Solar firm delayed project by 56 days. Govt company terminated PPA twice. SC says —

Sky Power won a 50 MW solar bid. They missed the deadline by 56 days. The government company terminated the PPA — twice. The High Court restored it both times. Now the Supreme Court asks: was the termination arbitrary?

On a November morning in 2022, the Supreme Court bench fell silent as the judges examined a stack of PPAs on the table. They sat down to answer a question that has haunted government contracting for decades: when a state-owned company tears up a contract, can the other party run to the High Court and ask for it back? Or must they file a civil suit like everyone else?

The answer would decide the fate of a 50 MW solar project in Madhya Pradesh — and the principle that governs every business that signs a deal with the Indian state.

When the PPA was signed

In September 2015, a Madhya Pradesh government company called MPPMCL (the state's power management company) invited bids for 300 MW of solar power. Sky Power Southeast Solar India Private Limited won three of those projects — each 50 MW. On 18 September 2015, they signed a Power Purchase Agreement (PPA — a contract where the government company agrees to buy electricity at a fixed price for a fixed period).

The price was Rs 5.109 per unit. The deadline was tight. Sky Power had to fulfil pre-commissioning conditions within 210 days, extendable by nine months with a penalty. The final deadline: 15 January 2017.

The 56-day delay that changed everything

Sky Power missed the deadline. Not by much — 56 days. But on 11 August 2017, MPPMCL issued a handwritten termination letter, pulling the plug on the entire project. No warning. No show-cause notice. Just a termination.

Sky Power rushed to the Madhya Pradesh High Court. On 20 June 2018, the High Court looked at the facts and quashed the termination — meaning it set aside the government company's decision. But it gave MPPMCL the liberty to pass fresh orders.

MPPMCL did exactly that. On 7 July 2018, it issued a fresh termination order. Same result: Sky Power went back to the High Court. And on 27 February 2020, the High Court quashed the termination again. MPPMCL filed a review petition, which was dismissed on 28 December 2020.

This time, MPPMCL didn't try a third termination. It appealed to the Supreme Court.

The two arguments that clashed in court

MPPMCL's lawyers raised a fundamental objection: a PPA is a contract, they argued, not a law. If the government company breached it, Sky Power should have filed a civil suit for damages — not a writ petition under Article 226 of the Constitution (the High Court's power to issue orders to government bodies). The High Court, they said, had no business interfering in a contractual dispute.

Sky Power's lawyers gave two answers. First, they said the termination was arbitrary — it violated Article 14 of the Constitution (the right to equality, which binds government bodies even when they act as commercial parties). Second, they pointed to another company called Renew Energy, which had faced a similar termination from MPPMCL. The Supreme Court had already restored Renew Energy's PPA in Renew Clean Energy Pvt. Ltd. v. M.P. Power Management Co. Ltd. — Civil Appeal No. 3600/2018. Sky Power argued it was being treated differently for no good reason.

They also pointed out that MPPMCL had not given the pre-termination notice that the PPA required. The termination, they said, was not just a breach — it was a capricious act by a state entity.

What the Supreme Court actually decided

The bench — Justice K.M. Joseph and Justice Hrishikesh Roy — delivered its judgment on 16 November 2022. The court did something careful: it did not simply say "writ petitions are always allowed" or "writ petitions are never allowed in contracts." It drew a line.

First, the court examined whether the PPA was a "statutory contract" — a contract whose terms are dictated by a statute, making it closer to a law than a private deal. Sky Power had argued that because the PPA incorporated bidding guidelines under Section 63 of the Electricity Act, 2003 (a section that allows tariff to be determined through competitive bidding), the contract had become statutory.

The Supreme Court disagreed. A contract becomes statutory, the court said, only when the statute itself mandates the terms as indispensable components that create rights and obligations. A mere reference to bidding guidelines is not enough. The PPA remained a commercial contract, not a statutory one.

But — and this is the critical "but" — the court held that even for non-statutory contracts, a writ petition under Article 226 is maintainable against a State instrumentality (a government-owned entity covered by Article 12 of the Constitution) if the impugned action is vitiated by arbitrariness. The premise must be arbitrariness, the court said, not mere breach of contract. And the case must not involve genuinely disputed questions of fact that require a trial.

The test for arbitrariness

The court laid down what "arbitrary" means in this context. In the words of the judgment: "Action is arbitrary if based on no principle, betraying caprice or whim; actuated by oblique motive or absence of good faith; reflecting total non-application of mind; or being wholly unreasonable akin to Wednesbury unreasonableness." A decision so irrational that no reasonable authority could have made it.

But the court also added a crucial qualification: exercising a contractual right — like terminating a PPA for breach — is ordinarily not arbitrary. A government company is allowed to enforce its contracts. The question is whether it did so in a way that no reasonable contracting party would.

The court drew on several key precedents to reach this conclusion. It relied on Kerala State Electricity Board v. Kurien E. Kalathil — (2000) 6 SCC 293, India Thermal Power Ltd. v. State of M.P. — (2000) 3 SCC 379, and ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. — (2004) 3 SCC 553, among others. These cases established that writ jurisdiction can lie against state instrumentalities even in contractual matters, provided the challenge is based on arbitrariness and not mere breach.

Why the government company's argument partly succeeded

The Supreme Court did not simply dismiss MPPMCL's appeal. It accepted the government company's argument that a writ petition is not automatically maintainable just because the other party is a State. The court clarified that the broader definition of "State" under Article 12 does not automatically mean a government company exercises executive power under Article 162 or Article 298 of the Constitution (the articles that allow the State to carry on trade and make contracts). A fully owned government company, the court said, cannot exercise executive power under Article 162.

This distinction matters. It means that not every contractual dispute with a government company becomes a constitutional case. The party challenging the termination must show arbitrariness — not just that the contract was broken.

The court also examined the binding effect of the earlier High Court judgment quashing the first termination. The procedural journey was complex: the first termination on 11 August 2017 was quashed on 20 June 2018; the second termination on 7 July 2018 was quashed on 27 February 2020; and the review petition was dismissed on 28 December 2020. The Supreme Court had to consider whether the second termination was a fresh exercise of power or merely a repetition of the first flawed decision.

What this means for every business that signs a government contract

The judgment gives both sides something to work with. For government companies: you cannot assume that every contractual decision is immune from High Court scrutiny. If you terminate a contract without notice, or treat one party differently from another for no reason, a writ petition can lie. The High Court can examine whether your action was arbitrary.

For private parties: you cannot assume that every breach by a government company gives you a right to run to the High Court. You must plead and prove arbitrariness — not just breach. If the dispute involves genuinely disputed facts — for example, whether the delay was caused by the government company itself — you may be told to file a civil suit.

THE PLAY: Before challenging a government company's contractual decision in a writ petition, ask: is the action arbitrary — based on no principle, discriminatory, or taken without notice — or is it merely a breach of contract that belongs in a civil court?

The line between contract and constitution

The Supreme Court did not rewrite the law. It did something more useful: it drew a practical line. A government company that acts like a private party — enforcing a contract, exercising a contractual right — is not automatically arbitrary. But a government company that acts without principle, that discriminates between similarly placed parties, that terminates without notice — that company can be called to account in a constitutional court.

The 56-day delay that started this case was real. The calendar on the judge's desk marked those days clearly. But the question the court answered was bigger than one solar project. It was about when a contract stops being just a contract and becomes a constitutional question.