Civil Suit No. 3392 0f 1995, filed by the State of Maharashtra Versus DPC and the MSEB
STATE OF MAHARASHTRA )
through the Secretary (Energy) )
having its office at Mantralaya
Madam Cama Road, Bombay - 400 032 )..... Plaintiffs
1. Dabhol
Power Company, a private )
company
with unlimited )
liability,
governed by the provisions)
of
the Companies Act, 1956 having )
its
registered office at 161, )
Makers
Chambers VI, 15th Floor, )
Nariman
Point, Bombay - 400 021 )
2. Maharashtra
State Electricity )
Board,
a statutory body established )
under
and in pursuance of the )
Electricity
(Supply) Act, 1948 ),
having its registered office at )
Hong Kong Bank Bldg., 3rd Floor, )
M.G.Road,
Fort, Bombay 400 023. ) ....Defendants
1. The Plaintiffs are the State of Maharashtra
2. The 1st Defendant is an Indian
Company incorporated (with unlimited liability) and registered under the
provisions of the companies Act, 1956 as a private company and having its
registered office at 161, Maker Chambers VI, 15th Floor, Nariman
Point, Bombay 400 021. The 2nd
Defendant is the Maharashtra State Electricity Board, a statutory body
constituted by the State Government of Maharashtra as a State Electricity Board
under the name of Maharashtra State Electricity Board under Section 5 read with
Section 12 of The Electricity (Supply) Act 1948 (hereinafter referred to as the
“ESA”).
3. The present suit raises vital Constitutional
questions, including questions relating to the rights and powers of a
continuing State Government after the calling of elections and after the
dissolution by efflux of time of the State Legislative Assembly under the
Constitution. The suit also raises
vital questions pertaining to the law of contract as hereinafter stated:
a) Under a Memorandum of Understanding dated 20th
June, 1992 signed between the 2nd Defendant herein, Enron Power
Corporation (hereinafter referred to as the ‘said Enron’) and General Electric
Company (GEC) (prior to the incorporation of the 1st Defendant),
general outlines of the Power Project - ENRON & GEC voluntarily stated that
they would form a joint venture company known as Dabhol Power Company. The Memorandum of Understanding recorded
that it was “ not intended to represent legally binding obligations which shall
only be incurred in future written agreements between the parties”. Hereto
annexed and marked as Exhibit ‘A’ is a copy of the said Memorandum of
Understanding.
Exhibit
A
b) M/s. Linklaters & Paines (at all
material times Solicitors of the said Enron and later of the 1st
Defendant) prepared a draft document headed ‘Power Purchase Agreement (PPA)”,
“Heads of Terms - Dabhol Power Project” dated 29th August, 1992 as
forming the basis for negotiation and definitive terms of contract to be
entered into between the 2nd Defendant and the 1st
Defendant for purchase of electricity/power from the proposed Dabhol Power
Station Again the said document stipulated that though it would form the basis
for the power project agreement, it would not create any legal binding
obligations. One of the “Heads of
terms” stipulated in the said draft, inter alia, included a term (Clause 15.2)
“Further Assurances” stating that in
addition to the terms of the PPA set out therein and as a adjunct to the
obligation of Maharashtra State
Electricity Board (MSEB), under the Power Purchase Agreement (hereinafter for
the sake of brevity referred to as “PPA”) there will be a need for inter alia,
guarantees by the State of Maharashtra of the obligations of MSEB under the
PPA. The said document headed PPA,
“Heads of Terms” was initialed by M/s. Linklaters and Paines as dated
29/08/1992 and also initialed by the then Advocates & Solicitors of the 2nd
Defendant M/s. Little & Co. the
Plaintiffs crave leave to refer to the said “Heads of Terms” when produced.
c) As more particularly mentioned hereinafter,
documentation envisaged in the head of agreement were entered into namely,
interalia, (i) Power Purchase Agreement (PPA) between DPC (1st
Defendant) and MSEB (2nd Defendant) dated 8/12/1993; (ii) The
Government of Maharashtra Guarantee dated 10.2.1994; (iii) State Support
Agreement dated 24/6/1994; (iv) Fuel Management Agreement between 1st
Defendant, 2nd Defendant and US Subsidiary of the said Enron namely,
Enron Fuel International; (v) Agreement dated 2/2/1995 between 1st
Defendant and 2nd Defendant providing for an amendment to the PPA in
accordance with its terms. the
aforesaid documents are relevant for the purpose of this suit and relief
claimed herein. The Plaintiffs will
refer to the said documents when produced.
Hereto annexed and marked Exhibits ‘B’, ‘C’, ‘D’ and ‘E’ are copies of:
i) The PPA (without annexures and amendments)
dated 8.12.1993.
ii) The Government of Maharashtra Guarantee dated 10/2/1994.
iii) State Support Agreement dated 24/4/1994
iv) Amendment to PPA dated 2.2.1995.
d) After the calling of elections in the State
of Maharashtra and the knowledge of impending dissolution of Maharashtra State
Assembly under Article 172 of the Constitution, after expiry of its full term,
the following documents came to be executed namely, (I) Amendment to PPA dated 2/2/1995, (ii)
Consent Agreement dated 23/24.2.1995 and (iii) Fuel Management Agreement dated
25.2.1995. the Plaintiffs crave leave
to refer to the aforesaid documents. As mentioned above, all the aforesaid documents were in aid of and supportive of
the PPA dated 08.12.1993 (later amended as mentioned above).
e) Thus several documents constituting one
transaction which envisaged the setting up of a Power Project at Dabhol in
District Ratnagiri in the state of Maharashtra were executed, inter alia, by
and between the parties hereto.
f) Right upto 25/2/1995 i.e., after the calling
of general elections by notification dated 10.1.1995, pursuant to the press
note dated 8.12.1994 and after holding of elections pursuant thereto on 9-12
February, 1995 (before the declaration of results on 11.3.1995) the conditions
precedent (both for Phase-I and Phase-II) had neither been satisfied in full
nor waived as provided by Clause 2 (Conditions Precedent) of PPA. However, as
more particularly mentioned hereinbelow the 1st Defendant
precipitately and being fully aware of the Limitation of the executive power of
then State Government consequent upon holding the election and dissolution of
the assembly purported to accelerate the coming into legal force of PPA dated
08.12.1993 and purported to fraudulently get waived the Conditions Precedent;
thus, deliberately denying to the successor government and its agencies the
right to review the PPA and supporting documentation and if so advised,
exercise unilateral right of termination under Clause 2.5 of the PPA. As a result of any such termination the
entire edifice of the documentation including Guarantee Agreement and State
support Agreement would necessarily and inevitably have come to an end without
incurring any liability or obligation.
As more particularly stated herein after in the amended PPA (dated
2.2.1995) after the calling of the election and/or date of dissolution of the
State Legislative Assembly the pre-closing clearances (Conditions Precedent)
were reduced to their advantage by the Ist Defendant. Even after this date i.e. 2.2.1995, the remaining pre-closing
clearances (Conditions Precedent) though not satisfied were sought to be waived
so as to accelerate bringing into force/in effect the PPA - thus depriving the
2nd Defendant from exercising its unilateral right of termination
(without consequences) under Clause 2.5 which was available till after May
1995. By reason of Clause 2 of PPA the
status of the PPA was that of an agreement not enforceable by law until all
Conditions Precedent had been fully satisfied and/or bonafide waived as
provided in PPA itself. Thus, by a
letter dated 25.2.1995 1st Defendant have purported to bring into
fact contractual obligations which before the date were in the return of an
agreement not amounting to contract which was not a legal enforceable contract
. That the so called waiver was not
bonafide but was deceptive and fraudulent is fortified by the last 2 paragraphs
of the letter dated 25.2. 1995
“All the conditions precedent set
out in paragraphs (a) to (I) inclusive of Clause 2.1 of the PPA have therefore
been either satisfied or waived in accordance with the terms of the PPA as of
the date of its letter. Therefore, al
the obligations of the parties to the PPA in connection with Phase I, including
those relating to the calculation and payment of the tariff for the supply of
electricity, will become binding and effective upon Financial Close of Phase I
as required by Clause 2.1 (m).
Please confirm your
agreement to the matters set out in this letter by signing and returning to us
the attached copy.”
Hereto
annexed and marked Exhibit ‘F’ is a copy of the said letter dated 25.2.1995. Ex.’F’
(g) This was purported to be complied with despite the fact that
there was no confirmation by 2nd Defendant purported to specify the mode of
confirmation namely, “by signing and returning to us the attached copy”. No
confirmation has been recorded by the 2nd Defendant on the letter
save and except the cryptic word “Received” (undated) and signed by the then
Chairman of the 2nd Defendant.
Receipt of the letter is not
and cannot be equated to the requirement of the agreement in writing between
the 1st and 2nd
Defendant as specifically provided in PPA. The 1st Defendant
addressed two further letters to the 2nd Defendant dated 2nd
march 1995 and 4th March 1995 purporting to record that the
Financial Closing Date was as of 1st March 1995. Hereto annexed and
marked Exhibit ‘G’ and Exhibit ‘H’ respectively are copies of the said letters dated 2nd March
1995 and 4th March 1995. Ex.’G’
and Ex.’H’
(h) In the circumstances, even the purported
invocation of the State Support Agreement against the Plaintiffs is not
bonafide, is fraudulent and ineffective in law.
(I) The unilateral mutual power if termination
of the agreement without adverse legal or financial consequences, which power
extended at least up to 15th May, 1995, was attempted and/or purported to be
prematurely determined and/or
extinguished so as to effectuate a fait accompli and expose a successor
Government to huge financial liabilities if it undertook a review of the
agreements and on a review decided that the agreements were onerous, contrary
to public interest, contrary to public policy, contrary to consumer interest
and contrary to the interest of the
State. The actions on the part of the 1st Defendant were a clear
attempt to purport to foreclose any review by or on behalf of the successor Government
of the Plaintiffs. That this was done under the guidance of and with the active
connivance of the previous Government and at express and/or tacit imprimatur of
the previous Government is clear and apparent.
(j) It is submitted that in law, after the date
of the notification of the General Election and particularly after the date on
which the Election/Polling were held (though the counting and results were
deferred), it was unlawful and/or impermissible as a matter of Constitutional
law for the Government to exercise the purported executive power either
directly or through any of its instrumentalities by taking major policy
decisions particularly when there was constant opposition to such a decision
and a possible likelihood of its not being implemented and/or if sought to be
implemented, to be reviewed. It is clear that the said purported waiver and the
various other actions taken after the declaration of Elections were clearly
with a malafide objective and contrary to accepted norms and standards as to
the exercise of such powers. A conscious attempt was made to pre-empt and
prevent the exercise of a simple termination permissible before satisfaction of
the pre-closing clearances by fraudulently and malafide waiving the outstanding
preconditions so abruptly which, if required to be complied with, would have
taken the possible Closing Date beyond the installation of the new Shiv
Sena/BJP Government, an event by which time was anticipated and would have
resulted in a possible review.
(k) Apart from the Constitutional obligations of a
Caretaker or pro-tem Government, it is submitted that assuming whilst denying
that full executive power vested with a Caretaker Government right up to the
time which the new elected Government was installed in office, the aforesaid
sequence of events clearly shows that the action on the part of the 1st
Defendant in unilaterally waiving compliance with various Conditions Precedent
(by letter dated 25.2.1995) were effectuated and conceived in fraud and were
not bonafide and this act alone (altogether apart from the principal and other
agreements being void for violation of laws and public policy on the grounds
stated hereinbelow) renders the agreement as void. The unholy haste with which
the purported Financial Closure was sought to be achieved was clearly in order
to reap the benefit of the huge sum of US$ 20 Million admittedly already spent
by the principal shareholder of the 1st Defendant (ENRON) described
by them euphemistically as “educational expenses”, the alleged facts pertaining
to the educational expenses, were brought to the attention of the Plaintiffs by
the 1st Defendant by their letter dated 18.8.1995 addressed to the
Secretary (Energy) of the Plaintiffs by stating.
“Considerable
criticism and allegations of impropriety are being leveled against the Dabhol
Power Company and its sponsors on the basis of the statement made by Ms Linda
Powers in a testimony in front of the US House of Representatives in January
1995.
The
fact about this statement and the complete testimony are being sent to you for
your perusal !”.
The
alleged facts and the complete testimony of Ms Linda Powers before the US House
of Representatives, Committee on Appropriations, Sub-Committee on foreign
operation appended to the said letter, are self-contradictory. In the testimony
of Ms. Linda Powers enclosed with the said letter it is specifically stated as
follows.
“Moreover,
our company spent an enormous amount of its own money approx. US$ 20 Million-on this education and project
development process alone not including any project costs.”
“Why
do we, and other developers include such things in our project? To win local
support and support of the authorities,
and contribute to the general improvement of conditions, and contribute to the
general improvement of conditions in the area”.
(l) According to the testimony of the said Ms.
Linda Powers (vice-president of the
said ENRON) 20 Million US Dollars spent (of its own money) was “win local support and the support of
the authorities and for the general improvement of conditions in the area”. In
the purported refutation also enclosed to the letter dated 18.8.1995 of the 1st
Defendant it is stated that 20 Million US Dollars included “engineering,
financing, legal, travel and administrative costs actually totaling a sum in
excess of 20 Million US Dollars as of 29.3.1995”. and it was stated that 20
Million US Dollars has nothing to do with education of any Indian. The factual
position stands as it was when the testimony of Ms. Linda Powers was given and
drew attention of media worldwide and the subsequent explanation (the incorrect
one) only compounds the initial frank admission (in sworn testimony) that 20
Million US Dollars. “on this education and project development process alone
not including any project cost” was as was stated “to win local support and
support of authorities and to contribute to the general improvement of
conditions in area.” It is significant that while statement was given on behalf
of ENRON to the US House of Representatives the statement was sought to be
contradicted and/or purportedly explained by the President of the 1st
Defendant company i.e. the self serving statement that there was full
compliance and that all Indian and US Laws including US Foreign Corrupt
Practices Act in the conduct of business activities in India had been complied
which does not accord the sworn testimony of Ms. Linda Powers. The Plaintiffs
crave leave to refer to and rely upon the letter of the 1st
Defendant dated 18.8.1995 along with its annexures when produced.
4.(I) Apart from the aforesaid important
Constitutional issues on which ground alone the agreement is void and/or
inoperative in law and/or incapable of being performed, it is submitted that
the said Agreement is null and void ab initio, inter-alia, on account of its
being violative of several statutory provisions, public policy, consumer
interest, public interest and interest of the state, suffers from the vice of misrepresentation by the 1st
Defendant and/or its principal shareholder ENRON and is conceived in fraud.
(ii) It is submitted that under Indian Law, the
consideration or object of an agreement
is unlawful if the Court regards it as opposed to public policy. This applies
also to contracts executed by the Government in the exercise of its executive
power under the Constitution. Accordingly every party (particularly an Indian
Company) which negotiates and enters into a contract with a Government or a
corporation entrusting to it with full knowledge that if it is shown to the
satisfaction of a Court that the agreement is opposed to public policy, it is
void and the only consequences would be to make restitution under Section 65 of
the Contract Act.
(iii) It is submitted that for reasons stated
hereinbelow, the unconscionable of the object of the principal agreement was
opposed to public policy would cause a huge loss to the public exchequer or
imposed unconscionable burden on consumers of electricity and consequently the
1st Defendant would not be entitled to claim any restitution from
the Plaintiffs before the Financial Closing Date (precipitately purported to be
advanced to 1st March, 1995) and not before the said date. This is
entirely without prejudice to the contention of the Plaintiffs that the
purported closing was wrongly and illegally achieved and in any event is no
closing at all as the conditions of
Clause 2 have not been complied with.
(iv) The Plaintiffs submit that all the agreements,
including the State Support Agreement and the State Guarantee are executed
pursuant to the PPA and are a part of one single transaction and if the Power
Purchase Agreement is void the subsequent agreements on that ground alone are
void, apart from the independent grounds on which they can be voided.
5. A narrative of the facts relevant for the
purposes of the present suit is set out hereinbelow:
(I) It appears that in May/June, 1992 a
delegation led by the Cabinet Secretary of the Union Cabinet visited inter alia
the USA Thereafter some of relevant dates and the quick succession of events
that took place are set our hereinbelow:
15.6.1992 - Arrival
of ENRON Team at New Delhi and discussions with various officials of the
Government of India.
18/19.6.1992 - (The
very next day after the arrival of the ENRON Team) The said Team visited
Dabhol, Nagothane and other sites in Maharashtra and held a meeting Prakashgad
in Bombay.
20.6.1992 - The ENRON
Team met Secretary (Power), Government
of India, Minister for Energy and
Hon’ble Chief Minister, State of Maharashtra.
20.6.1992 - (On the
very same day above, within 5 days of arrival in India and within 3 days of
arrival in Bombay) Memorandum of Understanding signed between the 2nd
Defendant represented by Mr. Ajit M. Nimbalkar, the then Chairman of the 2nd
Defendant, Ms. Rebecca Mark describing herself as the Vice-Chairman of the said
Enron and Mr. Douglas Mcfadden describing himself as Manager of Global
Developer Sales of General Electric Corporation.
The term sheet annexed
to the MOU opens with the following.
“Electrical Power
Purchase Contract”
·
Contract for 20 years
term between Power Venture and MSEB.
·
Contract to be
structured to achieve an all in price of
·
US$ 0.073/kwh,
comprised of a fixed monthly capacity payment calculating at the Indian rate
of inflation each year and a per-kwh
energy payment equal to the per-kwh operating cost (as defined below). The capacity payment will escalate at the
Indian rate of inflation, other than the portion of the capacity payment representing
debt service of the project, which will not escalate.
(ii) Thus, the purported decision to set up a huge
power generation project in the private sector with a foreclosed obligation on
a statutory corporation to buy power from the private sector at a predetermined
unprecedently high rate was taken in a great hurry without there being any
public debate on the said issue apart from there being any detailed
consideration of the matter.
(iii) Before the PPA was executed in December 1993,
the following events occurred:
(a) The World Bank expressed its opposition to the
said Project and advised that the Project was not viable, not in the interest
of the State of Maharashtra in particular and the country, the public and the
consumers in general. That this objection was treated with scant respect and
was brushed aside by the said Enron is clear from the correspondence wherein
the said Enron and/or the 1st Defendant stated that “The World Bank
opinion can be changed”, that “we (ENRON) will engage a PR Firm and hopefully
manage the media from here on” (June 1993).
(b) The Central Electricity Authority had drawn
attention to several aspects of the MOU one of which aspect is detailed below:-
“Price:
(I) The all-in-price is a departure from the
existing norms and parameters notified by the Government under Section 43 A(2)
of the Electricity (Supply) Act, 1948.
(ii) Denominating the price in US dollars is also a
departure from the existing norms.
(iii) We take it that that the price of US$ 0.073 kwh
will be applicable from 1996 when power would be available. We also take it
that the escalation of this price at the Indian rate of inflation each year
will also commence from 1996 or the date from which power is made available.
(iv) If the price is denominated in US currency, why
should there be a need top adjust for escalation at the rate of inflation in
India particularly as Indian Rupee is allowed to float. The exchange rate
floated would take care of this escalation.
(v) The current equivalent of US $ 0.073 in Indian
Rupees works out to Rs. 2.19 paise/kwh which is considered high.
(vi) It is not clear if the price is agreed for the
entire period of power purchase agreement.”
A
copy of the CEA’s comments on the said MOU is annexed hereto and marked as
Exhibit H-1’. Ex.’H-1’
(c) A notification dated 22.9.93 was issued
purportedly under Section 29 of ESA by the 1st Defendant as the “Generating
Company”. It did not contain relevant features of the scheme as required by
Section 29. In response to this cryptic notification as many as 34 letters of
objection to the scheme were sent to 1st Defendant, but as appears
from the letter dated 21.11.1993 written by the 1st Defendant to the
Central Electricity Authority, the said letters (representations) were not
forwarded to the Central Electricity Authority although required by law. The 1st
Defendant as generating company had made itself fully conversant with the
statutory provisions of the ESA. The Plaintiffs crave leave to refer to and
rely upon the said notification dated
22.9.1993 and the said letter dated 21.11.1993 when produced. The Central
Electricity Authority gave leave to refer to and rely upon the said
notification dated 22.9.1993 and the said letter dated 21.11.1993 when
produced. The Central Electricity Authority gave its clearance to the project
by its letter dated 26.11.1993 by recording that the power project proposal had
already been considered by the Central Electricity Authority in its prior
meeting held on 12.11.1993 and approved the same. This was even before the
expiry of the statutory period for representation and even though these
representations were mentioned in 1st Defendant’s letter dated
21.11.1993 addressed to the Central Electricity Authority. Moreover, the project for which clearance was obtained was a Project
Report dated April 1993 which was different from the final project envisaged in
the PPA. The Plaintiffs crave leave to
refer to and relay upon the said Project Report and the said letter dated
26.11.1993 when produced.
6. On 8th December, 1993 after
obtaining the approval of the then Maharashtra Government, the Power Purchase
Agreement was signed by and between the Defendants.
7. On 10th February 1994, in
purported pursuance of the provisions of the PPA, a Guarantee was signed by the
then Government of Maharashtra. By the said Guarantee in consideration of the 1st
Defendant undertaking to develop/procure finance to construct,
own, operate and maintain an electric power generating facility of 2015 MW
capacity at Dabhol in the State of Maharashtra and to make sales of capacity
and net electrical output from the Project to the 2nd Defendant under a PPA
and in order to induce financial institutions to finance the Project,
the State of Maharashtra irrevocably
and unconditionally guaranteed to the 1st Defendant to pay to the 1st
Defendant any and every sum of money which 2nd Defendant is liable
to pay to the 1st Defendant under the PPA. The relevant clauses of
the said Guarantee are as follows:
“This
GUARANTEE is made at Bombay on 10 day of February 1994 by THE GOVERNOR OF
MAHARASHTRA on behalf of THE STATE OF MAHARASHTRA (hereinafter referred to as
the “Guarantor”).
In
consideration of Dabhol Power Company, a company organized and existing under
the laws of India (the “Company”), undertaking to develop, procure finance for,
construct, own, operate and maintain an electric power generating facility of
2015 MW capacity (approximately) at Dabhol in the State of Maharashtra, India
(hereinafter referred to as the “Project”) and to make sales of capacity and
net electrical output from the Project to Maharashtra State Electricity Board
(hereinafter referred to as “MSEB”) under a Power Purchase Agreement
(hereinafter referred to as the “PPA”) dated as of 8th December 1993
and made between the company (1) and MSEB (2), and in order to induce financial
institution to finance the project, the guarantor hereby covenants and agrees
as follows:
1. GOM GUARANTEE
(A) Guarantee of MSEB Payment Obligations:
The Guarantor hereby irrevocably and unconditionally Guarantees to the Company
(as a secondary obligor) to pay to the
Company, within 7 calendar days
following submission by the company of a demand in accordance with Clause
1 (B), any and every sum of money which MSEB is liable to pay to the Company
under or pursuant to the PPA and shall fail to pay in accordance with the terms
of the PPA.
(B) Conditions relating to demand: The Company shall be entitled to make a
demand for payment upon the Guarantor pursuant to this Guarantee if MSEB has
failed to pay, within 7 days of the due date for payment thereof, any sum of
money which it is liable to pay to the Company under or pursuant to the Power
Purchase Agreement”.
(E) Indemnity: The Guarantor
undertakes, as primary obligor, to indemnify and keep indemnified the company
against any loss sustained or incurred by the Company by reason of the
invalidity illegality or unenforceablity of any of this Guarantee or the provisions of this Guarantee or the PPA
and the amount of such loss shall be the amount which, but for such invalidity,
illegality or unenforceability, the company would otherwise have been entitled
to recover hereunder or thereunder”.
(C) Governing
Law : The rights and obligations of the parties under or pursuant to this
Guarantee shall be governed by and construed
according to English Law”.
(D) Arbitration: Reference to arbitration:
(1) Any dispute or difference arising out of or in
connection with this Guarantee shall (regards of the nature of this dispute or
difference) be referred to arbitration under a specified system of
international arbitration rules to be agreed (the Rules) by one or more
arbitrators appointed in accordance with the Rules.
(2) As from the date on which no amount is owned
or capable of being owed to the Lenders under the relevant Financing
Agreements, then the dispute shall be finally settled by arbitration under the
Arbitration Acts of India.
(3) Arbitration proceedings pursuant to paragraph
(1) shall be held in Singapore. Arbitration proceedings conducted pursuant to paragraph
(2) shall be held in New Delhi, India.
(4) No
arbitrator appointed pursuant to this Clause 6 (D) shall be a national
of India or of the United States.
(5) The language of any arbitration under this
Clause 6 (D) shall be English.
(E) Sovereign Immunity: The Guarantor
unconditionally and irrevocably:
(1) agrees that the execution, delivery and
performance by it of this Guarantee constitute private and commercial act
rather than public or governmental acts;
(2) agrees that, should any proceedings be brought against it or its assets in any
jurisdiction in relation to this Guarantee or any transaction contemplated by this Guarantee, no immunity
from such proceedings shall, to the extent that it would otherwise be entitled
to do so under the laws of India, be claimed by or on behalf of itself or with
respect to assets:
(3) waives any right of immunity which it or any
of its assets now has or may acquire in the future in any jurisdiction; and
(4) consents generally in respect of the
enforcement of any judgment against it in any such proceedings in any
jurisdiction to the giving of any
relief or the issue of any process in connection with such proceedings
(including, without limitation, the making, enforcement or execution against or
in respect of any property whatsoever irrespective of its use or intended
use)”.
8. The next significant event that took place
thereafter was the execution of what is described as “The State Support
Agreement” by the then Government of the Plaintiffs in favour of the 1st
Defendant dated 24.6.1994. Some of the relevant clauses of the State Support
Agreement are as under:
9. TERMINATION OF THE POWER PURCHASE
AGREEMENT
Upon
termination of the Power Purchase Agreement, DPC and GOM shall both be released
from further performance of the obligations under this Agreement.
10. GOVERNING LAW
The rights and
obligations of the parties under or pursuant to this Agreement shall be
governed by and construed according to English Law.
11. ARBITRATION
11.1 Reference to arbitration:
(a) Any dispute or difference (each a “dispute”)
arising out of or in connection with
this Agreement shall (regardless of the nature of the dispute) be referred to
arbitration in accordance with the provisions
of the UNCITRAL Arbitration Rules (i.e. the Arbitration Rules of the
United Nations Commission on International Trade Law set out in Resolution
31/98 adopted by the General Assembly on 15 December 1976 and referred to
herein as “the Rules”) as at present in force by a panel of three arbitrators
(or such lesser number as the parties may agree) appointed in accordance with the Rules.
(b) Where the Rules do not deal with any issue
arising in connection with the conduct and/or procedure of the arbitration such
issue shall be resolved in accordance with the law of the place in which the
arbitration is held.
(c) The New York convention on the Recognition and
Enforcement of Foreign Arbitral Awards (“the Convention”) shall apply to
any award resulting from an arbitration
pursuant to this clause and any such award shall for the purposes of the
Convention, the laws of India and the laws of any other country in which the
recognition and/or enforcement of the award may be sought, be treated as
relating to a dispute or disputes arising out of a commercial legal
relationship and not as domestic award.
(d) Any dispute arising after the date on which no
amount is owed or capable or being owed to the Lenders under the relevant
Financing Agreement, shall be finally settled by arbitration under the
Arbitration Acts of India.
(e) Arbitration proceedings pursuant to paragraph
(a) shall be held in London Arbitration proceedings conducted pursuant to
paragraph (d) shall be held in New Delhi, India.
11.2 Nationality of arbitrator
No arbitrator
appointed pursuant to Clause 11.1 shall be a national of India or of the United
States.
11.3 Language
The language
of any arbitration under this Clause shall be English.
11.4 GOM Guarantee
The parties hereby
agree that any arbitration conducted pursuant to Clause 8(d) (I) of the GOM Guarantee
dated 10th February 1994 will be conducted in accordance with the provisions of
Clauses 11.1 to 11.3 above.
12 SOVEREIGN IMMUNITY
GOM
unconditionally and irrevocably:
a) agrees that the execution, delivery and
performance by it of this Agreement and those agreements and other documents
comprising the Security Package (as defined in the Power Purchase Agreement) to
which it is a party constitute private and commercial acts rather than public
or governmental acts;
b) agrees that, should any proceedings be
brought against it or its assets in any jurisdiction in relation to this
Agreement or any transaction contemplated by this Agreement, no immunity from
such proceedings shall be claimed by or on behalf of itself or with respect to
its assets;
c) Waives any right of immunity which it or any
of its assets now has or may acquire in the future in any jurisdiction, and;
d) consents generally in respect of the
enforcement of any judgment against it in any such proceedings in any
jurisdiction in the giving of any relief or the issue of any process in
connection with such proceedings including the making, enforcement or execution
of any such judgment or any order arising out of any such judgment against or
in respect of any property whatsoever irrespective of its use or intended use.’
9. On 15th Sept.
1994, a tripartite agreement was executed between the Government of India ,
Reserve Bank of India, and the then Government of Maharashtra and on the same
day a counter Guarantee was signed by the Government of India but the same is
not relevant for the purposes of this suit.
10. Meanwhile a Fuel
Management Agreement (referred to in PPA) was negotiated and 1st
Defendant also proposed amendments to the PPA and submitted draft for that
purpose.
11. While the aforesaid was going on, as already
mentioned above, on the expiry of the term of the State Legislative Assembly
under Article 172 of the Constitution, elections were called for prior to such
expiry by a press note dated 8.12.94 and a notification date 10.1.95; elections
to the new Assembly to be constituted were held from 9-12 February, 1995, but
announcement of results was deferred by the Election Commission in order to
complete election process in other States which were to take place. It was this
deferment of results which was taken advantage of and the letters/agreements of
2nd, 23rd, 24th, 25th February,
1995, 2nd and 4th March 1995 already mentioned above were
got executed and/or exchanged. It was
known at all material times to the 1st Defendant that one of the
principal planks of the election manifesto of Shiv Sena - BJP alliance (which
was then in main opposition and had been constantly on the floor of the
Assembly clamoring for disclosure of terms of the agreement with the 1st
Defendant which was being withheld) specifically provided (to the knowledge of
the 1st Defendant) for “a review of the doubtful ENRON deal” if and
when the said alliance came to power.
12. After the change of the Government on 14th
March, 1995, a review was undertaken and as a result of the review, the
Plaintiffs decided not to go ahead with the said Project. Consequently the Plaintiffs directed the 2nd
Defendant to inform the 1st Defendant to stop work on the said
Project. Accordingly letter dated 7th
August, 1995 was addressed by the 2nd Defendant to the 1st
Defendant with a copy thereof to the Plaintiffs, directing the 1st
Defendant to stop work on the said Project.
Hereto annexed and marked Exhibits ‘I’ is a copy of the said letter
dated 7th August, 1995 ex.’1’
13.
Since then the Plaintiffs have received two notices from the 1st
Defendant as follows:
i) A Notice of arbitration dated 4th
August, 1995 was issued by the 1st Defendant to the Plaintiffs
purporting to have been issued under the said State Support Agreement
purporting to invoke Clause 11
viz. the arbitration clause of the said
State Support Agreement, inter alia, claiming a sum in excess of US$
300,000,000 for the alleged breach of the State support Agreement. Additionally, the claim also includes an
alleged claim for loss of profit to be quantified in due course. The relief’s sought to be claimed are inter
alia declaration that the said support Agreement is valid and binding, for a
declaration that the Plaintiffs have allegedly committed a breach of the said
Agreement, for damages for the alleged breach, for specific performance and for
interim measures. By a Notice of
Appointment of Arbitrator dated 9th August, 1995 the Plaintiffs
appointed Mr. Andrew John Rogers as an Arbitrator. hereto annexed and marked Exhibit ‘J’ is a copy of the said
Notice of Arbitration dated 4th August, 1995 and Exhibit ‘K’ is a
copy of the said Notice dated 9th August, 1995.
ii) The 1st Defendant issued
another Notice of Arbitration dated 14th August, 1995 purportedly
invoking the arbitration clause 6(D) of the said Guarantee Agreement dated 10th
February, 1994 inter alia claiming that the Plaintiffs were bound to indemnify
the 1st Defendant against the alleged loss sustained. Hereto annexed and marked Exhibit ‘L’ is a
copy of the said notice dated 14th August, 1995 by the said Notice
the said Mr. Andrew John Rogers was appointed as an Arbitrator.
14. On 9.8.1995 the 1st Defendant
addressed a letter to the present Chief Minister of the Plaintiff which was
responded to on 11.8.95 the Secretary, Energy, of the State Government. The Plaintiffs crave leave to refer to and
rely upon the said letters dated 9.8.1995 and 11.8.1995 when produced.
15. In the circumstances, the Plaintiffs submit
that as more particularly stated herein below, the documents mentioned in para
3 © herein (which as already mentioned were part of one entire transaction) -
particularly PPA as well as other documents adjunct to PPA are in violation of
statutory provisions including the ESA - were and are as such fraudulent in law
and/or defeat the provision of law and are opposed to public policy. The said PPA and adjunct documents. viz.
inter alia Government’s State Support Agreement and Guarantee are also illegal
and void because there was active fraud and/or mis-representation on the part
of the 1st Defendant ( and its principal share-holders). The conduct
of the 1st Defendant has been vitiated by lack of bonafides is such
as the Court would record as fraudulent in the circumstances of the case. The various acts and conduct which are
deceptive and fraudulent and the grounds on which the contract is unlawful and
void are also set out herein below.
A) i)
The PPA has been executed in complete contravention of the requirements
of Section 29 of the ESA. The 1st
Defendant has been projected as a generating company under the ESA and is bound
to fulfill all the terms and conditions and provision of the ESA. Section 29
provides that before such a contract for a generating company supplying power
to the Board is entered into, the
proposed scheme along with the salient features thereof has to be notified in
the Gazette and published in the newspapers so as to invite objection from
interested members of the public as well as licensees. Thereafter these objections along with the
proposed scheme are to be sent to the Central Electricity Authority (CEA) for
techno economic clearance. In the
present case, the only notification or public advertisement under Section 29
was published on 21/22nd September 1993 by the 1st
defendant. The only information that it contained was the total cost of the
project (Rs. 9053 crores), total capacity (2015 MW) and that it would use LNG
as primary fuel. The Notification did
not contain other salient features thereof (such as the rate at which
electricity would be purchased by the 2nd Defendant, the rate of
interest on debt, the rate of return on equity, which were assumed in this etc.
In fact, the Notification did not even mention that the project had been
bifurcated into two Phases which could run independently of each other and further
that Phase. 1 of the Project would use distillate rather than LNG as fuel. In
fact the 1st Defendant acknowledged that it received 34 letters in
response to this advertisement including inter alia from the Mumbai Grahak
Panchayat and the Swadeshi Jagran Manch. These responses in particular pointed
out the complete inadequacy of information about the Project contained in the
Notification and sought further information about the terms on which the Plant
would supply electricity to the 2nd Defendant. Instead of notifying the other salient
features of this Project or even providing this information to the Mumbai
Grahak Panchayat and the Swadeshi Jagaran Manch among others, the 1st
Defendant proceeded to inform the CEA that though it had received letter in
response to their notification, there have been no objections to the Project
vide their letter dated 21.11.93, None of the queries of the representationists
were responded to by the 1st Defendant and in some cases even the
exact text of the notification was not provided. In fact the 1st
Defendant did not even forward these letters to the CEA in their communication
to them dated 21/11/1993. In their response dated 26/11/1993 the CEA informed
the 1st Defendant that it had already on 12.11.1993 granted
techno-economic clearance to the Project i.e., before even the expiry of two
months from the data of Notification and before even 1st Defendant had informed
the CEA about the response to the Notification. Apart from this, the Project
Report submitted to the CEA on the basis of which this clearance has been
granted is dated April 1993 which was not the project which has been finally
approved. It may be pointed out that
the capital cost mentioned in this Project Report for Phase - I and Phase - II
is 2459 Million Dollars (without duties) and 2711 Million Dollars (with duties)
which is several hundred million Dollars less than the final cost which was
given by 1st Defendant for the PA.
The CEA therefore was not even given the final draft of the PPA which
had been prepared in September/November 1993. it was asked and it did give its
clearance on the basis of an earlier project report of April 1993 where the
proposed project differ substantially form the final projects. One other major
different being that the final project is a decoupled project consisting of
Phase-land Phase-II. The Project
submitted to the CEA was a coupled project of Phase-I and Phase-II. Thus, the
whole object of Section 29 has been
completely defeated by making the CEA
give clearance to a project which was not the proposed project which has been
agreed upon, by making them give approval without notifying the project to the
public and without even waiting for the objections to even the few things that
were notified. The entering into of the
PPA was itself contrary to Law since the statutory requirements of Section 29
of ESA were not complied with.
ii) The PPA violates Section 43A of the ESA read
with the statutory notification dated 30.3.1992 issued under the Section giving
the tariff guidelines-in force on December 8, 1993. In particular, the tariff
guidelines permitted only a return of 16% on equity but the PPA allows a return
much in excess of 25%. Secondly, the tariff notification puts a cap on Operation
and Maintenance (O &M) charges at 2.5% of the capital cost. In the case of
the PPA the O & M changes were over Rs. 90 crores annually which is over 3%
of the capital cost. The PPA was not
even structured in accordance with the said notification. The entering into of the PPA was thus on
this ground also contrary to law and violative of Section 23 of the Contract
Act.
iii) The tariff notification allows payments only
for actual fuel consumed and not for deemed
consumption. In the present case the 1st Defendant has
allowed fuel charges or energy payments on the basis of deemed consumption
which is bound to be greater than their actual consumption since the heat rate
guaranteed by the 1st Defendant to the 2nd Defendant is
7605 BTU per unit while the heat rate guaranteed by GEC to the 1st
Defendant is considerably lower. Under the PPA about 25% of this difference and
deemed consumption and actual consumption is allowed to be retained by 1st
Defendant contrary to the tariff notification.
iv) The tariff notification obliges the tariff to
be fixed for 5 years in advance in the present case. Even though the PPA is valid for 20 years, the actual tariff is
completely variable and dependent upon such variables like rate of inflation in
India and the USA, the Exchange Rate variations between Dollar and Rupee and
market prices of fuel prevalent from time to time.
v) Under Section 16 of the ESA, the State
Government is required to constitute a body known as the State Electricity
Consultative Council for the state (SECCS) which advises the Boards (including
MSEB) and the generating companies (including 1st Defendant) on
“major questions of policies and major schemes” and to consider such other
matters as the board or generating company may place before it. Since 1986 SECCS had not been constituted
and on a Civil Writ Petition filed in
the Bombay High Court (CWP no. 707/93) a Division Bench of the Bombay High
Court on 7.6.1993 directed the State Government to constitute the said SECCS as
contemplated by Section 16 of the Electricity Supply Act within 6 months from
7.6.1993 i.e. on or before 7.12.19093. No. such Council was constituted by the
State Government till 8.12.1993 It was on 19.2.1994 that the State Government
constituted SECCS by which time PPA was a fait accompli (signed on 8.12.1993).
Section 16 was and is intended to be statutory safeguard particularly since council is to be a representative body
representing the wide range of
interest. At all material times, 1st
Defendant knew or ought to have known that a statutory safeguard had been
provided for in Section 16 and the Scheme of the 1st Defendant
normally would have gone to the SECCS .
The Scheme has therefore been executed in violation of the letter and
spirit of the Electricity Supply Act, 1948.
vi) The PPA violates the legislative policy of the
ESA as laid down by Section 18 of the ESA, which provides that the Board will
arrange “in co-ordination with generating companies in the State for the most
efficient and economical supply and distribution of electricity. This PPA
obliges 2nd Defendant to runt the 1st Defendant Plant as
a Base Load Plant (running at full capacity day and night) and thus shut down
other considerably cheaper plants whose variable cost also is considerably
lower than of 1st Defendant during off-peak hours when the supply of this
volume of the electricity is not required.
vii) The PPA also violates Section 30 of the ESA in
as much as the CEA has an obligation to clear only those proposals which are
techno-economically viable and most
feasible. In the present case,
the capital cost as well as cost of supply of electricity of this Plant was
much higher than that of other recently commissioned power plants and even that
which could be obtained from alternative sources.
B) The PPA has been procured by fraud and
misrepresentation on the part of the 1st Defendant. The 1st
Defendant has made the following misrepresentation or concealed the following
relevant information from the 2nd Defendant which ought to have been
disclosed.
i) The 1st Defendant misrepresented
about the cost of their other power stations in other parts of the world such
as the Teeside plant in U.K. which was
completed by the 1st Defendant in 1993. That the 1st Defendant gave false/misleading
information about the capital costs of their own other power plant set up in
other parts of the World in order to justify the capital cost of the 1st
Defendant’s plant. In their Annual
Report of 1992, the principal shareholder of 1st Defendant has given
the cost of the Teeside plant as 1.2 Billion $ for 1875 MW i.e., below $ 650
Per KW. Thereafter in July, 1993, the 1st
Defendant however represented to the Plaintiffs that the capital cost of the
Teeside Plant was $ 1009 per KW. further the 1st Defendant also gave
false/misleading figures, about the break up of the estimated capital cost of
the 1st Defendant’s plant at Dabhol. This is clear from the series of changing figures that 1st
Defendant’s gave from time to time between July 1992 and December 1993 about
the cost components for this plant. In
fact, the figures given by the 1st Defendant to the Central
Electricity Authority in their Project Report dated April 1993 which was used
as the basis for securing Techno-Economic Clearance for the Project are also
substantially different from the final figures on the basis of which the capacity
charges were built into PPA. This
is also clear from the fact that 1st Defendant in
its Annual Report of 1992 uses an expert study to justify the economic
viability of Gas based power plants. This study also mentions the capital costs of gas based plants to
be $ 683 per/KW, much less than the cost claimed for the Dabhol plant which is
$ 1200 per KW. The fact that the 1st
Defendant gave highly inflated cost figures for the Dabhol plant is also clear
from its own claim in its Annual Report of 1993 where it says, “using U.S.
costs and other cost comparisons as a base a new natural gas power plant costs
from one half to two thirds less to build than a coal or nuclear Plant. “It may be noted that even the current
capital costs of a Coal based Plant are considerably less than the figure of
4.2 crores per MW furnished by the 1st Defendant for Phase I and Rs.
4.5 crores Per MAW,. for Phase I and II of the Dabhol plant which is gas based
plant.
ii) The 1st Defendant misrepresented
to 2nd Defendant about the rate of interest which they were likely
to pay on foreign loans, which have been assumed as the basis for arriving at
the capacity charges and rates of return.
This is clear from the fact that the interest rates assumed for debt
servicing of the loans, both Indian and foreign, in the build up of the
capacity charge of the PPA are considerably higher than the commercial rate of
interest prevailing at that time as well as the rate actually paid by the 1st
Defendant for loans for this project. The interest rate represented by the 1st
Defendant on their foreign debt in justifying their return on equity is 10/
9.5%. This was greatly in excess of the interest which the 1st
Defendant knew would be charged on Foreign Debt which is actually much less
than 10%. In fact the Annual Report of 1st Defendant of 1992 and
1993 mentions that the interest rates on short term borrowing had come down to
3.9% in the year 1992 and even lower in the year 1993.
iii) The 1st Defendant concealed from
the 2nd Defendant the vital information that its
arrangement/contract with Bechtel, its turn-key contractor, provide for huge
penalties for delay in construction of the plant as well as for shortfall in
plant capacity. Thus, which the 1st
Defendant were justifying to the 2nd
Defendant the high rate of return on the basis of the guarantee to the 2nd
Defendant for the date of completion of the Project and plant capacity, it
concealed the fact that 1st Defendant contract with its turn-key
contractor gave the 1st Defendant several times higher penalties
than the penalties payable by the 1st Defendant to the 2nd
Defendant for any delay in construction or shortfall in the capacity. it may be
noted that the total contract cost of the 1st Defendant with Bectell
which is included in the Project cost takes into account these
guarantees/penalties. It may be pointed out that the net effect of the
guarantees/ penalties between the 1st Defendant/ the 2nd
Defendant and the 1st Defendant/Bectell
is that the 1st Defendant instead of being penalized for delay in
construction or for performance shortfall will actually get a huge premium for
it.
iv) The 1st Defendant misrepresented to
2nd Defendant about the preclosing clearances that had been complied
with by the 1st Defendant by 25th February 1995 and further
fraudulently induced the 2nd Defendant to agree to waiver of all
these conditions by stating in the letter of 25th February 1995 that
mere signing of that letter in respect of the same would constitute waiver of
the clearances set out in that letter. In particular, it may be pointed out
that even though several preclosing clearances such as clause 2 (I) (I) of the
pre-closing clearance of Schedule II of the PPA (a direct loan agreement
between 2nd Defendant and the lenders) had not been fulfilled, the 1st
Defendant fraudulently told the 2nd Defendant that this condition
had been complied with by means of consent letter of 2nd Defendant
dated 2/2/1995. This consent letter
clearly does not amount to a compliance with the pre-closing clearance
specified in clause 2(I) (I) of the PPA.
It may be pointed out that this direct loan agreement between the 2nd
Defendant and the lender was necessary on account of some clauses in the PPA.
which allowed for certain circumstances in which the contract would be
terminated in which case the 2nd Defendant was to take over the
obligations of the 1st Defendant to the lenders. That is why a direct loan agreement was
necessary between the 2nd Defendant and the lenders so that it was
clear that the lenders were agreeable for this contingencies in the PPA. What
had instead been executed on 2/2/1995 is merely in the nature of a trusteeship
deed executed between the 2nd Defendant, Bank of America and the
IDBI. There is no direct loan agreement
between the 2nd Defendant and the lenders as envisaged in clause
2(1) (a). Thus the 1st
Defendant purported to make the PPA binding upon 2nd Defendant and
the Plaintiff in this fraudulent manner.
C) The PPA is contrary to the public policy
of this country in as much as it will cause a huge loss to the public exchequer
on the purchase and sale of power of place an unconscionable burden on the
electricity consumers of the State. This is clear from the fact that the
estimated costs of Dabhol power at the bus-bar (factory gate) of the plant is
currently estimated by 1st Defendant to be Rs. 2.4 per KWH. This estimate is based on current exchange
rate of $ against Rupee, current, cost of distillate which constitutes almost
50% of the total cost of DPC power.
Apart from this there are several peculiar features of this PPA which
will have a critical impact on the
current as well as future cost of DPC power to the consumer and on the public
ex-chequer. These are the following:
i) The capacity
charge in this PPA is back loaded by 4% and in addition denominated almost
entirely in $. This means that irrespective of anything,
capacity charge would increase in $ terms by 4% per year and its impact on the
State Electricity Board would be further aggravated by the appreciation of the
$ against the Rupee which has historically for last 15 years been at an average annual rate of 8%. Thus the estimated capacity charge in Rupee
terms which are above 50% of the total cost under these conditions would
increase by about 12% per year over the 20 years term of the contract.
ii) The fuel
for the plant consists of entirely imported distillate/LNG, the supply or the
price of which is entirely beyond the control of the 2nd Defendant or any other State agencies . The supply and
price however is largely under the control of the 1st Defendant and its holding company ENRON whose affiliate has
been appointed fuel manger. The price for fuel would have to be paid for in $,
which means that its price would escalate
with the appreciation of the $ against the Rupee, the supplies would be on long
term fuel supply contracts entered into by the 1st Defendant since there are hardly any spot markets for LNG fuel.
Moreover, the risk of interruption or disruption of fuel supply is entirely
borne by the 2nd Defendant under the contract in the force major and other
clauses.
iii) The PPA is
structured in a manner such that 1st Defendant‘s plant can only be
operated as a base load unit with the 2nd Defendant being obliged to off-takes
at least 90% of the capacity of the plant at all times. This is because the capacity payments are
charged on plant availability and not on off-takes. Thus irrespective of the
off-take, capacity payment would have to be made for almost full capacity of
plant. Although the 2nd Defendant can ask the 1st Defendant to back down one of
the two main units, the other clauses of the contract render this completely
impracticable on account of.
(a) cold
and hot start fee which are quite high; and
(b) `take
or pay’ clause regarding fuel under the contract which essentially obliges
the 2nd Defendant to pay for the entire fuel which would have been consumed if the plant had been
running at full capacity.
All
this taken together would imply that under the PPA, the 2nd Defendant are
obliged to purchase the electricity at almost full capacity of this plant. This
means that during off-peak hours when the demand on the grid is less than even
the present availability and even future estimated availability from other
cheaper plants, the 2nd Defendant would be required to purchase power from the
1st Defendant, at a variable cost which is approximately 2 to 3 times the
variable costs of other 2nd Defendant’s plants. These plants will be required
to backed down in order to accommodate the supply from 1st Defendants plant in
order to meet its coercive obligation to the 1st Defendant. This factor alone
would add very significantly to the average cost of the 1st Defendant’s supply
of power to the 2nd Defendant.
(iv) More than 95% of the payment to the 1st
Defendant for electricity purchased by the 2nd Defendant under this contract
will be in $ terms. Thus the presently estimated annual foreign exchange out-go
for Phase I would be approximately 400
million $ and in excess of 1.2 billion $ for both Phases. This will go up every
year. In fact, even the approval of the Government of India for this Project
was only for a foreign exchange out-go of 950 million $ per year for both the
Phases together and this was the figure given by the 1st Defendant to the
Central Electricity Authority in its
Project report on the basis of which the CEA has granted approval. However, the
actual estimated forex outflow known to the 1st Defendant at the time of the
approval of the CEA was in excess of 1.2 billion $ which was to go up year by
year. These facts were concealed by 1st
Defendant from the various authorities in seeking and getting approvals.
(v) that the PPA has various force majeure
clauses and clauses relating to change in tax/change in law which not only
insulate the 1st Defendant against changes in tax/law in future but also
insulate the 1st Defendant’s profits against any unforeseen contingencies such
as fire, earth-quake, strikes, lock-out, etc. which may affect the working of
the plant. The adverse financial impact of all these above unforeseen events
under the PPA are to be borne by the 2nd Defendant. Further the 2nd Defendant
will be obliged to ensure that the 1st Defendant gets its profits and costs, on
account of any change in law, change in tax. The cost of these contingencies which will be directly passed
on to the 2nd Defendant should also be factored into cost of the 1st Defendant
supply power.
(f) In order to arrive at the consumer cost
of DPC power one has to further include the cost and interest of putting up the
main transmission line from the 1st Defendant’s plant to the Grid, cost of
augmenting the grid i.e. Transmission and Distribution (T & D) cost and the
transmission and distribution line. The
cost of mainlines to evacuate DPC power which is to be borne by the 2nd
Defendant is estimated at over Rs. 300 crores. The impact of T&D loss and
cost would be in addition.
(g) If all the above factors are included in
the cost of the 1st Defendant’s power and a levelised cost is worked out for
the 20 years operation of the contract, it will be found that the levelised
cost of DPC power to the consumer is greatly in excess of the price of Rs.
2.40/kwh being quoted by the 1st Defendant.
This cost would be more than twice the average current rate of the 2nd
Defendant’s supply of power from various other power plants supplying power to
the 2nd Defendant. In addition this
will require a foreign exchange out-flow of almost Rs. 4000 crores annually
(for phase I and II together) which would go on increasing with years on
account of back-loading of capacity charges will increase by 4% per year in $
terms and on account of $ denomination of the charges which will also increase
with the likely appreciation of $ against Rupee.
Another
method of establishing the high cost of DPC power would be to examine the
justification of 1st Defendant from time to time about their costs and returns.
I) The 1st Defendant assumes a total cost
of 910 million $ for Phase I and about 2.82 billion $ for Phase I & II. Out
of this, the debt equity ratio is 70:30 and about 85% of the debt is foreign
debt. The rate of interest assumed on
the foreign debt is approximately 10% and the Indian rate of interest on Indian
debt is on actual interest rate. The
internal rate of return of equity in $ terms was estimated by 1st Defendant (in
justifying their tariff) to be approximately 26%. The average rate of return by
1st Defendant’s own calculations is in excess of 40%. In the first place the
capital cost has been inflated as is clear from the arbitrarily varying figures
of capital cost furnished by ENRON from time to time, the comparison with the
capital cost of other power plants being set up in India, as well as the
estimated cost of power plants calculated by various expert organizations such
as Electric Power Research Institute, USA etc.
It can safely be demonstrated that the capital cost given by ENRON to
justify the tariff is at least 20% higher than the actual capital cost which
they were likely to incur.
Apart
from this, one major element in the capital cost is the cost of the
Harbour. The PPA allows 1st Defendant
to use the harbour for other customers in the country. This will also inflate their returns.
Therefore, there is no justification for the entire cost of the harbour to be
included in this Project cost.
ii) The interest rate assumed on a foreign
debt which is the bulk of the debt for this Project is approximately 10%. In
actual fact the weighted average rate of interest payable by ENRON for their
loans for this Project is considerably less than 8%. This factor alone will increase the 1st Defendant’s internal rate
of return considerably
iii) Apart from this there are various other
costs which have been used to justify the capacity and energy charges in the
PPA which are likely to be quite different from the actual cost incurred by the
1st Defendant. Thus the 1st Defendant
are likely to get various other benefits such as availability bonus, higher efficiency
of the plant, etc. All this will
further increase the IRR substantially.
iv) It may also be pointed out that the
capacity charge which is supposed to largely consist of debt servicing charges
and return on equity is to go on increasing at 4% ($ terms) throughout the 20
years of the PPA even though the debt of the 1st Defendant would be fully paid
up at the rate of capital repayment assumed within 12 years.
h) That this PPA is also contrary to
public policy in as much as the Project is dependent upon imported fuel
especially LNG, the supply of which is completely beyond the control of the 2nd
Defendant or any State Agency. In fact,
the supply of LNG is highly uncertain.
Apart from this the owners of the 1st Defendant viz., ENRON is one of
the main gas suppliers in the world and by such a contract as envisaged in the
PPA, the 2nd Defendant would become totally dependent upon the 1st Defendant
for the supply of fuel to the extent that they could easily manipulate its
price That the principal shareholders of 1st Defendant were hoping to make huge
profits on the supply of LNG for this plant is clear from their statement in
their Annual Report of 1992 that “Enron’s Power strategy is to secure
profitability through a making of secure long term fuel supply contacts with
long term power sales agreements. The strategy results in a predictable growing
earning stream. “Such an uncertain and risky arrangement for fuel supply,
especially where the price could be manipulated by the 1st Defendant and where
the risks of disruption in supply are entirely borne by the 2nd Defendant is
also contrary to public policy.
I) That this Contract read
with other subsidiary contracts
and guarantees insulates the 1st Defendant’s profits from every contingency such
as, change in law, change in tax, even income-tax as well as such contingencies
like fire, earthquake, strikes, lockouts, which would in any way affect the
functioning of the 1st Defendant’s Plant.
For a state agency to assume the consequences of such normal business
risks is of a private company is also contrary to public policy.
D) It is submitted that the manner in which
the arbitration clause in the PPA was originally agreed to and subsequently
amended also shows that the entire intention of the 1st Defendant was to get
maximum advantage to itself and cause maximum harm to the 2nd Defendant, the
Plaintiffs and public interest. For instance, in PPA initially the arbitration
clause was to be governed by the Indian Law. Suddenly after 8th December 1994,
the process of amendment of PPA inter alia of its arbitration, was expedited to
make English Law applicable to the Arbitration in the PPA. Similarly, the
clause in the State Support Agreement regarding Governing Law was strangely
agreed to in such manner as to make English Law applicable not only to the arbitration
but also to the construction of the Agreement. The Plaintiffs submit that both
the parties to the said State Support Agreement are Indian parties, one of them
being the State of Maharashtra and there is no cause whatsoever for the State
of Maharashtra to agree to the application of English Law, particularly when,
if at all any cause of action were to arise, such cause of action would arise
entirely in India under the said Agreement.
Under the said State Support Agreement, the State of Maharashtra has
given up its sovereign powers which it has no authority to do and clearly the
Agreement is unconstitutional and contrary to public policy. It is submitted that the provision under the
State Support Agreement to be governed
by English Law is not based on any valid or bonafide ground. In fact, opting for the application of
English Law by Indian parties in respect of an Indian cause of action is
clearly illegal and unconstitutional.
Such a clause, without prejudice to the aforesaid, is in any event not enforceable. Providing for English Law would result in excluding the
Government of Maharashtra, if at all such a clause is valid, from exercising
its constitutional and statutory rights and would be clearly in contravention of public policy. The manner in which different governing laws
and different arbitration clauses have been included in different agreements
and amended from time to time, clearly shows that the whole object was to gain
maximum advantage to the 1st Defendant and to deny the legitimate rights of the
Plaintiffs. There is no nexus or
connection with English Law and consequently there is no reason to stipulate
the application of English Law particularly when both parties are Indian and
more particularly so as one of the parties is an Indian State. Even under the doctrine of choice of law as
a rule of Private International Law, it is not permissible for Indian parties
to contract to stipulate in effect that a totally unrelated contract or a
totally unrelated cause of action with a foreign law would still be governed by
a foreign system of law even though that foreign system of law would have no
action whatsoever with the cause of action of the parties.
E) It has now come out that the whole
object of the 1st Defendant was to gain maximum advantage to itself by the said
Project at the cost of the Indian public.
It was inter alia decided by the said ENRON to divest 20% to 30% equity
holding in 1st Defendant to one New Orleans based Company called Energy Court
at a high premium straightway which would result in the said ENRON making a
substantial profit. It further appears
that not only was the said ENRON gaining by entering into the Fuel Management
Agreement but the said ENRON had nearly 40% equity or had negotiated to buy 40%
stake in the LNG Plant in Qatar which would ultimately supply the said LNG to
the 1st Defendant, Thus indirectly also the said ENRON was intending to make
huge profits. It is in these circumstances
that the said ENRON is making desperate attempts some how to cling to the said
contract and is resorting to all sorts of illegal steps including causing
threats to be delivered to the Plaintiffs.
f) Thus the manner in which the
transaction was entered into, the contents of the said transactions the manner
in which it was closed and the manner in which now the said ENRON and the 1st
Defendant are acting to see that some how it is executed clearly show that the
transaction is void, illegal, inoperative, incapable of performance, unlawful,
contrary to law, public policy and public interest.
G) The Plaintiffs submit that in large
multinational contracts, there is usually competitive bidding and in the
absence of competitive bidding where a contract is entered into by
negotiations, there must be complete transparency in the transaction and if the
record reveals that either the act of entering into the contract or its
implementation had corrupt consideration, the contract must be struck down a
contrary to public policy, that the entire transaction was conceived malafide
is made clear inter alia from the fact that the said ENRON admitted before the
US sub-committee on Foreign Operations that they had spent a huge sum of US$ 20
Million “on the education and project development process alone not including
the project cost”. thus what is
euphemistically described as education expense is unexplained expenditure spent to some how obtain the
said contract. the subsequent and attempted explanation given by the 1st
Defendant is at complete variance with their statement made by Linda Power-Vice
President, Global Finance for Enron Development Corporation. It is clear that
while the statement made by Linda
Power-Vice President, Global Finance for Enron Development Corporation. It is
clear that while the statement was given by ENRON, the explanation is now
sought to be given by the 1st Defendant and consequently ENRON has exposed
itself to investigation under the US Foreign Corrupt Practices Act.
H) The Government of Maharashtra under the
PPA was only required to guarantee due and proper performance of all payment,
obligations of the 2nd Defendant under PPA. But the Government of Maharashtra
Guarantee as per draft of the 1st Defendant which they go executed, contains
specific indemnity providing that the Guarantor (State Govt. of Maharashtra) undertakes
as primary obligor to indemnify and keep indemnified the 1st Defendant against
any loss sustained or incurred by it for reason, inter-alia, of illegality of
the Guarantee or even illegality of PPA.
Thus, the 1st Defendant envisaged a distinct possibility of PPA being
held illegal for corrupt, or fraudulent motives or having been obtained by
misrepresentation on the part of 1st Defendant. This is itself indicative of
important public policy consideration raised in this suit. Such an indemnity clause is clearly contrary
to public policy.
16.(a) It is submitted that in the circumstances
aforesaid, and in view of what is stated herein, the Government of Maharashtra
Guarantee dated 10.2.1994 (Exhibit ‘C’ hereto), and the State Support Agreement
dated 24.6.1994 (Exhibit ‘D’ hereto), along with the PPA dated 8.12.1993
(Exhibit ‘B’ hereto), are void, illegal and contrary to public policy and are
not capable of being enforced either in arbitration or otherwise and the
Plaintiffs are entitled to the declarations prayed for in that behalf herein
and the reliefs of perpetual and/or permanent injunctions as stated herein.
b) The Plaintiff submit that this Hon’ble
Court be pleased to declare that the transactions covered by the aforesaid
documents are invalid and void, inter alia, on the grounds of fraud and
misrepresentation on the part of the 1st Defendant. The Plaintiffs are entitled
to a further declaration that in any event the Government of Maharashtra
Guarantee dated 10.2.1994 (Exhibit ‘C’ hereto) and the State Support Agreement
dated 24.6.1994 (Exhibit ‘d’ hereto) are per se violative of the provisions of
the Constitution and/or law and/or are contrary to public policy and are as
such, void.
c) The Plaintiffs submit that without
prejudice to the aforesaid, they are entitled to a declaration that there was
no waiver of Conditions Precedent as stipulated, inter alia, in clause 2 of the
PPA as purported to be stated by the 1st Defendant in the letter dated
25.2.1995 (Exhibit ‘F’ hereto) of the 1st Defendant to the 2nd Defendant and
that in any even such purported waiver was not bonafide and was fraudulent and
of no effect,. Assuming whilst denying
that the purported waiver of the Conditions Precedent was valid and effective,
the Plaintiffs submit that in any case other Conditions Precedent have not been
waived and were not capable of being unilaterally waived.
d) The Plaintiffs submit that they are
also entitled to a declaration that it was impermissible for the parties to the
aforesaid transaction to enter into any arrangements or agreements after
8.12.1994 and/or 10.1.1995 and/or any date after 9/12.2.1995 by which time, the
entire transaction, including the Power Purchase Agreement dated 8.12.1993, the
Government of Maharashtra Guarantee dated 10.2.1994 and the State Support
agreement dated 24.6.1994 were terminable at will without legal and financial
consequences.
e) The Plaintiffs submit that in any event
it is impermissible in law for Indian parties to apply or agree to application
of foreign law where a contract or the fulfillment of a contract has no
relation whatsoever with the foreign law or law of foreign countries. It is quite clear that the provisions in the
State Support Agreement and in the Government of Maharashtra Guarantee that
rights and obligations of the parties under the Guarantee and the State Support
agreement will be governed and construed by the English law are contrary to
Indian law and violative of public policy. It is impermissible for Indian
parties to apply the law other than Indian law where neither the contract nor
its performance are referable to a place other than India. The Plaintiffs
further submit that the provisions of Section 28 of the Contract Act read with
Section 47 of the Arbitration Act, 1940 ,all arbitration between Indian parties
in respect of contracts entered into in India and to be performed in India must
be governed by law of arbitration in India and not under any alleged specified
system of international law or systems of arbitration rule which are not law in
force in India. Even the purported amendment of the arbitration clause by amendment of PPA on 2.2.1995 providing that an arbitration agreement would
be governed by the place of arbitration stipulated as London is also contrary
to law. The Plaintiffs submit that the Hon’ble Court may be pleased to declare
that it was impermissible for the parties to the Power Purchase Agreement, as
amended, the Government of Maharashtra Guarantee dated 10.2.1994 and the State Support Agreement dated
24.6.1994 to stipulate that the governing law of contract (in the Government of
Maharashtra Guarantee and the State Support Agreement) and the governing law of
arbitration in all the three Agreements would be English law and in any event, the relevant clauses
of the aforesaid three Agreements, stipulating the application of the English
law either to the contract and/or to arbitration are null void and of no legal
effect.
(f) The Plaintiffs submit that this Hon’ble
Court may be pleased to declare that the contractual provision with respect to
arbitration contained in the amended PPA, the Government of Maharashtra
Guarantee and the State Support Agreement are contrary to Section 28 of the
Contract Act and the Section 47 of the Arbitration Act, 1940 and are null,
void, illegal, inoperative and incapable of being performed and are null, void,
illegal, inoperative and incapable of being performed.
17. In the circumstances aforesaid, the
Plaintiffs submit that the Plaintiffs are entitled to orders of permanent and
perpetual injunctions as prayed for herein:
a) The Plaintiffs submit that this
Hon’ble Court may be pleased to issue
an order of permanent and perpetual injunction, restraining the 1st Defendant
from in any manner acting upon or in pursuance of the transactions contained in
the Power Purchase Agreement dated 8.12.1993, as amended, the Government of
Maharashtra Guarantee dated 10.2.1994 and the State Support Agreement dated
24.6.1994, Exhibits ‘B’, ‘C’ and ‘D’ respectively.
b) The Plaintiffs submit that without
prejudice to the aforesaid and in any event, this Hon’ble Court may be pleased
to issue an order and permanent injunction restraining the 1st Defendant from in any manner acting upon or
in furtherance of or in pursuance of the purported letters/notices dated
4th August, 1995, 9th August, 1995 and
14th August, 1995, being Exhibits ‘J’. ‘K’ and L’ hereto.
c) In any event and without prejudice to
the aforesaid, this Hon’ble Court may be pleased to issue and order and
permanent injunction restraining the 1st Defendant from proceeding on the
footing that there was a valid waiver of Conditions Precedent by the letter
dated 25.2.1995 of the 1st Defendant being Exhibit ‘F’ hereto.
d) In any event and without prejudice to
the aforesaid, this Hon’ble Court maybe pleased to issue an order and permanent
injunction restraining the 1st Defendant from proceeding on the footing that
all the unfulfilled Conditions Precedent contained in clause 2 of the PPA have
been waived.
18. The Plaintiffs submit that the Plaintiffs
have filed the present suit in respect of only some of the reliefs out of
several reliefs to which the Petitioners are entitled to arising out of the
documents set out in the Plaint.
Further, the Petitioners intend to file the present suit for some
reliefs in respect of only certain documents forming a part of the said transaction of Power Project as
compendiously evidenced by several documents.
The Plaintiffs have filed the present suit for setting aside and/or
declaration as void of only certain letters/documents. The Plaintiffs crave
leave of this Hon’ble court under Order 2 Rule 2 of the Code of Civil
Procedure, 1908 to omit to sue in respect of other reliefs arising out f the
same transaction and to omit to sue in respect of documents other than the
documents set out in the Plaint and forming part of the same transaction.
19. The Plaintiffs submit that the entire
cause of action in the suit has arisen in Bombay. The Agreements have been entered into in Bombay. The various
letters and/or documents in respect of which reliefs are claimed herein, have
been received by the Plaintiffs and/or the 2nd Defendant in Bombay. The 1st and the 2nd Defendant have their
registered offices at Bombay and carry on business in Bombay. In the circumstances, this Hon’ble Court has
jurisdiction to entertain and try the suit.
20. The claim in the suit far exceeds Rs. 15
lakhs and for the purpose of Court fees and jurisdiction the Plaintiffs have
paid the maximum court fees of Rs. 15,00/- The amounts of contracts,
agreements, guarantee and clams made by
the 1st Defendant and challenged herein are far in excess of Rs. 15 lakhs and
the Plaintiffs have paid the maximum Court Fees of Rs. 15,00/-
21. The Plaintiffs will rely upon documents a
list whereof is hereto annexed.
22. Mr. Nazir Nizaamuddin Patel, who is the
Deputy secretary of the Department of Energy of the Plaintiffs is aware of the
facts of the case from the documents thereof and who is competent to depose to
the contents of the Plaint has signed and declared the Plaint.
The
Plaintiffs, therefore, pray:
a) That this Hon’ble Court may be pleased
to declare that the transactions covered by the aforesaid documents namely the Power Purchase
Agreement dated 8.12.1993 (being Exhibit ‘B’ hereto), the Government of
Maharashtra Guarantee dated 10.2.1994 (being Exhibit ‘C’ hereto) and the State
Support Agreement (being Exhibit ‘D’ hereto) as well as the said documents are
invalid and void, inter alia, on the grounds of fraud and misrepresentation on
the part of the 1st ‘Defendant and violations of public policy:
b) That in any even this Hon’ble Court may
be pleased to declare the Government of Maharashtra Guarantee, dated 10.2.1994
(Exhibit ‘C’ hereto) and the State Support Agreement dated 24.6.1994(Exhibit
‘D’ hereto) are per se violative of the provisions of the Constitution and/or
law and/or are contrary to public policy and are as such void;
c) Without prejudice to the aforesaid and
in any event this Hon’ble court may be pleased to declare there was no waiver
of Conditions Precedent as stipulated,
inter alia, in clause 2 of the PPA as purported to be stated by the 1st
Defendant to the 2nd Defendant and that in any event such purported waiver was
not bonafide and was fraudulent and of no effect;
d) That without prejudice to the aforesaid
and in any even this Hon’ble Court may be pleased to declare that other
Conditions Precedent have not been waived and were not capable of being
unilaterally waived:
e) That this Hon’ble court may be pleased
to declare that it was impermissible for the parties to the aforesaid
transaction to enter into any arrangements or agreements after 8.12.1994 and/or
into any arrangements or agreements after 8.12.1994 and/or 10.1.1995 and/or any
date after 9/12.2.95 by which time, the entire transaction, including the Power
Purchase Agreement dated 8.12.1993, the Government of Maharashtra Guarantee
dated 10.2.1994 and the State Support Agreement dated 24.6.1994 were terminable
at will without legal and financial consequences:
f) That this Hon’ble Court may be pleased
to declare that it was impermissible for the parties to the Power Purchase
Agreement, as amended, the Government of Maharashtra Guarantee dated 10.2.1994
and the State Support Agreement dated 24.6.1994 to stipulate that the governing
law of contract (in the Government of Maharashtra Guarantee and the State
Support Agreements) and the governing law of arbitration in all the three
Agreements would be English law any in any event, the relevant clauses of the
aforesaid three Agreements, stipulating the application of English law, either
to the contract and/or arbitration, are null, void and of no legal effect.
g) That this Hon’ble Court may be pleased
to declare that the contractual provision with respect to arbitration contained
in the amended PPA, the Government of Maharashtra Guarantee, the State Support
Agreement are contrary to Section 28 of the Contract Act and Section 47 of the
Arbitration Act, 1940 and tare null, void, illegal, inoperative and incapable
of being performed;
h) That this Hon’ble Court may be pleased
to issue an order of permanent and perpetual injunction, restraining the 1st
Defendant from in any manner acting upon or in pursuance of the transactions
contained in the Power Purchase Agreement dated 8.12.1993, as amended, the
Government of Maharashtra Guarantee dated 10.2.1994 and the State Support
Agreement dated 24.6.1994.
I) The Plaintiffs submit that without
prejudice to the aforesaid ad in any event, this Hon’ble Court may be pleased
to issue an order and permanent injunction restraining the 1st Defendant from
in any manner acting upon or in furtherance of or in pursuance of the purported
laws/notices dated 4th August, 1995, August, 1995 and 14th August, 1995
Exhibits ‘J’, ‘K’ and ‘L’ respectively.
j) In any event and without prejudice to
the aforesaid, this Hon’ble Court may be pleased to issue an order of permanent
injunction restraining the 1st Defendant from proceeding on the footing that
there was a valid waiver of Conditions Precedent by the letter dated 25.2.1995
of the 1st Defendant being Exhibit ‘F’ hereto;
k) For costs of the suit;
I) For such other and further reliefs as
the nature and circumstances of the case may require.
Plaint
drawn by
Mr. Prashant Bhushan &
Mr.
Nitin Pradhan
Advocates
AND
Settled by:
Mr.
C.J. Sawant,
Advocate
General
AND
Re-settled by
Mr.
F.S. Nariman,
Senior
Advocate
For
M/s. Desai & Diwanji For the State of Maharashtra
Partner
Advocates
for the Plaintiffs Plaintiffs
I, NAZIR NIZAAMUDDIN PATEL of Bombay
Indian Inhabitant, Deputy Secretary, Department of Energy of plaintiffs having
his office at Mantralaya, Bombay - 400 032 do hereby solemnly declare and state
that what is stated in paragraphs, 1,2,12 to 14 and 22 of the foregoing Plaint
is true to my own knowledge and what is stated in the remaining paragraphs 3 to
11 and 15 to 21 of the foregoing Plant is stated on the basis of information
and belief and I believe the same to be true.
Solemnly
declared at Bombay )
this day of September, 1995 )
Before
me.
Associate/Asst.
Master
High Court, Bombay
For
M/s. Desai & Diwanji
Partner
Advocates
for the Plaintiffs.