Power company cannot claim coal rejects as set-off against supplier payments under washing contracts

Karnataka HC determined that a power company (KPCL) had no entitlement to claim value of coal rejects generated during coal washing as set-off against amounts owed to suppliers. The court held that KPCL purchased only finished washed coal at predetermined prices, not raw coal, and contract provisions regarding reject disposal were solely for environmental compliance. By-products from processing belong to the processor, not the purchaser of finished goods. The HC affirmed the Commercial Court's finding denying KPCL's claim over coal rejects but modified interest rate from 18% to 12.5% per annum on amounts due to plaintiffs. Appeals allowed in part.

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Issues Involved:
1. Entitlement of KPCL to the value of coal rejects.
2. Determination of sums due to plaintiffs for washed coal supplied.
3. Interest on delayed payments.
4. Improper deductions by KPCL.

Issue-wise Detailed Analysis:

1. Entitlement of KPCL to the Value of Coal Rejects:

The primary contention was whether KPCL was entitled to the value of coal rejects generated during the washing of raw coal. KPCL argued that as the owner of the raw coal, they retained ownership of any by-products, including coal rejects, and thus were entitled to their value. KPCL emphasized that plaintiffs were merely agents tasked with washing the coal, and any profits from the sale of coal rejects should be passed on to KPCL, as per Section 216 of the Indian Contract Act.

However, the Commercial Court found that the plaintiffs had purchased the raw coal at their own cost and were thus the owners of the raw coal. The contract stipulated that plaintiffs were responsible for disposing of coal rejects in a manner satisfying environmental regulations, indicating that KPCL had no claim over the coal rejects. The court affirmed that the coal rejects were the property of the plaintiffs and KPCL could not claim their value.

2. Determination of Sums Due to Plaintiffs for Washed Coal Supplied:

The Commercial Court determined that KPCL was liable to pay the sums claimed by plaintiffs towards the supply of washed coal. The amounts awarded were:
- O.S. No. 4332/2012: Rs. 17,67,61,369/-
- O.S. No. 4333/2012: Rs. 5,64,82,849/-
- O.S. No. 25577/2012: Rs. 16,55,27,148/-
- O.S. No. 25444/2012: Rs. 8,64,54,330/-

These determinations were not in serious dispute and were accepted.

3. Interest on Delayed Payments:

The Commercial Court awarded interest on delayed payments at 18% per annum. However, the plaintiffs, on instructions, agreed to a reduced rate of 12.5% per annum, considering the contractual term which stipulated the prevailing Prime Lending Rate (PLR) of State Bank of India (short term) for the delayed period, which was 13.9% p.a. at the relevant time.

4. Improper Deductions by KPCL:

The Commercial Court found that KPCL had made improper deductions from the plaintiffs' bills and awarded refunds for these wrongful deductions:
- O.S. No. 4332/2012: Rs. 13,00,000/-
- O.S. No. 4333/2012: Rs. 1,97,12,271/-
- O.S. No. 25577/2012: Rs. 13,20,343/-
- O.S. No. 25444/2012: Rs. 2,54,57,982/-

Conclusion:
The appeals were allowed in part, modifying the decrees only in relation to the rate of interest, reducing it from 18% to 12.5% per annum. In all other respects, the decrees of the Commercial Court were confirmed.

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