Indemnity Ends Where Change in Law Begins: Supreme Court Draws a Constitutional Line in Coal Block Cancellation Row

“Article 2.5 and Article 10 Operate in Different Fields” – In a significant ruling for the power sector, the Supreme Court on 27 February 2026 in West Bengal State Electricity Distribution Co. Ltd. v. Adhunik Power & Natural Resource Ltd. & Ors. partly allowed the appeals and clarified when cancellation of a captive coal block qualifies as a “Change in Law” under a Power Purchase Agreement.

A three-Judge Bench comprising Chief Justice Surya Kant, Justice B.V. Nagarathna and Justice Joymalya Bagchi held that the cancellation of the Ganeshpur captive coal block pursuant to the judgment in Manohar Lal Sharma v. Principal Secretary and the subsequent enactment of the Coal Mines (Special Provisions) Act, 2015 constituted a Change in Law event under Article 10 of the PPA/PSA. However, the Court denied compensation for coal procured through e-auction and imports prior to 25 August 2014, holding that Article 2.5 indemnified the purchaser against such escalation during the subsistence of the captive block.

The Court memorably declared that “Article 2.5 and Article 10 operate in different fields,” drawing a precise contractual boundary between indemnity and statutory upheaval.

Power Tied to a Captive Coal Promise

The dispute arose out of a long-term arrangement executed in 2011. WBSEDCL entered into a Power Supply Agreement with PTC India Ltd., which in turn executed a back-to-back Power Purchase Agreement with Adhunik Power & Natural Resource Ltd. for supply of 100 MW power for 25 years.

Although the PPA/PSA did not expressly name the source of coal, the Minutes of Meeting dated 03.01.2011 recorded a crucial commercial foundation: “APRNL has a captive coal block at Ganeshpur in Jharkhand and this coal block is a joint venture with TISCO.” Soon thereafter, WBSEDCL itself wrote to enquire about “lifting of coal from the coalmine and transportation of coal from captive mine, allocated to APNRL.”

When the captive block did not become operational, APNRL relied on tapering linkage coal from Central Coalfields Ltd. and met shortfall through e-auction and imports. It sought pass-through of additional costs, which was resisted by WBSEDCL on the strength of Article 2.5 of the PPA/PSA.

Then came the seismic development. On 25 August 2014, this Court in Manohar Lal Sharma cancelled coal block allocations made by the Screening Committee and Government dispensation route, including the Ganeshpur block. The Coal Mines (Special Provisions) Act, 2015 followed, restructuring the allocation regime.

APNRL claimed that this judicial and legislative intervention constituted a “Change in Law” under Article 10, entitling it to compensation restoring it to the same economic position as if the event had not occurred.

Can Surrounding Circumstances Identify the “Captive Source”?

WBSEDCL argued that the PPA/PSA never expressly stipulated Ganeshpur as the coal source and therefore its cancellation could not trigger Article 10.

Rejecting this contention, the Court upheld the concurrent findings of CERC and APTEL. It held that when Article 2.5 is read with the Minutes of Meeting and subsequent correspondence, “there is no escape from the irresistible conclusion that the ‘captive coal block’ refers to the Ganeshpur Coal Block at Jharkhand.”

Answering the argument based on Sections 91 and 92 of the Evidence Act, the Court clarified that while a written contract ordinarily speaks for itself, extrinsic evidence is admissible to relate language to existing facts or clarify ambiguity. Relying on Anglo American Metallurgical Coal Pty. Ltd. v. MMTC Ltd., the Bench reiterated that facts may be proved to show “in what manner the language of a document is related to existing facts.”

WBSEDCL, having participated in the negotiations and correspondence referring to Ganeshpur, could not later deny that the captive source meant that very block.

“Change in Interpretation” as Change in Law

The Court then examined whether cancellation of the coal block amounted to a Change in Law event.

It held that in Manohar Lal Sharma, this Court interpreted the Coal Mines Nationalisation Act, 1957 and the MMDR Act, 1957 differently from the interpretation previously adopted by the Government of India. This judicial reinterpretation resulted in wholesale cancellation of allocations.

The Bench concluded that such change “falls within Articles 10.1.1(b) and 10.1.1(f) of the PPA/PSA.” It materially affected APNRL’s right to procure coal from its captive source and compelled procurement at higher prices.

Importantly, the Court rejected the argument that Article 2.5 insulated WBSEDCL even in such circumstances. It held that Article 2.5 indemnifies the purchaser against escalation where coal is sourced from alternate sources during subsistence of the captive block. Article 10, on the other hand, is triggered when a Change in Law materially affects contractual performance.

The Bench made it clear: “WBSEDCL cannot claim immunity under Article 2.5 of the PPA/PSA” once a Change in Law event has intervened.

Accordingly, compensation with effect from 25.08.2014 along with carrying costs was upheld.

No Windfall Before Cancellation

However, the Court drew a firm line at the date of cancellation.

It disagreed with APTEL’s grant of compensation for procurement of coal through e-auction and imports prior to 25 August 2014. The captive block remained allotted until its judicial cancellation. Article 2.5 expressly provided that if coal was sourced from other sources, no separate escalation in Escalable Energy Charges could be claimed and such coal would be deemed sourced from the captive source.

The Court found that APTEL’s attempt to dilute Article 2.5 on grounds of delay attributable to the lead miner or environmental policies was untenable. Such interpretation would “expose WBSEDCL to the vagaries of coal cost escalation due to unforeseen events, save and except a Change in Law event under Article 10.”

Thus, compensation prior to the cancellation date was impermissible.

The Supreme Court partly allowed the appeals. The impugned order of APTEL was set aside to the limited extent that it granted compensation for coal procured through e-auction/import prior to 25.08.2014. The award of compensation on account of Change in Law events from 25.08.2014 along with carrying costs was upheld.

CERC was directed to modify its consequential order accordingly within four weeks. No order as to costs was passed.

A Contractual Compass for the Power Sector

This judgment is a crucial precedent in electricity law. It affirms that judicial reinterpretation of statutes can qualify as “Change in Law” under PPAs. It distinguishes with precision between indemnity against commercial risk and compensation for sovereign or judicial intervention. It also reinforces that surrounding circumstances may be relied upon to identify contractual intent without violating Sections 91 and 92 of the Evidence Act.

Most importantly, the Court’s pronouncement that “Article 2.5 and Article 10 operate in different fields” offers a doctrinal compass for future tariff disputes in the power sector.

Date of Decision: 27 February 2026