Ruling redefines ‘change in law’ for foreign businesses in India

The Indian Supreme Court ruling, following a decade-long legal battle between Punjab State Power Corporation Limited (PSPCL) and two private thermal power producers, was the result of the power producers seeking compensation, citing a ‘change in law’ clause under the terms of their power purchase agreements (PPAs) with PSPC, after ‘deemed export benefits’ were withdrawn post-bid by the Indian government.

Change in law provisions in contracts address how legal and legislative changes over the life of a contract will affect and impact the parties’ obligations and rights after the signing of that contract.

Deemed export benefits occur when goods – in this case, thermal power – do not physically leave the country, but are treated as exports for the purpose of certain benefits. The two companies tried to claim these benefits for certain plant components on the basis that they were to be treated as ‘goods’ under India’s foreign trade policy between 2009 and 2014.
The court ruled that no change in law had occurred when the benefits were withdrawn, and that the power producers could not seek compensation despite entering into PPAs reliant on the benefits.

Mohammed Talib, an expert in international arbitration at Pinsent Masons, said: “The Supreme Court’s ruling indicates that only duly promulgated statutes, regulations and official notifications can constitute ‘law’ when it comes to changes under commercial contracts.”
“Although international businesses may often rely on policy signals, press releases or administrative clarifications, they should anchor their risk assessments in formal legal instruments, not expectations or informal government communications about what the law will be.”
The power producers were also unable to claim for the impact of an escalation in Indonesian coal prices under the change in law provisions, as risk allocation under the PPAs was limited to Indian laws and policies, not foreign regulations.

Scheherazade Dubash, an expert in international arbitration at Pinsent Masons, said: “This precedent doesn’t just affect power PPAs, it sets the tone for all sectors where ‘change in law’ clauses are invoked, from telecoms to transport, where there is a need to anchor regulatory risk management in the contract.”