Coal-Block Cancellation Was a Change in Law, But Pre-Cancellation Fuel Shortfall Costs Were Not Pass-Through

The Background

The dispute arose under a power supply arrangement under which Adhunik Power supplied electricity through a back-to-back contractual structure to West Bengal State Electricity Distribution Company Ltd. The commercial understanding underlying the arrangement was that the generating company would source coal from the Ganeshpur captive coal block.

Because the captive block did not become operational, the generator sourced coal through tapering linkage and, for the shortfall, through e-auction and imports. Later, after the Supreme Court's decision in the coal block allocation matters, the Ganeshpur allocation stood cancelled and the legal framework for coal allocation changed.

Why the Supreme Court Intervened

The Court agreed that the captive source referred to in the agreement was indeed the Ganeshpur coal block, even though the contract did not name it expressly in one clause. It relied on the surrounding contractual record, including the negotiation minutes and later correspondence, to identify the factual basis of the agreement.

The Court then drew a key distinction. Before 25 August 2014, the generator could not pass through the extra cost of e-auction and imported coal used to cover shortfall in tapering linkage because Article 2.5 insulated the purchaser from such escalation when coal was sourced from elsewhere. But once the coal block was cancelled and the law changed through judicial interpretation and later legislation, Article 10 was triggered, and compensation for the Change in Law consequence became payable.

The Final Decision

The Supreme Court partly allowed the appeals. It set aside the part of the Appellate Tribunal's order that had granted compensation for e-auction and imported coal used to meet tapering-linkage shortfall before the cancellation of the coal block.

However, it upheld the rest of the tribunal's order granting compensation on account of Change in Law events with effect from 25 August 2014, along with carrying costs until actual payment. The Central Electricity Regulatory Commission was directed to modify its consequential order accordingly within four weeks.

Why This Judgment Matters

The judgment is important because it carefully separates ordinary commercial risk from genuine legal change. Parties cannot treat every increase in input cost as a Change in Law claim when the contract itself allocates that risk.

At the same time, the ruling confirms that when a judicial decision and later legislation take away the agreed captive coal source, the generating company is entitled to be restored under the contractual Change in Law mechanism.