Legal Intricacies of The Tangle - NTPC Vs RIL

Aug. 11, 2007 - PRLog -- The legal wrangle the power behemoth NTPC has dragged itself into is set to boomerang and raise questions about interests for which the corporation is working. Even as the Committee of Secretaries (CoS) on gas pricing suggests "prudence" on determination of a price given the court case by NTPC against Reliance Industries Limited (RIL), skeptics are beginning to question if at all there is any legal substance in the assertions of the power company. Given the inherent inadequacies, they say, the case is likely to fall flat on its nose.

For the beginners, NTPC had taken the matter into Mumbai High Court claiming that Reliance was not signing the Gas Sale & Purchase Agreement (GSPA) for supply to its 1300 MW each Kawas and Gandhar power plants expansion plans. NTPC had invited the bid in October 2002. RIL had emerged
as the sole successful bidder for supply of natural gas to these projects and a Letter of Intent was subsequently issued to the company. The company said it was committed to the price, quantity and a kick-off date. For next 18 months, NTPC and RIL continued to negotiate on various counts even as
latter kept asking for agreement on outstanding provisions of GSPA. Interestingly, RIL had made a conditional acceptance of the LoI and according to law that does not amount to an agreement, which is supposed to be mutual and without any coercion by any party.

Those in know of the legal intricacies of the tangle say that primarily there are four issues that emerge out of this imbroglio and that will be put to test in the court of law.

One, whether NTPC is likely to seek specific performance of GSPA? Legal experts say no for the following reasons. According to NTPC's own documents (Request for Proposal) RIL is still a "preferred bidder" and not a "selected bidder" as the two have not entered into any final contract as
laid out in Clause  7.7. Interestingly, the same clause allows NTPC to move to the second lowest bidder if a final agreement is not signed between it and preferred bidder. "If the LoI is not binding on NTPC and does not form an agreement for NTPC, the same cannot in any manner be considered as a
binding agreement for RIL," says a senior Supreme Court lawyer. Hence it is ridiculous for NTPC to claim in the Bombay High Court that LoI be treated as the contract.

Two, whether acknowledgement of LoI amounts to acceptance of GSPA? After getting the LoI, RIL had sent an acknowledgement where it had mentioned a conditional acceptance based on the resolution of outstanding issues in GSPA. Again lawyers cite Clause  7.7 which enables NTPC to move to the second bidder and further encash the bid guarantee in case the final agreement is not signed. Given this, RIL's acknowledgement is not equivalent to acceptance of GSPA, as the NTPC would like to believe.

Three, one may also wonder if there is any valid, concluded and binding contract between RIL and NTPC for supply of natural gas. Lawyers again reason that since the acceptance by RIL was "conditional and not unqualified" in no way can it be construed that there has been any concluded contract between NTPC and RIL.

Four, it is also being questioned if RIL can be compelled to agree to specific terms in the GSPA which are not acceptable to it. "It is for the parties to agree to the terms of the contract. In case of disagreement no court or third parties can force the parties to agree to the terms and the same cannot be re-written at the instance of courts or third partied," asserts the lawyer.

That in a nutshell has been the legal position but still NTPC continues with its tirade, which it is becoming apparent now is intentional and at the behest of some vested interests, allege observers.

Among others, NTPC put the tricky clause of "undue and unlimited risk" on RIL in case of failure of reservoir. It asked for payment of alternate fuel (Naphtha) in case the reservoir failed which amounted to a whopping Rs 100,000 crore, if the cost was calculated for the entire project period at the then prevailing rates for Naphtha. RIL had requested for a capping on this liability. Observers also express dismay at the disregard shown by NTPC over the projected benefit of Rs 15,500 crore that may accrue to the company if it took gas supplies from RIL's proposed competitive price of $2.34 mmBtu.

Instead NTPC moved to the Mumbai High Court on a rather flimsy issue of risk factor in case of failure of the reservoir and on the premise that LOI amounted to a contract with the bidder. What is also surprising that when NTPC expressed apprehension that RIL may walk out of the contract for
better pricing, RIL offered first rights to NTPC and provided a bond towards this.

It is intriguing to note that a company of the size of NTPC does not know that it is a global practice that when two parties enter into a project agreement, the nature of defaults by both parties and the remedies therein are well laid out in the contract agreement itself. Such defaults and remedial action are often spelt out for each stage of the standard five-stage project process viz. pre-bidding, bidding, development, construction and operation. Even if for a moment one considers the NTPC's logic that LoI is equivalent to a contract, the maximum the NTPC stands to gain is the Rs 20 crore bid bond that RIL had submitted along with the bid application. Skeptics question if this is what the real intent of NTPC has been.

Delve deeper into the issue and a pattern begins to emerge. One, the entire process is nothing but a blatant attempt by NTPC to jeopardize chances of the company itself as the case itself is so week. Two, it is not a coincidence that former chairman of NTPC CP Jain joined Reliance Energy as a Director days after his retirement. Three, it may not be far fetched to say that by botching up the case of NTPC Jain intended to benefit Reliance Energy which he now adores as a director himself. Four, while NTPC stands to only lose out in this tricky game, Reliance Energy gains on two counts.
The elimination of NTPC ensures not only maximum volumes to Reliance Energy, it also gets so at the best competitive price possible, which RIL had committed to NTPC. Now skeptics wonder if this isn't a brazen display of neglect and deceit by top officials of the NTPC.

Whatever may be the outcome of what now appears to be a long-drawn affair, one thing is for sure: a reputed public sector undertaking such as NTPC has been allowed to script its suicide note in full public glare.

Time all the stakeholders including the government took a serious note of it.