In developing countries like India, availability of electricity and the advancements made in the power sector are relevant yardsticks to ascertain the country’s growth and development. With this realization, India has introduced several measures over the last few years to attract private investment in the power sector, however, the dispute resolution mechanism continues to be largely governed by special legislations. This blog sheds light on the percolation of alternate dispute resolution mechanisms in a majorly state- controlled sector and the need for broadening the reach of such mechanisms in order to promote efficacy and private/foreign investment.
Despite the growing popularity and high effectiveness of Alternate Dispute Resolution (“ADR”) techniques in the present day and age, one cannot help but wonder about their scope and feasibility when it comes to complex and technical industries such as the power sector. A wide range of issues including but not limited to licensing, tariff, commissioning date, testing, certification, profit sharing, etc. can emerge between two parties. Since the power sector is largely controlled by the State in India and the fact that there are special commissions and tribunals to deal with certain categories of disputes in the power sector, the legality of resorting to ADR techniques becomes debatable. TheElectricity Act, 2003 (“Electricity Act”) majorly governs the power sector in India. Recently, to keep up with the dynamic needs of the society, anamendment to the Electricity Act was introduced in the Parliament in 2020 which seeks to promote private and international investment in the generation, transmission, and distribution of electricity with a view to enhancing business efficacy and function of distribution companies (“DISCOMs”). The amendment, if promulgated, will give way to new entrants in the market, increasing competition in the sector. Even though there is some reservation concerning the cascading effect that privatization may have on public interest, it is widely believed that the pros of privatization would outnumber the cons and prove to be advantageous for the growth and development of the power sector. Due to the nature and capacity of power disputes to impact public interest, most legislations and policies governing the sector are not very liberal when it comes to their resolution through ADR mechanisms. However, it is essential to take cognizance of the fact that one of the key elements that will attract private and foreign investment in the power sector in India is a sound and fair dispute resolution mechanism. In this blog, we discuss the viability, scope, and legality of ADR techniques in the power sector along with some reforms that may be introduced to not only promote its efficacy but also to give way to effective and streamlined ADR procedures in such technical sectors.
Nature of Power Disputes
Power projects are extremely complex, elaborate, and technical in nature, involving huge capital expenses. Like in a majority of commercial contracts, the emergence of disputes often becomes inevitable due to the dependability on external factors, such as government regulations, approvals, and political situations impacting the completion and functioning of projects. Furthermore, close interactions between private and state entities may also lead to disputes. The majority of such disputes are contract and domestic law based. However, with the advent of foreign investment in the sector, the disputes may also be governed by investment treaties. While the resolution of such disputes through arbitration and other ADR methods is increasingly common in the international domain, India still has a long way to go before it can be recognized as a country having fair use and implementation of ADR techniques in the power sector.
Legality of Resolving Disputes in The Power Sector via Arbitration in India
Arbitration, conciliation, mediation, and negotiation are the four main methods of ADR recognized in India underSection 89 of the Code of Civil Procedure, 1908.
Despite the availability of other methods, arbitration is the most popular and preferred form of ADR because of its unique characteristics- party autonomy, cost-effectiveness, binding nature, and time-bound disposal of proceedings. Arbitration proceedings can be invoked either by referring to the arbitration clause from an agreement between the parties or from an investment treaty. Having said that, in spite of the accolades that arbitration has received, parties are not free to resort to arbitration in all cases emerging from an agreement between the parties. It is a settled position of law in India that disputes concerning public interest ought not to be settled by a private mechanism such as arbitration and have to necessarily be adjudicated by courts. In light of this position, it is relevant to analyze – are all disputes in the power sector incapable of being resolved through arbitration and if not, what is the process of referring such disputes to arbitration?
The Hon’ble Supreme Court of India in the case ofVidya Drolia and Ors. v. Durga Trading Corporation discussed the issue of non-arbitrability of disputes in India in detail. While recognizing that party autonomy and consent of the parties to resort to arbitration are two key features of settlement of disputes through arbitration, the Hon’ble Supreme Court held that arbitrability of a dispute depends on its subject matter since arbitral tribunals, not being courts of law or established under the auspices of the State, cannot act judicially to affect those who are not bound by the arbitration clause. Thus, it is now established that the resolution of disputes through arbitration is unfit for cases that have an erga omnes effect i.e. which largely affect the rights and liabilities of people, not bound by the arbitration agreement.
Additionally, it is also relevant to take note of the position of law that the doctrine of election to select arbitration as a dispute resolution mechanism by mutual agreementis available only if the law accepts the existence of arbitration as an alternative remedy and freedom to choose is available. Under theArbitration and Conciliation Act, 1996 (“Arbitration Act”), the arbitrators are vested with the power to decide whether or not the tribunal has jurisdiction to adjudicate the subject matter of a dispute. However, that is not the case for certain special categories of disputes such as those covered under the Electricity Act.Section 158 of the Electricity Act states that matters can, by or under, the said act be directed to be determined by arbitration, however, power to refer such disputes to arbitration is vested only with the appropriate commission underSections 79 and 86 of the Electricity Act. Consequently, the jurisdiction of ‘courts’ under the Arbitration Act (under Sections 8 and 11) is ousted by the provisions of the Electricity Act. The said position of law has been affirmed by the Hon’ble Supreme Court in the case ofGujarat Urja Vikas Nigam v. Essar Power Ltd. (“Gujarat Urja judgment”). In the said case, the Hon’ble Supreme Court held that the Electricity Act, being a special legislation, overrides the provisions of the Arbitration Act. Therefore, all disputes between a licensee and generating companies, irrespective of their nature,are to be adjudicated either by the State/ Central commission or are to be referred to arbitrators approved by such commissions.
In the case ofTata Power Trading Company Limited and Ors. v. Uttar Pradesh Power Corporation Limited, before the Central Electricity Regulatory Commission, a dispute arose between an electricity generating company and distribution licensee on account of certain “change in law” conditions and the payment of resultant additional expenditure incurred by the generating company. The main question for the commission’s consideration pertained to whether the commission had jurisdiction to adjudicate the dispute. The objection raised by the Respondent was that as per the dispute resolution clause incorporated in the agreement executed by the parties, the disputes were to be amicably settled and in case of failure, referred to arbitration. The Commission, while applying the ratio ofGujarat Urja judgment, held that because the dispute had an implication on tariff, which falls within the ambit of the Electricity Act and affects public interest at large, the dispute can only be adjudicated by the Commission or be referred for arbitration by the Commission underSection 79 (1)(f) of the said Act. Thus, even though, the principle of consent of parties to an arbitration agreement is paramount in theory, its application in practicality is not unconditional.
Notwithstanding the above, in the case ofSaurya Urja Company of Rajasthan Limited v. Rajasthan Electricity Regulatory Commission and Ors., the Appellate Tribunal for Electricity (“APTEL”) examined whether a state commission had powers to adjudicate a dispute between a generating company and a solar power park developer underSection 86 (1)(f) of the Electricity Act. APTEL held that since a solar power park developer does not fall within the category of a generator or a licensee under the Electricity Act, the dispute could not be said to be covered under Section 86. It was conclusively determined that a state commission cannot be deemed to hold power to adjudicate such disputes and they must be resolved by arbitration as opted by the parties under the dispute resolution clause of the concerned agreement.
From a conspectus of the above discussion, it is safe to say that not all disputes falling under the power sector are incapable of being resolved through arbitration. The deciding factors for whether parties may directly invoke arbitration or first approach central/state commission remain (i) the identity of parties and (ii) the nature of the dispute.
Investment Treaty Arbitration
India’s bilateral investment treaty (BIT) programme focuses mainly on boosting investor confidence andincreasing investment flows into and out of the country. One major element of any investment treaty is its dispute resolution mechanism and investment arbitrations emanate from the said mechanism.
Even after 27 years of signingits first investment treaty in 1994, enforcement of investment treaty awards (for disputes not covered under the Electricity Act) in India remains an area of concern for many foreign investors. Because of India not being a signatory to the International Centre for Settlement of Investment Dispute (“ICSID”), the appellate mechanism provided therein is not available to India. As a result thereof, such arbitral awardsare challenged before the courts at the relevant seat. Needless to say, an agreement on the seat of arbitration can be a hindrance in inviting foreign investors to the Indian market and providing them a level playing field.
In the case ofDabhol Power Corporation (“DPC”) and Maharashtra State Electricity Board, India found itself in the eye of an investment arbitration initiated by DPC on account of alleged wrongful termination of a power supply agreement. Because an award was never rendered in the matter and the dispute was mutually settled between the parties, it is difficult to ascertain the judiciary’s point of view on the resolution of such a category of dispute in the power sector through arbitration under an investment treaty.
Negotiation, Conciliation, and Mediation in the Power Sector
Negotiation is a common, voluntary, flexible, and non-binding ADR mechanism wherein parties mutually try to reach a settlement of their disputes without the interference of a third party. Usually, agreements executed between the parties in the power sector have a layered dispute resolution clause, which states “parties must endeavor to settle the disputes amicably and in case of failure, refer such disputes to….” Even though parties are obligated to attempt to settle their disputes amicably at the first instance, this method is more often than not unsuccessful due to its informal and non-binding nature. There is no legal or statutory bar on the parties in the power sector to settle their disputes through negotiation.
Recently, a purported out-of-court settlement was reached between the parties in a curative petition filed by Gujarat Urja Vikas Nigam (“GUVN”) againstAdani Power (Mundra) Limited and Ors. before the Hon’ble Supreme Court of India. The dispute between the parties arose from the termination of a power purchase agreement. It has been reported that as per the settlement application submitted before the Hon’ble Supreme Court, Adani Power agreed to relinquish its right to claim compensation amounting to INR 1100 crores and that the two companies will work out a new tariff for generation and supply of the 1,000-MW electricity based on domestic coal. The parties have also purportedly agreed to withdraw the proceedingspending before the Central Electricity Regulatory Commission. In its order dated September 16, 2021, the Hon’ble Supreme Court had noted that the said curative petition raises substantial questions of law, which require consideration of the Hon’ble Court. It will be interesting to see whether the said application is allowed by the Hon’ble Supreme Court, considering the settlement between Adani Power and GUVN affects tariff rate for supply of electricity, which consequently brings the dispute under the purview of the Electricity Act and affects the public interest.
Conciliation, being another sought-after ADR technique, is governed by the Arbitration Act and is voluntary, non-binding proceedings in nature (unless a settlement agreement is executed), wherein parties are assisted by an unbiased third person/ entity to reach an amicable settlement. A third person acting as the conciliator assists the parties in viewing the facts of the matter objectively to reach a common ground. Keeping in mind its growing demand, the Ministry of Power, Government of India ordered constitution of three (3) Conciliation Committees of Independent Experts (“CCIEs”) with 3 members each, for settlement of disputes arising in contractswhere CPSUs/ Statutory bodies execute power projects. In the event such proceedings are successful, the parties would sign a settlement agreement, authenticated by the conciliators, which would be binding on the parties under Section 73 of the Arbitration and Conciliation Act, 1996. This is a step in the right direction as it seeks to save time and costs of parties, which will shall resultantly promote timely and effective completion of power projects.
The process of mediation and conciliation being very similar, mediation proceedings are also supervised by a neutral third person edging willing parties to an amicable resolution of their disputes. One major distinction between the two is that mediation proceedings are not governed by a statute yet. Further, prior consent of the parties is a sine qua non for parties to pursue conciliation but for mediation,the courts have the power to refer the parties to a court-appointed mediator or otherwise if it so deems fit. Each court usually has a set of rules that governs its mediation proceedings, such as theDelhi High Court Mediation and Conciliation Rules, 2004. Interestingly, amediation bill has recently been introduced in the Rajya Sabha in December 2021, which inter alia aims at giving mediation due legal recognition that has been lacking for many years. Even though, the introduction of the bill seems promising, the draft has several other shortcomings, one of them being that the First Schedule of the said bill stipulates that proceedings before the appropriate commissions or APTEL under the Electricity Act are not fit for mediation. This is a big loophole in the bill for the simple reason that it fails to recognize that disputes under the Electricity Act are capable of being resolved without the intervention of the appropriate commissions and invalidates amicable settlement between parties for the mentioned category of disputes altogether. The implication of this provision would open a pandora’s box as its application in spirit would render all disputes resolution clauses, providing for negotiation/ mediation or conciliation, meaningless. The said provision majorly falls short in achieving the bill’s primary object- “promotion and facilitation of mediation” and there is a strong need for the legislature to assess the impact of this provision on the power sector.
Reforms to Promote ADR in the Power Sector
In view of the above discussion, some reforms may be introduced in the power sector to promote and encourage reliance on ADR mechanisms, which would help ease the burden on electricity commissions and lead to an effective and speedy resolution of disputes.
A. Institutional arbitration: It is now well known that institutional arbitration provides several advantages over ad hoc arbitrations such as a structured database of arbitrators, experts, lawyers, etc. as per the need of the subject matter; reduced delays, pre-determined costs, better record keeping, and many others. Most institutional arbitrations also provide the parties with an option to initiate ‘emergency arbitration’ in situations where urgent interim reliefs are sought. For technical disputes such as those arising in the power sector, it is imperative to have able assistance from an institution at every step, starting from the appointment of an arbitrator till the rendering of an award, which is equipped and experienced in handling such disputes.
Additionally, encouraging institutional arbitration in the power sector will not only result in more effective and timely resolution of disputes but will also provide some assurance to private investors about the fairness and transparency of proceedings.
B. Amendment to provisions of the Electricity Act: that would dilute the powers of central/state commissions and empower specialized arbitral tribunals/ institutions to adjudicate the question of their jurisdiction over a subject matter as per the provisions of the Arbitration Act instead of mandating all disputes to first be filed before the appropriate electricity commission under Section 158 of the Electricity Act is the need of the hour.
In 2021, as per theWorld Bank’s Doing Business report, India ranked at 163 out of 190 economies when assessed for ease of enforcing contracts in the country. Presence of exclusive control and power assigned to central and state commissions under the Electricity Act, even in cases where there is mutual consent and a valid arbitration agreement between the parties, may deter the requisite private investment that the sector hopes to attract. To ensure that public interest is not compromised in an attempt to encourage ADR, a steady balance has to be achieved between the two. For instance, the legislature, in tandem with judicial precedents, can inculcate an inclusive list of categories of disputes that are purely private and are capable of being referred straight to arbitration with the consent of the parties, under the Electricity Act.
C. Exclusive jurisdiction to special authorities should be minimized: The Electricity (Amendment) Bill, 2020 proposes setting up of Electricity Contract Enforcement Authority (“ECEA”) which will have the sole authority and jurisdiction on matters regarding the performance of obligations under a contract related to sale, purchase or transmission of electricity. It is relevant to understand that with the establishment of such authorities, the scope of parties to resort to ADR mechanisms is further diminished, which is nothing but detrimental to the interest of parties. Such exclusivity granted to one authority with limited bandwidth would mean parties investing several years for resolution of disputes. An analysis of the judgments passed by State Commissions will reflect that these commissions, exercising both executive and judicial power over matters of electricity, are heavily bound by their own policies. Such judgments are often overturned by the appellate tribunal. The result is lapse of several years before a dispute is conclusively determined.
Furthermore, logistically- it will become extremely unviable for parties to get all their contractual disputes in the mentioned categories resolved by a single authority. Moreover, appeals from ECEA will lie before the APTEL, which currently has only two benches with two members each. Naturally, it takes a minimum of 2-4 years before a matter is heard and finally disposed of. Such delays in resolution of disputes will have a ripple effect and directly impact the amount of damages to be paid, litigation costs, fluctuating tariff rates, and most important of all- growth in the power sector.
In the post COVID-19 scenario, where the functioning of judicial and quasi-judicial authorities has been slowed beyond imagination, it is crucial for the legislature to allow parties to opt for ADR techniques and resolve their disputes as expeditiously as possible.
D. Liberal approach towards mediation in the power sector: Mediation, being a process very similar to conciliation, should not be viewed as being completely out of bounds for proceedings falling under the Electricity Act. In order to protect the element of public interest- a mediator or a board, equipped and qualified to deal with disputes in the power sector, may be bestowed with the power to draw up terms of settlement, in consultation with the parties, in a time-bound manner, which can then be reviewed and approved/rejected by the appropriate commission.
While the judicial precedents and amendments to the Arbitration Act are constantly aiming to widen the scope of ADR in India, provisions in legislations governing the power sector appear to be moving in the opposite direction. India’s electricity consumption patterns are indicative of surging demand,presenting wide scope and opportunities for foreign/private investors in the Indian market. Hence, the scope for ADR in India is vast. Given the importance of party autonomy, cost-effectiveness, and flexibility in determining procedures governing ADR mechanisms, they should be encouraged for most, if not all, power disputes as minimizing the wastage of parties’ valuable time and resources would help the sector flourish and achieve new heights.
About the Author
Ms. Swati Mittal is an Associate (Insolvency & Bankruptcy) at Indus Law [T-I], New Delhi.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Aakaansha Arya
Senior Editor: Gaurang Mandavkar
Associate Editor: Kshitij Pandey
Junior Editor: Harshita Tyagi
Preferred Method of Citation
Swati Mittal, “Need for Loosening the Noose- Alternate Dispute Resolution in the Power Sector in India” (IJPIEL, 25 February 2022)