MP High Court Judgment Analysis · Contract & Constitutional Law · Energy & Infrastructure Disputes
Can a State Discom Terminate a Power Project Lease Just Because Generation Fell Short? The MP High Court Says Not Without Asking Why
A Division Bench of the Madhya Pradesh High Court at Jabalpur has set aside the termination of a thirty-year hydel power lease, holding that a State instrumentality cannot treat a numerical shortfall in performance as an automatic default without first examining whether the shortfall was caused by circumstances beyond the contractor’s control.
On 7 September 2026, in Madhav Infra Projects Limited v. M.P. Madhya Kshetra Vidyut Vitran Co. Limited and Others (Writ Petition No. 12833 of 2022, Neutral Citation 2026:MPHC-JBP:69049), the High Court of Madhya Pradesh delivered a judgment that will matter to every contractor, concessionaire, and O&M operator who has ever signed a long-term agreement with a State instrumentality and later found that agreement terminated on the strength of a bare performance figure. The Bench of Hon’ble Shri Justice Vivek Rusia, Acting Chief Justice, and Hon’ble Shri Justice Pradeep Mittal quashed a termination order passed by MP Madhya Kshetra Vidyut Vitran Company Limited (MPMKVVCL), calling it arbitrary and violative of Article 14 of the Constitution.
This is not a judgment about hydel power alone. It is a judgment about how far a public sector undertaking can go in enforcing a contract before its own decision-making process itself becomes the problem. For anyone dealing with lease terminations, PPP concessions, O&M agreements, or government contract disputes in Madhya Pradesh, the reasoning here sets out a template worth understanding closely.
The Dispute: A Thirty-Year Lease, a CUF Clause, and a Water Problem
The Chambal Mini Hydel Project at Morena consists of three generating units of 600 kW each. In 2013, the erstwhile discom floated a tender to lease the project for thirty years on an “as is where is” basis, with the selected bidder responsible for operating and maintaining the plant and supplying the electricity generated to the distribution licensee. Madhav Infra Projects Limited won the bid, was issued a Letter of Award on 7 February 2014, and executed the Lease Agreement on 24 March 2014.
Article 10.3 of that Lease Agreement required the petitioner, as O&M Contractor, to achieve a minimum Capacity Utilisation Factor (CUF) of 30 per cent every year of the contract period. Article 10.4.2 separately provided that if the CUF fell below 30 per cent in a given year, the O&M rate payable to the contractor would be reduced proportionately.
Over several years, the plant’s CUF fell short of the 30 per cent benchmark. MPMKVVCL issued a notice on 3 November 2021 alleging failure to achieve the minimum CUF for six consecutive years, followed by a further notice on 6 April 2022. The petitioner replied on both occasions, explaining that generation from a hydel project depends entirely on the availability and discharge of water through the canal, a factor governed by a separate Water Supply Agreement between the Water Resources Department and the discom, to which the petitioner was not even a party. On 30 May 2022, the discom terminated the Lease Agreement anyway, treating the CUF shortfall as an Event of Default under Article 20.1.1(v).
The petitioner challenged the termination by way of a writ petition under Article 226. While the matter was pending, it also reached the Supreme Court, which kept the termination in abeyance, permitted the petitioner to continue operating the project, and directed the discom to purchase the electricity generated, while expressly leaving the question of the termination’s validity open for this Court to decide.
The Question Before the Court
The High Court framed a single substantial question of law: whether a State instrumentality, on finding that CUF has fallen below the contractual minimum, can treat that numerical shortfall by itself as an attributable Event of Default warranting termination, without examining the actual availability of water essential for generation, without considering the connected water supply arrangement, and without recording reasons for rejecting the contractor’s specific defence on that count.
The distinction between a numerical shortfall and an attributable contractual breach is material. A CUF below thirty per cent may establish a shortfall, but it does not, by itself, establish whether that shortfall was caused by the contractor’s own failure or by inadequate availability and discharge of water.
Paraphrased from the Court’s reasoning, Para 16How the Court Reasoned Through It
1. A shortfall is not the same thing as a default
The Court held that Article 10.3 does undoubtedly impose a binding obligation to achieve the minimum CUF, and it was careful not to dilute that obligation. But it drew a sharp line between a contractor missing a number and a contractor being at fault for missing it. Article 10.4.2, which reduces the O&M rate proportionately for a CUF shortfall, was read as strong internal evidence that the parties themselves never intended a mere shortfall to trigger the drastic and terminal consequence of ending a thirty-year agreement. If that had been the intention, the Court reasoned, the graded financial consequence in Article 10.4.2 would have been rendered redundant.
2. “As is where is” does not mean “at any cost”
The discom leaned heavily on the “as is where is” language in the tender and lease to argue that the petitioner had accepted the entire risk of performance, including the risk of inadequate water. The Court rejected this reading. In its view, “as is where is” governs the physical and technical condition of the plant and machinery at handover, not the separate question of who bears the risk of an essential input, water, over which the contractor has no control and no contractual access.
3. A contemporaneous agreement the contractor never signed, but could not be ignored either
A significant part of the judgment deals with Annexure P/12, the Water Supply Agreement executed in 2016 between the State’s Water Resources Department and the discom, to which the petitioner was not a party. The Court held that non-signatory status meant the petitioner could not be bound by that agreement’s obligations, relying on the Supreme Court’s recent articulation in Hindustan Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd. that a mere commercial relationship does not create a legal relationship between a signatory and a non-signatory. At the same time, the document was treated as admissible, contemporaneous evidence of the operational backdrop, showing that water shortage, interruption, and even Force Majeure contingencies were expressly contemplated as recognised risks in the very ecosystem the project operated in, risks the discom itself never guaranteed against in its own agreement with the Water Resources Department.
4. A contract law lens: contingent obligations and Sections 32 and 37
Perhaps the most instructive part of the judgment for contract drafters is the Court’s use of Sections 32 and 37 of the Indian Contract Act, 1872. Without holding that the entire Lease Agreement was a contingent contract, the Court applied the underlying principle by analogy: an obligation whose fulfilment is inherently dependent on an external, uncertain circumstance, here, the availability of water for a hydel plant, cannot be treated as breached, and its non-fulfilment cannot be visited as a default, without first establishing that the circumstance in question actually failed to materialise through no fault of the party relying on it.
5. Article 14 and the decision-making process, not the commercial merits
The discom cited a battery of Supreme Court authority, including Silppi Constructions, Air India v. Cochin International Airport, Master Marine Services, Joshi Technologies International, and Kerala State Electricity Board v. Kurien E. Kalathil, for the proposition that courts should not interfere in contractual and commercial matters. The Court went through each decision individually and found that none of them supported the discom’s position on the facts. Every one of those precedents, properly read, preserves judicial review precisely where a decision-making process is shown to be arbitrary, irrational, or vitiated by non-application of mind to a material defence, which is exactly the vice the Court found in the termination order. The Court also drew on M.P. Power Management Company Limited v. Sky Power Southeast Solar India Pvt. Ltd. and Bangalore Electricity Supply Company Limited v. Hirehalli Solar Power Project LLP to reinforce that an additional contractual relationship does not divest a party of the Article 14 guarantee against arbitrary State action, and that a shortfall caused by circumstances outside a generator’s control cannot be visited on it as a breach without an examination of cause.
The Finding and the Relief Granted
On the facts, the Court noted that it was not even in dispute that the Water Resources Department had failed to supply adequate water to run the project, that the discom never inspected the plant to determine whether the shortfall stemmed from mechanical failure or the water shortage, and that the “as is where is” clause could not be stretched into an admission by the petitioner that it would answer for every deficiency in generation regardless of cause. On this basis, the termination order dated 30.05.2022 was held to be arbitrary and unsustainable in law and was set aside, along with the two preceding notices to the extent they formed the basis of the termination. The petitioner was left free to pursue any money claims before the arbitral tribunal under the agreement’s own dispute resolution clause, and the Court made clear it was not adjudicating those claims itself. The parties were left to bear their own costs.
Facing a Similar Termination or Default Notice?
Long-term leases, PPAs, O&M contracts, and PPP concessions with State instrumentalities in Madhya Pradesh routinely carry performance benchmarks that ignore ground realities. If your agreement has been, or is about to be, terminated on the strength of a number rather than a fair inquiry into cause, the window to challenge it under Article 226 is often short.
Discuss Your Matter with Advocate Siddharth ShuklaWhy This Judgment Matters Beyond Hydel Power
The Madhav Infra Projects ruling sits at the intersection of three areas of practice that come up constantly before the Principal Seat of the Madhya Pradesh High Court at Jabalpur: writ jurisdiction against State instrumentalities, contract and commercial law, and the constitutional guarantee of non-arbitrariness under Article 14. Its reasoning is directly transferable to a wide range of disputes that regularly land on an advocate’s desk in Jabalpur, including:
- Termination of long-term leases and concessions awarded by discoms, municipal corporations, irrigation departments, and other State bodies, where a performance metric is used to justify termination without a causation inquiry.
- PPA and O&M contract disputes in the renewable and hydel energy sector, where delay or shortfall is frequently attributable to approvals, inputs, or infrastructure controlled entirely by government departments.
- Writ petitions challenging arbitrary State action under Article 226, where the respondent raises a preliminary objection of maintainability on the ground that the dispute is “purely contractual.”
- Disputes involving non-signatory liability, where a State entity attempts to fasten obligations arising under one agreement onto a party who never signed it.
- Interpretation of “as is where is” and force majeure clauses in tender-based and PPP contracts, a recurring flashpoint in infrastructure and energy litigation.
For contractors, concessionaires, and companies operating public utility infrastructure across Madhya Pradesh, the lesson is straightforward: a termination order that reproduces performance figures without engaging with a specifically pleaded and material defence is vulnerable to challenge, however commercially framed the underlying dispute may appear. Equally, for public authorities and discoms, the judgment is a reminder that recording reasons is not a formality but a constitutional requirement that determines whether a termination will survive judicial scrutiny at all.
Conclusion
The Madhya Pradesh High Court’s decision in Madhav Infra Projects Limited v. MPMKVVCL reaffirms a principle that is easy to state and frequently ignored in practice: a State instrumentality does not escape Article 14 merely by acting under a contract. Where a long-term public utility agreement is terminated on the basis of a performance shortfall, the authority terminating it must engage with the contractor’s explanation for that shortfall and record why the explanation is rejected, particularly where the explanation points to a cause squarely within the State’s own domain. Failing that inquiry does not merely weaken the termination; it renders the exercise of that power arbitrary and open to being set aside under writ jurisdiction, irrespective of whatever dispute resolution clause the underlying contract may contain.
At a Glance
Key Takeaways from the Judgment
A shortfall is not automatically a default
Missing a contractual benchmark like CUF is a numerical fact. Whether it amounts to an attributable breach is a separate question the State must actually examine before terminating.
Graded penalty clauses signal intent
Where a contract already prescribes a proportionate financial consequence for underperformance, termination for the same shortfall may render that clause meaningless and points against an intention to allow outright termination.
“As is where is” has limited scope
This phrase governs the condition of the asset at handover. It cannot be stretched to make a contractor guarantee performance regardless of external, uncontrollable inputs like water availability.
Non-signatories cannot be bound
A State entity cannot enforce obligations from an agreement between two other parties against a contractor who never signed it, though the document remains relevant background evidence.
Contingent performance needs contingent treatment
Applying Sections 32 and 37 of the Contract Act by analogy, an obligation dependent on an external uncertain event cannot be treated as breached without first confirming that event actually occurred adversely.
Article 14 survives inside a contract
A State instrumentality does not shed its constitutional obligation of non-arbitrariness merely because it is acting under a commercial agreement. That obligation runs independently, alongside the contract.
Reasons are not optional
Relying on the Constitution Bench in S.N. Mukherjee, the Court reaffirmed that recording reasons is essential to excluding arbitrariness, whether or not the decision is otherwise subject to appeal.
Writ jurisdiction has a narrow but real lane
Courts will not rewrite commercial terms or decide money claims in writ proceedings, but they will strike down a termination where the decision-making process itself is arbitrary or unreasoned.
Relief was surgical, not sweeping
The Court quashed only the termination and the notices leading to it, expressly leaving monetary and other disputed questions to be pursued before the arbitral tribunal under the agreement.
Case Law Relied Upon
Important Precedents Discussed in the Judgment
The Court engaged closely with the authorities cited by both sides rather than applying them mechanically, distinguishing several decisions the discom relied upon while applying others in the petitioner’s favour.
This Constitution Bench decision on the necessity of recording reasons in administrative and quasi-judicial orders was used to hold that a termination order which does not engage with a material defence fails a basic requirement of fair decision-making, regardless of whether the decision is otherwise appealable.
Cited for the principle, drawn in turn from Cox and Kings Ltd. v. SAP India (P) Ltd., (2024) 4 SCC 1, that a mere commercial relationship between a signatory and a non-signatory does not create a legal relationship between them. This was decisive in holding the petitioner could not be bound by the separate Water Supply Agreement it never signed.
Relied upon for the proposition that an additional contractual obligation does not divest a party of the Article 14 guarantee against arbitrary State action, and that an alternative remedy under the contract is a relevant factor but not an absolute bar to writ jurisdiction.
Cited to reinforce that a shortfall or delay caused by circumstances beyond the generator’s control, such as delay by government authorities, cannot be treated as a breach attributable to the generator without an examination of cause.
Relied upon by the respondents for judicial restraint in contractual matters. The Court read this decision as preserving, not excluding, judicial review in cases of arbitrariness, irrationality, mala fides, or bias, and held the present case fell squarely within that preserved exception.
Cited by the respondents on the threshold of judicial intervention in State contracts. The Court found the decision itself permits examination of the decision-making process for mala fides, unreasonableness, or arbitrariness, and held the public interest threshold was, in any event, satisfied on the facts.
Relied upon for restraint on examining contract terms in judicial review. Approvingly quoting Sterling Computers Ltd. v. M/s M.N. Publications Ltd., AIR 1996 SC 51, the Court held this authority in fact supports examining whether the decision-making process was reasonable and non-arbitrary, which is precisely what the petitioner sought.
Cited by the respondents on non-maintainability of purely contractual writ petitions. Distinguished on the ground that the petitioner was not seeking adjudication of a money claim but was challenging the legality of the process by which a public utility contract was terminated, which falls within the recognised exception for arbitrary or unfair State action.
Relied upon by the respondents to argue that contractual quantification disputes cannot be agitated in writ proceedings. Distinguished as concerning a pure money claim over escalation charges, unlike the present case, which turned on the legality of a termination process rather than any monetary computation.
Client Questions, Answered
FAQs on the Madhav Infra Projects Hydel Lease Judgment
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Advocate Siddharth Shukla
Practising Advocate at the High Court of Madhya Pradesh and various tribunals, with extensive experience in constitutional, civil, criminal, and commercial litigation. Focused on delivering strategic legal solutions, analytical insights, and effective representation in complex disputes and high-stakes matters.
