged to refer the dispute to Arbitration as per Section 8 of the Arbitration Act, 1996.

The Petitioner with regard to the applicability of Section 8(1) of the Arbitration Act, 1996, submitted that when the superseding provision of the 2003 Act read with Section 2(3) of the Arbitration  Act,1996, the arbitral clause in the Power Purchase Agreement is not valid and the provisions of Section 8(1) will have no application. The petitioners referred to the NCDRC case of Emaar MGF LandLimited v. Aftab Singh and Ors to argue that the implication of the amended section 8(1) of the Arbitration & Conciliation Act, 1996 to the provisions of the Consumer Protection Act as considered in this case will be applicable to the instant case as well.

In Emaar MGF Land Limited v. Aftab Singh and Ors, the National Consumer Disputes Redressal Commission observed that the disputes which are to be adjudicated and governed by statutory enactments, established for specific public purpose to sub-serve a particular public policy are not arbitrable and Section 2(3) of the Arbitration Act recognizes schemes under other legislations that make disputes non-arbitrable. This view was upheld by the Honourable Supreme Court of India. The Petitioner relied upon this case to draw a parallel to the facts of the case wherein the disputes between generating company and licensee has to be adjudicated by the appropriate commission

The Respondent in above matter contended that the petition before CERC is not maintainable as the dispute has to be adjudicated/referred to an Arbitration Tribunal as per the Arbitration agreement entered into between the parties as per Section 8 of the Arbitration Act,1996. The issues are to be adjudicated by a Sole Arbitrator and the venue of Arbitration is in Kolkata. Admittedly, in the present case, there is an arbitration agreement and an action has been brought before judicial authority and the dispute is purely a contractual matter. The Respondent relied on the case of Booz Allen Hamilton v. State Bank of India Home Finance to emphasize that a purely commercial matter is capable of adjudication by arbitration and in view of Section 8 of the Arbitration & Conciliation Act, 1996, as amended, the Petitioner ought to be directed to undertake arbitration for resolution of dispute.

As per Section 5 of the said Act, it is clearly mentioned that notwithstanding anything contained in any law for the time being in force, no judicial authority shall intervene in the matter governed by the Arbitration & Conciliation Act, 1996, as amended, except where so provided under the Arbitration Act. On a bare reading of Sections 5 and 8 Arbitration & Conciliation Act,1996 the legislative intent is clear wherein it is expressly stated that notwithstanding any judgment of Supreme Court or any Court, if parties have an arbitration agreement then the judicial authority shall refer them to arbitration. The respondent cited the case of Smt. Kalliani Amma & ors and V K.Devi & ors. AIR 1996 SC 1963 in which the Hon’ble Supreme Court has explained the meaning of ‘non-obstante’ or ‘Notwithstanding’ clause and has stated that it has an ‘overriding effect’.

The respondent also submitted that Gujarat Urja Vikas Nigam Limited v. Essar Power Limited is not applicable to the facts and circumstances of the case, as the said judgment was given prior to the amendment undertaken in the Arbitration & Conciliation Act in 2015.

The CERC held that Section 2(3) of the Arbitration & Conciliation Act, 1996 which specifically provides that the arbitration process under the said Act shall not affect any law for the time being in force by virtue of which the dispute between a generating company and a licensee under the 2003 Act cannot be referred to arbitration. Hence, even if there is an arbitration agreement between the parties, in view of the statutory provisions of the 2003 Act, the bilateral arbitration clause or the agreement stands superseded, continues to be valid law notwithstanding the above amendment. The term, notwithstanding any judgment, decree or order of the Supreme Court or any Court, employed in Section 8(1) of the Arbitration & Conciliation Act, 1996, is only with intent to minimise the intervention of the judicial authority which earlier had the discretion and power to examine various aspects while exercising power under Section 8.

The 246th Report of the Law Commission, the Statement and Objects of Bill and the notes on clauses do not indicate that the amendments to Section 8 of the Arbitration & Conciliation Act, 1996 were made for overriding the special/ additional remedies provided under different statutes.[1] It has also observed that the amendment to Section 8(1) cannot be given such expansive meaning and intent so as to inundate the entire regime of special legislations where such disputes were held to be not arbitrable. In cases where specific/special remedies are provided for in the statute and which are opted by an aggrieved person that judicial authority can refuse to relegate the parties to the arbitration.

Thus, the CERC concluded that the 2003 Act is a special legislation, the notwithstanding clause used in Section 8 (1) does not in our view, oust the adjudicatory provisions of the 2003 Act. The submissions of the Respondent MPPMCL are, therefore, rejected. The adjudicatory provisions of the 2003 Act have a superseding effect over the Arbitration & Conciliation Act, 1996 and will govern the resolution of disputes between the generating company and the distribution licensee. In this premise, the Commission has the jurisdiction to adjudicate the dispute in terms of Section 79(1)(f) reads with Section 79(1)(a) of the 2003 Act.

Conclusion

The judicial interpretation of Section 79(1) (f) and Section 86(1) (f) of The Electricity Act. 2003 has limited party autonomy, which lies at the core of Arbitration and the right to refer disputes to arbitration, thus, making certain disputes in power purchase agreements exclusive to adjudication by appropriate commission and statutory arbitration at the discretion of the appropriate commission. Such an interpretation of the provisions of law may be due to the fact impact of such disputes relating to tariff of electricity has wide reaching effect on the public.

In addition, legislative changes are proposed to the Electricity Act, 2003 which will impact the scope of arbitration of electricity disputes in India. The proposed bill proposes to constitute a Contract Enforcement Authority for adjudication of disputes. Thus, if it is enacted, the scope of arbitration may further narrow down. 

An arbitration under the Arbitration Act, 1996 has benefits of the time limit for arbitral award under Section 29A which states that the award in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings. Another benefit for parties for adjudication under Arbitration and Conciliation Act, 1996, the fast track procedure under Section 29B of the Arbitration and Conciliation Act, 1996 which provides that the parties to an arbitration agreement, may, at any stage either before or at the time of appointment of the arbitral tribunal, agree in writing to have their dispute resolved by fast track procedure. When the appropriate commission adjudicates the dispute themselves, these benefits cannot be availed by the parties.It is also to be noted that the default of payments by consumers and distribution licensee due to the Covid-19 lockdown will also reflect on the power sector as such defaults would trigger default of payments to generating companies. Various players will invoke Force Majeure and disputes will arise regarding project commissioning differences, forecasting accuracy challenges and curtailment of power purchase through long term PPAs. The CERC adjudicates several disputes by itself and then, often their orders are challenged before the APTEL. The saga does not end here but subsequently is brought before the Supreme Court of India, thus, making dispute resolution a cumbersome and time consuming affair.

Meanwhile, the Covid-19 lockdown has also created fluctuations in energy demand which affects the industry as long term power purchase agreements are entered into on the basis of predicted supply and demand and plummeting of demand creates excess capacity problem. At the moment, the distribution utilities are facing difficulty as the power purchase agreements which were entered into with suppliers were for larger supplies than there is demand for. Meanwhile, Competitive procurement has meant declining tariffs both for conventional and renewable energy. This drives the utilities to renegotiate the contract with suppliers creating pressure on independent producers to reduce prices or alter other contractual conditions affecting the investors in power sector. These disputes which will arise would fall within the appropriate commission’s jurisdiction as they would have effect on Tariff.

When the power to nominate is vested in the commission, the commission should be bound to refer disputes to Arbitration if there is an existence of arbitration agreement as there are array of benefits the party can avail under Arbitration and Conciliation Act, 1996. It is seen that even when parties agree to arbitrate, the commission objects to arbitration and adjudicates the dispute themselves. Foreign investors seek to avoid forum for dispute resolution forums for dispute resolution that are perceived to be hostile as well as procedural rules or substantive law that are considered unfavorable. The international parties strive to achieve greater certainty as to where and by whom their potential disputes may be resolved. In that regard, arbitration provides for a truly international, neutral and customizable approach to the settlement of energy disputes. Hence, in order to attract foreign investors, more legal certainty is necessary.

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