Surrounding Circumstances Can Be Examined to Interpret Ambiguous Contract Terms: Supreme Court

The Supreme Court has held that although the terms of a contract are ordinarily to be understood from the written document itself, courts can also look into surrounding circumstances and related facts to understand the true meaning of contractual terms, especially where a term may otherwise appear unclear or unworkable.

A Bench of Chief Justice of India Surya Kant, Justice B V Nagarathna and Justice Joymalya Bagchi ruled that the cancellation of the Ganeshpur captive coal block following the Supreme Court’s decision in the Manohar Lal Sharma judgment (2014) and the enactment of the Coal Mines (Special Provisions) Act, 2015 amounted to a “change in law” event under the Power Purchase Agreement (PPA) and Power Supply Agreement (PSA). Court held that Adhunik Power & Natural Resources Ltd (APNRL) was therefore entitled to compensation from August 25, 2014 along with carrying costs.

The judgment came in an appeal filed by West Bengal State Electricity Distribution Company Ltd (WBSEDCL) against a September 4, 2025 order passed by the Appellate Tribunal for Electricity (APTEL), which had modified an earlier order of the Central Electricity Regulatory Commission (CERC).

APTEL had held that APNRL was entitled to compensation for coal purchased through e-auctions or imports to meet the shortfall in tapering linkage coal supply pending operationalisation of the Ganeshpur captive coal block. It had also granted compensation for the “change in law” event from August 25, 2014 along with carrying costs until actual payment.

While examining the appeal, the Supreme Court noted that WBSEDCL’s argument that the PPA/PSA did not specifically mention Ganeshpur as the source of coal stood contradicted by the concurrent findings of both CERC and APTEL.

The Bench also rejected WBSEDCL’s contention that a written contract cannot be interpreted in light of prior or subsequent conduct of the parties. The court pointed out that Article 2.5 of the PPA/PSA referred to a “captive source” for coal supply and also protected WBSEDCL from additional costs arising from procurement of coal from alternative sources.

Although Article 2.5 did not expressly name the Ganeshpur coal block, Court said its identity became clear from surrounding circumstances, particularly the minutes of a January 3, 2011 meeting which recorded the key features of the agreement and specifically mentioned that APNRL had a captive coal block at Ganeshpur.

The Bench further referred to a letter dated April 30, 2012 issued by WBSEDCL seeking details regarding lifting and transportation of coal from the Ganeshpur captive coal block. According to the court, WBSEDCL never disputed these communications.

“In these circumstances, it does not lie in the mouth of WBSEDCL to contend that the PPA/PSA did not prescribe Ganeshpur Coal Block as the captive coal source for generation and supply of electricity,” the Bench observed.

Court also agreed with APTEL’s finding that the Supreme Court’s ruling in the Manohar Lal Sharma case had effectively changed the legal position relating to coal block allocations. It noted that the 2014 judgment interpreted the Coal Mines Nationalisation Act and the Mines and Minerals (Development and Regulation) Act differently from the interpretation earlier adopted by the Union government, resulting in cancellation of coal block allocations.

The Bench therefore upheld APTEL’s finding that the cancellation of the Ganeshpur coal block constituted a “change in law” event, entitling APNRL to compensation from August 25, 2014 along with carrying costs until actual payment.

However, the Supreme Court disagreed with APTEL’s view that APNRL should also receive compensation for coal procured through e-auctions or imports before the cancellation of the coal block.

Court held that APTEL was wrong in concluding that the indemnity clause under Article 2.5 would not apply merely because the delay in operationalising the coal block was allegedly caused by inaction on the part of the lead miner TISCO or because of the Ministry of Environment and Forests’ “go-no-go” policy.

Calling APTEL’s interpretation “untenable”, the Bench said such a narrow reading of Article 2.5 would unfairly expose WBSEDCL to rising coal costs caused by unforeseen events, except in cases specifically covered as “change in law” events under Article 10 of the agreements.

The Supreme Court ultimately partly allowed the appeals and set aside the APTEL order only to the extent that it granted compensation for coal procured through e-auctions or imports before the cancellation of the Ganeshpur coal block.

At the same time, Court upheld the remaining part of the order granting compensation for the “change in law” event from August 25, 2014 along with carrying costs until actual payment.

The Bench directed the Central Electricity Regulatory Commission to modify its order in line with the Supreme Court’s directions within four weeks. Court noted that CERC had already passed a consequential order on February 11, 2026 to implement the APTEL ruling.

Also Read| Surety Not Liable For Contract Changes Without Consent: Supreme Court

Case Title: West Bengal State Electricity Distribution Co Ltd Vs Adhunik Power & Natural Resource Ltd & Ors

Bench: CJI Surya Kant, Justices B V Nagarathna and Joymalya Bagchi

Date of Judgment: February 27, 2026