2021 (7) TMI 1459 - HC - Indian Laws

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

Karnataka Power Corporation Limited Versus Aryan Energy Private Limited and Ors.

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 ... Entitlement to lay a claim over the value of coal rejects which were generated during the processing of raw coal and claim that value as a set off against the money payable to the plaintiffs - Determination of sums due to plaintiffs for washed coal supplied - HELD THAT:- The KPCL was aware that processing of raw coal by washing would result in coal rejects and despite being aware of this fact, the Agreement did not vest any rights over the rejects in KPCL. In fact, the only stipulation in the contract was that coal rejects generated during the process of washing raw coal would be disposed of in a manner which would satisfy the environmental regulations. The KPCL had stipulated a term regarding disposal of coal rejects only for the purpose of ensuring compliance with environmental regulations. KPCL was aware that if the coal rejects generated during the processing of raw coal was disposed off in a manner contrary to environmental regulations, as a principal buyer, it could probably be liable as it was the end user and therefore, it was to safeguard themselves of any liability the above mentioned clauses were stipulated in the Agreement - if a purchaser intends to purchase a finished product from a person, the by products generated by that person who had secured and processed the raw material would essentially be of that person. To put it differently, the waste generated from processing of raw material cannot be said to be the property of purchaser of finished product. It is to be kept in mind that KPCL, in the instant case, had specifically stipulated that they would be buying only washed coal at a pre-determined price and they were not under an obligation to take care of coal rejects which were generated during the processing of raw coal. This generation of coal rejects during the processing of raw coal cannot enure to the benefit of KPCL and they cannot claim the value of coal rejects - the judgment of the Commercial Court holding that KPCL cannot have a claim over the coal rejects was perfectly justified and therefore, the finding of the Commercial Court affirmed. The entitlement of the plaintiffs to secure the raw coal from a specific colliery on the basis of the linkage of the plaintiff cannot be construed as KPCL purchasing the raw coal. So long as the plaintiffs purchased the raw coal by the paying the requisite price to WCL, KPCL cannot be permitted to contend that they were the owners of the Raw Coal. The decrees of the Commercial Court only insofar as it relates to interest shall stand modified and plaintiffs would be entitled to the following sums as determined by the Commercial Court along with interest at 12.5% p.a. instead of 18% p.a. The decrees are modified only in relation to rate of interest and the interest awarded by the Commercial Court is reduced from 18% to 12.5% - the appeals are allowed in part. 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.