Solar firm missed deadline by 56 days. State power company terminated contract. High Court restored it. Supreme Court now says:

A solar developer was 56 days late. The state power company tore up the contract. Twice. Both times, the High Court said: not so fast.

On a September afternoon in 2015, Sky Power signed a Power Purchase Agreement (PPA — a contract to sell electricity at a fixed price) with M.P. Power Management Company Limited, a state-owned utility. The deal was for a 50-megawatt solar project at Rs.5.109 per unit. The developer had 210 days to meet pre-commissioning conditions, with a possible 9-month extension carrying a penalty. The stack of PPAs on the court table would later feel thin for a case that climbed to the Supreme Court.

Sky Power missed that deadline by 56 days. The power company terminated the contract. Then terminated it again. By the time the dust settled, the Supreme Court was being asked a question that went far beyond solar tariffs: can a state-owned company be taken to court via writ (a constitutional remedy for fundamental rights violations) for simply breaking a commercial contract?

When the first termination landed

The state power company issued its first termination notice on August 11, 2017. The date-stamp on that letter would be scrutinised for years. Sky Power rushed to the High Court of Madhya Pradesh, arguing that the termination was arbitrary — that the company had acted unreasonably despite the delay being minor and within the extended timeline.

The High Court agreed. On June 20, 2018, it quashed the termination, relying on a similar case called Renew Clean Energy Pvt. Ltd. v. M.P. Power Management Company Ltd. The power company was told to restore the contract.

Instead, it issued a fresh termination notice on July 7, 2018 — barely two weeks after the High Court's order. Same project. Same delay. Same reason. The silence in the courtroom when the power company's lawyer argued the second termination was heavy; the bench seemed to sense the defiance in the ink.

Why the second termination also fell

Sky Power went back to the High Court. On February 27, 2020, the court quashed the second termination too. The power company's review petition was dismissed on December 28, 2020.

By now, the state utility had a new argument. It told the High Court and later the Supreme Court that power was now available at cheaper rates. The old contract at Rs.5.109 per unit no longer made commercial sense. The company argued that the High Court had no business interfering in a contractual matter through writ jurisdiction (Article 226 of the Constitution — the power of High Courts to issue orders to government bodies).

The core question: can a state-owned company, which is "State" under Article 12 (the constitutional definition of government entities), be sued via writ for breaking a non-statutory contract — one that isn't created by a law or regulation?

The legal knot the Supreme Court had to untie

The Supreme Court bench — Justice K.M. Joseph and Justice Hrishikesh Roy — heard the appeal in November 2022. The power company's lawyers argued that a PPA is a commercial contract, not a statutory one. Disputes about delays, penalties, and termination should go to arbitration or civil court, not to a High Court exercising constitutional jurisdiction.

Sky Power's lawyers countered that the state utility had acted arbitrarily. It terminated the contract twice, the second time immediately after the High Court had restored it. That, they said, was not a breach of contract — it was an abuse of power by a state instrumentality. And when the State acts arbitrarily, the Constitution provides a remedy.

The court had to decide where the line falls between a simple contract dispute and a constitutional violation.

What the court said about writs and contracts

The Supreme Court began by clarifying what makes a contract "statutory." A contract becomes statutory only when entering into it with prescribed terms is mandatory under a law, and the terms themselves create rights and obligations that flow from the statute. A PPA that incorporates bidding guidelines under Section 63 of the Electricity Act, 2003 (which allows tariff determination through competitive bidding) does not become a statutory contract just because it follows those guidelines.

But that did not end the inquiry. The court held that even for non-statutory contracts, there is no absolute bar on writ jurisdiction under Article 226 when the cause of action is based on arbitrary acts or omissions by the State or its instrumentalities during the working of a contract.

Here is the crucial distinction the court drew: the premise for invoking writ jurisdiction must be arbitrariness, not mere breach of contract. A party cannot walk into a High Court and say "the government broke our contract, give us a writ." They must say "the government acted arbitrarily, and the contract breach is evidence of that arbitrariness."

When state action becomes arbitrary

The bench laid down five situations where state action in a contractual setting crosses into arbitrariness: (a) when it is not based on any principle, (b) when it betrays caprice or whim, (c) when it lacks good faith or is actuated by an oblique motive, (d) when it shows total non-application of mind, or (e) when it is wholly unreasonable — what English law calls Wednesbury unreasonableness (a decision so irrational that no reasonable authority could have made it).

But the court added a critical caveat: "Visiting a party with contractual consequences of its breach is ordinarily not arbitrary." If the contract gives the state utility the right to terminate for delay, and the developer was indeed late, the termination is a contractual act, not an arbitrary one. The bench's words hung in the air — a reminder that not every broken promise is a constitutional injury.

The court also addressed a related question: can a government company exercise executive power under Article 162 (the extent of the State government's executive power)? The answer was no. A company, even if owned by the government, cannot wield executive power. That belongs to the Union or State governments. Article 12's broad definition of "State" does not extend to Article 298 (the power to carry on trade and make contracts) in the same way.

For practitioners, the five arbitrariness tests now form a checklist. Each test demands a distinct factual showing: Was there a principle guiding the decision? Was there whim or caprice in the termination? Was good faith absent? Was there total non-application of mind — for instance, terminating without considering the developer's explanation? Was the decision so unreasonable that no rational authority would have made it? The burden of pleading is shifted; a bare allegation of breach will no longer open the writ court's doors.

What this means for every commercial contract with the government

The Supreme Court's judgment in M.P. Power Management Company Limited v. M/s. Sky Power Southeast Solar India Private Limited & Others (2022 LiveLaw SC 966) does not shut the door on writ petitions in contractual matters. But it narrows the door significantly.

For practitioners advising companies that deal with state utilities, the message is clear: a writ petition is not a substitute for arbitration or civil suit just because the other party is a government company. You must plead and prove arbitrariness — not just that the contract was broken. The dispute must not involve genuinely disputed questions of fact. If the facts are clear from undisputed documents, a writ may still lie. But if the case requires a trial — examining witnesses, testing documents, resolving conflicting accounts — the writ court is not the right forum.

THE PLAY: Before filing a writ petition against a state-owned company for breach of contract, ask: is the state action arbitrary under the five tests, or is it merely a contractual termination that the contract itself permits?

The court ended where it began: with a developer who was 56 days late, a state utility that terminated twice, and a High Court that said not so fast — but the Supreme Court has now said: not so fast with the writ either.